Bridging the Gap: A Novel M2/LIHC Hybrid Indicator Unveils Energy Poverty Dynamics - Case Study of the Czech Republic

This paper introduces a novel composite energy poverty indicator, the M2LIHC, which combines elements of the twice-median expenditure share (2M) and Low Income High Cost (LIHC) measures. Using a unique dataset merging the Czech Household Budget Survey and EU-SILC data from 2017-2022, we demonstrate how this hybrid approach provides new insights into energy poverty dynamics. The M2LIHC indicator addresses key limitations of existing metrics, avoiding the LIHC measure´s counterintuitive response to income changes in the lowest decile and mitigating the 2M indicator´s potential overestimation of energy poverty among higher-income households with high energy costs. Our comparative analysis reveals significant differences in energy poverty rates and household characteristics identified by each indicator. The M2LIHC measure proves more robust to income fluctuations than LIHC while maintaining sensitivity to both income and energy cost components. We find energy poverty in the Czech Republic has increased across all indicators from 2017 to 2022, with the M2LIHC indicator suggesting a rise from 8.9% to 13.5%. To further validate our approach, we employ the DASMOD (Distributional And Social Impact Model) to simulate various energy and climate policy scenarios. These simulations demonstrate the complex effects of compensation policies on energy poverty measures, with M2LIHC providing a more nuanced view of policy impacts. By providing a more comprehensive and theoretically consistent measure of energy poverty, coupled with policy simulation capabilities, the M2LIHC indicator offers policymakers an improved tool for targeting support and assessing the effectiveness of energy poverty alleviation strategies in the context of energy transitions and climate policies.