Lenders could have a role in building a market for energy performance improvements. The government has been engaging with lenders, their engagement organisations, and other financial stakeholders to better understand how government can encourage lenders to innovate.

This consultation from the Department for Business, Energy & Industrial Strategy (BEIS) set out a range of proposals that could improve the energy performance of mortgaged properties, and deliver substantial emissions reductions.

BEIS said the consultation was open to all but would be of particular interest to:

• mortgage lenders and brokers, home valuers, estate agents and others involved in the sale of homes
• those in the energy efficiency supply chain, including installers, domestic energy assessors, accreditation bodies and enforcement bodies
• homeowners with a mortgage.

The consultation covers:

• proposals to improve awareness of the energy performance of lenders’ portfolios
• a target-based approach for improving the energy performance of lenders’ portfolios

Key points

Energy Systems Catapult broadly supports the proposals to improve home energy performance through
lenders. We would urge Government to consider some important factors in developing its policy proposals.

• ESC broadly agrees with proposals to encourage lenders to facilitate, develop and deliver green finance products, as part of a wider package of policy drivers to support building decarbonisation. Our thinking on this is set out in our Six Steps to Zero Carbon Buildings framework.
• Disclosure of energy performance information by lenders is a useful first step, provided it forms part of a wider set of changes to improve incentives and opportunities across all relevant stakeholders (including lenders) to decarbonise at scale, with government intervention to drive market demand. Markets will be much more likely to deliver green finance products if policy drivers drive demand for low and zero-carbon solutions.
• In framing obligations to drive decarbonisation it is important to recognise that lenders are only one actor within a complex heat decarbonisation journey. Other actors may also need to be obligated. In framing obligations, it also makes sense that they should be expressed as far as possible in terms of the desired outcome.
• The UK has some of the oldest and most inefficient housing stock in Europe and about 90% of the existing housing stock is expected to still be in use in 2050, as such there are significant risks of using an Average EPC Rating ‘C’ across a lender’s portfolio as a basis to drive decarbonisation of buildings across the UK.
  • Older, harder to treat buildings may be favoured poorly with these proposals, and conversely, lenders with a ‘younger’ portfolio may be able to achieve this target quicker.
  • Additionally, lenders and mortgagors in deprived areas that have generally poorer EPC ratings may be disadvantaged, leading to risk of wide disparity across the UK.
  • Our work on Local Area Energy Planning (LAEP) can be used to determine local characteristics of an area, including assessment of building age and local spatial considerations to inform local decision-making.
• The EPC, as a derivative of SAP/rdSAP is primarily a cost metric, not a measure of actual energy used or of carbon emitted, based on theoretical in-use performance – as such it is not fit for purpose to measure carbon reduction.
• The ideal option would be a complete overhaul and reforming of the EPC system to reflect Carbon performance accurately, with a push towards digitalisation to more accurately reflect carbon performance and energy use.
  • However, a dual metric including a heavier emphasis on the Environmental Impact Rating may be an achievable intermediary step.
• Government must be cautious of how lenders will be likely to achieve average EPC C. There is a risk that measures that score well on cost savings yet only marginally reduce carbon emissions versus other deeper retrofitting may be favoured by lenders in order to achieve this target.
  • Obtaining an average of EPC C could be achieved through several different approaches – environmental levies are not distributed fairly across different fuel types, meaning that price signals distort incentives in favour of high carbon fuels.
  • Based on current price signals, moving away from a high carbon gas boiler to a low carbon air source heat pump would most likely result in an EPC/SAP score penalty, given these imbalances and average carbon intensity factors in the current version of SAP.
  • BEIS must be clear whether these policy proposals are intended to target lower energy usage or lower carbon.
•  The UK does not yet have the skills and capacity needed to deliver the green jobs required to meet our Net Zero target. The buildings sector will need to attract both new entrants, upskill current professionals and develop new working practices if Net Zero is to be achieved; this can be done but only if there is a genuine step-change in our approach to the skills agenda.
  • It is important to help markets develop in a way that builds up supply chains and develops skills to drive solutions that mortgagors want.
  • A combination of Government intervention to encourage, and private market to develop green financing options can help this challenge, however, there is also a need for policy to drive demand from property owners for low and zero-carbon options.