Energy Efficiency of Existing Homes Contents

---

4Stimulating further progress in energy efficiency

Skills and training

Job creation

90.BEIS told us that the installation of energy efficiency measures was labour-intensive, and would therefore have a high multiplier effect in creating new direct jobs and supporting others across the wider supply chain.186 The Department recognised that energy efficiency measures were often delivered by local small and medium enterprises (SMEs) and there was potential to target policies to create jobs in deprived areas, including those most impacted by covid-19, thereby supporting the Government’s ‘levelling-up’ agenda.187 Pedro Guertler from E3G also explained the local benefits from investment in energy efficiency measures:

There is no investment like energy efficiency that is as good at generating jobs. It is unique… It is unique in saving people’s energy costs; it transforms what they spend. They tend to spend it locally. Those energy cost savings persist, so if we got to EPC C by 2030, the result is a permanent net increase of 100,000 jobs in local retail and services primarily net. There are very minor losses in energy supply, as you might expect, but that is the end result and a better fiscal position, because GDP is permanently increased as a result.188

91.The Energy Efficiency Infrastructure Group (EEIG) found that investing in energy efficiency alone could create 34,000 full-time jobs within the next two years.189 In the longer term, it estimated that energy efficiency investment could support over 150,000 skilled and semi-skilled jobs to 2030.190 Sarah Kostense-Winterton, chair of EEIG, told us that energy efficiency jobs could help 16 to 24 year olds who had been hit hard by the pandemic: “This is an area that retrains them, upskills them and puts them into jobs. That is obviously very relevant for now”.191 The Construction Industry Training Board has estimated that the programme to retrofit buildings would require over 200,000 extra full-time workers from 2030 through to 2050.192 Modelling by the New Economics Foundation found that, with the right fiscal stimulus,193 117,811 new direct jobs could be created in year one, rising to a peak of 382,885, in year four. This estimate rose to an average of 515,157 when factoring in indirect jobs.194

92.The present shortage of workers in the energy efficiency sector appears chronic, given the overall timetable for decarbonisation of properties.195 The Energy Efficiency Association told us:

There are not enough installers, for example, in the whole of the UK to be able to deliver the Net Zero targets for one very large Local Authority, let alone the whole country.196

93.The UK Green Building Council said that the supply chain had been “bruised” as a result of the Government’s “stop-start” policies and funding streams, and in order to ramp up to the required levels of activity there would need to be real confidence in the longevity of Government ambitions.197 The Green Homes Grant, which we have discussed above, was expected to support the creation of 100,000 jobs across the UK.198 We heard that, without a longer term scheme in place, businesses were not prepared to invest in the training of staff, since it was such a short term scheme.199 Brian Berry said that there was an opportunity for many trades to upskill, if they knew that the demand was there.200 Michael Lewis, CEO of E.ON said

This is a marathon. It is 30 years. We do not have to do it all in two years, but we have to get moving in the first two years and we have to identify where the gaps are and quickly train people up to deliver that.201

Training

94.The Energy Efficiency Association said that it could take up to four years for an installer of some energy efficiency measures to become fully qualified,202 and argued that training by qualified experts needed to be put in place to meet a standard which would be recognised and respected by the industry.203 The Green Finance Institute’s Coalition for the Energy Efficiency of Buildings said that government investment in training programmes was needed:

A government-funded training programme, available to those looking to upskill or requalify from sectors impacted by covid-19, delivers the skills and capacity required to address the UK’s retrofit challenge. A subsidised training programme could rapidly scale a high-quality supply chain and engage furloughed workers.204

This was reiterated by the Chartered Institute of Housing, which said:

A government-funded training programme could rapidly upskill furloughed workers or those looking to requalify from sectors impacted by the crisis.205

95.In September 2020, the Government launched the Green Homes Grant skills training competition and in November, a new Green Jobs Taskforce to support the creation of two million skilled jobs to reach net zero (see box 3).

Box 3: Government skills development initiatives

The Green Homes Grant skills training competition The Green Homes Grant skills training competition is designed to provide support to the energy efficiency and low carbon heating supply chains to deliver works under the Green Homes Grant scheme, and to scale up to meet the additional consumer demand generated. The competition will make available £6.9 million funding for programmes to deliver a suite of training solutions to support the Green Homes Grant scheme. A maximum of £1 million will be available for each competition project. The Green Jobs Taskforce The Green Jobs Taskforce was launched to support the creation of two million skilled jobs to build back greener and reach net zero emissions by 2050. It includes making sure the country has the immediate skills needed for ‘building back greener’, such as home retrofitting, and supporting workers in high carbon transitioning sectors like oil and gas to retrain in low-carbon technologies. The Taskforce will represent the views of businesses, employees and the skills sectors and includes representatives from the Construction Industry Training Board, Engineering Construction Industry Training Board, East London Institute for Technology, RetrofitWorks, Edinburgh University and National Grid. The taskforce will create an action plan to inform on what support is needed for people in transitioning industries.

Source: Green Homes Grant skills training competition, BEIS and DFE. 2020. Press release: UK government launches taskforce to support drive for 2 million green jobs by 2030

96.The Green Homes Grant Skills Training competition has now closed. 18 successful applicants have been awarded a total sum of £6.4 million.206 The Energy Efficiency Association said that certification bodies and technical monitors needed to be more highly skilled and said, “hopefully the results of the Green Homes Grant Skills Training Competition will go some way to addressing some of these issues, but much more will need to be done in this area”.207 We will be looking further at this issue in our Green Jobs inquiry.

