New financial models could unlock retrofit of social housing

Financial solutions

Financial solutions developed by the Green Finance Institute’s Coalition for the Energy Efficiency of Buildings (CEEB), with CEEB members from the finance, property and energy sectors, could help.

One possibility is local climate bonds, which enable local councils to attract low-cost capital from retail and impact investors for climate positive projects. These could raise an estimated £3bn in England alone.

The Green Finance Institute’s Local Climate Bond campaign helps councils to issue their own climate bonds and these could be used to fund social housing retrofits specifically.

“Retrofit models like Energiesprong… can guarantee carbon savings, energy costs and household comfort for years”

The government already provides a guarantee scheme to help housing associations fund the construction of new homes. A similar government guarantee scheme for large-scale social housing retrofit projects would help to de-risk transactions and minimise long-term borrowing costs, particularly for housing associations that can’t secure cheap debt finance on their own.

Retrofit models like Energiesprong – where social housing becomes completely energy independent and tenants pay landlords for a comfort plan instead of external energy bills – can guarantee carbon savings, energy costs and household comfort for years. Because these models generate revenue for landlords, they could be scaled with private finance. An insurance-backed guarantee could further de-risk these projects for lenders and investors.

Opposition from private leaseholders within blocks of flats or rows of terrace housing can prevent social housing landlords from completing multi-property retrofits. If private leaseholders were provided with leaseholder retrofit financing on attractive terms, this could increase participation.

Comfort as a service and heat as a service – where third-party service providers decarbonise social housing and recoup their outlay by charging residents energy service fees through performance-based contracts – could increase retrofits if they could access capital markets financing at scale.

If the affordable rent definition included a tenant’s modelled energy costs, this would reduce fuel poverty and incentivise landlords to conduct large-scale retrofits to bring the combined cost of rent and energy down.

“Market participants say the UK government must also clarify what constitutes net zero and the right performance metrics”

A nationwide methodology to measure real-time energy-efficiency savings over the lifetime of retrofitted buildings could support the development of new, targeted retrofit financial products. In February 2022, the CEEB published Towards a protocol for metered energy savings in UK buildings, which explained how this could be achieved.

A certification scheme for green buildings and retrofit projects, across all tenures, which dovetails with the third-party labels and certifications that housing associations already use to issue sustainable bonds, could stimulate environmental, social, and governance (ESG) investment.

The way ahead

To accelerate social housing retrofits further, landlords could issue bigger, longer-term contracts to stimulate the supply chain. Financial institutions could embrace innovative retrofit financing models and more flexible lending covenants. Fine-tuning the sustainable investment model for social housing could unlock more investment.

Market participants say the UK government must also clarify what constitutes net zero and the right performance metrics to achieve this. Social housing organisations are working to reduce the EPC ratings of their stock, but EPC ratings do not necessarily correlate with carbon reduction.

Among other recommendations, the NHF is urging the UK government to reform the standard assessment procedure (SAP) and EPC methodology, unlock more financing for the sector, and support the supply chain so that cheaper retrofit technology and installation is available at scale.

With the right financial solutions and policy and regulatory environment, the social housing sector could retrofit at scale, drive market efficiency and demonstrate how to decarbonise all UK homes.

Emma Harvey, programme director, Green Finance Institute