Energy efficiency: building towards net zero Contents

4Able to pay

The Green Deal

88.In 2015, the Government withdrew funding for its Green Deal scheme citing low uptake.209 This left no policy in place to encourage the ‘able to pay’ residential sector to invest in energy efficiency—the largest sector of all types of tenure. Launched in 2013, the Green Deal created a finance mechanism enabling households to install measures at little upfront cost, paying instead through energy bill savings.210 While originally envisaged to facilitate improvements to 14 million homes by 2020,211 only 14,000 households took out green deal loans.212 The scheme collapsed because it operated with an uncompetitive interest rate of over 7 per cent on its loans, was unaccompanied by incentives to drive demand, and failed to protect homeowners from rogue traders carrying out substandard installations.213 The scheme was re-launched privately by the Green Deal Finance Company and now runs with an interest rate of 9.5 per cent,214 but the level of activity has been comparatively low.215 The scheme’s breakdown appears to have discouraged the Government from developing new policies for the market, while the stop/start nature of policy undermined confidence in the energy efficiency market.216 These shortcomings of the Green Deal should not be used as an excuse for subsequent and continuing government inaction.

State of the market

89.To meet the Government’s 2035 EPC target, it is crucial that incentives and finance solutions are available to stimulate demand for energy efficiency, optimising key trigger points across the home ownership journey, such as prior to property sale, the point of home purchase and during renovation work.217 We sought to understand what products are currently being offered on the retail banking high street for residential energy efficiency, noting that many consumers are likely to use their current account or mortgage provider as a first point of contact in relation to their financial needs. We wrote to the five largest retail banks (HSBC, Lloyds, RBS, Barclays and Santander) with questions relating to the availability, marketing and take-up of residential energy efficiency finance products, as well asking what action the Government could take to overcome deterrents to provision.218 Our correspondence revealed a lack of engagement and low levels of product availability for residential energy efficiency products on the high street219, notably:

90.Given the importance of the primary banking relationship, the lack of current product availability offered by the high street banks is very disappointing. The Minister told us that “conversations with banks are happening”.222 But the evidence we received has not convinced us that these conversations are being pursued effectively, if at all.

Driving and enabling demand

91.In October 2017, the Government launched a consultation on ‘Building a market for energy efficiency’.223 This set out policy options to fill the current vacuum, largely focusing on routes to incentivise ‘able to pay’ homeowner investment. In response to this consultation, the Government is expected to publish an ‘Action Plan’ that will present a range of policies to shape the market.224 But 18 months after launching the call for evidence—and despite the Committee on Climate Change’s (CCC) recurrent calls for an attractive package for householders225—it has not materialised.

92.In March 2018, the Green Finance Taskforce issued a report, ‘Accelerating Green Finance’, which contained several recommendations to incentivise the supply and demand for energy efficiency financing for the ‘able to pay’ sector.226 The recommendations urged the Government:

93.Witnesses strongly supported the use of a Stamp Duty incentive, which would reduce the duty on more efficient properties and increase it on less efficient ones.227 Homeowners making energy improvements to their property within a set period could receive a rebate proportionate to the scale of improvements.228 Frontier Economics, an independent economics consultancy, found that if implemented across the UK, a variable Stamp Duty scheme could incentivise around 16 million homes to make energy efficiency improvements by 2035.229 Stakeholders argued that the price signals reflected in variable Stamp Duty rates would create a value for energy efficiency in the property market.230 This could incentivise sellers to improve the property before putting it on the market or encourage buyers to invest in improvements to recover the additional Stamp Duty paid. This mechanism also has the benefit of being progressive and revenue neutral to HM Treasury. The Government recently defended its decision not to link Stamp Duty to energy efficiency by stating:

In 2007, the then government introduced a relief from Stamp Duty Land Tax (SDLT) for zero-carbon homes intended to encourage greater energy efficiency in buildings. However, the policy was found to be ineffective with a limited number of transactions taking up the relief and it was ended as planned in September 2012.231

94.The previous policy, described above, provided Stamp Duty relief on new homes that were built to the zero carbon homes standard announced in 2006.232 It is unsurprising that the policy failed to drive any scale-up when very few homes were ever constructed to this standard. Furthermore, the policy was designed in such a way that any uptake resulted in a loss of revenue to the Government. The Government’s reasoning in its statement should not be used as evidence to justify disregarding the recommendation of the Green Finance Taskforce.

