Written evidence submitted by Places for
People
1.0 INTRODUCTION
1.1 Places for People is one of the largest property
management, development and regeneration companies in the UK.
We own and manage more than 62,000 homes and have assets of £3.1
billion.
1.2 Our vision is to create and manage places
where people want to live and our approach looks at all aspects
of communities rather than focusing solely on the bricks and mortar
provision of homes. Places for People's innovative approach to
place management and placemaking allows us to regenerate existing
places, create new ones and focus on long-term management.
1.3 Places for People has contributed extensively
to research and policy development around the creation of the
green economy, specifically around housing. We have been working
with other stakeholders to develop the finance mechanisms and
business models that will make possible the creation of a multi-billion-pound
market for the retrofitting of the UK's housing stock. This has
the potential to deliver thousands of new jobs and big reductions
in carbon emissions, as well as cost reductions for householders
and the UK economy. It will also make a significant contribution
to energy diversity and security.
1.4 We welcome the Environmental Audit Committee's
inquiry into the Government's plans for a Green Investment Bank,
which in our view could play a key role in supporting the development
of the UK's green economy.
1.5 In this response, we set out some background
notes and our general views before responding in more detail to
the issues raised in the inquiry.
2.0 EXECUTIVE
SUMMARY
2.1 In our response to the Environmental Audit
Committee's inquiry, we set out the following views:
We strongly support the creation of a Green Investment
Bank, as without it the development of a new economy of retrofitting
homes would be significantly hampered. We see strong benefits
not only in terms of carbon reduction, but also in terms of lower
energy bills for householders and the creation of a new green
supply chain which would have a positive impact on the wider economy.
Financial modelling has demonstrated that investors'
cost of capital has a dramatic effect on the cost-effectiveness
of extensive retrofit measures. Pay As You Save (PAYS and now
adopted as the basis of the Green Deal) and Feed-in Tariff (FIT)
schemes will deliver significant results if finance were to be
available at 3%, which underlines the need for a Green Investment
Bank.
We see the key investment priority for the new Green
Investment Bank as providing the low-cost finance and long-term
returns necessary to attract investors into the retrofitting economy.
Rising energy prices reinforce the business case for this investment.
In our view, it could do this by providing a pool
of capital from which low-rate loans could be made for installation
of carbon saving measures. This finance could be provided as a
sole source or "blended" with other sources of finance
to reduce the overall cost and increase the total amount of finance
available.
3.0 BACKGROUND
AND GENERAL
VIEWS
3.1 The UK Government has set a target of reducing
emissions from the home by 29% by 2020. It believes that the social
housing sector has the potential to make a big contribution to
achieving this target, both through reducing carbon emissions
from the sector's homes and in developing the supply chain necessary
to deliver domestic emissions reductions more widely.
3.2 Achieving these goals will require a significant
increase in the speed, scale and scope of retrofit activity. Most
activity to date has focused on basic, cost-effective measures
such as energy efficient light bulbs and loft and cavity wall
insulation.
3.3 Places for People has so far invested over
£5 million in the implementation of most of the basic
measures to improve energy efficiency in its homes. We have pioneered
the use of innovative technologies including heat pumps, solar
thermal, solar photovoltaic and wind. Our long-term commitment
to the green economy is evidenced by our investment in a start-up
solar manufacturer in 2007, which has now become one of the most
successful providers in the UK.
3.4 However, this is not enough to achieve the
Government's 29% reduction target by 2020 and we want to retrofit
more extensively thousands of homes to make them energy efficient
and affordable in the long term. We are also keen to maximise
the opportunities that may be created by the changing landscape
of increasing energy costs and the Green Deal.
3.5 We feel that the most crucial carbon reduction
measures to install across our housing stock in order to make
our homes sustainable in the longer term are: solar thermal; solar
photovoltaic; heat pumps; extensive insulation (solid wall); and
mechanical ventilation and heat recovery.
3.6 Places for People's work on housing and the
green economy has been based on clear and focused research. We
have also worked extensively with Government departments, including
the Department for Energy and Climate Change (DECC) and Communities
and Local Government (CLG), as well as agencies such as the Energy
Efficiency Partnership for Homes. We have been keen to develop
both the finance "engine" for this new market, ie establishing
how is it going to be paid for, as well as the delivery "vehicle",
ie the regulatory, financial and legal framework that will support
the creation of an almost entirely new market.
3.7 In all of this work we have felt that there
is substantial role for a Green Investment Bank. In our view,
large-scale retrofit (the Green Deal) is possible if low-cost,
long-term finance is made available, and if we radically use existing
sources of funding such as the supplier obligation.
