DHH0032

Written evidence submitted by The Northern Housing Consortium

Introduction

The Northern Housing Consortium (NHC) is a membership organisation whose membership is comprised of housing associations, local authorities, ALMOs and combined authorities across the North East, North West and Yorkshire & Humber.

Our members manage 9 out of 10 socially rented homes in the North and our local authority members are responsible for the regulation of the private rented sector within their areas. As a result, our submission to this Call for Evidence will focus on the issues facing our members with relation to decarbonising home heating in both rental tenures.

Summary

The key barriers currently inhibiting the decarbonisation of home heating for our members are:

• the scale and design of government retrofit funding is limiting housing providers from delivering home improvements to improve energy efficiency and move towards low-carbon heating systems
• a lack of effective regulation to drive up property performance in the private rented sector
• an immature supply chain, which often does not have access to see a pipeline of work coming up
• training and skills providers are not currently gearing up the workforce needed to fully deliver the wide adoption of low-carbon heating systems
• the wider financial context for housing providers and the significant demands currently being placed on their finances. This results in investment being prioritised in other critical areas such as ensuring compliance with the Decent Homes Standard, building safety remediation, and tackling damp and mould rather than decarbonising domestic heating.

State of the North

There are currently 3.8 million homes across the North that fail to achieve EPC Band C. There are, however, significant variations between housing tenure and regions within the North. The table below shows that the social rental sector outperforms both the private rented and owner-occupied tenures. Across the North as a whole, the private rented sector performs worse than owner-occupied tenures, in contrast to England. Energy efficiency performance is the worst in the Yorkshire & Humber region, especially in its private rental sector. 

Proportion of homes that achieve EPC Band C by region and tenure [1]

In addition to energy efficiency being lower in each housing tenure across the North, regions across the North are also disproportionately reliant on mains gas as their primary source of domestic heating. This makes the task of decarbonising heating even greater. Of the four regions in the country with the highest proportion of homes reliant on mains gas as their source of heating, three are in the North.

Proportion of households with mains gas as their source of domestic heating by geographic region: [2]

Issues and barriers to decarbonising the North’s homes

Social Housing Decarbonisation Fund (SHDF)

The primary source of government funding that our members access for retrofit is the Social Housing Decarbonisation Fund (SHDF). This fund has supported the delivery of energy efficiency improvements (including new zero-carbon heating systems) in thousands of homes across the North, but there are issues with the fund as it currently exists.

Firstly, the levels of funding so far have not been of the amount needed to deliver at the scale required. This impacts on the ability of supply chains to scale up.

Across the SHDF Demonstrator, Wave 1, Wave 2.1 and Wave 2.2, £1.02 billion has been allocated in total. Approximately 22% of this funding (£243 million) has gone to the North of England.

Using English Housing Survey data for the average cost to upgrade a social home to EPC Band C gives a total required investment of £2.15 billion for the North of England’s social housing.[3] This is before considering the significantly greater costs of fully decarbonising the housing stock. It is clear that government funding for retrofit is going to have to increase substantially in scale, but there are further issues with the design of the SHDF and other government streams for retrofit which affect delivery.

Problems with current government funding, especially the SHDF, include:

1. Short term funding cycles: funding for retrofit has so far been characterised by short-term’ initiatives which have not made significant progress. This has limited the ability of supply chains and skills providers to scale up their operations based on a reliably increasing level of demand for their work that would be provided by a long-term funding commitment for retrofit. The impacts of funding structure on the wider supply chain and skills ecosystem are discussed further in the ‘Workforce’ section of this response. In addition, rather than allowing housing providers to comprehensively plan how they intend to decarbonise their stock, intermittent tranches of funding incentivises directing investment at the homes which are currently easiest to retrofit. At the same time, these funding structures disincentivize spending on measures that are high in complexity or take longer to complete such as the installation of low-carbon heating systems. This risks leaving the hardest to retrofit homes untouched, increasing bills for residents and carbon emissions, and delaying attempts to address the challenge of decarbonising home heating.

2. Competitive bidding processes: providers spend significant resources in completing applications to access small pots of funding relative to the scale of funds required to decarbonise the nation’s housing stock. The Local Government Association estimates that when considering all kinds of competitive grants available to local authorities, the cost of applying for them can be up to £30,000 for each grant. [4] These resources could be put to more productive use elsewhere, including upgrading homes. The pitfalls of relying on competitive bidding for government grants have been recognised elsewhere in government, such as in Homes England’s Affordable Homes Programme where ‘continuous market engagement’ runs alongside larger strategic partnerships, ensuring that funding is available for providers as and when they and their schemes are ready. A move towards a similar approach for retrofit funding would be welcome.