95.Green mortgages, although a niche market in the UK, are successfully promoted in the Netherlands, where mortgage lending rules allow households to borrow up to €25,000 extra to purchase or refurbish to a net zero energy home.233 While supporting the development of green mortgages, stakeholders warned that Government’s encouragement of green mortgages could become a “tick-box energy efficiency solution”, with the Government pursuing the illusion of activity at minimum cost.234 The Government itself acknowledged that green mortgages will be inadequate to drive the ‘able to pay’ market unless positioned within a wider set of policy initiatives.235

96.The principal message presented by witnesses was that a combination of government-backed incentives is key to ensuring an attractive offer for all households, as shown by international experience.236 France, Germany, the Netherlands and Scotland all have attractive finance at 0 to 2.7 per cent that can be combined with capital subsidies.237 These countries see far higher renovation rates than the UK as a result.238

97.We heard that Germany’s programme has been particularly successful at driving private investment for energy efficiency retrofit.239 Germany’s development bank offers combinable low interest loans at 0.75 per cent and subsidies of up to €30,000 towards energy renovation and low carbon heat, linking the level of subsidy to energy performance standards.240 In 2016, the programme supported 276,000 energy renovations at a federal cost of €1.7 billion.241 Property owners invested €8.4 billion, leading to a total investment of €10.1 billion in energy renovation that year.242 With VAT revenues alone, at €1.6 billion, the scheme almost pays for itself.243 This is before considering the wider economic growth impacts. In 2016, this investment spurred €6.6 billion net turnover upstream in the supply chain, with 115,000 full-time equivalent workers required. For every €1 of public investment, €6 was invested in energy renovation.244

98.However, even Germany, which is considerably more successful than the UK at harnessing private investment for energy efficiency, is still off-track to meeting its goal to see 2 per cent of its housing stock (800,000 homes) per year undergoing major energy renovation from 2020.245 With the UK Government aiming for over a million homes renovated to a good standard per year—around 4 per cent of the housing stock, this shows that even the most successful policies have limits to their reach. This reinforces the case for multiple levers to be put in place.

Box 5: Further ideas for incentives for the able to pay market

Stakeholders suggested a number of further options that the Government could explore to incentivise energy efficiency investment within the ‘able to pay’ sector:

  • Linking council tax rates to energy efficiency;246
  • Home improvement ISAs;247
  • Local authority revolving loans;248
  • Low or zero VAT on energy-efficient products.249

The Green Finance Strategy

99.In July, the Government published its Green Finance Strategy in response to the recommendations made by the Green Finance Taskforce.250 In the face of a challenge that requires far-reaching action, the Strategy announced £5 million for a Green Home Finance Innovation Fund for the private sector to pilot green home finance products over 18 months, such as green mortgages. The Government ignored the Green Finance Taskforce’s key recommendation in relation to Stamp Duty. Supporting the provision of incentives for the market is of course a welcome step. But as discussed in Chapter 2, available evidence shows that around £1 billion of public funding per year will be required in order for homes to reach EPC Band C by 2035. The £5 million announced is less than 1 per cent of that annual requirement.

100.The Government’s announcement in July 2019 of a £5 million Green Home Finance Innovation Fund is woefully inadequate to stimulate demand for energy efficiency within the ‘able to pay’ sector and drive the scale of supportive action needed by the financial sector. The Government’s lack of ambition is particularly disappointing given international evidence that attractive finance and incentives have the potential to pay for themselves through VAT alone. It is also regrettable that the Government’s Green Finance Strategy rejected the Green Finance Taskforce’s key recommendation of linking Stamp Duty to energy efficiency. We remain none the wiser as to how the Government intends to meet its target for all homes to reach EPC Band C by 2035 without providing sufficient incentives for the market to grow. At present, this remains an empty commitment.

101.We recommend that the Government publishes its energy efficiency ‘Action Plan’ without further delay to explain how it intends to meet its EPC Band C 2035 target. We recommend that the ‘Action Plan’ drastically increases the £5 million allocated to the Green Home Finance Innovation Fund, to underpin a coordinated demonstration programme that tests a comprehensive and varied package of incentives and finance mechanisms for the ‘able to pay’ market. This should include a Stamp Duty incentive and low-interest loans, in addition to green mortgages. This demonstration programme needs to go well beyond the Green Home Finance Innovation Fund to be delivered at scale. We further recommend that the Government engages seriously with the retail banks to put in place the necessary enticements to ensure that attractive energy efficiency products that can be delivered on a nationwide basis are developed.


