Written response submitted by Policy Connect to the Environment Audit Committee’s Inquiry on Energy Efficiency of Existing Homes

Introduction

Policy Connect is a membership-based, not-for-profit, cross-party think tank dedicated to improving people’s lives by influencing UK public policy.  We bring together parliamentarians and government in collaboration with academia, business and civil society to inform, influence and improve UK public policy through debate, research and innovative thinking. Our work focuses on key policy areas including: health, education & skills, industry, technology & innovation, and sustainability. This submission has been compiled by the Sustainability Team.

Evidence submitted to this inquiry draws on the expertise we gained from managing the Westminster Sustainable Business Forum and Carbon Connect, both independent forums that facilitate discussion and debate between independent experts, industry and parliament to bring about a low carbon transformation underpinned by sustainable energy and infrastructure. We build our answers in particular on the ‘Warmer & Greener’ (2016) report and the ‘Future Gas Series’ reports entitled ‘Next Steps for the Gas Grid’ (2017), ‘Producing Low Carbon Gas’ (2018), ‘Uncomfortable Home Truths’ (2019), as well as roundtables we organise related to the low carbon transition.

Are the Government’s targets on residential energy efficiency still appropriate to achieve its ambition to reach net zero emissions by 2050?

Policy Connect believes that government aspirations and commitments for residential energy efficiency need to be more ambitious. While the home retrofit aspirations stated in the Clean Growth Strategy (EPC band C by 2035 where practical, cost-effective and affordable) provide a positive direction of travel, the target is 15 years hence so needs some interim milestones to galvanise action now, and the caveats around practicability et cetera should be monitored to ensure they are not used as easy ‘get-out clauses’. The recent slow-down in energy efficiency installations is worrying and needs to be reversed to ensure widespread energy efficiency improvements and the deployment of low-carbon heat.[1] Policy Connect therefore strongly recommends that the forthcoming Heat and Building Strategy should formalise milestones and interim targets for energy efficiency upgrades until 2035 and 2050, respectively.

Further, the government’s commitment to ensure that new build residential properties have low-carbon heating and world-leading levels of energy efficiency by 2025, stated in the Future Homes Standard, is not ambitious enough. We propose 2022 as implementation date, which would be beneficial from an economic, social and environmental perspective. Evidence from our work shows a 2022 date is feasible, would help with the skills and supply chains needed for at-scale retrofit, and would reduce the magnitude of the retrofit problem.

Economically, we know that retrofitting energy efficiency into existing homes is substantially more expensive than having it designed in from the start. Socially, retrofitting also faces important challenges around getting households to undergo the required disruption and hassle.[2] Environmentally, we know that the earlier we put in energy efficiency, the lower the carbon emissions will be over the lifetime of the house.[3] To exemplify the carbon cost of delay, if the Zero Carbon Homes Standard had been implemented in 2016, as intended before it was scrapped in 2015, 160,000 homes every year would have been built to higher energy efficiency standards and with low carbon heating and would not need retrofitting.[4] The Energy and Climate Intelligence Unit calculates that, if the Future Homes standards is implemented in 2025 as proposed, this means 1.4 million homes built between 2016 and 2025 will need subsequently to be retrofitted. Finally, the uplift to energy efficiency standards proposed by Government for 2020 is already ambitious, and by the Government’s own admission  they ‘expect that some developers would choose less costly ways of meeting the [2020 uplift to energy efficiency] standards, such as putting in low-carbon heating now.’ This means Government expects a proportion of house builders will have the supply chains ready to put low carbon heating into their properties from 2020 - 5 years before the Future Homes Standard will be fully implemented under current plans.

In order to avoid adding more houses to the UK’s stock that will need to be retrofitted to meet future energy efficiency standards, Policy Connect firmly recommends the Future Homes Standard brought forward to 2022.

What are the potential risks and opportunities of bringing forward the Government’s energy efficiency target?

