Financing energy efficient buildings: the path to retrofit at scale - Green Finance Institute
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Financing energy
efficient buildings:
the path to retrofit
at scale
May 2020
A report on phase one of the Coalition for the Energy Efficiency of Buildings
Green Finance Institute Financing energy efficient buildings
Foreword
Citizens, communities and economies are facing This report outlines the results from the Coalition’s
the two greatest challenges of our times: climate first phase including a focused review of the
change and the Covid-19 pandemic. The domestic retrofit market, a portfolio of
response to both these crises is rooted in ‘demonstrators’ that were developed by the 52
science and innovation, as we seek solutions to member organisations to unlock the barriers to
monitor, mitigate and adapt to the impacts of investment, and policy recommendations that
coronavirus and our changing climate. The role establish a conducive environment for rapid
of our financial system is also increasingly adoption and scale-up of energy efficiency
recognised as essential in facilitating those improvements.
solutions, while also helping to create a more
inclusive and sustainable global economy. The UK has shown global leadership in tackling
climate change and developing the green finance
In the UK, our built environment is responsible for market. The Coalition for the Energy Efficiency of
almost 30% of total greenhouse gas emissions. Buildings builds on the important work of the
And yet this sector has significant potential to Green Finance Taskforce and Green Finance
decarbonise and unlock wider benefits across Strategy. As the Coalition moves into its next phase,
the economy: energy savings that increase delivering the first portfolio of demonstrators to
consumer spending power, healthier homes that market as set out in this report, we aim to
reduce the burden on our health system, and the demonstrate that cross-sector collaboration,
creation of new skilled jobs that can help focused on practicable, financial solutions to
stimulate the UK’s economic recovery. deliver local real-economy impact, is a key
component to achieving the systemic change
In December 2019, the Green Finance Institute needed to meet the global challenge of
established the Coalition for the Energy Efficiency decarbonising our built environment. We
of Buildings to stimulate action across the welcome you to join our journey.
finance sector to support the decarbonisation of
our homes. In line with the Institute’s theory of
change – which focuses on creating opportunities Dr Rhian-Mari Thomas OBE
for the financial sector to profitably support the CEO, Green Finance Institute
transition towards an environmentally sustainable Chair, Coalition for the Energy Efficiency of Buildings
economy – the Coalition is developing the market
for financing net-zero and resilient homes, through
the co-design and launch of viable and impactful
financial ‘demonstrators’ that provide the catalyst
for further financial innovation at scale.
“The work carried out by the Coalition for the Energy Efficiency of Buildings represents a positive
step towards achieving our Green Finance Strategy ambition to build the market for green home
finance. The proposed demonstrators aim to support the development of innovative products to
finance energy efficiency and build a vibrant market for energy retrofit. This will support the UK in
delivering its commitment to move towards net zero whilst growing our economy.”
The Rt Hon Kwasi Kwarteng MP, Minister of State for Business, Energy and Clean Growth
1
Green Finance Institute Financing energy efficient buildings
Contents
Foreword 1
60-second summary 3
Executive summary 4
Introduction 12
The role of buildings in a greener economic recovery 13
The Coalition for the Energy Efficiency of Buildings 14
Context and timeline for the coalition 16
Profiling the market for home decarbonisation and resilience 20
Owner-occupied homes 22
Private-rented homes 26
Social-rented homes 30
Adapt and protect: strengthening homes’ resilience to climate change 34
Foundations for investor confidence: data that mobilises capital 35
Mobilising capital: the portfolio of demonstrator solutions 37
Data, digitalisation and enabling frameworks 39
Demonstrators for owner-occupied homes 44
Demonstrators for private-rented homes 48
Demonstrators for social-rented homes 50
Driving systemic change 53
Portfolio impact 54
Policy recommendations 56
Conclusion: a decade of recovery and regeneration 57
Bibliography 59
Appendix I – acknowledgements 61
Appendix II – devolved nation energy efficiency programmes 63
Appendix III – selected further resources 65
2
Green Finance Institute Financing energy efficient buildings
60-second
summary
• This report sets out the findings to date and the intended next steps of the Coalition for the Energy
Efficiency of Buildings.
• Established by the Green Finance Institute in 2019, the Coalition brings together a powerful multi-
stakeholder group focused on developing market solutions to scale up the finance needed to retrofit
UK homes to high standards of energy efficiency, and deliver significant social and environmental
benefits.
• Building on existing research, international best practices, and a focused review of the state of UK
market for financing energy performance retrofits, the Coalition puts forward 21 scalable
demonstrator projects, designed to overcome the barriers to mobilising capital towards the social-
rented, private-rented and owner-occupied residential sectors.
• The Coalition will take forward a portfolio of these demonstrator projects, helping to practically
demonstrate the viability of much-needed financing solutions for energy efficient buildings, both in
the UK and across the globe, in the run-up to important UN climate talks to be co-hosted by the UK
and Italy in 2021.
• The report identifies further government policy measures that would help bolster the commerciality
and scalability of the demonstrators and respond to the social and economic impacts of the Covid-19
pandemic. A key recommendation is the inclusion of both energy efficiency and climate resilience
investment in the government’s economic recovery plans.
• The report outlines further areas of work the Coalition will explore with a growing network of
stakeholders, as it continues its uniquely collaborative and pragmatic approach to this critical agenda.
3
Green Finance Institute Financing energy efficient buildings
Increasing the resilience
Executive of UK buildings to the
Summary effects of climate change
and reducing the number
of households at risk of fuel
poverty will be critical in
ensuring that our economy
and society can thrive in the
longer term.
4Green Finance Institute Financing energy efficient buildings
Executive
Summary
Buildings – a priority for decarbonisation, investment and economic recovery
The UK housing stock is responsible for Climate breakdown is not, however, the only
approximately 20% of the country’s total global crisis we currently face, with governments
greenhouse gas emissions, and the challenge of and citizens also confronted by the social and
decarbonising our built environment could result economic impacts of the Covid-19 pandemic.
in a 40% shortfall to our economy-wide The construction sector is facing significant
decarbonisation targets by 20301, unless it is challenges and should be considered as a central
addressed at pace. pillar of a longer-term green stimulus package.
