Use the housing market to drive an energy efficiency revolution

March 2, 2016

There is a clear case for improving the energy efficiency of UK homes. Improving energy efficiency can significantly reduce household energy bills, contribute to meeting decarbonisation objectives at low cost, and reduce fuel poverty and the associated health effects of living in a cold home. It can also improve security of supply by reducing the overall demand for energy, reducing the need to build new power stations, and reducing fossil fuel imports.

The UK has made great strides in improving energy efficiency: household electricity and gas use fell by 23% over the period 2004-14. Yet progress on energy efficiency is slowing. The Government is targeting 1 million homes to receive energy efficiency measures during this Parliament, compared to 4.5 million during the last Parliament. The UK still has amongst the least efficient housing stock and highest rates of fuel poverty in Europe. There is still huge potential to improve domestic energy efficiency: research shows that a more ambitious approach to energy efficiency could save households a total of £8.6 billion per year in energy costs, and save 24 million tonnes of CO2 per year by 2030 – equivalent to taking more than 10 million cars off the road.

The UK is now at a crossroads for energy efficiency policy. The failing Green Deal scheme has now been all but abandoned, having provided energy efficiency loans to just 16,000 households against the original ambition for it to support “millions of homes and businesses”. This leaves a major policy gap in terms of how to encourage energy efficiency in “able to pay” households. The current Energy Company Obligation is due to come to an end in 2017. The Government has committed to a future supplier obligation from 2018, focused on fuel poverty rather than carbon reduction, albeit with a reduced budget. The Government recognises the importance of improving energy efficiency but at present is not delivering against its ambition.

Against this backdrop, Policy Exchange has published a new report today which takes a fresh look at domestic energy efficiency policy. We propose a set of policies designed to structurally embed energy efficiency into the housing market, and the way that people think about homes. Part of the reason the Green Deal failed is that it attempted to promote energy efficiency on a standalone basis with a proposition based around energy cost savings. Conversely, research into consumer behaviour suggests that households are more likely to undertake energy efficiency improvements as part of a wider home renovation, and place significance on the comfort and value of their home.

Our first proposal is to link Stamp Duty to the energy efficiency of a property. Buyers of more efficient properties would pay less Stamp Duty and vice versa. A home-buyer purchasing a house worth £220,000 (the median average house price in the UK) would see a £500 reduction in Stamp Duty costs. This would create an incentive for purchasers to buy a more efficient home, and for homeowners to upgrade their home. This is not a new idea, having previously been raised by the likes of the Energy Savings Trust, UK Green Building Council, the Association for the Conservation of Energy, and even the Energy and Climate Change Committee. But it appears that the proposal is gaining some traction at DECC, with Lord Bourne recently signalling that the department is “studying” the concept.

The second proposal is to reform mortgage affordability tests to better reflect the energy performance of a dwelling. Surprisingly, it is common practice amongst lenders to base mortgage affordability calculations on the amount that a homebuyer currently spends on energy in their existing property, not what they are likely to spend in their new property – which means that the affordability tests are largely inaccurate. Reforming mortgage affordability tests to reflect actual energy costs would allow a homebuyer to borrow more against a more efficient property. The proposed changes could also encourage mortgage lenders to offer energy efficiency mortgages to finance energy efficiency upgrades: a low cost form of finance compared to the loans previously available under the Green Deal model.

These policies would embed energy efficiency into the housing market by reducing the transaction costs and increasing the size of mortgage available for a more efficient home. You would expect this to create a premium for more energy efficient homes, which in turn would encourage home-owners to invest in the energy performance of their home. Imagine estate agents marketing properties on the basis of their energy performance credentials, and energy efficiency installers promoting their services as a way to add value to your home. This could create an energy efficiency revolution! The best bit is that these policies do not require subsidies or public investment. The proposed reforms to Stamp Duty can be designed to be fiscally neutral. The change to mortgage affordability tests requires limited if any input from Government, and is in the interests of lenders as it reduces their risk. What’s not to like?

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