Upskilling the existing industry

97.Brian Berry, from the Federation of Master Builders, emphasised that every tradesperson needed to be upskilled in retrofit techniques in order to secure overall competency in the supply chain.208 He told us:

We need to upskill people in the building industry because there is a need to understand how their skills interrelate to one another. You cannot just pick out one bit of this. It has to be seen holistically, which is why I think there needs to be a national retrofit strategy, a clear political direction and a commitment to reducing carbon emissions in our homes. 85 per cent of our existing homes will still be here in 2050. We will not deliver that target unless we retrofit our existing homes. To do that, it is a major challenge. That is why need a national retrofit plan.209

98.The Government’s target is to install 600,000 heat pumps every year by 2028.210 The Microgeneration Certification Scheme (MCS), a quality assurance scheme supported by BEIS, is a requirement for heat pump installations made under the Domestic Renewable Heat Incentive, the Green Homes Grant and the Clean Heat Grant. When we took evidence on the contribution that heat pump technologies could make to climate change mitigation, we heard that there had been a 65 per cent reduction in MCS accredited installers between 2014 and 2017.211 There are currently around 930 air-source heat pump installation companies accredited by the MCS, and of these around 600 also install ground-source heat pumps.212 The Federation of Master Builders said that the Government should leverage the Construction Industry Training Board (CITB) or the National Skills fund to ensure the development of identifiable skills such as Heat Pump Installer or Retrofit Coordinator.213

99.When asked if the construction industry could cope with the demand to upgrade the energy efficiency of existing homes, Kwasi Kwarteng responded:

One of the things that we have done this year is launch the green jobs taskforce, which is a joint initiative between BEIS and the Department for Education. We are coming together to try to address that very issue, about the skills and the capacity to deliver on these ambitious targets.214

Kemi Badenoch told us why the Government was focussing on grants for its economic recovery:

We want to stimulate an economic recovery. On the jobs point as well, this is an area where we can upskill fairly quickly and create jobs, so that is the priority.215

100.Stop-start Government policies and intermittent funding streams have resulted in a dearth of installers of energy efficiency measures. A lack of accredited tradespeople has hampered the initial delivery of the Green Homes Grant, and there is a significant risk that the Government will not meet its heat pump installation targets due to a lack of qualified tradespeople.

101.Whilst we welcome the launch of the Green Jobs Taskforce and the Green Homes Grant Skills Training Competition, the Government must create a visible, long-term market that makes energy efficiency and heat pump installation a stable and desirable profession. The Department for Business, Energy and Industrial Strategy, working with the Department for Education, should commit to the funding of a dedicated training programme to support a long-term strategy for education and training in green jobs. Training is also required to develop the networks of advisers and coordinators which will underpin the successful growth of employment opportunities in the sector.

102.We recommend that as part of the forthcoming Heat and Buildings strategy a national retrofit strategy is developed with colleges and other education providers to provide the training and re-training needed to prepare our homes for a low-carbon future. The strategy must address the much-needed increase in certified heat pump installers to meet expected demand including through recruitment incentives, with support for apprenticeships and reskilling.

Minimum Energy Efficiency Standards

103.The private rented sector is the only tenure with Minimum Energy Efficiency Standards (MEES) in England and Wales. Since April 2020, landlords can no longer let or continue to let properties covered by the MEES Regulations if those properties have an EPC rating below E, unless they have a valid exemption in place.216 The Government is consulting on upgrading the MEES regulations: its preferred option is to require landlords to ensure that domestic properties for rental meet EPC C standards, at a minimum, for new tenancies from 1 April 2025 and for all tenancies by 1 April 2028.217 This will require 3.2 million properties to be upgraded in the next seven years in a sub-sector where there is little financial support. The Scottish Government has consulted on proposals to mandate a minimum of EPC band C on all domestic properties offered for sale or which undergo major renovation by 2024.218

104.Jenny Hill, head of buildings at the Climate Change Committee, said that there had to be a combination of standards and targeted incentives. She welcomed the Scottish Government’s proposal and said the UK Government should be “very much looking at following the Scottish example at some point in the next decade”.219 She also welcomed the proposed upgrade to the energy performance requirements on private rented sector, and said; “we think that proposal is absolutely the right ambition and that it should be replicated for social housing”.220

105.The Energy Efficiency Infrastructure Group (EEIG) said that new minimum energy efficiency standards for owner-occupied homes, applicable at the point of sale and at major renovations—modelled on Scotland’s proposals—would provide the clearest signal to homeowners that they needed to upgrade their homes.221 Policy Connect supported tighter targets in higher priority housing such as new houses, social housing and private rented homes. It said that setting milestones was important to raise public awareness of the importance of decarbonising heat, following the example of the policy signal communicated by the forthcoming ban on the sale of conventional petrol and diesel vehicles from 2030.222 Staggered targets also enabled building owners to plan investment in energy performance and to undertake it when most cost-effective without fear that they might need to make future investments to meet tighter regulation.223 The National Housing Federation said that statutory legislated standards would ensure that targets were prioritised and would create market certainty, support the reflection of improved home energy efficiency in market values and, if applied with care, ensure that resident bills remained affordable.224

106.Dr Rhian Mari-Thomas, from the Green Finance Institute, cautioned that in proposing minimum standards consideration needed to be given to “the risk of creating a two-tier mortgage market where the low EPC households will be unable to sell or re-mortgage their property”.225 This is also the case for landlords. The GFI’s Coalition for the Energy Efficiency of Buildings said that a full assessment on the risk of creating a two-tier mortgage market must inform any decision taken by the Government.226 There is a risk that this could cause blight on those properties that cannot achieve minimum standards and this is where Government support measures should be targeted.

