COP26: Plans to decarbonise the housing sector14/12/21
At the UN Climate Change Conference (COP26), the group of almost two hundred countries managed to agree the “Glasgow Climate Pact” to keep alive a target of limiting global temperature rise to 1.5C.
With many climate analysts estimating that we are currently on track for about 2.4C of global warming, there is still much more that needs to be done to meet the target of 1.5C. All countries will have to switch to clean technologies and all sectors of the global economy will have to be decarbonised. Since housing accounts for around 15% of the UK’s carbon emissions, it is vital for the sector to reduce carbon emissions and help mitigate the impact of climate change for future generations. In this insight we summarise the hot topics discussed at COP26 and their impact on the social housing sector, as well as what registered providers (RPs) can do to help reach net-zero and resolve some of the issues.
The Social Housing Decarbonisation Fund
In the weeks leading up to COP26, Chancellor Rishi Sunak announced an additional £800 million from the Social Housing Decarbonisation Fund, which will enable housing associations to carry out energy efficiency upgrades in their homes. A further £950 million was announced for the Home Upgrade Grant scheme to support low-income households to do similar upgrades, while £450 million is being allocated to the Boiler Upgrade Scheme giving homeowners grants of £5000 from April 2022 to install low-carbon heating systems.
Although it is good news for the sector that the government has provided this funding certainty over the next three years, the Chancellor has still not confirmed the entire ten-year, £3.8 billion Social Housing Decarbonisation Fund that was promised in the Conservative Party’s 2019 election manifesto. With the National Housing Federation estimating a total cost of £36 billion to decarbonise the UK’s social housing stock, even the sum of £3.8 billion falls far short of the funding that is needed.
What this means for you: Constrained by these financial limitations, navigating the path to net-zero by 2050 will require skilled decision-making from housing associations informed by robust data. For most RPs, this means a setting up a clear programme for upgrading stock, combined with embracing innovation in new developments and the disposal/regeneration of lower-performing stock.
The Heat and Buildings Strategy
Ahead of COP26, the government published its Heat and Buildings Strategy, setting out how carbon emissions from homes and workplaces are to be reduced. One of the main announcements was to phase out the installation of new natural gas boilers from 2035 while making carbon-free alternatives cheaper to install. Although the government acknowledges there is still uncertainty as to what exactly will be comprised in a decarbonised heating system in 2050, the Heat and Buildings Strategy indicates that heat pumps powered by electricity will play a significant role in the country’s transition. As there is currently only capacity to install around 35,000 heat pumps per year in the UK, an industry will have to be rapidly developed that can install hundreds of thousands of heat pumps a year by 2035.
A year ago, Prime Minister Boris Johnson committed to drive the growth of hydrogen as a potential clean source of fuel to heat our homes. Although there is still uncertainty around the viability of hydrogen as a major fuel source, the Heat and Buildings Strategy indicates that the government will make a decision on the role of hydrogen for heating buildings in 2026.
What this means for you: While the Heat and Buildings Strategy has certainly provided some clarity concerning the government’s intentions over the next decade, many questions remain unanswered such as what other technologies should be installed in homes. We are seeing new technologies developing daily and some of these are already starting to be experimented with by some RPs; from photo-voltaic heaters built into a thermally-insulated roof, to wall ‘wrappers’ formed out of prefabricated panels. Nevertheless, this technology comes at a cost and we are yet to find out the level of financial support that will be given to implement all of this. Those who had been hoping for more certainty in relation to what targets the social housing sector will be expected to hit over the next thirty years, and how these targets will be regulated, will be disappointed.
A retrofit programme for higher insulation
To tackle carbon emissions within homes, the demand for heating can be reduced by ensuring housing is well insulated and has less air leakage. A move to renewables and low-carbon heat networks can then provide the remainder of the heat required.
The UK’s housing stock, a substantial amount of which is inadequately insulated and energy inefficient, will need to be transformed into low cost, low carbon homes. The government had already stated an ambition back in 2018 to achieve an Energy Performance Certificate Band C rating by 2030 and this objective was reiterated again over the last few weeks. The average building type, age, quantity and current energy performance of the UK’s social housing stock means an extensive retrofit operation will be needed to meet this target.
The £562 million housing retrofit programme announced by the government back in March on a green upgrade of 50,000 social homes with measures such as cavity wall, underfloor and loft insulation was widely seen as not nearly enough. It will be important for the government to commit further funds for a long term retrofit operation on a much larger scale to make the country’s entire social housing stock more energy efficient.
