One of the key recommendations in our latest report, Better homes, was the introduction of new energy performance regulations for the owner-occupier sector. However, some are worried about the costs this policy would impose on households and the extent of government interference.
Policymakers should use regulation cautiously, usually as a last resort. But the UK has some of the draughtiest housing stock in Europe. Progress in installing energy efficiency measures has slowed in recent years because of low uptake under the Green Deal and reduction in the scale of supplier obligations. With the current policy mix, the UK is forecast to miss its carbon budgets.
There is a particular policy vacuum for incentivising the non-fuel poor to install these energy improvements in their homes. Previous market-based schemes, such as the Green Deal, have failed to create sufficient demand. A combination of attractive consumer financing and targeted regulation is now required to achieve the scale of home energy improvements needed to achieve the 2050 target for reducing carbon emissions enshrined in the Climate Change Act.
Regulation has been effective before
Regulation has in the past been a good way of cost-effectively reducing carbon emissions. In 2005, the Government introduced new building regulations mandating that all replacement gas boilers installed in homes should be the more efficient condensing boilers. This has seen the share of condensing boilers rise from 2% of the market in 2001 to 53% in 2014. This significant amount of saved energy has come at minimal cost to the consumer, with boilers across the housing stock gradually upgraded as older models break down.
More recently, the Coalition Government introduced regulation to prevent private-sector landlords from renting out homes with the lowest two ratings on the Energy Performance Certificate (EPC), an official measure of how efficient and green a home’s energy consumption is. These regulations, due to come into force in 2018, demonstrate a willingness to intervene in order to protect property occupants from high energy bills.
Our proposals
Imposing minimum energy performance standards across the entire housing stock is not politically feasible, and would be an unacceptable level of government intrusion. But there are moments when individuals are more likely to consider home improvements, which are known as ‘trigger points’. By designing regulations that focus on these, costs and hassle to consumers can be minimised.
We propose two pieces of regulation that target such trigger points. First, prior to the sale of a property, a home must achieve a minimum rating on the EPC, the precise level of which should be decided by government. Second, whenever building work is carried out on a home, such as an extension, the home’s overall carbon emissions must be reduced.
Trends in the housing sector
There is good evidence that bolting home energy improvements onto other types of renovation goes with the grain of consumer preferences. Focus groups run by the UK Energy Research Centre in 2013 found that just one in ten individuals would consider energy-only renovations, whereas they are three times as common when undertaken as part of general amenity renovations. Similarly, research by the Energy Saving Trust has found that 85% of homeowners were willing to stretch a renovation budget to include energy efficiency improvements.
There is also growing evidence that mortgage lenders are considering a property’s energy performance in their affordability calculations. Inefficient homes have higher bills, which means less money for individuals to make mortgage repayments. One US study from 2013 has found that mortgage default risks are 32% lower in energy efficient homes. The UK Green Building Council has argued that mortgage lenders should take greater account of efficiency, given the fact energy costs take up just over 7% of household income. Minimum energy efficiency regulations at the point of sale would reinforce this link.
The adverse effects can be mitigated
We propose some important exemptions to the regulations, such as listed buildings, fuel poor households, and homes with multiple occupants. It is essential that the government does not add costs to those who are not able, either legally or financially, to improve the energy performance of their property.
The government’s regulations for the private rented sector are conditional on a financing mechanism that removes the upfront cost. This is an important caveat, as it ensures improvements are affordable. This is why our proposed home energy improvement loans, guaranteed by government and therefore with lower interest rates than under the Green Deal, are an essential complement to the regulations.
Conclusion
This proposal would protect consumers from higher energy bills caused by volatile prices in wholesale energy markets. It would prevent homes being sold that will burden future occupants with permanently high bills. And it would prevent builders from installing extensions that cause a big increase in a home’s fuel bill.
But as well as protecting consumers, these regulations would also provide a public good. Some homes in the UK disproportionately contribute to carbon emissions. These big-emitting homes carry an environmental cost. The least efficient homes must be upgraded if the UK is to cut its carbon emissions by 80% by 2050. Targeted regulation can achieve this without excessive government subsidy and in line with other household decisions around renovations.
Sam Hall is a researcher at Bright Blue