107.In its Sixth Carbon Budget advice, the CCC has recommended that by 2028 all homes for sale should be at EPC C or higher. It said that at the current rate of housing turnover, of once every ten years for mortgagors and once every 24 years for outright owners, regulations applied at the point of sale would be expected to result in a further 15 per cent of owner occupied homes meeting the required standard by 2035 (with further upgrades driven by standards on lenders, totalling at least 60 per cent of owner-occupiers overall).227

108.The Government’s National Infrastructure Strategy, published in November 2020, stated that the Government would be “raising minimum standards for both new and existing buildings, and energy related products; and introducing minimum energy performance standards for domestic and non-domestic private rented properties”.228 Further details on the content of the standards and the timetable for their introduction are yet to be provided. The Strategy stated that:

More detail on how the government plans to use a combination of regulation and targeted spending to stimulate the energy efficiency market over the next decade, and encourage greater use of clean heat, will be set out in the forthcoming Energy White Paper, Hydrogen Strategy, and Heat and Building Strategy.229

The Heat and Buildings strategy was expected to be published in 2020 and is now expected in spring 2021.

109.We asked Kwasi Kwarteng whether there should be parity between minimum energy standards in the social housing sector and in the private rented sector. He answered:

Obviously, there has to be. We split up these sectors because different policies can apply and different levers are more appropriate depending on which sector we are looking at, but the overall objective is the same: we want to have net zero by 2050 and we want to drive up the energy efficiency of homes as quickly and as practicably as we can. The aim of the game, as it were, is to drive up standards across the housing sector, whether social housing, private rented accommodation or owner-occupier.230

110.We support the introduction of minimum energy performance standards across all tenures. Without these minimum standards, it is unlikely the Government’s overall ambitions on retrofitting energy efficiency will be achieved.

111.We recommend that the social rented sector should be subject to the same standards as the private rented sector.

112.In its forthcoming Heat and Buildings Strategy, the Government, acting on the advice of the Climate Change Committee, should set an ambitious and realistic trajectory for owner occupiers to achieve minimum EPC C standards. The CCC recommends that by 2028 all properties achieve EPC level C at the point of sale. This is a hugely ambitious target and the Government must set out how it plans to raise public engagement and revise its delivery mechanisms to achieve this target and specify where exemptions may be necessary. These measures may include cost caps to be applied to such work and exemptions from the requirement to meet these standards: for instance, on the grounds of affordability or for properties recognised as hard to treat. It should also ascertain the risks of creating a two-tier mortgage market and long-term blight for owner occupiers and the private rented sector of hard-to adapt properties and identify and implement measures to avoid this impact.

Green finance

113.The private sector will have a critical role to play in deploying the additional capital required to meet the current shortfall of demand in the owner-occupied sector.231 In March 2018, the Green Finance Taskforce published a Government-commissioned report, ‘Accelerating Green Finance’, which contained several recommendations to incentivise the supply and demand for energy efficiency financing for the ‘able to pay’ sector.232 The recommendations urged the Government to:

a)undertake a pilot to link stamp duty land tax to energy efficiency; and

b)provide incentives to “pump prime” the green mortgage and consumer loan markets.

114.As part of its 2019 Green Finance Strategy,233 the Government launched a £5 million Green Home Finance Innovation Fund to pilot green home finance products to incentivise energy efficiency retrofit, such as green mortgages, over an initial 18 month period. The outcomes of the Green Home Finance Innovation Fund are to be used to inform the development of future policy to build a market for green home finance.234 Only £1.8bn of funding was awarded, and the three successful bids were all related to green mortgages and no other green finance measures.235

115.The Green Finance Institute convened a Coalition for the Energy Efficiency of Buildings (CEEB) for the purpose of developing the market for financing net-zero carbon and climate-resilient buildings. In May 2020, the CEEB published an interim report listing an initial portfolio of 21 financial solutions that were considered commercial and scalable and which could mobilise both public and private capital flows towards the retrofit of UK homes to improve energy performance standards.236 These measures included:

• a salary sacrifice scheme for domestic energy efficiency upgrades
• Property Assessed Clean Energy (PACE) financing
• a green help-to-buy scheme
• large-scale retrofit programmes for social housing and void buildings, and
• a sliding scale of stamp duty based on energy efficiency.

Work on designing and delivering the demonstrator projects is underway to unlock funding and catalyse further private sector investment.237

Green mortgages

116.Around 47 per cent of owner-occupied homes are currently covered by a mortgage and the market is estimated to be worth around £275bn per year.238 ‘Green mortgages’ could provide access to better mortgage terms—lower interest rates or extra borrowing capacity—to those who purchase energy efficient homes or who commit to upgrading the properties’ energy performance. In the Netherlands, mortgage lending rules allow households to borrow up to €25,000 extra to purchase or refurbish to a net zero energy home.239 The Federation of Master Builders supported the proposal to bring forward green mortgages to incentivise retrofit works at the point of sale. Given the comprehensive nature of energy efficiency works, they are said to be most appropriate to be carried out when a property is vacant and changing hands.240

117.In 2020, NatWest launched a green mortgage offering a discounted interest rate to customers purchasing a property with an EPC of A or B, to achieve its ambition to have 50 per cent of its mortgage book with an EPC or equivalent rating of Band C or above by 2030.241 Clare Tracey, chief strategy and sustainability officer from Nationwide, told us that it had made £1 billion of additional lending available through its Green Additional Borrowing mortgage. This facility gives a lower initial interest rate on borrowing from £5,000 to £25,000, provided at least 50 per cent of the new advance is spent on energy efficiency home improvements.242 She added that take up of the product had not yet met expectations: because of other barriers, including the cost of retrofitting relative to the financial payback, at present the level of funding was not matched by the demand.243

