Green finance cannot thrive in a vacuum: it needs the right conditions to flourish. Juliet Phillips, senior policy advisor at E3G, examines what is needed this autumn to boost the scale and pace of green home retrofits. E3G acts as secretariat for the Green Finance Institute’s Coalition for the Energy Efficiency of Buildings.
Tackling the emissions produced by homes is one of the biggest challenges on the path to net-zero and represents the most important gap in the UK’s green policy landscape. Decarbonising our housing stock is also a major infrastructure investment opportunity. The UK Government’s independent climate change advisors estimate that around £360bn of investment will be needed to upgrade and decarbonise our homes by 2050. The major question is: where will this money come from? There will be important roles for public, private and blended capital.
It should go without saying, but there is no ‘one size fits all’ solution – different financial solutions are appropriate for different households. Clearly, the case for public funding to support the transition is most clear for vulnerable and fuel poor households. The Government has recognised this and made commitments in the 2019 Conservative party manifesto to provide £9.2bn through schemes including the Social Housing Decarbonisation Scheme and Homes Upgrade Grant. In addition, support is available through the Energy Company Obligation (ECO) to support vulnerable and fuel poor homes.
The conversation gets trickier when it comes to those who are not classified as vulnerable or fuel poor – those who fall into the so-called “able to pay” category. This is a broad range of people, spanning those sitting just above the breadline, right through to millionaires with mansions. The term “able to pay” is confusing at best, and unhelpful at worst – conflating a wide range of household circumstances, including millions of people who would struggle, or find it impossible, to pay for green home retrofits even if they were inclined to do so.
For many households classed as “able to pay”, green finance products and services offered through the UK’s leading banks and building societies – such as green mortgages – will have an important role to play. But before this can happen at scale, we need to put in measures to stimulate demand and grow the market. The organisations we work with through the Coalition for the Energy Efficiency of Buildings highlight that green finance cannot thrive in a vacuum. The right combination of measures is needed to support the market. The much anticipated Heat & Buildings Strategy can act as a catalyst for the green finance market by offering the regulatory certainty – for example on the prospective gas boiler phase-out – that households, businesses and financial institutions need to plan for the future.
Along with regulation, structural incentives and public funding will have a critical role to play in growing the market for green homes finance. The Spending Review and Budget later this month are the key opportunity to deliver the push the market needs. Currently there are no support or incentives for the majority of households – who represent the largest proportion of emissions – to undertake the fabric improvements needed to get on track for climate targets. There is low awareness among households of what is required, the benefits of making these changes, or the options available to them to do so. Even for those who are engaged, many do not have the means to do so –the most recent English Housing Survey found that 33% of owner occupiers have no savings whatsoever. The impacts of the pandemic and energy crunch will put even more households in a position where undertaking a large household renovation doesn’t look financially possible, let alone attractive.
Recent conversations with lenders have underscored the important role that private finance can play in filling the green home investment gap – but only with the right ecosystem of drivers in place to stimulate significant new demand. Measures targeted at different ‘trigger points’ where people are likely to undertake works are needed to meet government targets, as well as considering the needs and drivers of different segments of the population. There is an opportunity to get on track at the forthcoming Spending Review:
- A long-term, but ultimately time-limited, subsidy scheme for both energy efficiency and heat pumps. Grants are an effective way of boosting household demand and can leverage private investment – for example, the Green Homes Grant scheme covered just two thirds of the costs of green home installations, with homeowners paying the remaining costs themselves. Analysis by the Energy Efficiency Infrastructure Group estimates that £3.6bn should be made available to support all households with energy efficiency measures, as well as £4.76bn to pump-prime the market for heat pumps. Through supporting economies of scale, these can help lower technology and installation costs, and ensure that regulatory mandates are fair and affordable. With long-term certainty provided through multi-year spending commitments, financial institutions can innovate and link products to public grant schemes.
- An EPC-linked reform to Stamp Duty Land Tax (SDLT) can spur retrofits at the point of sale of the property – a popular time for undertaking retrofit measures. Home purchasers could claim a rebate for energy efficiency improvements made within the two-year post-purchase window before final SDLT is paid. Many lenders are in favour of the reform, describing it as a win-win solution that was gentle enough not to shock the market, while also providing a clear enough signal to nudge action.
- 0% interest finance and concessional finance, offered through the new UK Infrastructure Bank (UKIB): Blended finance – where public and private finance are combined – has the effect of maximising the impact of public spending, while helping de-risk and crowd-in private finance. The UKIB could be a leading source of blended finance for decarbonising the UK’s building stock, financing projects – including local authority projects – which currently struggle to attract sufficient private investment, and crowding-in additional finance to maturing markets. The previous UK Green Investment Bank demonstrated this leverage effect, mobilising £2.50 of private capital investment for every £1 invested.
A focus on green homes is mission critical for the UK’s levelling up agenda and net zero target; and can also secure the UK’s place on the map as a leader in green finance. Combined, the Heat & Buildings Strategy and Spending Review are a key opportunity for the Government to support the green homes finance market to thrive this decade, helping underpin the transition to net-zero homes which is crucial if the UK is to get on track for climate targets.
The benefits associated with doing so are economy wide – a long-term programme to get all homes to at least EPC C by 2030 reduces household energy expenditure by £7.5bn per year at today’s prices; and a sustained investment package can support 190,000 jobs in energy efficiency and heat across a range of trades through to 2030. Now is the time to invest in our futures – and with the eyes of the world on the UK ahead of COP 26, the UK can show leadership through supercharging a green home renovation drive.