A perceived risk of accelerating energy efficiency targets is often associated with the time needed to build up robust supply chains, including highly trained installers for energy efficiency and low carbon heating technology deployment. However, Policy Connect believes that, on the contrary, accelerating targets will reduce the number of new houses that will require retrofitting in the future and also provide the necessary push for industry and the skills system to focus on building up the supply chain and providing necessary training requirements. Longer implementation and delivery dates, by contrast, introduce risk and uncertainty, and hence industry inaction.

Further, particularly now that the UK is looking to provide a stimulus for economic recovery post-Covid-19, accelerated energy efficiency targets, if underpinned by appropriate levels of public investment, have the potential to create much needed new jobs, vital infrastructure and resilience to help tackle the expected unemployment crisis. As stated by a recent report of the Energy Efficiency Infrastructure Group, of which Policy Connect is a member, renovating homes is labour-intensive and predominantly carried out by Small- and Medium-Sized Enterprises (SMEs). Energy efficiency investment can therefore level up opportunity by supporting skilled and semi-skilled jobs in every part of the country. In addition to supporting job creation, accelerating energy efficiency targets and investment now can level up energy affordability by supporting households in or at risk of fuel poverty, health inequalities and thereby pressures on the NHS. In tandem with low-carbon heat deployment, large-scale energy efficiency improvements therefore represent an opportunity to level up disparities between rural and urban infrastructure across the UK in the near term.[5]

Should Government targets for energy efficiency be legislated for, and if so, what difference would this make?

Policy Connect’s reports “Uncomfortable Home Truths” and “Warmer & Greener: a guide to the future of domestic energy efficiency policy” support legislation for energy efficiency targets as it drives improvements in domestic building efficiency in the areas of newly built homes, the private rented sector, owner-occupied properties and social housing. Setting out clear long-term targets and providing a high degree of policy certainty to the construction industry is essential for planning, investment and innovation. It is unsustainable and deeply problematic to add homes which need to be retrofitted to the UK’s existing housing stock. There is therefore a need to provide certainty and a legal framework to the construction industry by setting a long-term target for the energy efficiency of newly constructed homes, with steps and review points along the way to ensure that action is started early and not left to the end of the target period. Experience with statutory climate change targets have demonstrated this. Regulation is necessary to force those that are currently uninterested in improving the efficiency of the homes they are building to make improvements, and to reassure those that are interested in building to a higher standard that they will not lose a competitive advantage by doing so. In the private rented and owner-occupied sector legislated energy efficiency targets can be an excellent example of regulation in that they set out a clear long-term target allowing landlords and home owners to comply and retrofit in the way that suits them best.[6]

How effective is the EPC rating at measuring energy efficiency? Are there any alternative methodologies that could be used? What are the challenges for rural areas?

Energy Performance Certificates (EPCs) rate the performance of domestic and commercial buildings in terms of the energy use per square metre of floor area, energy efficiency based on fuel costs and environmental impact based on carbon dioxide emissions. The rating is based on the designed performance of the building itself and its services. The certificate includes an A-G performance rating and a recommendation report with suggestions to reduce energy use and carbon dioxide emissions. An EPC is required for all buildings in England and Wales when built, sold or rented. Broadly, EPCs have two purposes: demonstrating compliance with building regulations and providing a source of information for consumers.

It is important to be aware of the fact that EPCs are not an accurate measure of predicted energy use, but a standardised compliance calculation that cannot accurately reflect the real lived-in performance of a building, so it is important to question the appropriateness of the standardisation they are based on. It has become apparent that, both in the domestic and commercial sector, the gap between expected and real life performance may be significant. This performance gap is made up of a combination of factors, which include inaccuracies regarding underlying behavioural assumptions, data input and product performance. EPCs measure relative performance of buildings against a fixed set of behavioural assumptions. These assumptions are made before sale or rental and therefore before knowing future occupants’ plans for building usage and behavioural patterns. Energy assessors often have to base their data input on a single site visit on a particular day. The EPC rating therefore depends on the assessor’s interpretation of conditions on the day as well as on their ability to access different parts of the building, while they are often exposed to a multitude of commercial pressures to meet the needs of their clients. Further, different parts of a property and their specific configuration can have a bearing on whether they are included in the assessment as a habitable room and count towards the final assessment or not. Finally, assumptions about product performance are based on lab test data or computer modelling (unless comprehensive field trial data is available) which do not always accurately reflect real-world construction methods or operational conditions.

