Energy efficiency or energy subsidies?

A simple question with a complex answer. Which is the best Public Policy? Subsidise energy usage for low income people or reduce their energy consumption by funding the improvement of home energy efficiency?

Traditionally, Governments have provided subsidies for energy usage to assist low income people. Energy subsidies of $US310 Billion are provided by “second tier” nations that include the Arab Emirates, Indonesia and Malaysia. These subsidies are usually for fuel and electricity 1. At a local level, Pensioners and other low income earners can get rebates and/or discounts on their energy bills 2. If we take the average low income energy bill to be $A650 annually then 15% discounts and rebates are worth just under $A100.

Energy Audits of homes show that there is usually more than 20% of energy wasted due to inefficient lighting, poor insulation and draughts that allow heat to enter or leave a house through gaps in the structure (Downlights are a major Winter heat loss with hot air escaping to the roof at a considerable rate).

Low income households are actually likely to be less efficient than the average. There is likely to be more structural problems, less window coverings and less efficient lighting. Appliances are probably not as efficient and renters are unlikely to pay for insulation or other energy saving measures on behalf of a landlord.

So we have a 15% subsidy on energy usage but at least 20% inefficiency. That leaves these households in a deficit by over 5% compared to well insulated and efficient houses. What does it cost to make these houses more efficient? How can it be achieved?


Insulation is probably the first thing that comes to mind. It is important and it can be expensive. Roof insulation is the most important in Australia where Summer heat is such a big driver to install air cooling. Wall insulation is the next most important, especially West walls for Summer. The capital cost of insulation is more than the cost of 5 years energy saving but ends up saving over more than 20 years. Retrofit of insulation can be expensive in some older houses but is very inexpensive in new houses where it can be quickly installed during construction.


Lighting is where many people “see” the cost of energy. Most energy saving advice includes turning off lights and using energy efficient globes. These things are important but there is another factor that makes as much or more difference. Downlights that were popular in the 1980’s and 90’s used incandescent reflective bulbs that generated a lot of heat in a confined space (often coated in black) so the downlights were ventilated into roof spaces. Even with efficient globes that do not generate much heat, a gap is there to let heat out and protect the downlight from heat damage. Dichroic lights that started to be popular in the mid 90’s had the same heat problem but usually only had a smaller vent space.

That all means that there is effectively a vent for hot air to rise through the ceiling and out to the roof in Winter. The efficiency impact of downlights can be as much as a 25% increase in heating for Canberra and that is reflected in EER reports that mark a building down severely for having downlights installed. A visit to a roof space in Winter will show how much of an issue it can be, jets of warm air come through the downlights strong enough to blow loose insulation away (a sheet of A4 paper will blow away immediately). A single downlight can add between 2% and 10 % to heating, depending on where it is and the model.

Fortunately, there are now high efficiency replacement assemblies that effectively seal the gap and keep the heat in. They are not easy to buy and installation is tricky so it probably needs to be done by an electrician, boosting the cost considerably. When installed, these lights are efficient and long lasting with relatively easy bulb replacement.


After a house is built it is hard to do much about the structure but the direction of the windows and solid walls as well as siting of garages, rooms and floor materials make a big difference to efficiency. Small design changes prior to building can make a house more comfortable and reduce energy usage for heating and especially cooling by at least 20% on an average block.

One thing that can be done is to install doors that allow you to easily divide off parts of the house so you do not heat/cool areas that are not in greatest need. Older houses had many doors so that one or two main rooms were kept warm in Winter and the other rooms remained cold. Opening a house up completely is convenient and contributes to a relaxed lifestyle but significantly adds to the cost of heating and cooling. A small number of strategically placed sliding doors allow you to have the better parts of lifestyle (in the 75% of days that are moderate) and still keep the efficiency in extreme weather.

Window coverings

Window coverings are often left for later purchase when buying a first home and yet they cover the source of 30% of average heat gain and loss – windows. good curtains with high insulation factors are more expensive than thin blinds and gauze curtains but can pay for themself in 2-3 years in a climate like Canberra where the summer and winter extremes are high. Once again the capital cost is high and the payback period is long enough to tempt people to defer expenditure and just use more heating or cooling.



Refrigeration is a major energy user. Replacing inefficient freezers, in particular, can save over 15% of a household’s electricity consumption. A cost difference of $200 for a 3 star and a 4 star rated refrigerator takes around 10 years to recover in reduced electricity costs but many older refrigerators would be rated more like a 1 star because of design and deterioration issues. For those refrigerators a replacement would pay for itself in 10 years.

There is another factor that is often overlooked. A near empty refrigerator runs highly inefficiently because they rely on the thermal mass of the contents to maintain an even temperature. That means a nearly empty refrigerator is running the motor more than is efficient and that each time it is opened much of the coldness is lost when air mixes with room temperature air. Replacing family sized refrigerators with smaller ones for one or two people can be a good thing.


The other side of the equation is the subsidies. The dimensions of overall subsidies for energy use can be found here. Non-transport energy subsidies are estimated to be in the region of $A350 million overall in Australia. What are they and how are they organised?


Larger users of energy pay less for their energy than the low volume users. There are two factors here. Tariffs are lower if you meet a minimum usage. you typically get 5-10% discount for high usage. Second is the “supply fee” which is either fixed or cheaper if you sign a contract to use more energy. The supply fee means you pay a minimum amount regardless of what you use. Essentially this acts to make low energy use expensive and high energy use relatively cheap. Lets take two households that used 180% of average electricity and one that used 40% in Canberra last year.

% ave Use Usage Fixed Variable Total Per kWh Plan3
40 2720 188.705 385.968 574.673 0.211277 Standard
180 12240 444.059 1332.936 1776.995 0.145179 Saver Plus

This amounts to a subsidy/discount of $1594 over a year for the high user and the low volume user pays an effective premium of 50% over the heavy user. The heavy user has to pay a “contract fee” of $255 a year regardless of their usage so there is less incentive to use less electricity.

Low Income

For low income users of energy, there are subsidies and rebates available. In most States Pensioners can get rebates between $57 and $165 for energy use. In some States, there is a rebate for low income earners who are not pensioners in the same order. Some energy providers offer an extra discount and even some local councils have a scheme. There are special “survival” grants to low income earners to keep them connected in the case of threatened disconnection that threatens life. The whole area of subsidies is rather complex and is the subject of investigation for future taxation systems. Apart from the economic distortions, there is a clear message sent by these subsidies that it is best to directly subsidise now rather than fix underlying problems.

Of course there is a particular difficulty with low income support for energy usage. The place where the people who qualify for the support is unlikely to be owned by them unless they are on a pension. Therefore it is difficult to see how Government subsidies can be spent on improving a house owned by a landlord rather than supporting the low income household.

Summing up

So, if we were to improve everything by the percentage figures quoted then we would use almost no energy. Unfortunately not. Each efficiency gain is dependent on others. If you gain 20% efficiency by reduced heating load (say 1 MWhours) then the 10% efficiency gained by insulation is only 8% of the total (ie 10% of 80% or 80KWhours).

What would happen if we allocated the energy subsidies of $350 million to energy reduction measures? If that money was spent on insulating houses, fixing draughts and other heat leaks. Replacing inefficient electric heating and putting curtains up?

  1. Reference IEA Outlook
  2. Reference from Australia
  3. ACTEW website
  4. usage costed for the high user on the same terms as the standard plan

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