One of the first achievements of Theresa May's new government was to secure the passage through Parliament of the fifth carbon budget. This committed the UK to reducing emissions by 53 per cent between 2028 and 2032 relative to 1990 levels. It was an important demonstration that our cross-party consensus on tackling climate change will continue. But how is the government going to make good on this now legally binding ambition?
Twenty-two percent of the UK's carbon emissions currently comes from heat and power used in homes. The Committee on Climate Change does not think that there is a cost-effective path to decarbonisation without eradicating these emissions. Owner-occupiers are the biggest sector in the housing stock. They also have the worst energy performance. Yet since the scrapping of the Green Deal in 2015, there has been no scheme to incentivise home energy improvements. That's why today Bright Blue is today publishing a new report proposing fresh policies to cost-effectively stimulate this market.
The first set of improvements that should be prioritised are energy efficiency measures, which reduce the amount of energy homes consume. Good progress has been made on installing cheaper measures, like cavity wall insulation, but for more expensive measures, like solid wall insulation, there is still much further to go. The Committee on Climate Change believe that around 10 per cent of the UK's carbon emissions could be mitigated cost-effectively through improving the energy efficiency of residential buildings.
The second set of improvements that should be prioritised are decentralised renewables, which decarbonise the remaining electricity and heating supply. For electricity, there is now about as much small-scale solar power in the UK as a large power station generates. Much of this uptake has been driven by falls in price. Renewable heat has seen slower progress, with just 2.5 per cent of our heating demand met by low-carbon sources. The Committee on Climate Change believes this heating figure needs to be at least eight per cent by 2020 if we are to achieve a cost-effective route to decarbonisation in 2050.
The government's previous scheme to incentivise these measures in the able to pay market, the Green Deal, is widely regarded to have failed. When the Green Deal launched in 2013, ministers predicted 14 million homes would be improved by 2020. Yet the reality was no way near that. Just 15,000 Green Deal plans had been signed by the time the scheme ended last year.
The Green Deal allowed households to fund improvements by a loan that was repaid through energy bills. This attractive off-balance sheet financing was made unappealing as a result of high interest rates and the long average payback period. In addition, the 'Golden Rule' limited the size of the loan such that repayments could not exceed the amount that was being saved on bills from the measures. As a result, the average Green Deal loan was just £3,500 - insufficient to finance expensive measures like solid wall insulation or heat pumps.
Bright Blue is making a number of recommendations for how these deficiencies with the Green Deal can be overcome.
First, the government should introduce new 'Help to Improve' loans and ISAs. The government should underwrite loans to households to finance an exciting package of home energy improvements including energy efficiency measures, decentralised renewables, battery storage, and smart appliances. The interest rates would be considerably lower than under the Green Deal, because the government has much cheaper borrowing costs than private lenders. In Germany, where there is a similar scheme to the one we are proposing, every €1 of public money spent on the programme earns the Treasury €4 in additional taxes and reduced welfare spending. A new Help to Improve ISA should also accompany this policy, to encourage households to save for improvements.
Second, the government should introduce new regulation to ensure there is consumer demand for home energy improvements and to give the supply chain confidence to invest. Homes should be prevented from being sold if they do not meet minimum energy performance ratings. Building regulations should also be amended to ensure that any general renovations, such as constructing a new conservatory or an extension, do not increase the home's overall carbon emissions.
The new government is currently drawing together its emission reduction plan for the end of the year. This will set out how it intends to meet the legally-binding fourth and fifth carbon budgets, in a way that is cost-effective and guarantees energy security. Incentivising more home energy improvements in this sector should be a top priority.
Sam Hall is a researcher at Bright Blue and co-author of 'Better homes'
This article originally appeared on BusinessGreen and can be viewed behind the paywall here.