As climate shocks - including flooding and heat Energy efficiency measures and other building
waves - continue to strike with increasing retrofit works are among the most cost-efficient
impact, increasing the resilience of UK buildings ways to reduce emissions, with many co-
to the effects of climate change and reducing the benefits including improved living standards,
number of households at risk of fuel poverty will healthier and more resilient communities, and
be critical in ensuring that our economy and the delivery of new, skilled green jobs in every
society can thrive in the longer term. part of the country. Focussing on buildings will
therefore help the UK deliver on its climate
targets, support a green and inclusive recovery,
and generate innovative green finance
opportunities.
1
Derived from BEIS (2019) Updated energy and emissions projections: 2018 and CCC (2016) fifth carbon budget dataset.
5Green Finance Institute Financing energy efficient buildings
The Coalition for the Energy Efficiency of Buildings
The Green Finance Institute was established in renovation in UK homes across the owner-
2019 to mobilise capital and accelerate the occupied, private-rented and social housing
domestic and international transition to a tenures. This exercise allowed them to identify
climate-resilient economy. The Institute and co-design financial solutions to overcome
convened the Coalition for the Energy Efficiency barriers to scaling up finance, as well as policy
of Buildings (CEEB) for the purpose of developing levers that could bolster the commerciality and
the market for financing net-zero carbon and scalability of these solutions.
climate-resilient buildings. Formed of global
experts from financial services, local and In the next phase, the Coalition and its members
national governments, energy and construction will bring to market a portfolio of 'demonstrator’
industries, academia and civil society, under the financial solutions that are commercial, scalable
chairpersonship of the Green Finance Institute’s and mobilise capital flows towards the retrofit of
chief executive Dr Rhian-Mari Thomas OBE, the UK homes to improved energy performance
CEEB is a unique and powerful collaboration. standards. The Green Finance Institute will help
unlock the synergies between the demonstrator
Since its formation in December 2019, the projects, working with government and other
CEEB’s 52 member organisations have stakeholders to drive systemic change in the
conducted a focused review of the extensive run-up to important UN talks on climate change
research, best practice examples and current (the 26th Conference of Parties, or COP 26) to be
state of the market for energy performance hosted by the UK in 2021, and beyond.
Context and timeline for the Coalition
Across the UK – at a national, regional and local Ready availability of private finance for the ‘able-
level – there is a mosaic of policy initiatives and to-pay’ market is critically important, but will not
targets related to energy efficiency and building on its own drive sufficient demand for insulation
standards, which can contribute towards a and low carbon heating systems. Actions and
roadmap for reaching economy-wide net-zero activities – better information, access to capital,
emissions by 2050, as well as the UK-wide standards to ensure that works deliver the
target for as many homes as possible to achieve energy savings predicted, as well as incentives
an Energy Performance Certificate (EPC) rating of and regulation for both borrowers and lenders to
C2 by 20353. act – are also needed. For low income and fuel-
poor households, public capital has a much
larger role to play. Government-supported
schemes can achieve the economies of scale
that reduce costs for all.
2
On a scale of A (most efficient) to G.
3
HM Government (2017) The Clean Growth Strategy: Leading the way to a low carbon future
6Green Finance Institute Financing energy efficient buildings
Meeting the 2035 target alone will require a total The exact timeline is uncertain due to the Covid-
investment in energy efficiency upgrades of up to 19 pandemic, but key policy announcements
£65 billion4, while the broader decarbonisation expected this year include the National
challenge will require even greater sums of Infrastructure Strategy, Spending Review and
public and private capital to be mobilised. Heat Strategy. These can shape stimulus
responses to the pandemic into a longer-term
strategy, providing certainty of the path ahead,
and allowing the leverage of further private
capital for housing infrastructure projects.
Profiling the market for home decarbonisation and resilience
The Coalition’s market review was structured to Sector-specific barriers were identified: for
explore the three main tenures: owner-occupied, example, owner-occupiers can experience long
private-rented and social-rented homes. The payback periods on investment and a limited
Coalition identified key decision-makers and impact on property valuations, which can hold
behavioural drivers for each of these groups, households back from expending the upfront
including barriers – both financial and non- costs required. In the private-rented sector there
financial – faced in scaling up retrofit activity. is a ‘split incentive’, whereby the landlord pays
Some barriers were identified as common to all for energy efficiency improvements and yet
three groups, including: uncertainty on the tenants accrue the benefit through reduced
benefits of energy saving measures; lack of energy bills. In the social-rented sector, the
access to information about the retrofit journey short-term nature of grant schemes can prevent
and finance options; high supply chain costs and more ambitious retrofit projects, and private
uncertainty around green credentials; and a lack leaseholders and occupiers within blocks of flats
of incentives to incur the upfront costs and and terrace rows can prevent social housing
‘hassle factor’ associated with retrofits. providers from undertaking large-scale retrofit
projects.
Mobilising capital: the portfolio of demonstrator solutions
The portfolio of over 20 ‘demonstrator’ projects, existing energy efficiency initiatives and inform
comprising financial products and services government policy. Importantly, this portfolio
designed to overcome the challenges identified seeks to focus on homeowners who are not
by the Coalition, seeks to appeal across the already supported by existing government policy
market’s breadth of housing tenures, socio- or its manifesto commitments on energy
economic and geographic profiles, interact with efficiency.
