How can home energy efficiency improvements help us reach net zero?

Improving residential energy efficiency can be a cost-effective way to tackle the current energy crisis, increase energy security and mitigate climate change. Significant variations in the efficiency of homes across the country raise the question of how retrofitting should be implemented to maximise impact.

Sharp increases in gas and electricity prices have raised major concerns in the UK. With millions of households facing the choice between heat or food, the winter is looking bleak. Experts predict that over half of UK households will be in fuel poverty in January and that the energy crisis will extend until at least 2024.

In response, a £400 fuel rebate was set out in April 2022. This was followed by the announcement, during Liz Truss’s short tenure, of a price guarantee until 2024 costing £150 billion. This was subsequently scaled back by the Sunak government in the November Autumn Statement. As it stands, until April 2023 the price guarantee caps energy bills of a typical household at £2,500 yearly. This rate will then increase to £3,000 per year until March 2024.

The quick succession of UK prime ministers has created conflicting signals for energy markets. For example, Liz Truss lifted a ban on fracking, which was then reimposed by the current government. She also refused to launch an information campaign about residential energy savings, which has since been signed off by Rishi Sunak. The campaign is estimated to cost £18 million and aims to provide tips on how to cut energy use while keeping warm.

Finally, the government has announced additional financial support to the existing energy company obligation scheme. This £1 billion retrofitting grant will predominantly target middle-income households and will be enacted in April 2023 and last until March 2026.

Faced with the pressing challenges of the cost-of-living crisis, longer-term plans to decarbonise the economy risk dropping down the government’s priority list. But this does not have to be the case. Energy efficiency initiatives can be bolder and further net-zero efforts, while simultaneously addressing the energy crisis and improving the UK’s energy security.

Net zero and energy efficiency

To meet the UK’s target of reaching net zero by 2050, emissions must be reduced by at least 100% compared with 1990 levels. In 2021, the Climate Change Committee reported that UK greenhouse gas emissions were 47% lower than 1990 levels. Although this progress is significant, more than the same reduction must be made again in the next quarter of a century.

Given the level of change needed, it is no longer an option to rely solely on emissions reductions in the transport and energy sectors. Decarbonisation efforts must be intensified and diversified to other sectors to meet the looming deadline.

One area that has gained increasing attention is the residential sector. The Climate Change Committee estimates that 25% of the UK’s greenhouse gas emissions can be attributed to residential energy use, including lighting, heating and appliances.

Given the UK’s high proportion of older buildings, many homes have low energy efficiency. Indeed, the UK is believed to have one of the lowest residential energy efficiencies in Europe (see, for example, BEIS, 2019).

At the same time, the rate of home energy improvements fostered by government policies has sharply reduced since 2013. Approximately 2.2 million homes received loft or cavity wall insulation in 2012, but this dropped to only 500,000 homes in 2013 and less than 200,000 in 2017 (Climate Change Committee, 2019; Institute for Government, 2022).

Crucially, improvements in homes are a central part of the International Energy Agency’s net-zero scenario – a well-respected analysis outlining pathways to reach net zero.

Can retrofitting help with energy savings?

Retrofitting – upgrading to more energy efficient equipment – has repeatedly been associated with energy and cost savings. But the scale of impact is unclear, and realised energy savings frequently fall short of projected estimates (Fowlie et al, 2015; Allcott and Greenstone, 2017).

Experts refer to this as the ‘performance gap’ between actual and theoretical savings. Studies highlight several explanations related to occupant behaviour that are not accurately accounted for by theoretical models (Loucaro et al, 2016). For example, the rebound effect describes increased energy use following energy efficiency improvements.

Further, studies report important variation in energy use behaviours depending on income and energy prices (Cayre et al, 2011). Together, this can lead to over-confident energy saving estimations, which may affect individuals' willingness to participate in retrofitting projects (Gram-Hassen, 2013).

But energy savings from retrofitting are very sensitive to energy prices. As energy prices go up, it makes more sense to invest in energy efficiency and save on monthly energy bills. Notwithstanding the performance gap, the current high energy prices will make retrofitting more appealing for the next few years.