210 The Green Deal was available for customers in England, Scotland and Wales.

211 Department for Energy and Climate Change, Greg Barker speech: Green Deal and Big Society event (June 2011)

212 Department for Energy and Climate Change, Household Energy Efficiency National Statistics (June 2016)

213 Energy and Climate Change Committee, Home energy efficiency and demand reduction (HC 552; 12 March 2016), pp.11–12; Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, Consultation response: ‘Call for evidence on the reform of the Green Deal Framework’ (Nov 2017); Rosenow.J, Eyre.N (2016), ‘A post mortem of the Green Deal: Austerity, Energy Efficiency, and Failure in British Energy Policy’, Energy Research & Social Science, Vol. 21, pp.141–144; National Audit Office, Green Deal and Energy Company Obligation (April 2016); Energy and Utilities Alliance (ENE0026)

214 Energy Efficiency Infrastructure Group (ENE0041); For a discussion on the current Green Deal, see: Green Deal Finance Company Group Limited (ENE0020)

216 Q94 [Matthew]

218 Letter sent from the BEIS Committee Chair, Rachel Reeves MP to the Chief Executives of HSBC, Barclays, Lloyds, RBS, and Santander (March 2019).

219 Letters from HSBC (April 2019), Barclays (May 2019), Lloyds (April 2019), RBS (May 2019), and Santander (June 2019).

220 Institute for the Market Transformation, Home energy efficiency and mortgage risks (March 2013); See also: Allcott, H., Knittel, C., Taubinsky, D., (2015) ‘Tagging and Targeting of Energy Efficiency Subsidies’ American Economic Review, Vol. 105, pp.187–91; UK Green Building Council and UCL, The role of energy bill modelling in mortgage affordability calculations (Aug 2015); Q117 [Lewis]; Green Finance Taskforce, Accelerating Green Finance (March 2018); Electrical Contractors’ Association (ENE0073)

221 We are referring to the big retail banks, we note that green mortgages are offered by Ecology Building Society.

222 Q453 [Perry]

223 Department for Business, Energy and Industrial Strategy, Call for Evidence: Building a Market for Energy Efficiency (Oct 2017)

224 Department for Business, Energy and Industrial Strategy (ENE0069)

225 Committee on Climate Change, UK housing: Fit for the future? (Feb 2019); Committee on Climate Change, Reducing UK emissions 2018 Progress Report to Parliament (July 2018); Committee on Climate Change, 2017 Report to Parliament – Meeting Carbon Budgets: Closing the policy gap (June 2017); Committee on Climate Change, Meeting Carbon Budgets - 2016 Progress Report to Parliament (June 2016)

226 Green Finance Taskforce, Accelerating Green Finance (March 2018)

227 A paper by Melius Homes developed for UK Green Building Council Incentives Task Group explains how this policy could work in practice with illustrative examples, Giving home energy a ‘nudge’: A Home Energy Adjustment to Stamp Duty Land Tax (Feb 2016)

228 UK Gren Building Council (ENE0042)

229 Frontier Economics, Affordable Warmth, Clean Growth (Sept 2017), p.54

230 E.ON (ENE0027); The Energy Efficiency Infrastructure Group (EEIG) (ENE0041); ROCKWOOL Ltd (ENE0038); Canetis (ENE0068); Kingspan Insulation (ENE0060); Canetis (ENE0068); Energy UK (ENE0059); UK Green Building Council (ENE0042); Regulatory Assistance Project (RAP) (ENE0064); Policy Connect (ENE0009); The Institution of Engineering and Technology (ENE0040); Green Deal Finance Company (ENE0020); Q290 [Lord Deben]; Q90 [Lewis]; Q108 [Matthew]

231 Written Question from Alan Brown MP to HM Treasury, answered by Robert Jenerick (April 2019)

233 E3G, Silver Buckshots? Opportunities for closing the gap between ambition for, and policy and investment to drive, UK residential energy efficiency renovation (July 2018); The European Union is also seeking to establish a market for green mortgages by piloting a standardised energy efficient mortgage based on preferential interest rates for energy efficient homes and additional funds for retrofitting homes at the point of purchase European Union, Energy efficient Mortgages Action Plan (EeMAP) Initiative

234 Q125 [Matthew]; Q107 [Bray]

235 Q404 [Golding]

236 For example: Sustainable Energy Association (ENE0062); UK Green Building Council (ENE0042); The Energy Efficiency Infrastructure Group (EEIG) (ENE0041); Centre on Innovation and Energy Demand, Warm Homes for All A comprehensive policy approach for residential energy efficiency retrofit in the UK (2018)

238 As above

239 Qq103–105 [Matthew; Lewis]

241 As above. The €1.7 billion comprises €1.45 billion for loan interest rate subsidy and a debt write-off incentive, and €0.25 billion for standalone capital subsidy.

243 As above

244 As above

245 Green Finance Strategy, Accelerating Green Finance (March 2018), p.40

246 UK Green Building Council (ENE0042); Sustainable Energy Association (ENE0062)

247 Q100 [Lewis]

248 As above

249 As above; see also: Q108 [Bray]




Published: 12 July 2019