118.In the Prime Minister’s Ten Point Plan for a Green Industrial Revolution, the Government has undertaken to “kickstart” the green home finance market by consulting on introducing mandatory disclosure requirements for lenders on the energy performance of homes on which they lend and setting voluntary improvement targets.244 BEIS subsequently launched a consultation on how mortgage lenders could help householders to improve the energy performance of their homes: this closed in February 2021.245

119.The Climate Change Committee’s Sixth Carbon Budget advice recommended that standards for lenders targeting EPC C across the housing portfolio should be introduced between 2025 and 2033. This would mean that homes with mortgages ought to achieve EPC C by 2033, such that all practicable lofts and cavities are insulated alongside other low-regret measures such as draught proofing, with solid wall insulation deployed where this supports low-carbon heat and wider benefits. It is estimated that these measures would apply to just under half of all existing owner-occupied homes.246

Stamp duty rebate

120.Dr Rhian Mari-Thomas, of the Green Finance Institute, said that the Government should consider a stamp duty rebate as an action to stimulate more private capital. Owner-occupiers of properties improved to a higher EPC within 12 to 24 months of purchase would be eligible for such a rebate. She said we needed to “normalise the concept of energy efficiency improvements as part of the property sale and purchase process”.247 Energy UK recommended that, following the end of the present stamp duty holiday, the Government consider a variation in levels of stamp duty to be paid by buyers so as to reflect the energy efficiency rating of a property.248 The Green Finance Taskforce recommended a sliding scale of stamp duty, designed to be fiscally neutral and linked to energy performance, which could drive demand for more energy efficient properties. This could be preceded by near term action, in the form of a stamp duty rebate for the purchase of highly efficient properties.249

Low interest loans

121.Jenny Holland, from the UK Green Building Council, said that the overall barriers to householders wishing to improve the energy efficiency of their homes were high up-front costs with long payback periods on investment and no guarantee that that investment would reap a reward in the form of a higher property value.250 She said one of the solutions was a PACE-style lending product:

PACE in the US is a retail lending product that supports 100 per cent of the up front costs with the liability secured against the property and repaid through an additional property tax. I know this sounds very similar to the late Green Deal, but the US has got it right with PACE loan books able to be aggregated and securitised in order to access wholesale, lower cost capital.251

Box 4: Property Assessed Clean Energy (PACE) loans

A PACE loan is a type of financing that is available for energy-efficient upgrades or the installation of renewable energy sources for commercial, industrial, and private residential properties. The property serves as collateral and the debt is tied directly to the property, rather than its owner. Any remaining balance on a PACE loan remains intact when ownership of the property changes hands. Unlike a traditional mortgage loan, PACE financing doesn’t require an upfront down payment. PACE loans are repaid through property assessments, as an addition to the owner’s regular property taxes. These assessments are typically spread out over a specific time frame, which may range from five to 25 years, based on the amount of financing involved.

Source: Property Assessed Clean Energy (PACE) Loan [accessed 28/10/20]

122.Michael Lewis from E.ON described his experience in Germany with the state-owned development bank KfW, which he said was a model “we can certainly learn from” (box 5). With his KfW loan, taken out in addition to his mortgage with the same provider at 250 basis points lower than a commercial lending rate, he had been able to add solid-wall insulation, upgrade to thermally insulated windows and install loft insulation in his home. This had generated significant savings in energy consumption.

Box 5: The German model of state funded low interest loans

In Germany, the state-owned development bank, KfW, offers low-interest loans of up to €120,000 to fund installation of energy efficiency measures into homes as part of their Energy Efficient Renovation scheme. The scheme incentivises uptake by offering a subsidy of up to 40 per cent of the loan value. This is dependent on the retrofitted property meeting specific energy performance measures and a higher subsidy is received for a higher standard of performance. For every €1 invested by KfW to incentivise energy efficient renovation, building owners were motivated to borrow and spend €6. The programme cost the federal government €1.7 billion in 2016, unlocking €8.4 billion from building owners and nearly covering its own cost through the resultant VAT revenue alone (€1.6 billion). Between 2005 and 2017, this scheme has led to installations in 2.8m properties, invested €73bn, and delivered 7.5 MtCO2 savings.

Source: E.ON UK (EEH0069); Department for Business, Energy and Industrial Strategy (EEH0024)

123.When asked whether the Government was working with the financial sector to develop and encourage low-interest loans, Kemi Badenoch responded:

We have a different approach. Loans are treated like capital spend. Therefore, from our perspective if it is Government giving out the loans, it competes with other Government spending priorities. In terms of what we are doing with the financial sector, what we really want to do is stimulate private investment more broadly. That is where the national infrastructure bank comes in. […] We are looking at the macro level, and infrastructure projects. We will be announcing more in terms of the infrastructure bank.

Value Added Tax

124.New build construction is zero-rated for VAT purposes (or it can be reclaimed). However, work to existing buildings is generally standard-rated at the full rate of 20 per cent.252 Several witnesses supported changing VAT to encourage energy efficiency—and of those that mentioned changes to VAT—most supported a cut to five per cent for refurbishment and renovation.253 Ralph Carpenter, a low and zero carbon architect, told us:

The VAT regime is the single largest obstacle to homeowners doing this work, despite there being a growing appetite for home energy improvements.254

125.Cutting VAT to five per cent on the labour element of repair and renovation in the domestic building sector would stimulate investment in energy efficiency upgrades of private domestic dwellings. Research by Experian found that in the first year of cutting VAT, a potential saving could be generated of up to 36,358 tonnes of CO₂ by the retrofitting of 14,000 homes.255 Projected over five years, this could lead to an additional £1.08bn spent on energy efficiency measures.256 Brian Berry from the Federation of Master Builders told us:

I think Brexit gives us the opportunity, or the UK Government the opportunity, to reduce the rate of VAT on green homes and it would be a fantastic stimulus for retrofitting our homes.257

Research by the University of East Anglia found that nine in ten homeowners completed energy efficiency works as part of a wider suite of home improvements. Therefore, stimulating the repair and renovation sector could bring about consequential improvements in the energy efficiency of homes.258

126.The Green Finance Institute said that, at a minimum, the Government should reintroduce the reduced rate of VAT payable on energy saving materials at the previous level of five per cent, rather than the standard rate of 20 per cent. For higher impact and wider construction sector stimulus, it should introduce zero per cent VAT on all renovation activity, conditional on the inclusion of energy efficiency measures.259 Energy UK also suggested this reinstatement, and proposed that the definition to be expanded to include storage, air-source heat pumps and electric vehicle charging equipment for public and private use.260

127.The National Residential Landlords association told us of an anomaly in the tax regime: where a landlord wants to carry out work to undertake repairs, such repairs are tax deductible, but energy efficiency improvements are not. As an example, whilst replacing a broken boiler was considered a tax deductible expense, if a landlord wanted to replace a functioning but inefficient boiler with a more energy efficient one it would not be.261

128.Given the widespread support for a reduction in VAT, we asked Kemi Badenoch whether the Treasury would consider a reduction in the rate of VAT on energy efficient measures to five per cent. She responded:

It is not about whether it is a good idea or not but about what it will cost. We look at tax changes at Budget, and it has to be looked at completely in the round. The cost of reducing VAT on, say, property renovation is about £4 billion a year. That is quite a lot of money. We need to look at that in the context of the VAT relief on loads of different things requested by the Treasury. If we are going to forgo £4 billion, what will be the impact of that on other parts of the economy? What will we not be spending that money on? … It has to be done at a fiscal event, where we understand how we are going to fund it.262

129.Green finance options are essential to encourage owner occupiers to take action on energy efficiency. We welcome the ambition of some leading lenders to make green mortgages available, and the Government consultation on how mortgage lenders can help householders to improve the energy performance of their homes.

130.Alongside an extension of the Green Homes Grant, other financial incentives, such as low interest loans, will need to be made available to owner occupiers and landlords to achieve the thorough retrofit of domestic housing stock the Government envisages. The Green Finance Institute has identified 21 possible products. It is therefore disappointing that the Green Home Finance Innovation Fund only looked at green mortgages and did not pilot stamp duty rebates and low interest loans which have shown considerable success in other parts of the world. We look forward to hearing more details from the Government on how the proposed National Infrastructure Bank will be used to finance domestic energy efficiency.

131.Despite the need to make progress in improving energy efficiency of 19 million homes to achieve net zero Britain objectives, no mention was made in the Budget statement on 3rd March by the Chancellor of energy efficiency, nor any steps taken to improve delivery of the Green Homes Grant, his flagship measure announced by him in July 2020, which has so far signally failed to deliver its targets.263

132.We recommend that the Chancellor of the Exchequer look again at proposals to reduce to five per cent the rate of VAT on the labour element of refurbishment and renovations. The Government should also bring forward proposals to reinstate the reduced rate of VAT payable on Energy Saving Materials at its former level of five per cent and to expand its scope to cover energy storage, heat pumps and electric vehicle charging.

133.We support and reiterate the Green Finance Taskforce recommendation that the Government should pilot a stamp duty rebate for homeowners that improve the efficiency of their homes within the first year of purchase. We recommend that the Government work with the financial sector and major landlords, including local authorities and other social landlords, to stimulate renovation through the introduction of green mortgages, green finance and low cost loans. These instruments would help to address the barriers to energy efficient renovation and retrofit in the form of high upfront costs of energy efficiency measures. The Government should consider how the national infrastructure bank could be used as a vehicle to finance energy efficiency given the scale of success achieved in Germany through its state funded low interest loan scheme.

134.The Government should work with the financial services sector to devise and implement a communications strategy to raise awareness about, and to encourage the uptake of, appropriate types of financing measures already on the market being offered, such as green mortgages.

Reforming Energy Performance Certificates (EPCs)

135.Provision of an Energy Performance Certificate (EPC) is a statutory requirement whenever a property is bought, sold or rented. It represents a rating of how energy efficient a property is. EPCs were originally designed to provide a basic indicator of the energy cost of running a home (Box 6). They were introduced in 2007 and now underpin a range of Government policies and targets, including the legally binding fuel poverty targets, the ambition to have as many homes as possible to be grade C by 2035 and the Minimum Energy Efficiency Standard for privately rented homes.264

Box 6: Energy Performance Certificates

Energy Performance Certificates are being used as a rating of how energy efficient a property is, although originally designed as a measure to estimate the relative cost of home heating in order to assess fuel poverty. The performance of the combined measurements is graded on a scale of A (most efficient) to G (least efficient). EPCs have two metrics, a fuel cost-based energy efficiency rating and a rating relating to CO2 emissions. The Energy Efficiency Rating (EER) metric (which measures the cost of energy) is used as the headline rating (commonly referred to as the EPC rating). The Government’s Standard Assessment Procedure (SAP) is used to monitor the energy efficiency of homes. It is an index based on calculating annual space and water heating costs for a standard heating regime and is expressed on a scale of 1 (highly inefficient) to 100 (highly efficient with 100 representing zero energy costs). In 2018, the average SAP rating of English dwellings was 63 points, up from 62 points in 2017.