4
BEIS (2019) Green Finance Strategy: Transforming Finance for a Greener Future
7Green Finance Institute Financing energy efficient buildings
The demonstrators include projects that will create the ‘enabling’ conditions needed by other financial
demonstrators, by overcoming some of the universal barriers faced across all tenures. An overview is
provided below:
Tenure
Type Name Demonstrator description
OO PRS SRS
Energy Efficiency Research and development of practical solutions, based on
& Property the relationship between energy performance and property ✓ ✓ ✓
Valuations valuation, that unlock investment towards net-zero homes.
Metered Energy A standardised savings calculation methodology to deliver
Data and enabling f rameworks
Savings rich data on real-time energy savings over the lifetime of a ✓ ✓ ✓
retrofitted building.
Building A tool to increase the rate and depth of retrofits, providing
Renovation information on what measures are possible and a long-
Passports term renovation plan that can be achieved at a flexible
✓ ✓ ✓
pace.
TrustMark ‘Call to A platform to support customers through the full retrofit
Action’ Platform journey: identifying improvements, sources of funding and ✓ ✓ ✓
linking homeowners to a reputable supply chain.
Residential An industry-recognised certification for financial solutions
Retrofit that support the retrofit of residential buildings to a high
Principles standard, to enhance the confidence of lenders and
✓ ✓ ✓
borrowers.
Sustainable A certification scheme for green buildings and retrofit
Housing Label projects, spanning the full breadth of tenures, to stimulate ✓ ✓ ✓
demand and investment into the sector.
Tenure
Type Name Demonstrator description
OO PRS SRS
Green Leases Green Leases with an ‘Energy Alignment Clause’ enable
landlords to recover the cost of a retrofit, based on the ✓
ag reemen ts
predicted energy savings, and minimise the landlord-tenant
Ten an cy
split incentive.
Affordable Rent, Adjust the ‘affordable rent’ definition to include modelled
Affordable Living energy costs, to incentivise landlords to deliver properties
where tenants can afford the combined cost of rent and ✓
energy bills.
* OO: owner-occupied homes; PRS: private-rented sector; SRS: social-rented sector;
8Green Finance Institute Financing energy efficient buildings
Tenure
Type Name Demonstrator description
OO PRS SRS
Property Financial institutions provide long-term capital for retrofit
Assessed Clean projects, while local authorities or associated independent
Energy ‘style’ third parties collect repayments via an additional property
✓ ✓ ✓
financing charge that is passed through to the lender.
Green Equity Enables homeowners over the age of 55 to unlock the equity in
Release their property for investment, with favourable terms to ✓ ✓
incentivise investment into energy efficient improvements.
Lendin g p rod ucts
‘Help to Green’ Homeowners can borrow against the equity in their property,
Equity Loan in order to invest into energy efficiency improvements. ✓ ✓
Government support, similar to the Help To Buy scheme, could
facilitate favourable borrowing terms.
Domestic Energy A salary sacrifice scheme that allows employees to draw a
Efficiency Salary loan through their employer for investment into home energy ✓
Sacrifice Scheme improvements, which is repaid via gross salary contributions.
Leaseholder Provides an attractive financing offer to private leaseholders,
Financing via social landlords or related intermediaries, to foster positive ✓
engagement and consent for multi-property retrofit projects.
Add-to-my- A digital platform to streamline the process for homeowners
Mortgage to apply for a Further Advance (e.g. additional borrowing on
Platform their mortgage) at the ‘point of sale’ of energy efficiency
✓ ✓
measures.
Tenure
Type Name Demonstrator description
OO PRS SRS
Community Utilises a crowdfunding approach to create an efficient,
i n ve s t m e n t p ro d u c t s
Municipal Bonds scalable and cost-effective source of funding for local
authorities to finance projects that address the climate
✓
emergency.
S av i n g a n d
Long-Term Retail Retail investors to provide capital for home improvements,
Investment receiving predictable returns from energy-efficient private ✓ ✓ ✓
rental properties
Energy Saving Energy bill savings from a retrofit project can be directed
ISA towards an ISA or savings product, to help tenants build up ✓ ✓
their savings for a mortgage deposit or other investments.
* OO: owner-occupied homes; PRS: private-rented sector; SRS: social-rented sector;
9Green Finance Institute Financing energy efficient buildings
Tenure
Type Name Demonstrator description
OO PRS SRS
Insurance- An insurance-backed guarantee mechanism for ‘Comfort
Energy service products
backed Comfort Plans’ to increase confidence amongst early adopters (e.g. ✓ ✓
Plans social landlords) and improve the financing available for
deep retrofit projects.
Comfort as a Financial mechanisms to unlock the cash savings in energy
Service efficient and optimised homes, to support the investment ✓ ✓ ✓
case for housebuilders and homeowners to achieve high
efficiency standards.
MEES Compliant An energy performance guarantee that allows private-rental
Funding landlords to procure long-term compliance with MEES ✓
requirements.
Tenure
Type Name Demonstrator description
OO PRS SRS
mechanism
Guarantee
Government A government guarantee to support large-scale retrofit
Guaranteed projects in the social housing sector, aimed to scale the
Financing supply chain and drive economies of scale that benefit all
✓ ✓
housing tenures.
* OO: owner-occupied homes; PRS: private-rented sector; SRS: social-rented sector;
Driving systemic change, empowered by policy recommendations & financial innovation
‘Systemic change’ refers to the finance industry, financial products, which could be aggregated
government, supply chain and households and securitised, utilising sustainable housing
working together around a shared ambition to labels to attract investors from the ever-growing
drive system-wide change that is greater than market for responsible investment opportunities.
the sum of individual efforts. There is huge
opportunity for positive and mutually reinforcing Government policy can help to bolster the
interplay between the demonstrators profiled in commerciality and scalability of these
this report. Innovations in data depth and the demonstrators. Alongside tackling carbon
establishment of industry-recognised standards emissions and fuel poverty, upgrading the energy
could act as crucial enablers for many financial efficiency of our homes corresponds to three
products, nurturing market-wide confidence in essential criteria for resetting the economy in
the quality of retrofits and supply chains, and response to the coronavirus pandemic:
showcasing the benefits associated with energy supporting the goal of ‘levelling up’ infrastructure
savings. This could help drive demand for and opportunity across the UK; stimulating rapid
10Green Finance Institute Financing energy efficient buildings
investment; and stimulating consumer spending. in social housing to scale-up a quality supply
In order to support the economic recovery plan, chain; long-term regulatory clarity for rented
key policy recommendations include: a new housing and new Minimum Energy Efficiency
interim target of EPC C for all homes by 2030; Standards for owner-occupied homes; fiscal
delivering the manifesto commitments for a incentives for able-to-pay owner-occupiers and
Social Housing Decarbonisation Fund and Home private landlords; and a government
Upgrades Grant; a loan guarantee mechanism for standardised methodology and framework for
lending to at-scale renovation projects anchored Building Renovation Passports.
