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ECONOMIC OPPORTUNITY STUDIES

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April 11, 2001

Thanks Anyway, I’d Like A Low Operating Cost:

Or: Why The Poor Do Not Need Government Or Industry Protection From Efficiency Standards

The EOS performs analyses of a database of Department of Energy data on low-income residential energy consumers for a variety of organization concerned about the energy burdens of the poor, including the U.S. Dept. of Energy’s Weatherization Assistance Program.

We have recently reviewed the material DOE has submitted in support of EE RM97500, the rule on new central air conditioner and heat pump efficiency standard. We are concerned about the accuracy of the summary analysis of low-income electric consumer energy use; it purported to show negative impacts from appliance efficiency standards on the poor.   Yet, this material was presented by the Department of Energy in its rulemaking and unnecessarily undermines the case for the proposed standard. Not surprisingly, the leaders of the appliance manufacturing industry have welcomed this opportunity to put their deep concern for low-income customers into action and cite these findings as part of the case against high efficiency standards.

Our analyses of the RECS 1997 data differ with the departmental consultants’.  Our review of the Residential Energy Consumption Survey shows there is not a disproportional impact on the poor as a class.  The benefits and cost to low income consumers are no different than they would be to households at higher income levels with similar usage patterns.  As best we can tell, DOE’s consultants simply averaged the central air and heat pump usage of the poor over all low-income consumers.  Our table at the end of page 2 shows data on the population that is poor and uses central air or heat pumps; we discuss probable new purchasers below.

Price Issues: 

   The recent past: First, our tabulations of the same 1997 RECS data cited by the prepares of the DOE analysis show the poor pay essentially the same delivered price per kilowatt as the non-poor in every region, not less.   The price data in RECS are taken from the supplier data forms and reflect nearly all the billed costs, not regulated rates alone.  Nationally both groups averaged about $0.85 per kWh in 1997.  The material prepared in connection with the rule-making may have not take regional variation into account, as the poor may have been disproportionately residents of lower cost Southern states, of rural areas, and were also more likely to have had electric heat as their main source; controlling for these factors which lend themselves to lower kwh prices, shows the households in poverty with costs at least as high as those of their immediate neighbors who are not poor.

The near future: observers of the constraints on contemporary power markets tend to agree that there will probably be frequent, perhaps transient, electricity price increases before we arrive at the long-awaited lower competitive price predicted in the long-term forecasts used by DOE.  That mid-term increase would accelerate the recovery of costs within the equipment’s life cycle period, regardless of the long-term price.

Usage Issues:

The DOE analysis suggests Life Cycle Cost (LCC) savings to the non-poor are 1500% those of the low-income consumer.  This implies either a parallel difference in consumption or a dramatic price advantage for the poor.  However, the RECS figures show the poor on average used about 70% as many kWh as the rest of U.S. households.  Thus, the group of non-poor consumers might have savings averaging about 142% of those of the average low-income consumer, not a big difference.   

Further small cost reductions equal a high proportion of income to low-income families.  Their incomes are generally fixed monthly and they have negative equity (i.e. positive debt).  Thus, the short-term benefits have added importance and should be weighted so.  LCC is not a consideration for most of these consumers, but monthly reductions certainly are. 

Low-Income Renters:  Ownership, Purchase and Length of Use:

There are other reasons the poor will benefit from efficiency requirements that are also not captured by conventional life cycle cost recovery analysis the Department is apparently required to use.  As NRDC correctly pointed out in its initial comment, most of the poor are renters and will not make the major equipment purchases for their residences.  The table attached shows that of central air users, 50% are renters. 

DOE’s model necessarily over-simplifies the recovery of costs through rent.  However, most of the housing market literature finds housing costs to be determined by housing supply.  RECS show that 96% of the poor who have central air conditioning pay their own electric bills; it is not included in rent.  Landlords have no incentives to lower any operating costs that are not collected as a part of rent, and will choose the least– first–cost equipment.  The proposed appliance standards would put a floor on the economic damage such perverse incentives cause the tenants, as well as on energy waste.

Regional Variations or – How should the DOE LCC estimates have been weighted?

In 1997, nearly two-thirds (63%) of the poor using central air equipment lived in the South Census Region.  Their a/c kWh averaged 2,198, or 21% of all their electrical usage.  This a/c consumption was double that for any other region’s households in Poverty, but it represented just two-thirds of the average consumption level of all the Southern region’s homes with central air in that region.

This southern low-income population has the lowest incomes and highest “energy burden” of any region’s poor; all their electricity expenditures together consumed 21% of the average annual income of the Southern homeowners in Poverty and 15% of poor renters’ annual incomes.  The other fuels made those burdens even worse.  

The DOE’s analysis of current central air and heat pump users begs the questions of who will be the next purchasers and where they will be located.  Growth in market penetration of central units will affect all regions, but the Southern region is a most appropriate area for impact analysis.  In those states, the poor need the long-term savings the most and will have the highest.

Non-cash life cycle benefits

In the case of the poor, the so-called “take back” identified in the technical analysis provides critical health enhancement to those consumers who are disproportionately at risk of suffering from excessive heat.  Populations of low-income households include high percentages of the elderly, the disabled and young children.  In general, any “take back” is to meet a minimum temperature standard, not to rise to the condition of “comfort”.  It can be quantified as a non-energy health benefit.

In fact viewing cooling energy costs through a risk analysis perspective shows they provide a disproportionate benefit.  The health and safety risk of housing high bills is greater to the poor because the percentage of their monthly income consumed to pay their bills is so high.  RECs documented more than a million needy families losing utility service in winter as a result of non-payment.  The costs of such crises in family well being, nutrition and medical care are high.  Fees and penalties incurred with late payments or lost service increase energy debts. 

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