Do Green subsidies help?

Introduction
Various ‘green subsidies’ have existed for the past decade which have helped to part fund housing refurbishment projects aimed at improving energy efficiency, and help reduce the amount of carbon emitted from the UK’s existing built assets. Although the UK Government places an obligation on the energy companies to fund these initiatives, the subsidy is actually collected via the consumer’s energy bill. It is fair to say that these schemes have been a success, as household bills in 2016 were below 2008 levels as higher prices resulting from low-carbon policies and network costs were more than offset by reductions in energy use. The green investment has traditionally been focused on lower costs measures such as boiler upgrades, cavity wall and loft insulation but the most recent scheme was designed to improve the fabric of homes built using a solid wall construction through the installation of external wall insulation. The Energy Company Obligation (ECO) was originally expected to create over £1 billion of investment into energy efficiency over 3 years, both in private and social housing. This level of investment would have helped to upgrade our existing housing stock, help lift many more thousands of households out of fuel poverty, reduce carbon emissions and also create a substantial amount of skilled jobs. However over the last three years the ECO scheme has been subject to various consultations and reviews which have resulted in little support for the more expensive measures such as solid wall insulation. This is extremely disappointing as in order to achieve the Government’s goal of improving fuel poor homes to efficiency band C by 2030, this would require roughly doubling the funding currently provided under the Energy Company Obligation (Committee on Climate Change Energy: Prices and Bills – impacts of meeting carbon budgets – 2017 p.8).

Further to the recent ECOt2 consultation response the Energiesprong Market Development Team has agreed a decision not to pursue ECO funding for the demonstrator projects, yet may still be considered an appropriate source of grant to be used as part of a volume deal. The previous structure and mechanism of ECO have been altered to place more emphasis on private sector housing and individuals classified as living in fuel poverty. Although the greater focus on the fuel poor is welcomed, we feel that the limitations on social housing are counterproductive. There are now two strands to the funding instead of three - Affordable Warmth (HHCRO) and the Carbon Emissions Reduction Obligation (CERO). The original Carbon Savings Communities Obligation (CSCO) which formed part of ECO and focused on properties located in rural areas has been removed, although there is a ‘sub-pot’ of funding within HHCRO aimed at rural households. The main strands to ECOt2 are summarised as follows.

ECOt2 Strands
The two strands referenced above do still offer the potential for funding on Energiesprong schemes, although the amount of funding and household qualification criteria is now far more limiting as a result of the changes. The HHCRO will be increased as a proportion of the overall scheme from around 36% to 70% of estimated supplier spend, however the CERO will decrease as a proportion of the overall estimated spend, from approximately 34% to 30%. Previously, when ECO was first launched, you could expect to receive between £60 – 70 per tonne of carbon saved, which meant that most schemes could attract up to 50% funding and in some cases 100% funding was available where the existing building had a particularly poor energy performance. Unfortunately, initial estimates now suggest this number to be more in the region of £15-20, dependant on the size of the scheme and property type. The method of calculating the funding available has also been altered and in highlighted later on in this report. The amount of funding directed at Wales and Scotland should also be considered, as both currently operate separate home improvement schemes which can attract match ECO funding – Arbed2 and HEEPS respectively. Therefore, it is fair to assume that energy suppliers will look to these schemes to provide additional funding and an increased probability of project development.

HHCRO
Using a predetermined eligibility criteria the HHCRO will target low income private households living in fuel poverty, with funding calculated based on pence per pound of energy bill saved. Eligibility for insulation/energy efficiency measures under HHCRO will be extended to social housing in EPC Bands E, F or G only. The provision of funding to the social housing sector is further limited by the omission of central heating (including renewable heating) or district heating unless it is the first time install of a central heating system in the property. The decision to omit these measures is in indication that BEIS perceive that it is the responsibility of the landlord to ensure that heating systems are maintained and replaced accordingly.