Conclusion: navigating uncertainty and realising opportunity
This decade will be defined by our response to The Coalition’s wide-ranging expertise, and its
the twin crises of climate breakdown and the delivery of innovative and practical solutions,
coronavirus pandemic. In partnership with presents an opportunity for the financial sector
government, the finance sector will play a crucial to support the market for net-zero carbon and
role in providing the capital and services to resilient buildings, vital in driving momentum on
underpin these efforts. Likely to be among the climate action in the run up to COP 26 and
sectors heavily affected by the fallout of the beyond.
coronavirus pandemic, housing is key for
meeting decarbonisation and climate resilience
ambitions; upgrading the UK’s housing stock will
also capture significant environmental, social
and health benefits.
11Green Finance Institute Financing energy efficient buildings
The strategy to decarbonise
our homes and other
Introduction buildings is a critical
component in the UK’s ability
to reduce emissions over the
next 10 years.
12Green Finance Institute Financing energy efficient buildings
Introduction
The role of buildings in a greener economic recovery
Our climate is changing, and with it the global Therefore, the strategy to decarbonise our homes
financial system. As people and communities and other buildings is a critical component in the
across the world respond to new phenomena UK’s ability to reduce emissions over the next 10
that impact our daily lives, the financial system is years.
uniquely positioned to invest capital into a net-
zero carbon and climate resilient economy. The resilience of our built environment is also
increasingly important as the new decade
An unprecedented scale, pace and immediacy of heralded extreme flooding across the UK with
action is required to limit global temperature storms Ciara, Dennis and Jorge damaging
rises to 1.5°C. The special report published by thousands of homes. Our summers continue to
the Intergovernmental Panel on Climate Change become hotter, placing new pressures on
is clear that significant decarbonisation progress housing and the way we build and renovate. With
is required in the next 10 years to achieve climate homes accounting for one fifth of greenhouse
safety – globally cutting emissions by 50% gas emissions9, and further sustainability issues
between 2018 and 20305 – demanding arising throughout the lifecycle of buildings –
decisiveness and speed. from the production and choice of materials,
through construction, use and renovation,
The UK became the first G7 member to pass into demolition and subsequent impacts – an
law its target to reach net-zero emissions by ambitious and circular approach to our built
20506 and over two thirds of local governments environment is needed.
have declared a climate emergency7; however,
without a significant acceleration of emission
reductions across the UK built environment –
including energy efficiency improvements and
low-carbon heating systems – the sector could
account for nearly 40% of the overall shortfall8 in
meeting 2030 targets.
5
IPCC (2019) SR15: Global warming of 1.5°C
6
BEIS (2019) UK becomes first major economy to pass net zero emissions law
7
climateemergency.uk (2020) List of Councils who have declared a Climate Emergency
8
Derived from BEIS (2019) Updated energy and emissions projections: 2018 and CCC (2016) Fifth Carbon Budget Dataset.
9
CCC (2019) UK housing: Fit for the future?
13Green Finance Institute Financing energy efficient buildings
Climate breakdown is not the only global crisis towards the net-zero transformation of our
we currently face. As governments and citizens homes and directly contribute to the UK’s
confront the social and economic impacts of the economic and social recovery.
coronavirus pandemic, the construction and
building sectors – whose workers and supply Housing currently presents a considerable
chains will be severely impacted10 – must be challenge in the context of the UK’s climate
considered as a central consideration in any response. If this can be turned around, the social
stimulus package that places economic and and economic benefits will be extensive; with
environmental recovery at its core. As the near- improved living standards for millions of
term fiscal response to the coronavirus crisis households, healthier and more resilient
takes hold, and longer-term structural stimulus communities, and the potential to create a
packages are explored, the financial sector can thriving sector that provides skilled green jobs in
play a critical role in channelling investment every part of the country.
The Coalition for the Energy Efficiency of Buildings
Ahead of the UK and Italy’s hosting of important London Corporation, the Institute is uniquely
UN climate talks (the 26th Conference of Parities placed to mobilise capital through accelerating
– COP26), it is critical the UK shows climate the domestic and global transition to a
leadership to energise and inspire the sustainable, net-zero carbon and climate-
international community to join the net-zero resilient economy. In particular, by convening
transition. The launch of the UK’s Green Finance mission-led coalitions, the Institute aims to
Strategy in July 2019, complementing the earlier identify and unlock barriers to deploying capital
Clean Growth Strategy and Industrial Strategy, at pace and scale towards impactful, real-
demonstrated an ambition to expedite the economy outcomes.
transition towards cleaner and more resilient
economic growth. Delivering this ambition at In December 2019, the Green Finance Institute
pace and scale represents a significant challenge convened the Coalition for the Energy Efficiency
that will require collaboration across all markets of Buildings (CEEB) to develop the market for
and sectors. financing net-zero carbon and climate-resilient
buildings in the UK. The Coalition’s goal is to
In response to this challenge, the Green Finance design, develop and launch a portfolio of new
Institute (the ‘Institute’) was established in July financial solutions that unlock investment into
2019 as the UK’s principal forum for public and the sector and stimulate further innovation.
private sector collaboration in green finance. As Formed of global experts from financial services,
an independent organisation supported by HM energy and construction industries, local and
Treasury (HMT), the Department for Business, national government, academia and civil society,
Energy and Industrial Strategy (BEIS), the Foreign the Coalition represents a unique and powerful
and Commonwealth Office (FCO) and the City of collaboration.