4.0 BARRIERS
AND MARKET
FAILURES
4.1 The key issues in the green economy debate
are cost and finance. Retrofitting existing homes is expensive
- in fact we believe the figure quoted in the Conservative Green
Deal of £6,500 per home is too low. In our experience, £12,500
is more realistic and in many cases costs can rise to £30,000.
Places for People recently completed two retrofit projects funded
by the Technology Strategy Board and spent £150,000 on extensive
environmental retrofitting in each of the two homes.
4.2 Given the significant costs involved in implementing
measures which will have a real impact on carbon reduction in
the long term, the most important question is one of finance.
The Government has acknowledged that retrofitting homes can either
be funded through energy bills (with the energy costs saved being
used to fund the measures in a Pay As You Save arrangement) or
through the sale of energy to customers (with the Feed-in Tariff
paying a premium for the production of renewable energy).
4.3 In general, investors' cost of capital has
a dramatic effect on the cost-effectiveness of extensive retrofit
measures. Commercial finance rates of 7% would be prohibitive.
A lower rate of 4.5% makes the PAYS and FIT schemes just about
viable and a rate of 3% would deliver real results.
4.4 The financial modelling we commissioned (as
Chair of one of the Energy Efficiency Partnership for Homes sector
groups and Chair of the Social Housing and Finance Task Group)
to assess the viability of these funding mechanisms has shown
straightforward commercial financing would not make the schemes
cost-effective and would therefore prohibit real carbon savings
being made in the UK's existing homes (further details of this
modelling can be found in Appendix 1). In our view, this is the
most important argument for the creation of a Green Investment
Bank. Failure to establish a vehicle which can deliver finance
at viable rates would seriously jeopardise the delivery of the
Government's carbon reduction targets both in the short and long
term, and we therefore feel that not creating a Green Investment
Bank in the short term would represent a significant risk.
4.5 Places for People was also Chair of the Technology
Group of the DECC Microgeneration Strategy Consultation, which
is due to report to Ministers in the coming weeks. Our view, supported
by our Board membership of Viridian Solar, is that there is a
need for investment in research and product development as well
as commercialisation (and much less in "new" or innovative
technologies themselves). The role of the Carbon Trust has been
useful, but more needs to be done. The recent lack of credit from
banks has made this situation even more critical. Again, we feel
that the Green Investment Bank could play a strategic role in
providing lower-cost and long-term finance in order for the UK
to create its own manufacturing base for renewable energy.
5.0 OBJECTIVES
AND ROLE
OF THE
GREEN INVESTMENT
BANK
5.1 Pending clarification of the role of energy
companies in terms of supporting the reduction of CO2
emissions, the Green Investment Bank should aim to deliver both
the low-cost finance and the long-term (20 years plus) returns
required for investors to undertake large-scale investment in
energy saving measures in housing. It could do this by providing
a pool of capital from which low-rate loans could be made for
installation of carbon saving measures. In our view, there a number
of options:
Energy company-managed funds.
White Certificates that buy and sell carbon savings.
National fund(s) created out of existing public funding,
combined with contributions from energy companies and other private
sector sources.
5.2 Whichever option was chosen, contributions
would have to be optional for suppliers, in order to avoid HM
Treasury tax and spend concerns. The funds would be established
on the basis that the energy supplier contribution would be fixed
for an agreed period of time, potentially up to 2020, rather than
being revised on an ad-hoc basis. With either option, the supplier
can claim the carbon credits.
5.3 The first option is simply a revised version
of the existing supplier obligation, but with new regulation of
the fund management and the carbon reduction outputs. Any organisation
then "bids" into the fund using the new funding mechanisms
such as PAYS-type funding schemes plus any other funding (for
example some of their asset management investment).
5.4 The second option would allow providers such
as local authorities, commercial companies and community groups
to contract with energy suppliers to deliver carbon savings in
return for funding.
5.5 The third option is more ambitious and sets
up a single or range of national funds that then allows existing
or planned public funding to also go in to the fund, including
Warm Front and potentially Winter Fuel Payments. Furthermore,
funding from other sources, such as Allowable Solutions,[9]
could also contribute to the fund. Again anyone could bid into
it using whatever funding they want to bring.
5.6 Whatever mechanism is developed, it is clear
that the supplier obligation must play a central role in the green
economy. Combined with the Green Investment Bank, this could kick
start the investment needed in manufacturing, retrofitting and
innovation.
5.7 We feel that any organisation (for example
supermarkets, social housing providers, community groups, charities,
etc) should be able to bid competitively to the Green Investment
Bank in order to install carbon saving measures in homes. These
organisations could then use mechanisms such as PAYS-type finance
schemes, green mortgages and community investment funds at lower
interest rates due to Green Investment Bank capital which would
drag down the overall rate and moreover de-risk the funds they
raise themselves.