None of these factors should be used to undermine the value of the EPC as a useful, albeit relatively crude indicator of energy efficiency and habitability of the home. However, the EPC could be improved. Research by Policy Connect suggest that collecting additional data from occupants after move-in could complement the EPC and thereby contribute to a better reflection of building performance, thereby providing more useful information for the owner or tenant. However, sudden and unforeseen changes in occupant behaviour (for example triggered by something as simple as the birth of a child or a change in working shifts) can quickly render the assessment inaccurate again. Alternative sources of information – for instance provided by smart meters – also have the potential to aid the improvement of the accuracy of the models but are not available to all households. Based on our research, Policy Connect recommends that in order to improve the accuracy of EPCs training and enforcement of assessors needs to be improved to remove the random aspect to the quality of the EPC as a reflection of energy efficiency at a point in time. Placing enforcement with Trading Standards Officers has proven problematic as EPCs are not a high-priority item for them and training for EPC enforcement among officers is generally lacking. Further, while Local Authorities frequently set energy and carbon targets to be met at the planning stage they often do not have the capacity and resources for enforcement. One possible solution could be to ringfence and allocate money to Local Authorities for enforcement. Fines for non-compliance could be added and thereby create a virtuous feedback loop.[7]

How will lack of progress on residential energy efficiency impact the decarbonisation of heat and the associated costs of this?

Energy efficiency is an extremely important part of the UK’s transition to low carbon heat. Energy efficiency is crucial to reducing demand for energy from households, as well as improving thermal comfort and occupant wellbeing and balancing out the cost of climate policies levied on energy bills. Energy efficiency must be deployed at the rate suggested by the Committee on Climate Change in their ‘Further Ambition’ scenario, in order to meet our 2050 net zero target. In this scenario, there is a 25% reduction in energy demand as a result of fabric efficiency measures. This includes around 6 million cavity walls and 2 million solid walls insulated, and increased rates of loft insulation.

How can the Government frame a Covid-19 stimulus strategy around improved energy efficiency of homes?

Policy Connect is part of the Energy Efficiency Infrastructure Group (EEIG), a collaboration of leading industry and trade bodies and consumer groups, think tanks, environmental NGOs and major engineering, energy, construction and insulation businesses. On 11 June 2020 the EEIG published the report “Rebuilding for Resilience: Energy efficiency’s offer for net-zero compatible stimulus and recovery”. The report sets out a two-year stimulus programme of £2.8bn in public investment, unlocking £3.4bn from homeowners, social landlords and the public sector, supporting job growth, reducing fuel poverty and health inequalities and levelling up rural- urban infrastructure disparities across the UK.

At the micro-level, home energy efficiency improvements secure energy cost savings and increase disposable income, resulting in an on-going boost to consumer spending and accelerated economic recovery. At the macro-level, lower energy demand for heating also reduces gas imports by 26% by 2030, redirecting spending onto goods and services with a stronger domestic component and therefore improving the balance of payments.

An energy efficiency stimulus is a good fit with the UK’s immediate needs post-COVID. The wider construction sector – which accounted for 2.3 million people in work (6.4%) at the end of 2019 – is among the hardest-hit by the crisis and is historically a ‘first responder’ to economic stimulus. An energy efficiency stimulus would also drive activity in a broad spectrum of local trades, which can support the overall construction sector’s recovery and resilience while hedging the risk of stimulus failing to achieve impacts swiftly. Further, social housing providers and their supply chains can provide a key delivery route for the stimulus.