10
FT (2020) Building site closures undermine key housing targets;
Unite (2020) Government must extend wage assistance to help construction’s million plus self-employed
14Green Finance Institute Financing energy efficient buildings
This report presents the findings and In the next phase, the Coalition and its members
recommendations of the Coalition’s 52 member will bring to market a portfolio of 'demonstrator’
organisations from January to March 2020. It financial solutions that are commercial, scalable
assesses the state of the market for energy and mobilise capital flows towards the retrofit of
efficiency improvements in UK homes across the UK homes to improved energy performance
owner-occupied, private-rented and social- standards. The results of this report will inform
rented tenures and identifies specific initiatives the overall portfolio, whilst the Green Finance
where financial services and government can Institute will unlock synergies between individual
bridge investment gaps, drive systemic change demonstrators and facilitate cross-sector
and smooth the path to retrofitting over 28 collaboration to address specific challenges that
million homes in the UK11, taking into account the limit the uptake of energy efficiency, low-carbon
wider economic and social benefits that can play heating and resilience upgrades in UK homes.
an important role in a green and inclusive
economic recovery from the coronavirus
pandemic.
11
Compiled from: MHCLG (2020) English Housing Survey 2018 to 2019: headline report; NRS (2019) Estimates of Households
and Dwellings in Scotland, 2018; Statistics for Wales (2019) Dwelling Stock Estimates for Wales, as at 31 March 2019; NISRA
& DfC (2019) Northern Ireland Housing Statistics 2018-19.
15Green Finance Institute Financing energy efficient buildings
Context and An estimated investment of
timeline for £65 billion is required to
the coalition achieve the UK
government’s stated
ambition to improve as
many homes as possible to
an Energy Performance
Certificate (EPC) rating
of C by 2035
16Green Finance Institute Financing energy efficient buildings
Context and
timeline for
the coalition
An estimated investment of £65 billion12 is
required to achieve the UK government’s stated A challenge inextricably linked:
ambition to improve as many homes as possible decarbonising heat
to an Energy Performance Certificate (EPC) rating
of C13 by 203514. However, the total investment The replacement of fossil-fuelled heating
will be significantly greater; the target is only a systems with low-carbon alternatives requires
milestone on the way to the UK’s net-zero considerably more investment, in which
ambitions (see box). energy efficiency upgrades will play a crucial
role in keeping costs to a minimum. Without
To set the £65 billion investment in context, the all appropriate efficiency improvements, the
cost of heat decarbonisation could be £6.2
size of the home repair, maintenance and
billion higher per year to 2050*. Whilst low-
improvement (RMI) market in the UK was £28.8
carbon heating and related infrastructure
billion in 201915. Tapping into this market is one
upgrades are mostly outside the Coalition’s
of the best opportunities to mobilise capital at current scope, there will be lessons in financial
the scale and speed required - through innovation that can be drawn from its work
incorporating energy efficiency measures into that could be applied to the broader project of
renovation decisions (often referred to as ‘trigger decarbonising the UK’s homes.
points’) and investments wherever possible - and
* Imperial College London (2018) Analysis of
offers opportunities to grow the construction Alternative UK
sector and create skilled jobs15.
Layered over the plethora of targets, regulations
and supportive policies across the UK’s four
nations, many cities and regions have committed
to net-zero ambitions by 2035 or even sooner,
with more than two thirds of local authorities
having declared a climate emergency17.
12
BEIS (2019) Green Finance Strategy: Transforming Finance for a Greener Future
13
On a scale of A (most efficient) to G.
14
HM Government (2017) The Clean Growth Strategy: Leading the way to a low carbon future
15
ONS (2020) Output in the construction industry
16
For example by incorporating external wall insulation works when scaffolding is up to renew roofs.
17
climateemergency.uk (2020) List of Councils who have declared a Climate Emergency
17Green Finance Institute Financing energy efficient buildings
This has spurred numerous councils – for whom Across all housing tenures, additional activities
housing is a large source of emissions – to seek are needed to generate consumer demand and
a level of ambition over and above the national unlock the provision of finance for decarbonising
policy. For instance, Bristol has pledged that its and improving the resilience of our homes. These
new buildings will be carbon neutral and climate include activities such as the providing better
resilient by 2030, and the energy performance of information, access to capital, standards to
existing buildings will be improved through ensure that projects deliver the predicted energy
tailored retrofit solutions to minimise heat savings, as well as incentives and regulation for
demand and prevent overheating18. both borrowers and lenders to act. As highlighted
in the Government’s Call for Evidence on Building
For homeowners in the ‘able to pay’ category, a Market for Energy Efficiency, “…there is no
private capital will deliver the lion’s share of single ‘silver bullet’ policy for improving energy
investment in energy efficiency improvements. efficiency19.”
Ready availability of private finance is critically
important, but – as the Green Finance Taskforce Important policy announcements were expected
and Green Finance Strategy have acknowledged in 2020 regarding energy efficiency, the
and experience in other countries shows – will renovation supply chain and finance providers.
not on its own drive sufficient demand for However, the Covid-19 pandemic has cast
insulation and other efficiency measures. For uncertainty over timings: the delayed National
low-income and fuel-poor households, public Infrastructure Strategy was due in the first half of
capital has a much larger role to play. 2020; the Spending Review has been postponed
from July 2020; and the Heat Strategy had been
anticipated in September this year. A provisional
timeline of targets, commitments and processes
is mapped over the deliverables of the Coalition
in Figure 1.