3. Existing funds come with strict deadlines and little flexibility: Where component prices are volatile and schemes have faced delays, some schemes have struggled to deliver as originally planned. Extra flexibility would allow providers to decide how best to address these issues while still meeting required outcomes. This would be preferred over meeting arbitrary deadlines or requirements that may no longer be the best use of funds or going through a lengthy scheme adjustment request process. We have heard from providers who have considered handing back funds to government or not participating in future funding waves because of onerous restrictions and inflexibility.

Recent engagement with the Department for Energy Security and Net Zero (DESNZ) has been promising with regard to the fact that they are aware of many of these issues and wish to streamline the application process for housing providers. Reforms that make this funding easier to both access and use, granting greater flexibility about how providers use money granted to them would go a long way to accelerating the decarbonisation of domestic heating.

Alongside government providing long-term funding certainty, more could be achieved by trusting local areas to deliver retrofit solutions tailored to their areas. This is not new and is a proven approach, with Local Authority Delivery 2 (LAD2) retrofit funding having been successfully delivered following allocation to local energy hubs rather than by a competitive bidding process.

Expanding on this success, government could look to fund retrofit through long-term funding allocations, based on need, to local areas, possibly through Mayoral Combined Authorities. These are best placed to consolidate existing funding pots, coordinate local supply chain partners and housing providers and then deliver across multiple housing tenures in their areas. Allocations could be based on fuel poverty levels, proportion of homes without zero-carbon heating, or % of homes failing to reach EPC Band C and distributed to local housing providers, landlords and owner occupiers using greater local knowledge than central government can realistically have.

Regulation and enforcement

As the above shows, the private rental sector performs significantly worse on energy efficiency than its social counterpart. In addition to the data comparing the rental tenures found above, the most recently available data from the English Housing Survey noted that while 23% of all heat pumps in England are found in either local authority or housing association homes, the number of heat pumps in privately rented homes was “too small to report on.” [5]

One of the most significant reasons that energy efficiency performance and the adoption of low carbon heating is so much lower in the private rental sector is the lack of effective regulation. The establishment and enforcement of effective Minimum Energy Efficiency Standards (MEES) is required to drive up energy efficiency standards, especially in the private rental sector, ensuring homes help to reduce energy demand and are ready for low-carbon heating.

The existing MEES for private rental homes is EPC Band E. A proportion of Band E homes, and “the vast majority of homes” within Bands F and G – which account for 4.9%, 2.9% and 1.2% of the owner occupied, private and social rental sectors respectively – will have Category 1 ‘excess cold’ hazards under the Housing Health and Safety Rating System (HHSRS). [6] This means that it is a serious enough concern for the local authority to take formal action due to the impact on the occupier’s health. The existing standard and its enforcement are clearly inadequate and must be strengthened. This is why it was disappointing that the Government made the decision last year to abandon attempts to increase Minimum Energy Efficiency Standards.

We believe that a requirement for all rental homes to reach EPC Band C by 2030 remains a realistic but stretching target and that the case for implementing these requirements in the private rental sector should be revisited. This could form part of a strengthened Decent Homes Standard, which is set to be applied to the private rental sector for the first time once the Renters Reform Bill is passed into law.

We are also concerned that the government plans to ‘review’ the existing arrangements around local authority landlord licensing, as mentioned in the DLUHC Parliamentary Under Secretary of State’s recent letter regarding the Renters Reform Bill. Licensing schemes are one of the only tools that local authorities can use to effectively enforce and improve standards within the private sector, and they should be supported to use them wherever necessary. It is important that any review of licensing does not disempower local authorities from using them as appropriate and ensures that there is robust regulation of standards in the private rental sector.

Alongside this, it is critical that local authorities in the North have the capacity to monitor and enforce compliance with any Minimum Energy Efficiency Standards to ensure that they genuinely result in performance improvements. This must be viewed in a context where spending on local authority housing services across the North has been reduced by 53% since 2010, as opposed to 34% across England as a whole. Recent data from the Department for Levelling Up, Housing and Communities (DLUHC) showed that the most common local authority housing enforcement team size is between two and five Full Time Equivalent (FTE) staff, with 26 local authorities reporting that they have between zero and one FTE staff working on housing enforcement. [7]

Workforce

While providers of social housing are upskilling their workforces, more needs to be done in partnership with colleges, universities, institutes of technology, energy hubs, local authorities and Mayoral Combined Authorities to deliver the skilled workers required to fully decarbonise our housing stock.