What this means for you:Some housing will not be able to achieve the required energy efficiency levels and housing associations will need to have a clear plan in place for the long-term future of these homes, not least because the 2050 target date should fall within your long-term business planning. The cost of upgrade works will often not be recoverable from tenants/leaseholders via service charges because these are usually an improvement (rather than repairs or maintenance). “Doing nothing” does, however, also have a cost – for example reputational, access to funding (see below), and higher running costs for tenants, and potential future legislation/guidance.
Construction of new homes
The UK will only achieve its net-zero ambition if we not only decarbonise existing homes but also ensure that new homes are built to higher environmental standards. The Heat and Buildings Strategy contained little information on new builds beyond what we already know from the government’s Future Homes Standard, which will come into force in 2025 and aims to ensure that new build homes are future-proofed with low-carbon heating and high levels of energy efficiency. Building cleaner and greener homes with carbon-saving measures installed at the outset will prevent any need for expensive retrofitting later on.
The Heat and Buildings Strategy failed to make reference to carbon emitted during the construction of a building. However, the government’s Net Zero Strategy published on 19 October outlines a vague plan to start reporting on embodied carbon in buildings in the future.
What this means for you: Housing associations will need to continue to invest and drive innovation in the building of new homes by utilising sustainable materials and modern methods of construction, as well as working with the funders to the sector to support such innovation.
For example in recent years there has been a growing trend to incorporate ‘green clauses’ in building contracts to promote core sustainable building practices such as encouraging the use of recycled building materials and holding back retentions as security against the performance of various green objectives.
In addition there has been a greater emphasis towards adopting MMC such as modular construction as an alternative to typical on site construction methods. In particular a commitment to deliver new homes using MMC is now a core requirement for securing Homes England strategic partnership status for the Affordable Homes Programme 2021-2026.
COP26 also introduced challenging new targets for the funders, as the UK aims to become the world’s first net zero carbon finance sector by 2050. UK financial institutions, regulated asset owners and listed companies will need to publish detailed plans for carbon reduction by 2023. Although we will have to wait for the legislation to evolve for the position on RPs to become clearer in this respect, we can expect that these rules will apply to RPs in the near-future. The government’s Roadmap to Sustainable Investing, titled ‘Greening Finance’, states the objective is for the publication of climate transition plans to become “the norm across the economy”, applying to all companies within the next three years. Most RPs already have to include sustainability disclosures in their annual reports but they will need to start collating further data now and preparing operational systems that can readily access the information required to make these further disclosures.
What this means for you: Housing associations are already benefitting from the availability of ESG loans, and this trend it likely to continue. At the moment, this gives a pricing advantage of around 0-6 basis points (although up to 10 basis points has been seen). With protections against “greenwashing” stepping up, it will become vital to be able to demonstrate clearly what RPs are doing around sustainability, and so a sustainability framework and high quality data is recommended so that you can access this funding. Other likely KPIs from the funders will include an accurate baseline carbon with clear targets; an alignment with strategic objectives demonstrating genuine organisational support and a strategy to support the targets; and transparency around the cost of raising the portfolio to a minimum EPC “C” rating.
Data to be captured around construction/upgrading of homes to improve efficiency and reduce carbon might include replacement of gas boilers; insulation; solar panel information (and capex); electric vehicle charging points; fuel cost for tenants. Some funders may look for governance targets, such as gender equality on boards, and pay gap reduction. Please also note that some changes (e.g. ground source heat pumps) can adversely impact EPC ratings.
There is certainly no lack of enthusiasm or commitment within the social housing sector to tackle climate change and there is collective agreement that there is no time to waste when it comes to reducing emissions. Improving the energy efficiency of homes will also cut fuel bills and help to improve the health and wellbeing of residents. However, the path to decarbonising the country’s social housing stock remains a difficult one with various obstacles such as funding, adoption of new technologies, educating residents and uncertainty around the government’s plans still needing to be overcome. Housing associations will need to collaborate closely to resolve these issues with the government, local councils and tenants in the years ahead if the targets set out at COP26 are to be met by the sector.
On an organisational level, you will need to ensure your governance arrangements consider sustainability and carbon reduction as part of your long-term business planning and more immediately. You will also need to ensure that you have in place systems and processes for collecting and reporting on relevant data as a matter of course.
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