Despite this, retrofitting offers several advantages in comparison to energy bill subsidies. While the latter can alleviate the financial pressure of energy bills in the short term, they must be renewed to have a continuous impact.

A massive advantage in the UK is the high quality, publicly available Energy Performance Certificate (EPC) data for England and Wales that have been accessible for several years. Scotland has also recently published similar data.

EPCs are a measure of home energy efficiency. They use a rating system ranging from A (lowest energy use) to G (highest energy). Simply put, the higher the EPC rating, the less energy used or carbon emitted, and the lower the energy costs.

New research based on England and Wales shows how using EPCs data combined with other information – including smart meter data – can attenuate the performance gap.

The study shows that, under current prices, retrofitting can lower energy consumption in England and Wales by 29%, with the highest energy savings concentrated in the wealthiest parts of the UK (Fetzer et al, 2022). Energy savings are estimated to be between £10 and 20 billion per year, implying that investments could break-even within six to seven years (Fetzer et al, 2022).

Given the time pressure of meeting net-zero goals, the UK should focus on highly targeted retrofitting, by leveraging available EPC data to identify opportunities with most potential for improvement.

What is the current situation?

In 2017, following a campaign by the World Wide Fund for Nature (WWF), the UK government committed to upgrade as many homes as possible to energy performance certificate (EPC) level C by 2035.

Figure 1: Example EPC certificates

Source: Energy Performance Certificate, GOV.UK

EPCs are conducted by independent assessors and need to be updated every ten years, for a cost between £35-£120. They provide current and potential ratings (see Figure 1). The potential rating is the rating achievable by implementing energy-efficiency modifications (such as cavity wall insulation, a new boiler, etc). Such recommendations form part of the report.

Since 2008, EPCs are mandatorily included in home reports for every property out for rent or purchase. This means that not all homes will have an energy efficiency rating (for example if a home hasn’t been sold or rented since 2008). Some buildings, such as places of worship, are also exempt from regulation. Therefore, the information collected does not reflect all buildings but only those with an energy efficiency rating (EER).

The availability of EPC data for England and Wales, and more recently Scotland, has enabled a significant amount of research on energy efficiency in the UK to take place.

The existing data provide information for over 15 million homes in England and Wales, which represent about 50% of the total residential dwellings, a substantial portion.

Figure 2: Percentage of band C or higher ratings in England and Wales

Source: Author’s calculation, EPC dataset, Department for Levelling Up, Housing and Communities (DLUHC), 2022

Of properties with an EPC, the average rating in England and Wales is band D, with 35% of homes rated as band C or higher. The average potential rating is band C, and 85% of homes have the potential to reach this or higher (see Figure 2). If this was achieved through retrofitting, there would be significant emission and energy cost reductions, especially under current energy prices.

Figure 3: Potential EPC rating by current rating

Source: Author’s calculation, data from EPC dataset, DLUHC, 2022

The majority of houses have the potential to reach band C or above (Figure 3). Around 25% of potential band C houses have a current rating of E, as do around 20% of potential band B houses.

Further, the existing EPC information could be used to direct grants to local authorities (LAs) with the largest potential. All LAs across England and Wales have an average rating of at least band C or higher, which shows that they have the potential to meet governmental targets (see Figure 4).

Figure 4: Current and potential EPC ratings in England and Wales

Source: Author’s calculation, EPC dataset, DLUHC, 2022

Despite these averages, there is a lot of variation in residential energy efficiency across England and Wales (see Figures 5 and 6). One study shows how the EPC data – combined with local-area level data and smart meter readings – can predict more representative energy consumption for the whole England and Wales (Fetzer et al, 2022).

Figure 5 shows ‘room for improvement’ by LA – in other words, the percent point difference between potential and current EPC rating for the unique set of properties in the EPC dataset. Most improvements (dark green) are in those LAs in the West and North of England and Wales. This seems to correlate with fuel poverty distribution.

Overall, Tower Hamlets in London has the highest EPC rating, and the Isle of Anglesey in North of Wales has the lowest. Gwynedd county in North Wales had the lowest percentage of houses per local authority rated as band C or higher, while the highest can be found in Buckinghamshire.