CERO
CERO will provide more opportunity for social housing as there is no qualifying criteria, however the number solid wall insulation installations have been limited to 21,000 over the course of ECOt2. It is estimated that there are more than 7 million solid wall dwellings in Great Britain and this proposed quota does not therefore offer much in the way of confidence for how the remaining 99.7% of solid wall dwellings will be adressed. In previous versions of ECO, the reduced version of the Standard Assessment Procedure (SAP) was the preferred method of calculating the level of funding available. SAP is the method used to assess and ascertain whether a building will comply with Part L of the building regulations, and the reduced (rdSAP) was developed to offer a lower cost method to underpin the delivery of a number of key energy and environmental policy initiatives. This method would have been favourable for Energiesprong projects, given the estimated 35 SAP point improvement put forward as part of the consultation response. However, this calculation has also been altered in an attempt by BEIS to reduce administration and costs, relying instead on a deemed score of the measures installed as highlighted in the example below. Further cost reductions have been implemented by removing the requirement for a chartered surveyor’s report form the process, however an appropriate guarantee will still be required. Retaining the requirement for a guarantee is perhaps one of the few positive aspects to the new obligation and something which Energiesprong welcome and encourage. The promotion of higher quality standards within the refurbishment market is critical to creating consumer confidence and achieving the desired outcomes which is well reflected within the Bonfield Review and Energiesprong’s 30 year performance warranty.

Example calculation
In order to illustrate the likely level of funding per property available from ECOt2, Energiesprong have used the following example calculation. As is shown, once appropriate guarantees and administration costs are factored in the amount available is disappointingly low. It should be noted that the price per tonne of carbon saved is estimated and could be higher or indeed lower. As mentioned at the start of this report, a larger volume deal may offer more attractive opportunities for funding as administration costs lower and energy suppliers attempt to allocate their obligations as efficiently as possible. With this in mind, Energiesprong do not deter any housing or industry partner from seeking ECOt2 funding but hope that this report highlights some of the challenges and limitations.

Assumptions:

• starting u-value of 2.1 and end 0.18 W/m²K
• <100mm existing loft insulation
• No funding for heating
• £20 tCO2 funding rate 

Example:

9 terraced properties, with starting EPC rating of C/D/E (end terrace vs. mid).

End of terrace – deemed score 46.95 (EWI) and 6.6 (LI) x 2 x 20 = £2,142 

Mid terrace – deemed score 22.94 (EWI) and 7.2 (LI) x 7 x 20 = £4,219

£2,142+4,219 = £6,361 of funding less cost of appropriate guarantees (~£150 per property)

~£550 funding per property (excluding submission/administration costs)

Conclusion
Energiesprong UK feel that the current ECO arrangement encouraging a piecemeal approach to installing energy efficiency measures will not meet the speed and aspirations of Government’s carbon budgets without £billions of further subsidies and significant policy intervention. A move to consumer focused outcomes rather than on particular technologies and standards would be a next logical step for a progressive Government committed to innovation and consumers. Building on the policy direction outlined in the consultation document, Energiesprong UK would encourage BEIS to accelerate deployment of radical deep retrofits in the UK. To facilitate this, deep retrofits could be defined as:

Proposal

• Improving a home by more than 35 SAP points
• Demonstrating by simply providing a ‘before’ and ‘after’ EPS using rdSAP
• Deemed scores based on modelled examples taking all measures into account (fabric, heating, lighting, renewables) across the key archetypes: terraced, semi, flat, detached homes
• Energiesprong solutions will offer a performance warranty which could in time be used in place of measures lifetime. However, to encourage innovation and until the performance warranty has been tested in the UK market, we would suggest that deemed scores are based on an aggregate lifetime of all the measures installed, which would equate to approximately 200tCO2 per property.
• Require that more than 50% of property elements are the maximum 5 stars (on EPC) with all a minimum of 4 stars (with the exception of floors) to guard against unintended consequences of a single measure such as PV being deployed in very large quantities and ‘gaming’ the intent
• Make available to private, private landlords and social housing