18
Bristol City Council (2020) One City Climate Strategy
19
Green Finance Taskforce (2018a) Accelerating green finance: Green Finance Taskforce report
182020 2021-2025 2026-2027 2031-2035 2036-2040 2041-2045 2046-2050
Q1 Q2 Q3 Q4
Phase 1: Phase 2a: Demonstrator Present portfolio Phase 2b: Demonstrator Delivery (Financial Solutions)
Coalition Segmental Delivery (Market Enablers) of demonstrators Present portfolio of demonstrators at COP26
Market Review Interim report Final report (1) Ongoing scale-up and mainstreaming; Final report (2)
England & National UK 2021: COP26 UK 2030: UK 2035: Scotland Scotland UK 2050:
Wales: all Infrastructure all rented EPC C for 2040: at 2045: net-zero
private rented Strategy England 2025: all fuel-poor homes at all least net-zero emissions
homes at Spending Review homes at least EPC D least EPC C homes EPC C emissions
least EPC E Heat Strategy or Scotland for all
Sixth carbon Scotland 2022: all private-rented equivalent 2032: homes;
Targets, milestones homes at least EPC E; 2025: all (expected) EPC B for EPC B
budget proposal
and moments (expected) social-rented homes at least social for fuel
EPC D England rented poor
England: all fuel 2030: all homes homes
poor homes at fuel-poor
least EPC E homes at
least EPC C
Great Britain: Energy Company Obligation for delivering home heating cost reduction measures until 2028
Current policy UK 2030:
(see Appendix II for England & Wales 2025: Future halve the
Devolved Nation England & Wales: cost of
new building Homes Standard enters into
policies and force retrofitting
regulations enter homes to
programmes)
into force new build
standards
UK (2019 manifesto commitment) to 2030: £3.8bn Social Housing Decarbonisation Fund
Commitments
UK (2019 manifesto commitment) to 2025: £2.5bn Home Upgrades Grant
Each Home Counts implementation (on consumer advice, protection, standards and enforcement)
UK 2021: Shared Prosperity Fund
Proposals and other to replace EU Structural Funds
processes Scotland 2024: owner occupiers
must achieve EPC C at point of
sale and/or major renovation
(proposed)
Figure 1: CEEB in the context of the UK housing energy efficiency timeline
19Green Finance Institute Financing energy efficient buildings
Profiling the
market for
home The working groups rapidly
decarbonisation reviewed and collated
and resilience recognised issues to help
evaluate the opportunities to
scale up activity across the
sector.
20Green Finance Institute Financing energy efficient buildings
Profiling the
market for
home
decarbonisation
and resilience
The overarching goal for the Coalition is to Each working group employed a set of questions
mainstream financial solutions related to the to structure the review:
construction and retrofit of UK homes to net-zero
carbon and climate resilient standards. To • Who are the financial decision makers?
achieve this ambition, the Coalition’s work is
structured in two phases: the Segmental Market • What is their profile?
Review (Phase 1) and the Demonstrator Delivery • Their motivations and trigger points for
(Phase 2). renovation
• Their awareness and knowledge
The Segmental Market Review was conducted • Geographic and socio-economic
between January and March 2020, bringing differences
together stakeholders from finance, industry, civil
society, academia and government, to review • Existing initiatives and the delivery partners
different segments of the residential housing
market and identify the barriers and enablers of • What are the main barriers to retrofit?
retrofit projects and investment. Benefitting from • Financial
the extent of research already completed in this • Non-financial
field, the working groups rapidly reviewed and
collated recognised issues to help evaluate the The following sections provide further detail on
opportunities to scale up activity across the each tenure and conclude with an overview of
sector. These findings were applied to design a common themes around resilience and data.
series of scalable ‘demonstrators’ of new
financial solutions and finance-enabling
initiatives that could unlock investment in retrofit
projects.
The review was organised by housing tenures:
owner-occupied, private-rented and social-
rented homes.
21Green Finance Institute Financing energy efficient buildings
Owner-occupied homes
Chaired by Jenny Holland, UK Green Building Council
At 62% of the UK’s 27.2 million households in
201720, owner-occupiers comprise the largest
millions of homes
housing tenure, and therefore the largest potential
market (by volume) for financing home
decarbonisation and climate resilience. The
number of new entrants to the sectors has been
declining steadily, with the share of households
who live with a mortgage at 28% in 2017, down on
37% in 200720. This decline has been mirrored by
growth in the share of households renting
privately. The incidence of fuel poverty amongst
owner-occupiers is lower than in the other sectors, Figure 2: Distribution of EPC ratings in the owner-
at 8%, although given the percentage of homes in occupied sector, England 2016/17
this sector the number of fuel poor households –
1.2 million in England21 – is the largest.
Public and private finance for owner-occupiers
Operating across the devolved nations (except The government’s election manifesto committed
Northern Ireland), the Energy Company to a new Home Upgrades Grant scheme of £2.5
Obligation is the UK government’s current billion over five years from 2020/21, focused on
flagship energy efficiency policy. Delivered by subsidising ‘whole-house’ retrofits for low-
energy suppliers and worth £380 million in 2019, income households. Eligible households include
it primarily funds insulation measures and owner-occupiers living in F- and G-rated
efficient gas boiler replacements, with a focus on properties in deprived areas.
lowering heating costs for low income and
vulnerable households across all tenures. It Whilst at an early stage, the private sector is
helped 78,000 owner-occupied households in starting to develop financial products to help
201922. A former flagship policy, the Green Deal – owner-occupiers retrofit their properties. Green
an ‘on-bill’ financing mechanism secured against Mortgages are available from Barclays,
the electricity meter – had public investment Nationwide and Ecology Building Society, whilst
withdrawn after homeowner take-up fell short of the Energy Efficient Mortgage Initiative aims to
expectations. The scheme is currently under develop a pan-European model for energy
review and still available to private finance efficient mortgages.
providers wishing to enter the market. The
Renewable Heat Incentive offers financial
support for seven years to owner-occupiers
adopting a renewable heating system.