6.0 INVESTMENT
PRIORITIES
6.1 As argued above, providing the finance and
long-term returns to enable large-scale investment to take place
in retrofitting, enabled through either PAYS or FIT-type schemes,
should be the Green Investment Bank's core priority. There are
huge benefits to be achieved from this, including significant
carbon reductions, lower energy bills for householders and the
creation of a green supply chain which will create thousands of
highly skilled, long term jobs which would boost the wider economy.
6.2 Considerable investment is needed in the
UK's energy infrastructure over the next few years in order to
ensure secure and sustainable energy supplies, bringing with it
increased energy prices. This bolsters the financial business
case for taking action on low carbon retrofit, making energy efficiency
measures and renewable energy technologies more cost-effective.
7.0 FUNDING AND
GOVERNANCE STRUCTURES
7.1 In broad terms, Places for People will not
comment on the funding and governance structure for the Green
Investment Bank. Our view is that much of this will be determined
by the need to address public spending constraints and Treasury
"tax and spend" concerns. However, the Bank does need
to balance the need to be open, transparent and accountable with
the need to take a long-term view on strategy and investment.
8.0 CONCLUSIONS
8.1 The case for a Green Investment Bank is abundantly
clear when looking at financial modelling, which shows how commercial
finance rates would prevent investors from entering into the retrofit
market. Creating this new market and new economy would have a
positive impact not only in terms of carbon savings, but also
in terms of consumer energy bills and the creation of a green
supply chain, which would benefit the economy as a whole.
8.2 The Green Investment Bank can play a pivotal
role in creating an almost entirely new market by stimulating
demand for the Green Deal and micro generation and at the same
time delivering the supply chain by investing in research and
development and UK manufacturing in retrofit and microgeneration.
8.3 The fact that energy prices are set to increase
further strengthens the business case for investment in this new
market. We therefore feel that providing the low-cost finance
and long-term returns necessary to attract investors into this
market should be the Green Investment Bank's key priority.
8.4 It could do this by providing a pool of capital
from which low-rate loans could be made for installation of carbon
saving measures, either through energy company-managed funds or
through national fund(s) created out of existing public funding,
combined with private sector sources.
8.5 We feel that any organisation (for example
supermarkets, social housing providers, community groups, charities,
etc) should be able to bid competitively to the Green investment
Bank in order to install carbon saving measures in homes.
APPENDIX 1
DETAILS OF FINANCIAL MODELLING
Recent modelling showed undertaken with Energy Efficiency
Partnership for Homes shows great potential for financially viable
investments in low carbon refurbishment. Across UK housing stock,
at 6% cost of capital it could be financially viable to deliver
emission reductions of 30% by 2020, 50% by 2030 and 80% by 2050
against a 2013 baseline, with 10% of the value passed to the resident.
This assumes that grid decarbonisation will take place according
to DECC's projections, and that there is no limit to the number
of projects that can be supported by the Feed-in Tariff and the
Renewable Heat Incentive.
Opportunities would be enhanced by a lower cost of
capital or higher energy price inflation, which would allow a
proportion of the benefits to be passed on to the home occupier
through lower energy bills. For example, at 3% cost of capital
it would be possible for around 20% of the value to pass to the
resident. The modelling has shown that long contract lengths are
important (typically 25 years) in order for the investor to generate
maximum return on their investment.
A medium refurbishment package of measures
includes more expensive measures with longer payback periods.
With a marginal increase in the cost of capital, from zero to
3%, the amount of carbon saved is reduced by more than 20%, as
certain projects are no longer cost effective. The limited range
of more expensive measures applied in the medium package
means that increasing the cost of capital to 6% only causes a
small reduction in the number of projects that are viable.
A high refurbishment package includes expensive
advanced energy efficiency measures, various forms of low carbon
heat and also microgeneration technologies such as PV and wind
energy on suitable homes. There is a great dependence on a low
cost of capital to help deliver carbon savings in the high
refurbishment package. A 3% cost of capital lowers the potential
carbon saved by more than 80%, as many refurbishment measures
are no longer cost effective. The wide range of measures with
high capital costs means that an increase in the cost of capital
to 6% reduces the amount of potential carbon saved by a further
15%. This clearly shows how a low cost of capital is vital for
securing carbon savings through extensive refurbishment packages.
14 October 2010
9 Part of the 2016 zero carbon homes standard, Allowable
Solutions is an "offset" payment made for dealing with
any remaining carbon emissions from a development off-site. Back
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