Source: Ministry of Housing and Local Government 2020. English Housing Survey 2018–19, Headline Report

136.EPCs are increasingly influencing the retrofit of existing housing, a purpose for which they were not originally intended and for which they may be inadequate.265 They have several widely recognised shortcomings which were highlighted to us in written evidence:

• They are built on a theoretical desktop calculation and almost nothing is ‘measured’ on-site. An assessor may visit a home and check which materials are present in terms of wall or loft insulation, type of brickwork, but the performance of the materials present in resisting heat loss is not measured.266
• The headline EPC rating is based on the cost of the fuel used for heating, and therefore they are unreliable as a measure of energy efficiency.267 A property not connected to the gas grid is likely to automatically score a low EPC rating, owing to the higher cost of fuel to heat such properties.268
• A low carbon heat pump will not achieve a higher EPC than a gas-heated property, nor will the EPC methodology suggest the installation of a heat pump because of the higher cost of electricity over gas. The Standard Assessment Procedure (SAP) does not take into account the improved operational performance of heat pumps, nor the progress in decarbonisation of the electricity grid.269
• The SAP is based on standard assumptions about household occupancy. The assumptions made of older houses make them more likely to receive a notional rating less favourable than the performance attained in practice. This can lead to inappropriate and unnecessary retrofits of older properties.270
• Assessors only look at what is visible in a building: for example, they do not consider under-floor insulation if it cannot be directly inspected,271 or tested by intrusive investigation which householders may dislike.
• The open source database does not link to Land Registry data, which is a significant issue for lenders seeking to assess the efficiency of properties on their mortgage portfolio.272
• Because the assessing of EPCs is so unreliable, two near-identical properties could receive different EPC ratings.273
• The various accreditation and certification bodies are all competing for customers, which does not necessarily encourage rigour in the auditing process.274
• The training for EPC assessors is minimal, with no requirement for specific training in the discipline of building physics.275
• There is currently no obligation to obtain an EPC for houses in multiple occupation, a category of property which is disproportionately occupied by vulnerable people.276

137.The UK Green Building Council said that, despite the known issues with EPCs, it did not advocate the use of alternative methodologies, since EPCs underpinned such a broad range of relevant Government policies and targets.277 E3G considered that, while there were problems with EPCs, they should be maintained in order to define targets for energy efficiency, Pedro Guertler explained:

I think the nub of EPCs is right in that they are well understood. They mirror the energy efficiency ratings that we see on home appliances and the like and they are very useful to be able to set targets. There are risks inherent, but think of them as something where you can change what is going on under the bonnet while retaining the wrapper as the benchmark for meeting a target consistently.278

138.National Energy Action (NEA) said the benefits of EPCs were that they were easy to understand; they showed how much the average household would spend in a property for heating, lighting, and hot water, and they helped tenants, landlords or homeowners find out how they could save energy and money by installing improvement measures. NEA would be concerned about the possibility of a hiatus or a reversal of Government commitments that have subsequently adopted this framework,279 though they did recognise that EPCs should evolve and respond to some of the well-known issues within the current Standard Assessment Procedure.

139.The Climate Change Committee recommended in its 2018 and 2019 progress reports that EPCs needed to reflect real-world energy efficiency performance.280 In its 2019 report on housing, it stated that “EPCs are not currently a good reflection of the expected running costs of a home”.281 It said that the SAP should be reviewed and revised and that only suitably qualified persons carry out energy modelling and assessment. In a letter to Rt Hon Robert Jenrick MP, Secretary of State for Housing, Communities and Local Government, the CCC called for a shift towards monitoring actual energy consumption,282 and in its Sixth Carbon Budget advice it reiterated that EPCs needed to be reformed to ensure they drive the energy efficiency measures needed.283

Box 7: EPC vs real world performance: the Knauf retrofit project

Knauf conducted two ‘housing estate level’ pilots for proof of concept of real performance measurement technologies. One was a 28 home ‘retrofit’ of an estate in Manchester. The homes were 1970s construction and already had wall and loft insulation. The homes were electrically heated, with occupants paying a high pre-payment tariff while many had high levels of heating system operation and high thermostat settings which resulted in electricity bills of over £3000 per year for some and under-heating for others. Retrofit measures installed were applied as a ‘whole house’ approach with a ‘maximum improvement within reasonable cost’ approach. These included cavity insulation extraction, cavity cleaning and insulation re-application, party wall insulation, replacement loft system insulation including draught proofing in the loft, enabling or correction works to de-risk future issues such as fixing the guttering. Knauf Energy Solutions’ measurement technology establishes the real performance of each home using sensors to measure how well an individual building’s walls, roof, windows and doors retain heat. Over 12 weeks, data from the sensors is combined with weather data, energy meter readings and other intelligence, using machine learning algorithms to build an accurate picture of the real energy performance of the home. It found a 31 per cent average improvement in home fabric efficiency. The average energy saving of 2,071 kWh per year or £411 based on standard occupancy (tenants on pre-paid electricity meter at 19.85p per kWh). Higher users on the estate would see a saving of £660, and lowest user a saving of around £228. Calculating the savings using the Government’s National Energy Efficiency Dataset results showed an average 11 per cent reduction in energy use from installing loft and cavity insulation when compared with an equivalent property that was not insulated in a scheme. The homes’ notional EPC rating (under the current system) remained mostly unchanged. Yet the Knauf calculations showed almost three times that improvement on that average and the ‘worst’ performer was still improved by 20 per cent. It said the EPC ratings do not necessarily reflect the actual energy performance of buildings because the current system makes no physical measurement on site.

