Making every home count for a green recovery

20 July 2020

Making every home count for a green recovery

To aid recovery from the global pandemic the UK government has pledged to ‘build back better, build back greener, build back faster’. But what does this mean for our homes and why is a stimulus to ‘go green’ needed?

The announcement earlier this month by the chancellor of a stimulus package to boost an economic recovery in the light of the pandemic has been widely welcomed, though considered by some to be insufficient to meet even pre-existing obligations.

Part of the package announced is aimed at the construction industry, both for new building, including roads and flood defences, and for maintenance and improvements of buildings. Specifically, £3bn is allocated toward energy efficiencies improvements, including a £2bn stimulus to enable homeowners to make their houses more energy efficient via a ‘voucher scheme’; a further £50m is for retrofitting of social housing.

These measures, indeed any measure, which leads to an upgrade of the energy efficiency of our homes must be welcome, not just because they lower carbon emissions but also because they reduce running costs and enhance comfort and well-being; for those less well-off, lower energy bills can contribute to taking people out of fuel poverty. So, the social and health arguments for more efficient homes is undisputable.

But in economic terms, they may also, over time, make our properties more desirable in the market should we sell – or conversely, and perhaps more likely, as expectations of buyers and renters rise, so energy efficient homes may suffer value depreciation – a so-called ‘brown discount’.

But it is the environmental requirement which presents the greatest incentive.

The current carbon commitments

The imperative to achieve energy efficiency has long been recognised. Currently buildings, primarily residential units, contribute approximately 19% of all UK carbon emissions. Although this represents a significant fall from 1990 levels, it is far from meeting statutory targets imposed by the Climate Change Act (2008) as amended. This requires that, by 2050 carbon emissions should be at least 100 per cent below 1990 levels. How such a target, which aligns with the government’s obligations under the 2015 Paris Accord to keep temperature rise to within 1.5 degrees Celsius, can be met is set out in a ‘roadmap’ laid out by the Climate Change Committee in 2019 as a follow up to the Green Growth Strategy set out in 2017.

Such actions by government demonstrate a real commitment towards a greener economy – but who should pay to upgrade the stock? The UK’s buildings are among the most energy inefficient in Europe, so improving the energy efficiency of our homes is not optional: it is urgent and essential.

But according to the government’s Business Energy and Industrial Strategy Committee report last year the country was still off-track to meet its commitments. They concluded that it required an estimated £65bn for homes alone over the next 15 year.

Energy efficiency of buildings is generally (although perhaps not fully accurately) measured in terms of the Energy Performance Certificate (EPC) on a scale of A (best) to G (worst). Currently the average EPC rating for homes in the private sector is D; what is required by 2050 is an A grade. The noted £65bn is unlikely to achieve full efficiency but would raise average ratings to a C at least.

Put against such requirements, and the human and planetary costs of failing to decarbonise, the stimulus package announced earlier this month falls far short of the target required. It is welcome, but only as a first step.

What is really required is a comprehensive package of measures which will include more extensive, deep, retrofitting, the cessation of reliance on fossil fuels and skills development to support measures towards a truly green and sustainable economy.

Better news

But this is not the whole story: much else is happening that is seeking to use market and regulatory levers to encourage the transformation. We now present a snapshot of just some of the reasons to be positive.

The Coalition for the Energy efficiency of Buildings (CEEB) was set up last year as part of the Green Finance Institute to accelerate the pace of “financial innovation and mobilising capital towards the retrofit and development of a climate-resilient housing stock”. By bringing together a range of experts and organisations, it has already delivered its first progress report chronicling a range of demonstrator projects, ranging from energy services products to guarantee mechanisms to ensure quality of upgrade works.

Such coordinated efforts from across the property and finance industries demonstrated real commitment to unlocking the barriers to progress and bringing forward private sector finance where it can make a difference.

Stimuli for private owner-occupier market demand

There is little doubt that, though currently muted and of limited impact on house prices, home-buyers’ interest in acquiring energy efficient homes is growing with discernible links at the macro level between, prices and rents and EPC labels. This may be a result of growing environmental awareness, but it also relates to energy costs, so a ‘nudge’ towards the cost of improving inefficient homes will undoubtedly help, both at the point of decision making and beyond.

Another stimulus is the dynamic changes in the mortgage market. In addition to CEEB initiatives, more widely the attitudes of lenders towards their loan books and the credit risks is beginning to be ‘energy aware’.

Already some banks have schemes of differential lending costs for new homes rated B or above, but in support of retrofit financing, the work of the European Energy Efficient Mortgage Action Plan (EeMAP) and the recently launched VALUER project could be critical in better informing lenders of the energy risks/benefits of their loan books and, through this, supporting finance of upgrades.

A regulatory requirement on the Private Rented Sector (PRS)

Whilst the owner-occupier sector is set to benefit from financial incentives, the PRS is especially challenging, as landlords’ have little incentive to make improvements, the financial benefits of which are reaped by tenants. Thus, the government approach, although having made some grants available, has become more of a stick than a carrot, with the introduction of Minimum Energy Efficiency Standards (MEES).

First enacted by the energy Act (2011), MEES was introduced for new lettings in 2018 and all residential lettings from April this year. The regulations require that, with exceptions, all let dwellings must achieve an EPC of E and it is planned that this requirement will be ratcheted up over time, thus forcing private landlords to upgrade but only where economically feasible. But the really good news is that private landlords, who generally own the least energy efficient stock are also eligible, at least in England, for the voucher scheme.

Towards a Green Grid

Improvements in the form of integrating new technologies, such as solar panels and heat pumps as well as simple measures such as double (or triple) glazing and enhanced insultation can improve efficiency considerably – but for a long time most homes will be dependent on the grid. And this is rapidly decarbonising. Indeed, in 2019, for the first time since the industrial revolution, fossil free fuel contributed more power to the grid than coal and gas. Coal, which a decade ago contributed over 30%, now accounts for less than 3%. So, as we start to make our homes more efficient and reduce demand, so too the shift in the grid power sources is supporting a rapid decarbonisation.

Making the UK residential stock zero carbon is an enormous challenge, given the age of the stock and the associated energy inefficiencies, but it is an essential plank of the fulfilment of national and global commitments. And to succeed is of benefit to us all by the reduction/elimination of fuel policy, more comfortable homes (which may need to be protected against heat as well as cold) and reduced negative environmental impacts.

In strategic terms the UK have been leaders, but decarbonisation of our residential stock has been particularly problematic. It needs money and changing consumer demands and the skills to complete the work. All this is happening - but too slowly. The new announcement by itself will not make for radical changes; but combined with money for training and harnessing the power of well-directed private sector finance, it provides a useful step to making sure the rebuilding of the economy can go hand in hand with redressing damage to the planet.