Is the £5 million Green Home Finance Innovation Fund enough to stimulate the market for and drive action from the banks to encourage owner occupiers to improve the energy efficiency of their homes?

We have no relevant evidence on this figure.

What policy and/or regulation could supplement it?

In Policy Connect’s report “Warmer & Greener: a guide to the future of domestic energy efficiency policy”, we highlight the Mortgage Market Review (MMR), which obliges high-street lenders to look more closely at the outgoings of prospective borrowers in mortgage affordability calculations. At present, however, MMR legislation is not prescriptive about how energy bills are accounted for. Mortgage providers do not account for energy costs in a detailed way within these calculations and include energy bills by taking the national average rather than looking at individual EPC rating and property type. This is despite energy costs being one of the largest parts of household expenditure, and information on a property’s efficiency and likely energy costs being available at the point of sale through the EPC. Fuel costs usually vary by a large degree between different households. For example, it is estimated that owners of a property with a SAP score of 80 are likely to have energy bills that are £1,000 lower per year than owners of a property with a SAP score of 40. It is therefore possible that in the absence of a sophisticated measure of energy efficiency, mortgage providers are over and under-lending on individual mortgages to the tune of thousands of pounds on individual properties and millions or even billions across their portfolios. Lenders are also substantially increasing the risk associated with their mortgages by not accurately accounting for energy costs.[8]  Nor are they helping to drive action on energy efficiency through market signals around mortgage availability and ease of mortgage application approval.

Mortgage providers should implement a detailed assessment of energy efficiency into their lending practices. The government should therefore make minor amendments to the MMR legislation, requiring lenders to factor in an accurate evaluation of energy costs. This would allow purchasers of more efficient homes to borrow a greater amount on a mortgage, thereby encouraging buyers to purchase more efficient properties which would in turn impact on house prices. It is likely that this would incentivise households to increase the efficiency of their home prior to selling it in order to make it more attractive.[9]

The financing mechanism within this scheme could come through an additional element whereby mortgage extensions are offered to fund efficiency improvements. The only product of this type is currently offered by Nationwide.[10] These products could proliferate though as energy costs become a more central part of the mortgage lending process and provide an extremely low-cost way of households financing energy efficiency investments. Additionally, the Government could consider providing some additional subsidy to these arrangements, either through public funds or coordination with ECO, to incentivise the take-up of more expensive measures. [11]

Beyond green mortgages, government needs to support the development of additional finance options. Publicly funded grants which subsidise or pay for energy efficiency measures can directly target gaps in the take-up of efficiency measures; however, they only ever offer immediate solutions to particular needs and therefore generally do not to have a long-term market impact on their own. Tax incentives by contrast can be a highly useful tool to encourage energy efficiency improvements. One of the main advantages of these mechanisms is that they can provide long term, structural pulls on demand that the market can deliver against. These can be in the form of VAT incentives, council tax incentives and stamp duty land tax incentives.[12]

Which models in other countries have been successful at stimulating demand for energy efficiency within this market?

In Policy Connect’s report “Warmer & Greener: a guide to the future of domestic energy efficiency policy”, we discuss the Energiesprong scheme, which was originally set up in the Netherlands to help the country meet its carbon emissions targets. The initial focus of the approach has been in the Dutch social housing sector where Energiesprong offers net-zero energy retrofits with thirty or forty year performance and maintenance guarantees. This is paid for upfront by social housing providers who then recoup the money through aggregated savings from maintenance and energy plans which tenants pay on a monthly basis instead of energy bills.[13] Motivated by the success of the scheme in the Netherlands, where the scheme has already led to significant cost reductions through trial and innovation, Energiesprong UK was established as a not-for-profit organisation to deliver performance-warranted whole-house retrofits throughout the UK.[14] In order to scale up the Energiesprong model throughout the UK and make it sustain itself, investment on both the supply side and the demand side is required.[15] This should be part of the government’s Covid-19 stimulus strategy (see question 4).

