The residential sector is responsible for over one-fifth of all UK CO2 emissions, and since 2014 decarbonisation rates have slowed. Emissions of CO2 have increased by 9% since 2014. In 2017, the government published an ambition to upgrade all homes where “cost-efficient, affordable and practical” to EPC C by 2035. But the scale of the challenge is considerable, with a third of homes built pre-war still carrying EPC ratings of E or below. To meet the 2035 target, the rate of retrofit needs to be seven times greater than current levels, and EPC improvements data suggests the total cost could be as much as £330 billion.

The problem will be harder to resolve than other sectors. Decarbonisation works are intrusive for residents, can impact the appearance of a home, and may not result in lower energy bills. There is also currently limited evidence of a residential green premium that could incentivise improvements. Consequently, a higher level of policy intervention, such as property-specific taxes, will likely be needed to move the market, particularly for owner-occupiers.

AMBITIONS AND CHALLENGES

• In 2017, the government published an ambition to upgrade all homes where “cost-efficient, affordable and practical” to EPC C by 2035 (EPC E by 2020 and EPC D 2025)

• To meet the 2035 target, the rate of energy-efficient renovation will need to increase by 7x according to the Department for Business, Energy and Industrial Strategy

• Information on EPCs estimates the cost of implementing all potential energy efficiency improvements is in the order of £330bn; previous grant schemes have been a drop in the ocean

PROBLEM #1

The payback on many energy improvements remains unattractive (especially the big-ticket items such as photovoltaics, solid floor and wall insulation).

The economics of getting the EPC level C:

PROBLEM #2

While the value of the asset is affected by its energy efficiency, the uplift in value for most homes won’t justify the expenditure.

Average £ per sq ft vs a band D home:

Other policy considerations

HERITAGE PROPERTY

Listed properties present a particular challenge as improvement works will often conflict with the need to protect their special architectural and historical merit. Clarity on the policy trade-off between heritage and energy efficiency is essential, including the nature of concessions and exemptions.

HEATING

While the International Energy Agency has already called for a ban on the sale of fossil fuel boilers by 2025, current government proposals are that they will only be banned on newly constructed homes from that date. A requirement for hydrogen ready boilers from 2035 looks more likely. Other alternatives such as heat pumps and biomass-fed district heating are likely to become increasingly common, subject to cost and production.

CARROTS & STICKS – THE ROLE OF TAXATION

Grant and green finance initiatives alone are unlikely to facilitate the step-change in investment in energy efficiency needed to meet government targets. More radically, discounts and surcharges on property-specific taxes such as stamp duty and council tax have the potential to increase the 'green premium' and 'brown discount' of housing, providing a greater incentive for owners to invest in energy efficiency improvements.

The challenge by tenure

AFFORDABLE HOUSING

• 5.08 million homes

• EPC ratings 2016–2020:

• Getting to zero carbon by 2050 is underpinned by regulatory requirement of the Decent Homes Standard

Savills Housing Sector Survey 2021

• 25% of providers do not have a planned timescale to upgrade stock to zero carbon

• 42% plan to complete works between 2031 and 2040

• A further 19% plan to complete works between 2041 and 2050

• 37% have not factored costs into their business plan

• Average expected costs of improvement stand at £20,600 per dwelling

• 17% of homes may be uneconomic to upgrade, a catalyst for redevelopment, stock sales and offsetting

PRIVATE RENTED SECTOR

• 5.57 million homes

• EPC ratings 2016–2020:

• In England and Wales private landlords already need to be at a minimum of EPC E unless costs exceed £3,500

• Proposals are to tighten that to EPC C and to increase the exemption cost to £10,000

• There are similar regulations in Scotland

• As the ambition to reduce emissions increases, so minimum standards will be increased and exemptions tightened

• 37% have not factored costs into their business plan

• These requirements will place an additional cost burden on private investors, putting particular pressure on mortgaged buy-to-let landlords. Institutions with purpose-built portfolios are much better placed to meet these obligations though currently represent less than 3% of the sector

OWNER-OCCUPIERS

• 18.93 million homes

• EPC ratings 2016–2020:

• Average energy consumption among owner-occupiers is 21% higher than private renters and 43% higher than those in the affordable housing sector (Source: BEIS)

MORTGAGED

• 8.70 million homes

• Favoured policy lever is to tackle energy efficiency through mortgage lending or re-mortgage

• That would involve lending targets for both energy efficiency improvements and the efficiency profile of a lender’s portfolio

• Were proposals to affect lending terms this could quickly change the economics of undertaking improvement works; particularly if interest rates rise

OUTRIGHT

• 10.23 million homes

• +1.55m in the past 10 years

• Dominated by older households in less energy-efficient homes

• Owners are conscious of heating prices, but the cost of improvements presents a major obstacle unless increased grants plug the gap

• Without a mortgage, the trigger point will often be on sale. Yet, on average, an outright owner has been in their home for 24 years.

_{Read the other articles within Spotlight: Real Estate and the Carbon Challenge below}