The UK government's Net Zero Strategy (NZS) sets out an ambition to reduce UK territorial emissions to net zero by 2050. Heating buildings currently accounts for nearly 20% of emissions on this measure, with most of this coming from residential housing. This post looks at how the NZS plans to reduce emissions from residential housing and focuses on one particular area where costs are likely to lie: improving the energy efficiency of private rented sector properties to meet tougher regulations. We show that these costs are likely to be very unevenly spread, making it important to model the impact on properties at a sufficiently granular level.
The NZS looks at emissions from housing using the same modelling approach used to produce Energy Performance Certificates (the 'Standard Assessment Procedure'). It is a physical model of a dwelling that can be used to calculate the energy required to heat the dwelling to a comfortable temperature, given the physical structure of the building, the external temperature at different times of the year, and a range of other inputs. Together with knowledge of the heating source (i.e. gas boiler, electric storage heaters, etc) and its efficiency, the total energy consumed for heating can be calculated. And multiplying that by an emissions intensity factor gives you the CO2-equivalent emissions for heating the dwelling.
To simplify the SAP very crudely, the energy required to heat a home depends on some things that are fairly easy to improve, like how well insulated it is and how leaky it is (i.e. how much warm air is escaping over time); as well as some things that are harder to change, like how much the building is warmed by the sun through windows and how exposed it is to the wind. While the NZS doesn't lay out detailed policy proposals, the scenarios it sets out for meeting Net Zero involve reducing the energy required to heat homes by 15-20% by 2050. A small part of this can be achieved by building more energy efficient homes, but the majority is going to have to come from improving the energy efficiency of the existing stock - with most of that coming from improving insulation.
But reducing the energy required to heat homes by 15-20% won't cut net emissions to zero. To do that, the country needs to move away from heating sources that use fossil fuels (the majority of homes have gas boilers) to cleaner alternatives. Here, the NZS sets out two main options: to switch to electric heat pumps, with the electricity provided by the grid and generated from renewables and nuclear; and to switch to hydrogen-powered boilers. Heat pumps are a proven technology already fairly widely used today, whilst hydrogen boilers would require serious innovation and investment in national infrastructure, so the NZS considers a scenario reliant entirely on heat pumps and a scenario using a mixture of the two. But in either scenario, almost all existing dwellings will need to replace their existing heating source with a new, cleaner alternative.
At this point, there are not many specific policy proposals to price up, but there are plenty of suggestions of what might come. It seems likely that there will be a period of improving the energy efficiency of the existing housing stock ahead to get it ready for a phasing in of heat pumps and/or hydrogen boilers. For new builds, fossil fuel boilers could be banned in the coming years, before a possible ban in 2035 of new fossil fuel boilers for the existing housing stock, which would see them phased out of the existing housing stock by 2050, assuming a 15yr lifespan for gas boilers (as the report does).
There are various references in the NZS to the proportion of dwellings with EPC rating C or above, and to getting specific groups of households, such as the 'fuel poor' and those in social housing, to EPC C by a certain point in time. While it is not stated explicitly in the NZS, it could be that moving the whole housing stock to EPC rating C or above becomes (or has already become) a rough yardstick for quantifying the desired improvement in energy efficiency. But how does this relate to the discussion of energy efficiency above?
Recall that the SAP is also used to produce EPC ratings. Total energy consumption is measured as described above, then used to calculate the cost of heating a property per square metre, to make it comparable across properties of different sizes [see endnote 1 for some caveats]. This figure (in £/m2/year) is then mapped onto a 0-100 scale, with 0 representing the least efficient homes and 100 the most, and then simplified into bands A-G , with A being the most efficient and G the least. Knowing this, and using EPC certificates for the 15m properties for which they are available to estimate the distribution of property characteristics for the whole housing stock, we can roughly estimate the energy efficiency improvements that would come from moving all properties up to the lower cusp of EPC rating C. It is indeed in the 15-20% range used in the scenarios laid out in the NZS, although we should note that this calculation is sensitive to a number of assumptions.
The Energy Performance Certificate database includes recommended improvements to properties to increase their energy efficiency and it even offers standardised estimates of how much the improvements should cost. We can use these to get a rough sense of the cost of making these improvements, focusing here on the private rented sector (PRS, Chart 4) [see endnote 2 for details]. For a lot of properties, there is no cost, as they already have an EPC rating of C or higher. But for those with lower ratings, the cost varies quite widely, with the construction of the walls a particularly important factor that leads to a big density of properties with costs around £15k.
There is lots of interesting variation within the cost across properties, with costs being higher for older properties (that were built with less insulation) and lower for flats that have heated spaces (i.e. other flats) around them. But perhaps the most interesting variation comes when looking at costs as a proportion of the value of property. Chart 5 does this for the PRS in England as a whole. Charts 6-9 then look at the underlying spatial distribution. They focus on Local Authority Districts in England and look at the proportion of properties for which the cost of improvements is greater than X% of the estimated value of the property. It shows that the cost of meeting a prospective energy efficiency standard, as a proportion of the value of the property, will be highest in rural areas and the North, where it will commonly exceed 10% of the value of properties and in some cases exceed 50%. Note that this is only one of the costs of the transition to net zero for PRS landlords: they will also have to upgrade to a cleaner heat source and in most cases will need to add material redecoration costs to the costs of energy efficiency improvements.
Why focus on the Private Rental Sector? The government currently requires privately rented properties to have an EPC rating of E or higher and have already consulted on increasing this to C by 2028, as well as having suggested in the recent Levelling Up White Paper that they will shortly bring forward policies to improve the quality of rented housing. So it seems likely that they will be first in line. And it also seems more likely that private sector landlords will be left to bear the cost themselves, with owner-occupiers more likely to be offered support.
The transition to net zero will require very material changes to the UK housing stock. As this analysis shows, some of the costs of transition are likely to be very unevenly spread, which emphasises the importance of being able to model impacts at a sufficiently granular level. Treehouse Consultancy can provide this sort of bespoke, granular modelling. The focus in this blog is on a specific possible regulatory change that could come as part of the government's NZS. We are happy to provide this as part of a climate-change stress test (alongside modelling of physical risks, like flooding), or alongside broader scenario analysis on future drivers of house prices, like demographics. For thematic risks that we have already modelled, calculating the impact on a specific portfolio can be as easy as matching the properties in the portfolio to our own records. But we're always happy to build bespoke scenarios, either independently to a brief, or working alongside clients.
[1] An EPC rating considers not just the total energy required to heat a property, but also the energy required to provide hot water, lighting, any cooling systems installed and mechanical ventilation.
[2] There are around 40 different standardised recommendations that surveyors can make when producing an EPC for a dwelling, with the set of recommendations following a detailed algorithm to prioritise cost-effective improvements to energy efficiency. This analysis includes all recommendations to improve energy efficiency except recommendations to change the main heating source (as a prospective policy seems unlikely to do this ahead of the introduction of heat pumps and/or hydrogen boilers) or to generate energy renewably (by installing solar panels or wind turbines). Much of the included cost is to improve insulation.