CASE STUDY: Germany's Green Finance Support for Home Energy Efficiency "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% 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 2.8 million properties, invested €73 billion, and delivered 7.5 MtCO2 savings."- Environmental Audit Committee (2021)710 |
991. As set out above, the upfront costs of energy efficiency measures and low carbon heating can be prohibitive, and action is needed from government to support households with these. The Review has repeatedly heard of the need for long-term, low- interest loans for energy efficiency and low carbon heating. Innovative products are coming to market but are not being deployed at the pace and scale required.
992. In a recent letter to the Chancellor, the Climate Change Committee (CCC) said "our updated analysis suggests that over 60% of households can achieve levels of energy efficiency that are compatible with net zero for less than £1,100". However, both the CCC and evidence received by this Review notes that many households and businesses are unable to afford additional costs. Government's role in facilitating access to finance is therefore critical.
993. This is supported by evidence provided to this Review with industry players, such as E.ON, calling for government to introduce incentives such as guarantees to the banking industry to offer green mortgages and loans at low interest rates (see Germany case study). The Review has also heard about the importance of timing for the provision of green finance products - for example, the point of purchasing or re-mortgaging a home can be a sensible time to carry out installations, given the property is likely to be empty for a period of time, so incentives offered at this point can be particularly effective.
994. There are many international examples of innovative financial solutions coming to the fore. The USA is progressing with its PACE financing model (Property Assessed Clean Energy financing) - an innovative mechanism for financing energy efficiency and renewable energy improvements on private property. Residential PACE is typically enabled through state legislation and authorised at local government level and provides long term financing for up to 20 years. This mechanism tackles the barrier for a householder to have to pay back the complete loan for energy efficiency measures passing repayment obligations and energy bill savings to the property owner.
995. While this Review notes that the UK context is different, using all of government's levers is critical to build industry and consumer confidence and to crowd in private finance, maximising value for money for public support initiatives. This view was reinforced by evidence provided to the Review by the Environmental Audit Committee who recommended in their inquiry on 'Energy Efficiency of Existing Homes' that:
"The government should work with the financial sector and landlords to stimulate renovation through the introduction of green mortgages, green finance and low-cost loans; and pilot a stamp duty rebate for homeowners that improve the efficiency of their homes within the first year of purchase".
CASE STUDY: E.On and BNP Paribas Personal Finance E.ON partnered with BNP Paribas Personal Finance in 2018 on a green mortgage trial with the aim of providing a competitively priced mortgage to fund a range of personalised energy efficiency solution bundles delivered by E.ON. Improvements to EPC rating could then enable participants to receive lower interest rates.711 |
CASE STUDY: Octopus Energy Octopus Energy have recently teamed up with Halifax on a scheme which will bring the upfront costs of installing a heat pump down to £2,000, on par with gas boilers. Octopus will install heat pumps, while Halifax mortgage customers will be awarded with a £1,000 green living reward, which can be combined with BUS grants.712 The company has also teamed up with Ilke homes, using funding provided by asset manager Gresham House, to pilot zero bill homes. 6 properties in Essex have been equipped with air source heat pumps, solar panels and battery storage. Octopus provide 'zero bill' smart tariffs, allowing residents to use power from their solar panels on sunny days, and to use credits from surplus energy sold back to the grid to use energy from the grid when its cloudy. More of these 'bill free' homes are planned around the country. |
996. The UK's financial sector can lead in this space. For example, lenders are already stepping into the green mortgage market, providing preferential treatment on the basis of a home's EPC rating. These are primarily for those purchasing homes with a higher EPC rating (e.g. NatWest provides a preferential interest rate if you purchase or re-mortgage a property with EPC A or B).713 Some options exist for homeowners to carry out green home improvements. The Review has heard the risk of lenders primarily focusing on properties with already high EPC ratings, and low uptake overall for green mortgages.
997. Tax and subsidy policy can act in tandem to turbocharge the transition. Government has already cut VAT on energy efficiency measures, heat pumps and solar panels to zero, for the next five years. This is helping to reduce costs and incentivise homeowners to make changes to their properties, and we recommend this should be maintained permanently.
998. The Review has also heard calls for an energy-adjusted Stamp Duty Land Tax, which would encourage owners to improve the energy performance of their homes, boosting the energy efficiency retrofit market. The Green Finance Institute argue that this would also help to encourage lenders to develop green finance solutions. Stamp Duty applies only to property purchases over £250,000 but increasing house prices have put more homes within this bracket.
999. Government should include an Energy Efficiency Taskforce workstream on green finance products to report by end of 2023. This should help to support those in low EPC rated properties to carry out green home upgrades and should identify opportunities to crowd-in private finance, alongside public funding. |
Government should deliver the Heat Pump Investment Accelerator to catalyse private investment for at least two major heat pump factories in the UK. |