20
ONS (2019) UK private rented sector
21
BEIS (2019) Fuel poverty detailed tables 2019
22
BEIS (2020) Household Energy Efficiency Statistics, detailed report 2019
22Green Finance Institute Financing energy efficient buildings
Profiling financial decision-makers
There are significant variations across the Changing household circumstances, such as
owner-occupier segment, ranging from highly moving home, preparing for a growing family, or
mortgaged first-time buyers to those who own a planning for later life, can drive building works
property outright; and there are wide differences that could incorporate energy improvements. It is
in purchasing power within these groups, even if important to acknowledge that the Covid-19
they tend to cluster around particular crisis has temporarily stalled the housing market,
demographics. For example, in England the with unprecedented consequences for sale
outright owners are typically older and evenly volumes and property valuations. Following the
distributed across the income quintiles23. Owner- financial crisis, owner-occupiers pivoted their
occupiers might use a range of finance sources housing investments towards ‘staying and
for retrofit and renovation purposes, including improving’ rather than moving up the housing
housing-related finance such as advances on an ladder. Should a similar trend emerge in the
existing mortgage or equity release. The years ahead, this has implications for the
variation in circumstances and choices across composition of retrofit trigger points that
multiple dimensions generate variation in the households could experience.
motivations, challenges and opportunities for
homeowners to improve the energy efficiency of Owner-occupiers engage with a wide range of
their property. potential professional influencers of renovation
and retrofit decisions including lenders,
Lower energy bills and creating an mortgage brokers, architects and builders,
environmentally friendly home are common surveyors and estate agents, regulators, and
motivators, but owner-occupiers may also freeholders should the property be a leasehold.
choose energy efficiency improvements when
pursuing other goals, such as increased comfort
and a healthier home, for aesthetic reasons, or to
protect the value of their property. Major
renovations to homes (e.g. extensions, kitchen or
bathroom refurbishments) or general
maintenance and repair (e.g. roofs or façades)
create valuable opportunities to undertake
concurrent work to improve energy and
emissions performance.
23
DCLG (2018) English Housing Survey, 2016-2017: Household Data
23Green Finance Institute Financing energy efficient buildings
Barriers to retrofit
Owner-occupiers experience a breadth of financial and non-financial barriers depending on their individual
circumstances, as outlined in Table 2.
Financial Barriers Non-Financial Barriers
• High upfront costs for improvements. • Low awareness among homeowners, and
• Lack of access to capital. disconnect between a genuine concern about
climate change and the energy efficiency of their
• Low confidence in energy bill savings: A barrier property
for homeowners seeking full repayment via
energy savings. • Professional influencers fail to inform and educate
homeowners of benefits.
• Duration of tenancy: Energy bill savings may not
accrue to the original homeowner if they move • Lack of good quality information and support on
property. products, choices and suppliers. to embark on a
renovation ‘journey’.
• Property value-add: Efficiency improvements not
considered to increase and/or protect property • Duration, hassle and complexity (i.e. supply chain,
values. installation, finances) of retrofit projects.
• Availability and accessibility of products: Low • Lack of confidence in the supply chain.
penetration and availability of attractive financial • Leaseholders gaining permission: Getting
offers for efficiency measures. collective agreement amongst groups of share-of-
freeholders.
Table 1: Financial and non-financial barriers to retrofit projects in the owner-occupied sector
24Sub-segment / profile features First-time buyer High loan to value Low loan to value Own outright (recently repaid) Own outright (sufficient savings)
Decision Maker Y Y Y Y Y
Characteristics Cash poor, generally lower A: Mixed ability to access credit, Typically 45-65, first time Generally older; often asset rich A: Generally older, sufficient
credit rating, more likely to own typically 30-49 | B: highly buyers with parental support, and cash poor; fixed income; savings and/or fixed income;
a new home (Help to Buy etc.) leveraged property developers mature career stage less efficient home less efficient home / B: cash-
rich property developers
Key influencers Lenders, mortgage brokers, Lenders, mortgage brokers, Surveyors/valuers, architects, Peers, advisors of home retrofit, Valuers/ surveyors,
surveyors surveyors, architects, supply advisors of home retrofit financial advisors architects/designers, financial
chain (for property developers) advisors
Level of Awareness Generally very low | EPC data is the only item and not all OOs consider it | High climate awareness not linked to home and not translated into action
Drivers To buy an already energy Desire improvements | Changing family circumstances Minimising costs | consider A: Aesthetics, health, comfort |
efficient home | concerned aesthetics, comfort | consider | consider home as retirement home as retirement plan minimising costs | B: consider
about cost of living | growing dwelling as an investment/ plan | aesthetics, comfort dwelling as an investment/
family asset value increase | rapid asset value increase | rapid
turnover turnover
Trigger Points About to move / recently moved Recently moved | growing Becoming empty nesters | Becoming empty nester | A: Adapting home for future | B:
family | recently acquired recently moved | extensions and retirement | moving to downsize recently acquired investment
investment repurposing
Barriers - Financial Highly leveraged | seeking to High upfront costs, low High upfront costs, low Limited options/desire for Improvements not reflected in
minimise outgoings | limited certainty of savings | certainty of savings | borrowing | high upfront costs, home value
options/desire for further combination of financial combination of financial low certainty of savings
borrowing products required| products required|
improvements not reflected in improvements not reflected in
asset value asset value
Barriers – Non-financial Uncertain performance of EE | Uncertain performance of EE | Uncertain performance of EE | Uncertain performance of EE | Lack of access to good quality
lack of access to good lack of access to good lack of access to good lack of access to good information | hassle | trust in
information information | trust in supply information | hassle | trust in information | hassle | trust in supply chain
chain supply chain supply chain
Table 2: Profile of the owner-occupier segment
25Green Finance Institute Financing energy efficient buildings
Private-rented homes
Chaired by Simon Gordon, National Residential Landlords Association
This sector has grown rapidly in recent years, from
13% of UK households renting privately in 2007 to
one in five in 201724: approximately three million
millions of homes
households. This growth has been mirrored by a
decline in the percentage of households that
purchase a property, and it overtook social
housing as the second-largest tenure in 2014.