Figure 5: Difference between current and potential EPC rating by local authority in England and Wales

Figure 6: Mean (average) potential EPC rating by local authority

Source: Author’s calculation, EPC dataset, DLUHC, 2022 and the Ordnance Survey, 2022

What does this mean for carbon emissions?

EPC includes information on the carbon emission impact of a property. These figures may overestimate carbon emission savings, they can still be used to identify top priority LA areas and for illustrative purposes.

Accounting for population variation, it is possible to calculate the carbon emissions saved each year if: a) all; b) the top 50; c) the top 100; and d) the top 200 local authorities retrofit all EPC homes to their potential rating (see Table 1).

Table 1: Carbon emissions saved if homes in the EPC data are retrofitted to their potential rating

	Carbon emissions saved annually (tonnes)	Percentage of UK annual carbon emissions*	Carbon emissions in million tonnes saved by 2050 (net zero)**
All local authorities (331)	31	8.5%	837.4
Top 50 local authorities	2.6	0.7%	69.4
Top 100 local authorities	5.4	1.5%	145
Top 200 local authorities	12.8	3.5%	345.7

Source: Author’s calculation,EPC dataset, DLUHC, 2022

Notes: *363.4 million in 2019; **holding yearly emissions constant.

Figure 6: Carbon emissions before and after retrofitting

Source: Author’s calculation,EPC dataset, DLUHC, 2022

If all homes in the EPC dataset are retrofitted to their potential rating, approximately 31 million tonnes of carbon emissions, equivalent to 8.5% of total UK carbon emissions, will be saved each year. By 2050, this is equivalent to 837.4 million tonnes saved.

For context, the UK average carbon footprint is approximately 10 tonnes of carbon dioxide per person per year. This means that by 2050, retrofitting all EERs to their potential would save over 1.2 times the UK population’s carbon footprint for 2022.

How much would retrofitting cost?

The UK government committed to upgrade as many homes as possible to energy performance certificate (EPC) level C by 2035. Retrofitting the stock of homes in the EPC dataset has been estimated to cost about £60 billion (Fetzer et al, 2022).

The English Housing Survey (2019) estimates that improving energy efficiency of homes in England and Wales currently with a band D or lower EER to reach an EER band C would cost around twice as much about £114.1 billion (see Table 2). This is equivalent to about 5.2% of UK GPD in 2021.

Table 2: Estimated retrofitting costs to reach EER band C

Upgrade to Band C from...	Cost	No. of EER properties	Total
Band D	£6,272	7,936,184	£51.3 billion
Band E	£13,285	3,260,100	£43.4 billion
Band F/G	£18,858	1,031,724	£19.5 billion
Total cost		12,228,008	£114.1 billion

Source: Author’s calculation based on English Housing Survey, 2021

Significantly, the government previously estimated the costs to retrofit homes at between £35 billion and £65 billion. This is much lower than figures suggested by the English Housing Survey.

But, government estimates do not account for factors such as conservation laws for historic buildings, which makes retrofitting more complex and expensive. The disparity between these estimates stresses the need for additional funding, which will still be less costly than energy bill subsidies.

Conclusions

Retrofitting homes offers an opportunity to address both the energy crisis, the ensuring public health crisis – as cold homes are linked with excess mortality (see, for example, the Marmot Review – and climate change. In addition to being more cost effective than energy price schemes or energy bill subsidies, improving energy efficiency is a vital pillar in achieving net zero and improving energy security.

While several energy efficiency schemes have been initiated, the take-up rate has been sluggish. Many have not granted all, or even the majority, of available funds, further limiting their impact.

Uncertainty and lack of trust are serious barriers to retrofitting homes, so this potential impact should be taken seriously before implementing other retrofitting schemes. This is especially relevant to the recently announced ECO+ scheme.

It is important to think of ways to co-design effective interventions, between the UK government, LAs and homeowners. Focusing on behavioural barriers and improving transparency will also be crucial for meeting net-zero targets.

If this is achieved, the benefits of retrofitting will go beyond the energy crisis, energy security and net zero and will extend to better health and will boost local employment – given retrofitting requires a number of home improvements and provision of services to maintain energy efficiency over time.