Comment: Building a Greener Future (part one)

Published on 14 Jan 2020

Author: Emma Harvey, director, Green Finance Institute

As the Christmas festivities fade into distant memory, households across the country will be packing away the tinsel and turning up the thermostat as the chilly weather arrives with the new year.  The cold winter months are unavoidable, however as my heating came on this morning an uncomfortable question came to mind: what is the cost of this warmth to our bank accounts and our planet?

Dwelling on the challenge

Take a moment to consider the buildings on your street.  Consider the age and construction type, the windows and insulation, the heating and electricity sources.  It should come as no surprise that the UK building stock is far from the pinnacle of energy efficiency and climate resilience.

With over 62% of residential buildings constructed before 1970, the built environment is responsible for 30% of emissions in the UK.  According to the UK Committee on Climate Change, energy consumption in our homes must drop by 24% before 2030 if the UK stands a chance of meeting its legally binding net-zero emissions target.  An estimated investment of £35 to £65 billion is required to meet the UK Government’s energy efficiency targets by 2035.  However, the total investment will be significantly higher to achieve the 2050 net-zero ambitions and ensure our homes are resilient to increasingly frequent extreme weather events, such as floods and heat waves.

It’s 2020 – where is the solution?

The importance of energy efficiency was first recognised in 1965 with the legislation of Buildings Regulations, a set of national building standards that introduced the first limitations on the amount of energy a new building could lose through its fabric.  Despite the improvements in technologies and techniques, as well as stricter regulations on new and existing buildings, over five decades later the solution for retrofitting all UK homes remains elusive.

The old saying that “An Englishman’s home is his castle” illustrates one of the major barriers to energy efficiency improvements; changes to our homes can elicit deeply emotional responses, especially when that activity is complex or potentially disruptive.  Many homeowners continue to live in cold and potentially harmful ‘castles’ owing to the inertia barrier, inhibiting action due to anticipated hassle or damage to their property.

The elusiveness of a ‘magic bullet’ solution is also attributable to several other barriers:

  1. Energy Efficiency Split Incentive: Typically called the ‘payback barrier’, homeowners are deterred from investing into energy efficiency measures if the energy bill savings are not sufficient to repay the upfront cost before they move out of the property. (As a quick aside, it’s interesting to reflect on why this logic does not apply to interior design choices, such as marble worktops or luxury paint brands.)
  2. Landlord-Tenant Split Incentive: An endemic problem in the private-rented sector, this barrier can be summarised as follows,  Landlord: Where is the incentive to invest into energy efficiency measures, if the energy bill savings accrue to the tenant?  Tenant: Where is the incentive to invest into energy efficiency measures, if the energy savings fail to repay the upfront investment before my lease expires? Despite the introduction of minimum energy efficiency standards in the residential and commercial private-rented sectors, the divergent incentive structures have prevented widespread action in the sector.
  3. Trust & Advice: In addition to the financial barriers, a lack of consumer awareness on energy efficiency retrofits, combined with a fragmented advice network and inherent mistrust of tradespeople, has created an environment that fails to help homeowners gain the knowledge and confidence to even start a project.

Cross-sectoral challenges, Cross-sectoral solutions, Cross-sectoral benefits

The smorgasbord of barriers highlights an important feature of the retrofit challenge; it spans multiple sectors and stakeholders, with multiple barriers and possible solutions, and thus risks creating unintended consequences if a ‘systems thinking’ approach is not adopted.  Systems thinking is a holistic approach that focuses on the way constituent parts of a system interrelate, and how systems work over time and within the context of larger structures.  Solutions that consider all stakeholders across the retrofit value chain will be essential, given the cross-sectoral nature of the challenge.

“…[housing decarbonisation] is a problem that is difficult to solve because different stakeholders have different versions of what the problem is, it has many interdependencies… is socially complex, it does not sit conveniently within the responsibility of any one organisation and it involves changing behaviours.” Welsh Government (2019)

So far, I have focused on the barriers and nature of solutions to stimulate large-scale adoption of energy efficient home improvements.  However, every business case should outline the benefits a solution will bring; and with cross-sectoral solutions come cross-sectoral benefits.

In 2014, the International Energy Agency published a study demonstrating that energy efficiency can generate multiple benefits and deliver “… compelling returns when the value of multiple benefits is calculated alongside traditional benefits of energy demand and greenhouse gas emissions reductions”.  The co-benefits from energy efficiency include increased comfort in the home, higher property values, and macroeconomic development with an estimated 32.6 jobs created per €1.4 million investment into delivering domestic retrofits. Further studies have identified that energy efficiency interventions can lead to modest but significant improvements in health; benefits include reduced risk of respiratory and circulatory conditions, improved mental health and lower morbidity rates.  In fact, the models suggest that every €1 spent on reducing exposure to cold in homes, the NHS will recoup €0.42 in avoided health costs.  And the health benefits could boost economic productivity and education levels, through the avoidance of health-related absenteeism in the workplace and schools.

Can financial innovation accelerate the energy efficiency market?

The benefits are compelling, the technologies are available, and the fuse is lit – the countdown to 2050 has started.  From a banker’s perspective, my next question is what role can finance play in the retrofit journey of individual homes in the UK?  How will finance enable collaboration across multiple fragmented sectors?  And what financial innovations are required to deliver the systems-based solutions of the future?

For answers, check out the second part of Building a Greener Future for an insight into the innovation and collaboration that could help finance a cleaner, greener built environment.

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