What additional policy interventions are needed for social housing, leaseholders, landlords and tenants?

In Policy Connect’s reports “Uncomfortable Home Truths” and “Warmer & Greener: a guide to the future of domestic energy efficiency policy”, we highlight the need to tighten minimum standards of energy efficiency in homes, principally in private rented and social housing, but potentially extended further into owner-occupier homes. The government should pursue the principle of setting a long-term emissions target in the housing sector, with tighter targets in higher priority housing such as new houses, social housing and private rented homes. There should also be a strengthening trajectory of standards towards that goal.[16] Setting an end-date coupled with milestones or waypoints (see question 1) can also help to raise awareness of the importance of decarbonising heat with the public, as has been shown with the 2040 ban on conventional petrol and diesel vehicles.[17]

For new homes, the Future Homes Standard should set out a tightening of standards from now out to 2025 such that by 2025, all new homes will have a low carbon emissions rating per unit of warmth delivered (less than a space heat requirement demand of 15kWh/m2/year).[18]

For owner-occupiers simply extending the minimum energy efficiency standards on a whole-house basis might be politically difficult. Therefore, rather than strengthening regulation, in the short term the government should aim to commercialise the most successful pilots of financial incentives for energy efficient upgrades from the Green Home Finance Innovation Fund. These pilots should include tests of the feasibility of green mortgages or reduced stamp duty for energy efficient homes but could also test whether these types of incentives encourage uptake of low carbon heat.[19]

For private rented homes minimum energy efficiency standards should be set on a strengthening trajectory out to 2030 alongside visible monitoring and enforcement. The government should review and implement the findings of the Hackitt Review, especially in relation to enforcement and a clear and identifiable duty holder. There should also be stronger sanctions for those who do not meet the minimum standards for energy efficiency. Private rented homes will also be affected by financial incentives currently being trialled by the Green Home Finance Innovation Fund.[20]

For social housing minimum energy efficiency standards should be strengthened to achieve the Clean Growth Strategy’s target of all housing being EPC Band C by 2030, and then strengthened further to EPC Band A by 2050, in conjunction with tightening standards on carbon emissions from heating systems. This should be put in place alongside enabling funding sources like an extended Renewable Heating Incentive or the Scottish Home Energy Efficiency Programmes.[21]

For off-gas grid homes the government should set a trajectory of tightening standards that ends installation of highly carbon emitting heating systems by the end of the 2020s, but effectively excludes installation of the highest carbon emitting heating systems (oil and coal) at an earlier date. This could be put in place with a tank scrappage scheme coupled with legislation requiring a change to low carbon solutions when boilers (usually oil boilers) require to be replaced.[22]

Are there examples of where energy efficiency policy has fallen between Government Departments? How could cross-departmental coordination be improved?

Energy Performance Certificates and building regulations in particular are elements within the UK’s energy efficiency policy landscape that have suffered from a lack of coordination between government departments responsibilities. In Policy Connect’s report “Uncomfortable Home Truths”, we highlight that regional planning can be a powerful way to drive change across the UK energy system, allowing for area-specific pathways that are developed and delivered by the people who live there. However, it will require support, oversight and coordination from central government, including on decisions about national energy infrastructure, pricing, taxation, regulation and engagement. [23]

We recommend that this coordination should be delivered by a new Central Delivery Authority, similar to the previous Olympic Delivery Authority or the body proposed to deliver energy efficiency as an infrastructure priority in Scotland. The Central Delivery Body can provide a central point for expertise, data and information energy efficiency retrofits and low-carbon heat planning; monitor and evaluate the delivery and impact of regulation and policies, such as EPCs and building regulations, that sit across departments; and coordinate and link together awareness raising and engagement programmes.[24]

June 2020