A central issue for the success of the European Green Deal is – how to bring about the low energy transition of Europe’s housing stock? The current approach on individual households is not working. It needs to be replaced with a collective model, which is organised at city-wide level and delivered at neighbourhood level to get the necessary economies of scale. Rufus Grantham from Bankers without Boundaries describes how it could work.
Rufus Grantham is co-head of the UK & Ireland Bankers without Boundaries, a not for profit sustainable finance advisory firm.
European, national and civic climate emergency declarations all depend on a rapid decarbonisation of our housing stock given the current large share of CO2 emissions linked to heating and powering our homes. We know what needs to happen at an individual property and neighbourhood level, i.e. reduction of demand through mitigation actions and transition of power and heat generation to renewable sources. However, there is little consensus about how to actually kickstart the Renovation Wave other than a broad acceptance that the current model is failing.
Why is the current model failing?
Across all jurisdictions that we have looked at, current approaches are designed to move capital into the hands of those who are seen as the problem holders, i.e. property owners, who are also assumed to be the beneficiaries of the work (more comfortable homes, lower energy costs). This is being done through subsidies and access to cheaper finance options. But they aren’t working. Why not?
First, retrofitting a house is a complex and technical task requiring multiple contractors and decisions, which we are asking individual property owners to make in parallel and in isolation, rather than centralising to leverage technical expertise. And looking at multi-occupancy buildings the complexity increases further.
Second, there is a fundamental agency issue at play here. In order to deliver deep de-carbonisation the retrofit capital cost is significant (€20-50k per property), and while energy savings can also appear significant (€1,000+pa), the economics of this investment are poor (including repayment of the original capital plus a reasonable financial return) unless you believe you are going to live in the property for 30+ years. Property owners do not see the purported financial benefits and hence en masse are choosing not to participate in these economic incentive schemes (European domestic retrofit rate is currently 0.3% p.a).
Third, even if the property owner does know that they will live in the house for 30+ years, the economic returns from energy saving and lower maintenance alone are still poor, with 20-50 years to repay the invested capital let alone generate a reasonable investment return on top.
Fourth, there are other significant returns from accelerating a neighbourhood-wide retrofit programme but these do not accrue to the individual property owner and so are currently not driving the decision making. These co-benefits (e.g. improved healthcare outcomes, better air quality, fuel poverty alleviation, job creation etc.) have direct benefit to the wider neighbourhood, but this incentive is currently only harnessed bluntly through national subsidy schemes.
What is the alternative?
We believe in a solution that turns the equation on its head. Rather than disbursing capital to individual property owners, we think a structure could be created to centralise the energy savings into entities that invest capital at scale as a “public service”. A city retrofit agency could take a more systemic approach to decarbonising whole neighbourhoods, tying in with district heating approaches for example, and considering energy systems beyond the individual residence. Centralised expertise could be leveraged. Scaled procurement and roll out commitment would reduce unit-cost economics. A more integrated holistic approach could be taken when retrofit becomes a place-based investment. (see diagram) Retrofit the buildings, yes, but also invest in the spaces between the buildings with nature-based solutions, community investment such as community based co-working spaces, creches etc. driving ancillary benefits such as improved biodiversity and community resilience. Retrofit is a necessarily invasive process, and while improved comfort can be a key motivator, improving the locality as a place to live and thrive could increase the engagement of whole communities. This is why we have termed our approach “Green-Neighbourhoods-as-a-Service”.
The centralisation of energy savings would be through a long-term Neighbourhood Comfort & Maintenance contract. This contract would be embedded in the property, automatically assigning over on change of ownership, and wouldn’t be secured on the property. From a mortgage lender perspective, the fee would be part of an affordability assessment along with other bills rather than a debt attached to the property impacting loan-to-value calculations. The level of the fee would be set so that the resident would be no worse off than prior to the retrofit work, i.e. the post retrofit energy costs + the Neighbourhood Comfort & Maintenance fee would be equal to or lower than pre-retrofit energy costs.
This would create a low credit risk contracted annual income for the central retrofit agency which would allow a significant portion of the initial capital to be raised from private sector lenders e.g. pension funds, matching some grant subsidy from Green Recovery or Green Deal programmes. This would be attractive to long-term private finance capital such as pension funds or insurance companies which are increasingly focused on delivering impact with their investments, as well as financial returns. Other sources of non-repayable capital could also be engaged with, for example water company investment in green infrastructure, while there is also scope to accredit this scaled and place based retrofit programme as a source of carbon credits.
An accelerated Renovation Wave would deliver both measurable CO2 reductions, as well as clear impacts around healthcare, education and poverty.
There are many details to work through on how this would all work in practice. We plan to pilot schemes of this nature in Edinburgh, Birmingham, Milan and Copenhagen amongst others to deliver that learning. Publicly-owned properties may well be able to show the way to prove the economics of the model using Green Deal funding before rolling out into the private sector.
More detail of our proposal can be found here: Green Neighbourhoods as a Service – a Mechanism for Retrofit at Scale. This is an innovative finance model that will enable the wholesale retrofit that is required across Europe.
Don’t miss the next edition, released Friday 30 April, with Professor Sir Geoff Mulgan, former CEO of innovation agency, NESTA, writing about Making the Green Deal Happen – ‘The Missing Digital Dimension..’
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