To combat climate change and to keep the global warming limit at no more than 1.5 °C, greenhouse gas emissions must be reduced by 45% by 2030 and reach Net Zero by 2050. The UK Government agreed to this goal as signatory to the Paris Agreement. However, decarbonising the UK’s existing housing stock is not an easy task. Carbon emissions from residential properties account for about one fifth of the UK’s annual emissions.

In the 2019 report the Climate Change Committee noted that there are approximately 28 million homes in the UK, nearly two fifths of which were built before 1946 and over half before the 1965 Building Regulation first required thermal insulation. Transforming the UK’s housing stock to be energy efficient and carbon neutral is a massive and expensive task. Roughly 1.2 million homes in the UK are below EPC (energy performance certificate) C. The National Housing Federation has calculated that it will cost a minimum of £36 billion for housing providers (RPs) to bring their existing stock up to an EPC rating of C by 2030. Funding investment in existing homes is a real challenge for all RPs. This is the first in a series of insights looking at options that are available to RPs to help pay for retrofit and regeneration works. In this insight, we look at some of the funding options available in the sector.

Social Housing Decarbonisation Fund

The Social Housing Decarbonisation Fund is government funding which has been made available to improve stock below EPC C by providing funding for decarbonised heating systems and the installation of energy performance measures in social homes in England. Approximately £1.25 million has been made available for Wave 3 of the fund which requires that funding be utilised by the housing provider by the end of September 2028. The key aims and objectives of the fund are to:

  • reduce fuel poverty by increasing energy efficiency
  • deliver cost effective carbon savings
  • improve the health of tenants
  • support the green economy
  • develop the retrofit sector.

While the Social Housing Decarbonisation Fund is considered to be a good start, it is accepted that the amount the Government has currently committed to the scheme is small in comparison to the amount of funding needed. Extensive government funding is needed in order for housing providers to be able to carry out retrofit at the scale required.

HACT Retrofit Credits

Developed by HACT and PNZ Carbon (PNZ) Retrofit Credits is a carbon credit scheme which assists with funding for social housing retrofit works. Once the RP has identified the retrofit works it wishes to fund, PNZ calculates the potential greenhouse gas emission reductions from carrying out the decarbonisation works using the Verified Carbon Standard (the world’s leading greenhouse gas crediting programme). This calculation identifies the projected funding which could be available to the RP at completion of the works. At the same time HACT calculates the social value generated by the retrofit works using the UK Social Value Bank. Once the retrofit works are complete, PNZ originates the carbon credits. These are called Verified Carbon Units or VCUs. Each VCU represents a reduction or removal of one tonne of carbon dioxide equivalent (CO2e) achieved by a project. These VCUs are listed on the Verra Registry (the registry on which carbon credits issued in connection with the Verified Carbon Standard are listed). The carbon credits are then sold by HACT and PNZ and the RP receives the payment from the sale of the VCUs.

The Retrofit Credits scheme is an innovative way of providing funding to housing providers by incentivising the reduction of greenhouse gas emissions while helping providers to articulate the social impact that their developments have on the local community.

The Energiesprong Model

This model of retrofit was first developed in the Netherlands and has had a number of successful pilot schemes in the UK. The Energiesprong model takes a whole house approach to retrofit. Houses are fully insulated using a thermal wrap approach including the installation of off-site manufactured wall and roof panels. The RP contracts with an energy supplier to provide the utilities to the development (the RP cannot do this itself as the provision of energy is a regulated activity regulated by Ofgen). Meanwhile, the tenants contract with the RP and enter into an energy service plan with an allowance for a guaranteed indoor temperature, plus an allowance for hot water per day and a power bundle for light and appliances. The energy service plan provides the RP with a guaranteed income stream it can use to fund future retrofit works and the tenant benefits from lower energy bills. The Energiesprong model can be scaled up and does provide a guaranteed income stream for retrofit works. It does, however, require that tenants enter into long-term energy service plans with the RP (not necessarily a concern in a world where energy bills are skyrocketing) and it doesn’t run with the land, meaning that each new tenant has to enter into a new contract.

Affordable Housing Guarantee Scheme

The Government recently increased the funding available under the Affordable Housing Guarantee Scheme to £6 billion and announced that the funds available under the scheme could also be used for decarbonisation works. Loan funding is available starting at £5 million and at least 50% of the proceeds from any loan must be used by the RP on the development of Approved Pipeline Schemes (being new build properties not already earmarked for development).

Strategic Partnerships

A lot of impactful work is being done in relation to decarbonisation across the sector.. The use of strategic partnerships between housing providers and local authorities could be crucial to unlocking capacity and enable the scaling up of retrofit works.

There is still much to do in terms of getting the sector’s stock to net zero. Scaling up retrofit activities will require significant government intervention and investment to boost investor confidence in the sector. Blended finance (a mixture of equity investment and debt) will likely be needed to enable RPs to meet the challenging net zero targets.

How Capsticks can help

We can help you with your net zero journey and support you with retrofit funding. If you are looking for sustainably linked funding for decarbonisation works, we can assist by ensuring targets are achievable and measurable (and properly benchmarked) - going about this the right way can really help with investor confidence.

Capsticks aims to be the firm of choice to RPs, offering a full service across corporate and securitisation, development and planning law, housing leasehold and asset management. We can provide advice and assistance on changes discussed above and any updates that come in the future on this topic.

If you have any queries around what's discussed in this article, and the impact on your organisation, please speak to Naomi Roper to find out more about how Capsticks can help.