Energy-efficient homes are an economic must

With a danger of blackouts this winter amid soaring energy prices and great hardship for swathes of the population, well-insulated properties could drive down the nationwide demand for energy and household bills. Dr. Rhian-Mari Thomas OBE, Chief Executive of the Green Finance Institute, reflects on how improving the energy efficiency of the UK’s housing stock is vital for a successful transition to a net-zero economy.

This article features in issue two of Connected Places magazine.

Despite the clear and urgent need, accessing and deploying finance to retrofit UK homes presents a significant challenge. In the years to 2050, the Climate Change Committee has estimated that decarbonising all UK buildings – which account for more than 21% of the country’s total carbon emissions – will require around £12bn in annual investment.

So how can this challenge be turned into an opportunity – and whose responsibility is it to secure the investment needed to accelerate the decarbonisation of our built environment?

At the Green Finance Institute, we have led the discussion between financial institutions, industry experts and policy makers to answer these questions. The market has responded with a range of recommended policy interventions as well as a portfolio of financial solutions, reflecting the various considerations and barriers to investment across the owner-occupied, private-rented and social-rented tenures. When it comes to policy interventions, this includes the reduction of VAT to 0% on energy efficiency renovations, recommended by the Green Finance Institute in 2020 and adopted by government earlier this year to stimulate consumer demand and scale up the retrofit supply chain.

Adopting a methodical and radically collaborative approach, we have also been working with our partners to establish a thriving green mortgage market across the UK, introduce digital building renovation plans, metered energy savings solutions and support the successful issuance of local climate bonds.

The latter, delivered in partnership with Abundance Investment, are regulated debt instruments issued by Local Authorities to raise money directly from the public, providing a powerful model for councils to engage with citizens as investors, with anybody able to invest £5 or more via an accessible crowdfunding platform.

Indeed, our work has identified that local authorities are key delivery agents in upgrading the energy efficiency of the UK’s homes. As our recent work with Innovate UK has shown, there is considerable opportunity for local authorities to generate benefits in terms of economies of scale, to aggregate investments and to access an expanding range of financial solutions.

This was the thinking behind the Green Finance Institute’s collaboration with the 3Ci initiative – which seeks to unlock the latent potential of local authorities to deliver net-zero investment by leveraging their balance sheets more effectively.

It also led to our partnership with the Greater Manchester Combined Authority (GMCA), announced in July 2022, to deliver the innovative financial solutions proposed and developed through our market engagement, which will unlock funding to upgrade the energy efficiency of around 60,000 homes every year across Greater Manchester, supporting residents as they face increasingly high energy costs.

This partnership will enable homeowners and landlords to access new, attractive sources of private and blended finance to fund energy efficiency upgrades. These new financial solutions include pioneering and scalable products like the UK’s first Property Linked Finance (PLF), designed to support homeowners. A unique characteristic of PLF is that the finance is ‘linked’ to the property, rather than the property owner. Importantly, this overcomes the ‘payback period barrier’ that discourages homeowners from investing in efficiency upgrades as the energy bill savings from the installation are not sufficient to make it financially worthwhile over the likely period of ownership. It also enables lower monthly payments by extending the length of the loan.

Introducing this new product to the UK could bring significant benefits to support widescale upgrades to the built environment, replicating the success of PLF in other countries, in particular the PACE model in the US that has now supported $10bn investment into energy efficiency and resiliency measures in recent years.

PLF is just one solution – there is much more local authorities can and are already doing to help households, as they increasingly recognise the opportunities to work with private finance to deliver access to capital for their citizens. The importance of their convening role cannot be underestimated as it builds on a deep understanding of residents’ needs and the specific challenges they face.

That’s why the Green Finance Institute will continue to partner with local authorities and the private sector to finance the decarbonisation of our built environment. We know that to accelerate the transition to a net-zero and nature-positive economy, capital must be channelled into local solutions. We’re committed to doing everything possible to play our part, using the expertise of our team of financial professionals and our highly practical approach, to deploy capital where it can make a difference to people and our environment.

This article features in issue two of Connected Places magazine.