Property Linked Finance: Tackling the ‘energy trilemma’ and retrofitting for energy efficient homes

By Emma Harvey-Smith .

The energy efficiency of the built environment has long been a challenge and the current energy crisis has worsened the situation, leading to greater urgency to act.??

It’s crucial that we take action to manage the energy crisis by looking for positive solutions. Improving the energy efficiency of the built environment through retrofitting is an area we believe can help deliver necessary change at a pivotal time, and is a topic that all of us at the Green Finance Institute have been increasingly excited about.?

The scale of the challenge to improve energy efficiency across the built environment is great, with an estimated ￡250 billion of investment required to futureproof UK homes to 2050. However, the opportunity for the private sector and the general public is significant, given that improving the energy efficiency of the built environment could help deliver real progress for household affordability, energy security and net zero.?

We’re pleased to be sharing the findings of new research published?yesterday, commissioned by the Green Finance Institute, on consumer attitudes towards energy efficiency and Property Linked Finance, and the announcement that GFI is actively developing this new financial instrument with the market to help homeowners with retrofitting their homes. The research shows a rising consumer interest in energy efficiency upgrades and appetite for an attractive new financial solution to help decarbonise homes.?

The research and development of Property Linked Finance comes at a critical time: net zero, energy security and the cost-of-living crises are colliding in an ‘energy trilemma’ perfect storm. The price of energy has substantially increased in recent months, both in the UK and globally. Rising prices are causing widespread and severe affordability concerns for both domestic and commercial energy consumers with reports that the number of households struggling with energy bills is set to triple in 2022.

It's clear that the immediate symptoms of the crisis must be addressed and that relief is offered to struggling households. However, alongside this, it’s essential to offer attention to developing solutions for future energy crises.??

Crucially, resilience will stem from both securing energy supply and also addressing energy demand. In this sense, better insulated homes will lead to lower demand for energy and will cost less to heat. Through upgrading and enhancing the energy efficiency of our existing housing stock, this will futureproof against consumer crisis resulting from energy shocks, and also for a net zero future. Mechanisms that mobilise private capital towards funding the upgrading of homes will be transformational and essential.

The research from the Green Finance Institute, ‘Property Linked Finance: Rising consumer demand for energy efficiency and the need for financial innovation’ identifies that energy efficiency in the home is important for UK consumers, underlining the significant unmet demand for retrofitting UK homes and a desire for innovative financial solutions, and particularly Property Linked Finance, as a way to achieve this.

Graph 1:?Importance of energy efficiency, total, 5pt, 2021 and 2022

The research shows that nearly 9 in 10 people considered the energy efficiency of their homes to be ‘important’ or ‘very important’ in 2022, up from 83% in previous data collected before the energy price crisis. However, only 20% of individuals surveyed this year were likely or very likely to use existing types of finance to do upgrade works, and around 50% were unlikely or very unlikely.?

These findings?demonstrate the need to develop new solutions to help homeowners access the funding needed for energy efficiency upgrades. Recognising the need to provide solutions to homeowners in the face of soaring energy bills, Property Linked Finance?provides an innovative and scalable financial mechanism which can mobilise capital towards retrofitting upgrades.

Graph 2: Likelihood to consider using a PLF scheme, 5pt scale, 2021

Property Linked Finance, or PLF, is not yet available in the UK, however it could support homeowners by funding up to 100% of the upfront costs of energy efficiency improvements. A unique characteristic of PLF is that the finance is ‘linked’ to the property, rather than the property owner. This solves a key issue that is often experienced in traditional financial instruments designed for retrofitting property, in that PLF directly addresses the “payback period barrier”. This is whereby homeowners looking to move in the near-to-medium-term are discouraged by investing in efficiency upgrades as the energy bill savings from the installation are not sufficient to make it financially worthwhile.

This mechanism has proven effective in the USA, with the PACE model, a similar finance mechanism for home upgrades, to date mobilising over $9.8 billion of financing towards energy efficiency improvements across 323,000 homes and creating 141,000 skilled jobs.

Based on successful mechanisms developed in the US, Australia and elsewhere globally, the research has shown there is appetite from consumers for a PLF scheme, both in stable and rising energy price environments. If coupled with mechanisms to drive demand, and other public, private and blended finance schemes, PLF will play an important role in supporting widescale upgrading of the built environment across the UK.

Establishing Property Linked Finance will require a co-ordinated cross-sector collaboration bringing together the innovation and expertise of the key relevant sectors, including finance, legal, installer and property sector, including local, devolved, and central governments. To achieve this, the Green Finance Institute will collaborate with leading market participants to develop a viable model for Property Linked Finance in the UK.

At such a crucial time, we look forward to developing Property Linked Finance as a solution to decarbonise homes and improve energy efficiency, whilst delivering real progress on energy security and net zero.