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Household investment in home energy retrofit – reviewing the evidence and designing effective policy

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Household investment in home energy retrofit – reviewing the evidence and designing effective policy

Conference Blog No. 4 by Niall Kerr and Mark Winskel

The energy retrofit of our domestic buildings (e.g. loft and cavity wall insulations, replacement of old inefficient boilers, draught proofing etc.) has seen many millions of UK and Scottish homes become more energy efficient in the last 15- 20 years. The demand for energy from our homes – electricity, gas and other heating fuels – has simultaneously fallen steadily in this period.

The large-scale uptake of retrofit has been driven by government policy, with many of the measures heavily subsidised and promoted via schemes such as home mandatory Energy Performance Certificates (for all homes for sale or rental). Many of the retrofit measures we have seen have been the most cost-effective, ‘lowest hanging fruit’, and whilst there are many more opportunities for home retrofit and energy savings still available, the ‘easiest/cheapest first’ approach means these are gradually becoming more difficult, and more expensive.

Home energy retrofit has largely been publically funded, as governments have set out to achieve carbon emission and fuel poverty reduction targets. There are, however, many reasons for private households to invest their own funds in retrofit: lower energy bills, more comfortable homes, environmental concerns are just some of the perceived ‘multiple benefits’ of home energy retrofit.

Our report is based on an evidence review carried out as part of ClimateXChange’s ‘Energy Policy Effectiveness’ project at the University of Edinburgh. To understand the rationale for the study it is useful to consider some figures. Firstly, the recently published Energy Efficient Scotland Route Map has set a target of ‘all homes in Scotland having an EPC rating of C (where technically feasible and cost effective) by 2032’. The ‘Existing Homes Alliance’ in Scotland (an influential campaign group) estimate that more than £10 billion would be needed to bring “the vast majority of homes in Scotland to an EPC rating of C”.

In Scotland, roughly, £0.5 billion of public funding has been earmarked to deliver energy efficiency and heat decarbonisation in the 4 years to 2021. At the UK level the latest supplier obligation could offer around a further £0.24 billion to Scottish households over the next 4 years. This difference between potential retrofit investment and available public funds was the inspiration for our evidence review question: “How can public policy more effectively encourage private, ‘able to pay’ households to invest in energy efficient retrofit?”

The review provided insight into the levels of private and public investment that have resulted from retrofit policy programmes based on loans, grants, tax subsidies and other measures. As might be expected, government subsidised loans tend to provide greater levels of private-to-public funding in retrofit than grants and tax incentives. The highest level of private to public funding in the review was 400% – i.e. private funding in retrofit that is four times the level of public funding. By contrast, some of the UK’s energy supplier obligations were found to have resulted in a private contribution that was less than that of the public funds i.e. less than 100%.

Public policy aimed at encouraging higher levels of private retrofit investment needs to consider the ‘additionality’ of retrofit support programmes, i.e. the extent to which the programme is supporting retrofit that would not have otherwise occurred. Our review shows that while in some schemes the majority of retrofit measures subsidised can be ‘free-riding’, there are also positive spill-over effects from policy that enhance the overall market. Different types of retrofit measures tend to achieve different levels of additionality; policy supporting measures which are new to a property e.g. new insulation, are likely to achieve higher additionality than policy programmes that support the replacement of existing building components i.e. boilers or windows.

While grants and tax incentives are more attractive to households than loans, loans typically achieve higher private-to-public funding ratios, suggesting a trade-off between policy effectiveness in terms of overall energy savings, and policy efficiency, in terms of the relative impact of limited public funds.

Due to the long-term nature of retrofit targets and the gap between the investment required to achieve targets and available public funds, an effective retrofit policy package might do well to use limited public funds to support low interest loans and work on innovative policy options that seek to increase the uptake of this relatively efficient mechanism.

There are many options for improving the attractiveness of retrofit to households. Aligning policy incentives with retrofit ‘trigger points’ – such as moving house, or coinciding with other home renovations – offers a way to increase household interest and investment. Whilst a ‘whole house’ approach to retrofit where multiple improvements are made is desirable from the point of view of reducing cost and hassle, it is often impractical in reality. There remains, however, the possibility of retrofit adhering to a ‘whole house plan’ over time, with any single change made with an awareness of how it relates to possible future changes.

Providing households with more information on energy use and retrofit options will help support overall policy, but it is unlikely to instigate much demand on its own. With respect to regulation, there are options that can see new standards gradually introduced over time. Many countries already see energy efficiency improvements required when an extension is added to a property, whilst in others improvements are required when an existing area is renovated.

There is also a need for policy to focus on the actors involved with the supply of energy retrofit and general home renovation. There is more general home renovation than energy retrofit, and households do not ordinarily distinguish between energy and non-energy home improvement, so the multiple occasions of general refurbishment can act as important opportunities to encourage energy retrofit improvements. This can be achieved if policy engages with the actors involved in installation and supply chains, so that it is in their interests to include retrofit in their plans.

Finally, an effective policy package needs to be considered in terms of the overall guidance that it gives to both households and supply-side actors. Support needs to be seen as stable enough so that businesses can be built on a sure footing and households can consider home improvements safe in the knowledge that long term government support will be available. This stability needs to be married with a flexibility in terms of adjusting policy where it is not working or where regional differences may necessitate variety. A simple, straightforward policy support package that avoids any unnecessary administrative burden or complexities is also critical.

There is an increasing incentive for governments to encourage households to invest in retrofitting their homes. Encouraging the ‘able to pay’ to retrofit is likely to prove a difficult task. A long term effective and efficient policy strategy is needed to unlock the many public and private benefits involved.

Originally published by ClimateXChange

The Author

Niall Kerr is an interdisciplinary energy researcher with a background in social and political science, and economics. I currently work as the Research Fellow on the ‘Energy Policy Effectiveness’ project, developing a dedicated method for Scottish energy policy assessment based on systematic evidence review methods.