CBA - Warm Up New Zealand: Heat Smart Programme

Under the Smart Heat Programme, subsidies are provided towards the costs of retrofitting insulation and/or installing clean heating for pre-2000 houses. The benefits that are included in this report are analysed in more detail in three separate papers produced as part of this study that assess the impacts on energy use, health outcomes and producer surpluses, with additional data on employment. The costs of the programme are also assessed in this report and include the costs of the additional insulation and clean heating plus the administrative costs falling on the government. Administrative costs for companies are assessed as part of the report on impacts on industry.

Methodology

Taking account of the results of previous studies, the cost benefit analysis (CBA) incorporates  the following costs and benefits:

Costs

• The administrative costs of the programme for the government; 
• The costs of raising revenue for the subsidy – the deadweight costs of taxation;
• The costs of the insulation and clean heaters. 

Benefits

• The reductions in energy costs;
• The savings in CO2 emission costs not included in the fuel price; 
• Improvements in health outcomes;
• Producer surpluses for suppliers of insulation and clean heaters, ie. the
• difference between the price and the costs of supply. 

 The analysis applies to the insulation and clean heating that is estimated to have been installed as a result of the programme, recognising that some proportion of the total number of households that received a subsidy would have installed these products anyway.

The benefits are estimated over the expected duration of those benefits. For insulation this might be a long period, ie. the duration of the house. The duration of a clean heater is expected to be shorter. However, it is likely that,  for some houses at least, some proportion of the benefit will not be additional as it is bringing the timing of the installation forward in time, rather being an absolute saving, ie. some of the houses that received insulation or heating under the programme would have purchased it in the absence of a subsidy at some point in the future; this also means some of the costs are also simply brought forward in time. The starting place is an assumption that insulation benefits will last for 30 years 37 and clean heating for 10 years.

Costs and benefits that fall in different time periods are discounted and these are fully discussed in the report.

Outputs

The following outputs are considered in this report:

• Government Administration Costs
• Deadweight costs of taxation
• Costs of Installations
• Energy Savings
• Health Savings
• Producer Surplus
• Scale of Activity and Employment Effects

Findings and conclusions

The energy study found that energy benefits from insulation were greatest for houses in cooler regions. This result most likely reflects the fact that energy use for heating purposes prior to treatment is greater for houses in cooler areas than for those in warmer regions. There is therefore greater scope for energy savings following treatment for houses in cooler areas. 

There are differences between regions in the impacts of insulation and clean heating on metered energy use. The results for Northland and Auckland suggest small reductions in electricity consumption but an overall increase in total metered energy use; elsewhere there are overall reductions in total metered energy use. 

Clean heating results in increases in energy use in all regions. The energy study showed, however, that there were positive energy savings for treated houses that already had reticulated gas, in contrast to the result for other houses. Thus energy savings from installation of clean heating may be increased if clean heating is targeted at houses that initially use reticulated gas rather than electricity for heating. 

The health impacts study shows clear differences between the effects on low to middle income earners and other households, with significantly larger benefits for Community Service Card (CSC) holders. This result is consistent with prior research that the sick and other at-risk groups are most adversely affected by cold house temperatures. These groups therefore have the most to gain from installation of retrofitted insulation.

Present value of total costs and benefits ($ million)

The overall results suggest that the programme as a whole has had sizeable net benefits, with our central estimate of programme benefits being 4.8 times resource costs attributable to the programme. Nevertheless, even greater benefits may be achievable through consideration of four targeting strategies:

1. Prioritise the insulation component of the programme relative to the clean heating component of the programme.
2. Target clean heating to houses that use reticulated gas rather than electricity for heating prior  to treatment.
3. Target insulation to houses in cooler rather than warmer areas. 
4. Target insulation to low and middle income earners and other at-risk groups in terms of illness.

Associated Models

References

Arthur Grimes, et. al.  (2012): Cost Benefit Analysis of the Warm Up New Zealand: Heat Smart Programme. Prepared for the Ministry of Economic Development, New Zealand.