Owing to a typical combination of lower energy
performance and housing quality than other
tenures, combined with a high proportion of low-
income households, the sector has the highest
Figure 3: Distribution of EPC ratings in the
incidence of fuel poverty at 19.4% in England,
private-rented sector, England 2016/17 [Source:
equivalent to 900,000 households. DCLG (2018)]
Policy and commercial offers
As of April 2020, the Minimum Energy Efficiency The Renewable Heat Incentive is also available,
Standard (MEES) mandated all private rental where landlords fund the new renewable heating
properties to have an EPC rating of E or above in system and receive subsidy payments.
England and Wales, and a consultation proposing
to increase this to an EPC rating of C by 2030 is The government’s 2019 election manifesto
anticipated later in 2020. In 2019, the Energy commitment to a Home Upgrades Grant scheme
Company Obligation (ECO) funded energy also applies to low-income households living in
improvements for 14,500 low income and inefficient homes in the private-rented sector,
vulnerable private-renting households across and could dovetail well with current MEES.
Britain25. The Green Deal was available across
the private-rented sector, where tenants were Finance offerings from the private sector are
responsible for repaying the upfront investment limited, with only Ecology Building Society
via the energy bill. The scheme experienced offering a Green Buy-To-Let Mortgage. As of
difficulties in this tenure, as landlords were March 2020, LendInvest announced a new
unable to apply for the financing during void Bridge-to-Let Loan offering cashback to
periods when renovations are typically landlords that improve the EPC rating of their
completed. investment property.
24
ONS (2019) UK private rented sector
25
BEIS (2020) Household Energy Efficiency Statistics, detailed report 2019
26Green Finance Institute Financing energy efficient buildings
Profiling financial decision-makers
The profile of landlords is wide-ranging: from MEES may become a significant driver of energy
small landlords with portfolios of one or two efficiency improvements to private rental
holdings, through to corporate landlords, properties, especially if – as is planned in
institutional investors and asset managers. 94% England and Wales – its scope is expanded
of landlords are individuals, and almost half of beyond properties with an EPC rating of F or G
landlords own just one property. However, the top (approximately 7% of properties in the sector) to
17% of landlords by portfolio size account for encompass E and D rated properties by 2030. At
approximately half of all tenancies in the UK. On 42%, awareness and understanding amongst
average, landlords report a gross rental income landlords and agents of MEES is low, but steadily
of £15,000 per year and the median borrowing rising. Tenants’ awareness of, and willingness to
value of mortgages to purchase a rental property act on, their rights in respect of MEES is expected
is £180,000. to increase over time. More broadly, renovation
works in the sector are usually driven by the need
With the notable exception of students in for repairs (e.g. heating system replacement)
purpose-built accommodation, tenants are especially amongst small landlords. Property
typically responsible for paying the energy bills. improvement works are usually undertaken
Private-rental tenants tend to be younger than during void periods, due to the reduced
households in other tenures and stay in complexity and potential to recoup a portion of
properties for a shorter time than owner- the improvement costs through higher rental
occupiers, with an average duration of four and rates on the new tenancy.
18 years, respectively. An estimated 63% of
private renters have no significant savings, and Given the regulatory and fiscal changes to
one in five receives Housing Benefit. These landlords’ circumstances in recent years,
factors mean that, despite tenants possibly coupled with short-term uncertainty caused by
benefitting from energy bill savings, the capacity the coronavirus health crisis, the landlord
of tenants to directly contribute towards the cost community is likely to favour longer-term clarity
of retrofits – as is common in France, Germany on the technologies and timelines for energy
and the Netherlands – is limited and leaves efficiency improvements. And the professional
landlords as the principal investors and decision network of letting and management agents,
makers. sustainability advisors, asset managers and
larger landlords – as well as tenants – has
significant potential to influence the energy
renovation decisions of landlords.
Barriers to retrofit
The private-rented sector faces significant, yet Meanwhile, the short length of tenancies and
not insurmountable, challenges to retrofit. The lack of disposable income typically seen among
degree of separation from the owner to the private-rented tenants limits their ability to
property can create an additional layer of contribute to efficiency measures.
complexity in motivating landlords to make the
significant upfront costs required.
27Green Finance Institute Financing energy efficient buildings
Financial Barriers Non-Financial Barriers
• Split incentive: Most landlords do not pay energy • Low awareness of MEES: Particularly amongst
bills, hence do not benefit from energy savings smaller landlords, whilst tenants have limited
that help justify retrofits. appreciation of their rights and relatively weak
• High upfront costs, particularly for landlords with position. Influencers (e.g. letting and management
multi-property portfolios. agents) and tenants often fail to raise efficiency
issues.
• Access to capital: Landlords with medium-sized
portfolios (3-5 properties) are not well served by • Duration, hassle and complexity of projects,
financial products suitable for renovation coupled with uncertainty about tenancy length (to
projects. plan projects for void periods). A challenge for
tenants as well, especially those in short-term lets.
• Uncaptured value: Energy improvements do not
translate into increase rental rates or property • Lack of good quality information and support on
valuations. how to meet or exceed MEES, product choices
(technical and financial) and suppliers.
• Leasehold limitations: Leasehold are landlords
not permitted by default to recoup costs of • Regulatory uncertainty about future requirements,
improvements via increased service charges, only in particular MEES and how compliance fits in with
for replacements or repairs. future regulation.
• Freeholder incentive: Freehold owners of
leasehold rental properties typically interested in
ground rent only, which is unaffected by property
improvements.
Table 3: Financial and non-financial barriers to retrofit projects in the private-rented sector
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