Source: Knauf Insulation (EEH0076).284

140.BEIS told us that the Standard Assessment Procedure (SAP) and Reduced Data SAP (RdSAP) methodologies which underpin EPCs provide accurate and reliable assessments of the Energy Efficiency Rating and the Environmental Impact Rating. It said that the SAP is

updated regularly in line with updates to Part L6 of the Building Regulations. We will keep these methodologies under review as we develop policies and plans for improving the energy efficiency of homes and reducing fuel poverty, including those in rural areas.285

The Government’s website states that the current SAP is from 2012 and that “a formal review is currently underway, which is expected to be completed in 2016”.286 BEIS and MHCLG launched a call for evidence on EPCs in July 2018 to gather evidence on how they were working and how they could be improved. The results were published alongside an action plan in October 2020.287 This showed that only three per cent of respondents thought that EPC assessments were reliable. The action plan indicated that, in the short term, actions would aim to improve EPC reliability, but in the longer term broader changes were needed to reflect real-world performance. By the end of 2021 the changes needed for SAP 11, expected to be rolled out in approximately 2025, will be reviewed to make EPCs more accurate which could include considering the potential role of Smart Meter Enabled Thermal Efficiency Ratings data in SAP.288

141.Energy Performance Certificates have a range of flaws, with their inability to reflect real-world energy performance being the biggest challenge. Desk-based assessments with out-of-date software are doing nothing to improve the market value of decarbonised homes and do not accurately reflect the progress the country is making in improving the energy efficiency of housing stock. Given their role underpinning Government policy and targets, EPCs should nevertheless be retained but thoroughly overhauled to ensure that they represent an accurate assessment of the improved energy performance of buildings.

142.We recommend the EPC methodology is fundamentally overhauled to support low carbon heating measures by indicating, in its headline rating not only the fuel cost of heating a property but also its energy and carbon metrics. The measures in the Government’s EPC action plan are not enough to achieve what is needed to support the decarbonisation of homes: we recommend that Ministers look at this again with far greater urgency. Well in advance of 2025, while the energy market is rapidly decarbonising, we would like to see the introduction of EPCs more reflective of real-world performance, and the publication of regular updates on the developing methodology behind EPC assessments. Those carrying out EPC assessments should be suitably qualified and trained in energy modelling and assessment.

Building renovation passports

143.During the inquiry several witnesses supported the introduction of building renovation passports (BRPs) as a successor to Energy Performance Certificates.289 A BRP is an evolution of the EPC and uses measured data (e.g. kwh/m²) rather than deemed energy performance (i.e. SAP) (box 8). They are intended to outline a long-term—up to 15–20 years—step-by-step renovation roadmap to achieve deep renovation for a specific property. BRPs are expected to reflect the changing situation of the owner or occupier and to provide them with renovation options, expected benefits, including energy savings and comfort improvement.290

Box 8: The evolution to building renovation passports

Source: Climate Change Committee. 2020. The sixth Carbon Budget: The UK’s path to net zero

144.Building renovation passports were recommended in a report to the Government by the Green Finance Taskforce, which said they should be introduced for residential and commercial properties by 2020.291 Pedro Guertler from E3G told us that BRPs were being introduced in several European countries and were already being used in Germany. The benefits were that a homeowner could sequence improvements and align them with other work such as extending the loft or renovating a kitchen in a way compatible with work which might be required later.292 This can reduce the disruption caused by building work, which was a key concern of the Climate Assembly UK.293 Russell Smith from RetrofitWorks said that they should be introduced across every type of tenure.294 Gavin Dick from the National Residential Landlords Association said that BRPs would be very helpful to landlords to allow them to plan their future costs:

Any landlord sitting there wants to know […] “How much money will it cost to replace my boiler with an air source heat pump? What is that going to cost me and when should I do that intervention?” That is what people need to know, and only through something like a building passport will they be able to actually have that plan. It does not matter then if you have one property or 100 properties, you can make those decisions based on information against your properties.295

145.Jenny Hill, of the Climate Change Committee, said that BRPs could be “really transformational” at helping householders put in place a plan that is able to unlock green finance:

We think [building renovation passports] would be robust enough to unlock significant levels of green finance through, for instance, green mortgages.296

146.Since its 2018 progress report to Parliament, the CCC has recommended that EPCs should be developed towards digital green building passports.297 The Green Finance Institute’s Coalition for Energy Efficiency in Buildings is currently working to develop an industry-recognised framework for a building renovation passport, while exploring opportunities with TrustMark, local authorities and devolved administrations to become early adopters of the framework.298 Dr Rhian Mari-Thomas explained:

One of the projects we are working on with our 200 coalition members is to bring out a feasibility study that sets out exactly what the data inputs and outputs should be for that sort of building/renovation passport, such that it would not just provide information on what measures are possible, and what a long-term renovation plan could look like, but would create a link with both the supply chain and the finance providers, making sure there is finance and advice made available at all the right points in that chain.299

When asked how long the rollout to BRPs would take, Dr Thomas said it would be “dependent on resources and financing”: she thought the rollout would be welcomed and the construction industry had been very positive.300

147.The Government’s EPC action plan noted that BRPs had been recommended by the Climate Change Committee and Green Finance Taskforce, but did not consider their potential role in improving energy efficiency measures.301 When asked whether he would consider the replacement of EPCs with BRPs, Kwasi Kwarteng replied:

… we don’t have to have one metric. There is no sense in which it is a competition and we have to look at the best metric. There is a whole range of things that we need to look at.302

148.Building renovation passports have the potential to provide much more accurate data on energy usage and could be used to unlock green finance. They provide homeowners with long-term renovation strategies which can minimise disruption to their properties and thereby encourage more extensive retrofitting of energy efficiency measures.

149.We recommend the Government develop an approved, standardised methodology and data framework for Building Renovation Passports and supports their roll-out, with a view to the eventual replacement of Energy Performance Certificates.