Our research in partnership with IPPR North, ‘Northern Powerhomes’, demonstrates there is potential for 77,000 direct jobs across the North in retrofit, heat pump installation and maintenance, and heat networks, generating a combined benefit of £3.85 billion GVA by 2035. [8]

In addition, the North East LEP’s domestic retrofit skills assessment concludes that if we are to reach Net Zero by 2050, there will be demand for 67,000 full time equivalent employees in retrofit across the North East and Yorkshire alone (or 80,000 for Net Zero by 2030). [9]

These roles include:

• Retrofit coordinators
• Product manufacturers
• Public procurement officers and support roles
• Assessors
• Designers
• Installers
• Evaluators
• Advisors
• Service operators

Engagement with our members, however, has identified numerous issues with existing skills provision. These include:

• Insufficient skills in the current workforce
• Lack of training infrastructure and courses
• Poor communication of career opportunities to potential students
• Poor training standards and existing skills provision providing limited practical experience and applicability to real world retrofit work

Many of these issues are downstream of the structure of existing retrofit funding, such as the SHDF. Rather than providing a constant stream of financial support for retrofit, the wave-based approach means that skills providers and supply chains cannot scale up their operations on the assumption of consistently increasing volumes of work.

This approach means that demand for labour tends to be partially cyclical rather than a consistent, steady expansion. This is a disincentive for further education colleges to commit to long-term programmes of relevant skills provision.

Our members have also told us that this cyclical nature of funding and skills demand means that when waves of funding are announced, an immediate problem is that multiple housing providers in the same locality or region must compete against each other to procure contractors with the relevant skills or experience. This is due to the contractor base remaining too small to adequately meet the needs of the market during periods of high demand.

Rather than using waves of funding to deliver retrofit support, by providing consistent, long-term levels of funding that housing providers and the wider sector can rely on, skills provision and supply chains will be able to scale up their own operations on the safe assumption of gradually increasing demand for their skills. This would support bringing down costs of retrofit and the installation of low carbon heating systems, accelerate the net zero transition and ensure the benefits of a low carbon home can be experienced by a greater number of households.

Wider financial context 

Finally, significant attention must be given to the wider financial context and the numerous financial pressures currently facing the housing sector, and how these will impact the decarbonisation of social housing stock.

In addition to meeting its net zero ambitions, the housing sector currently faces demands on its finances related to addressing the housing crisis through developing new homes, remediating existing properties in line with new building safety requirements, maintaining an ageing housing stock and complying with a strengthened regulatory regime.

As highlighted by the Levelling Up, Housing and Communities Committee’s inquiry into ‘the finances and sustainability of the social housing sector’, all of these additional requirements are placing further pressures on housing provider budgets.[10]

The Regulator of Social Housing’s (RSH) ‘Global Accounts’ are instructive as to how costs have been rising for housing providers in these areas. In 2023, expenditure on routine and planned maintenance rose by £634 million or 17%.[11] Expenditure on new development also rose by 12% despite the number of new home completions only rising by 7%, reflecting the increased costs of developing new homes.[12]

This comes at a time when several changes to social housing rents have reduced the ability of providers to plan their own investments in confidence. Despite being promised certainty over rental income by government, including a ten-year rent settlement being announced in 2014, this certainty has never been provided. The rent settlement was abandoned within a year of operation with the introduction of a four-year rent cut which reduced income for the sector by £1.4 billion over the period.[13] Rents were then understandably capped in 2023/24 at a level below inflation to support tenants during the cost-of-living crisis. [14] These changes severely undermine the ability of providers to reliably plan their investments in existing properties over their 30-year business plans, while each reduction in rental income further reduces the capacity for investment over the business plan period.

Within such a context, housing providers are forced to focus finite resources on the areas where legal or regulatory requirements compel them to do so. This means that investment focused on ensuring compliance with the Decent Homes Standard or wider regulatory requirements such as addressing damp and mould will take priority over investment in decarbonising domestic heating.

Residents have also felt significant financial hardship as the cost of living has risen significantly over the last few years. The RSH’s ‘Global Accounts’ show that rent arrears are currently at record levels, now standing at 5.3% of gross rents, and a total arrears figure of £819 million at the end of March 2023. [15] This simply demonstrates the incredibly difficult financial pressures placed on social housing residents, who are primarily on incomes below the UK average. [16] At the NHC, we have made significant efforts through our ‘Heartwarming Homes’ research to understand the barriers to retrofit related to tenant engagement – including concerns around energy costs and the wider cost of living – and how housing providers and local authorities can best engage with residents on these areas. [17] This work has shown that barriers to retrofit and decarbonising our homes that relate to tenant willingness to engage are not insurmountable and require careful and considerate communication so that residents do not feel that retrofit is something that is done to them.

Within the current economic context, however, housing providers are extremely hesitant to make any changes to a home that may risk increasing domestic running costs, such as replacing a gas boiler with an air source heat pump. This hesitancy is undoubtably a barrier to accelerating the decarbonisation of domestic heating, especially for the poorest households. One way in which housing providers are attempting to mitigate this risk is to install solar PV and battery storage alongside a low-carbon heating system. This does, however, significantly increase the capital expenditure requirements of any retrofit scheme and reduces the number of homes that providers can deliver improvements to overall.

To remove this barrier to decarbonising homes, the government will need to focus efforts on reducing electricity costs.

April 2024