Advice and support

150.The Climate Change Committee said in its 2020 progress report that the “lack of public awareness and support for low-carbon heating is arguably the single greatest consumer barrier to achieving net zero”.303 Improving the housing stock largely rests on the Government’s success in persuading homeowners to act. For this to happen, they need to know what work to get done, who can do them and how to pay for them. In England, the Government provides the Simple Energy Advice web service and recommends the PAS 2035 and TrustMark system for some publicly supported schemes taking people from an assessment through to an installation.304 Laura McGadie, group head of energy at the Energy Saving Trust, explained that as well as a need to raise awareness and provide information, an engagement programme was needed:

The engagement piece is missing to get people to look for the information in the first place and then to handhold them through the process, because we are asking them to do something quite complex and, in many cases, we are asking them to invest their own money.305

She added that to hit the net zero target a Government-supported advice service was “a crucial part of the picture” for consumer protection and to change people’s buying behaviour from gas boilers to air source heat pumps.306

151.The Energy Saving Trust said that its experience gained through delivering Home Energy Scotland (box 9) highlighted the value of bespoke advice and ‘handholding support’ for those who were looking to install more complex measures like solid-wall insulation or air source heat pumps.307 Where the Energy Saving Trust had given advice and people took action as a result, 87 per cent had said that its advice “made a contribution to” their decision. Laura McGadie explained why there was a need for a bespoke service:

You can certainly give some basic information, but if you are asking somebody to put in solid wall insulation and a heat pump, then you are asking them to do something quite significantly different from what they might be used to, so they need that support… They need that extra reassurance that the route they are going down is the right route.308

Box 9: Home Energy Scotland

Scotland’s national energy efficiency advice service is managed by the Energy Saving Trust, provides customers with “one-stop shop” information about, and access to, these schemes. All households can call Home Energy Scotland (HES) to receive general advice on energy in the home. Where relevant, HES can then refer its callers to the most appropriate financing programme specific to their personal circumstances. Scottish households cannot access much of the financing support without first talking to Home Energy Scotland, which helps prevent mis-selling (e.g. by ensuring householders get three quotes from different installers). Home Energy Scotland provides additional in-depth, in-home handholding support to households in particular vulnerable groups, ensuring they do not miss out on the support provided. It also provides specialist advice services for more complex energy saving technologies, for example renewable energy technologies, energy storage and/or solid wall insulation in order to promote uptake of these improvements.

Source: Energy Saving Trust (EEH0102)

152.Gavin Dick, from the National Residential Landlords Association, said that it had repeatedly asked for the same kind of information as available Scotland to be provided in England. He said that it should be available for everybody “to understand how to use properties, live in properties and use energy properly in the property”.309

153.We have heard of the benefits of a bespoke advice service on energy efficient retrofitting. We consider that such a service will be essential in order to achieve the pace of change needed to meet the net zero target.

154.We recommend the Government’s present basic energy advice service available in England is upgraded to a specialist bespoke advice service similar to the Home Energy Scotland network. This should include measures to identify the most appropriate financing programme for each consumer.

Sustainable building materials

155.The technology to improve the energy efficiency of homes already exists, although some measures such as solid wall insulation need cost reductions in order to scale up their use at pace. Unlike other sectors where technologies need to develop to facilitate carbon reduction on scale, energy efficient housing can be put in place immediately.310 Mark Lynn, from Eden Renewable Innovations Ltd, told us that sustainable bio-based and breathable products and systems could provide many energy efficient, healthy, and sustainable improvements to existing homes but had been under-utilised in the UK to date despite being well established in other major European countries.311 Sustainable products include insulation made using natural fibres, breathable mineral, clay and lime-based plasters, renders, mortars, and paints as well as structural components made predominantly from timber. Bio-based materials such as sheep’s wool or wood sequester non-fossil carbon, while lime based renders, plasters and mortars have lower embodied carbon compared to equivalent cementitious materials due to the lower energy inputs during manufacture.312

156.Natural fibre insulation (NFI) is highly suitable for use in the older, traditional properties of which there are eight million in the UK.313 It provides greater breathability which helps with humidity and damp issues. NFI use, in new build and retrofit alike, accounts for between 0.2 and 0.3 per cent of the UK insulation market at contractors’ prices. By contrast, in France and Germany, its market penetration is at between five and ten per cent.314 Mark Lynn explained that France had mandated the use of natural materials, with a requirement for 50 per cent natural materials in public buildings, by 2022. He added that this was highly ambitious, and the UK could not make this sort of mandate because the capacity to supply was not adequate at present.315 Except for sheep’s wool, all natural fibre insulation is imported from mainland Europe to the UK. Brian Berry from the Federation of Master Builders said that the availability of sustainable insulation materials was an issue and there were concerns about some products and availability post-covid and post-Brexit.316

157.Asked how the Government was planning to support the supply chain for natural fibre insulation in the future, Kwasi Kwarteng said:

Supply chain issues are things that we are always mindful of in BEIS … Clearly, things like the green home grant and our push to improve energy efficiency are things that we feel we should invest in in this country, and the supply chain is something that we look to. We do not have specific targets, but a lot of the supply chain is already based here in the UK. That is the nature of insulation and the nature of bringing in installers to people’s homes; they generally tend to be UK-based. […]

We are looking at all sorts of issues relating to the actual materials used in public buildings insulation. That is not something we have touched on here in this forum, but you will know from the manifesto that some £2.9 billion has been earmarked for public sector buildings. Within that, there is a debate to be had about the kinds of materials that companies can use.317

158.Sustainable building materials are not being utilised to anywhere like their full potential in the UK. The use of natural fibre insulation could have significant benefits for the UK’s older housing stock.

159.We recommend that within its Heat and Buildings Strategy, the Government consider stipulating the use of sustainable materials in public sector energy efficiency contracts as a first incentive to drive the UK’s domestic supply chain of these materials.