Home retrofit loans: What works and what doesn’t?

UK homes are among the oldest, coldest, and leakiest in Europe. In the teeth of a serious energy shortage, retrofitting our homes to feel warmer and consume less energy should be a priority. But the UK’s recent track record on retrofitting homes has been poor, with a number of high-profile policy failures. So what can we learn from other countries about what does and doesn’t work for retrofit?

As is the case with getting a heat pump installed, retrofitting our homes can come with a hefty price. Choosing between wall and loft insulation, glazing, draught-proofing, and low carbon heating technologies such as heat pumps is complicated and expensive — too expensive for most people to pay for upfront.

Depending on whether single measures or deeper retrofit consisting of a package of measures are chosen, the final bill can range from a few thousand to over £100,000. Encouragingly, the Climate Change Committee estimated that 63% of homes wouldn’t need to spend more than £1,000 on retrofitting energy efficiency measures. But that still leaves a lot of homes facing a potentially higher cost.

So how can we make home retrofit affordable and attractive for homes that are “harder to treat”? A promising way is through public-backed home retrofit loan schemes. Germany’s Energy Efficient Home Retrofit Loan run by KfW is the leader in the field; the UK has a track record of less successful schemes such as the Green Deal and Green Homes Grant. The success of the Home Energy Scotland loan delivered by the Energy Saving Trust is one of the few bright exceptions.

While there exists no secret recipe, both successes and failures have a lot to teach us. Let’s explore first what can drive retrofit loan schemes to an early grave, and then see what can make them flourish.

What doesn’t work

The aspects that don’t work are those that create barriers to loan uptake and jeopardise the long-term sustainability of the scheme.

Strikingly, some schemes such as Greece’s Savings-Autonomy programme may require recipients to pay for the retrofit work and energy assessment partially upfront before the total amount of the loan is disbursed. It is not surprising that most households do not have enough savings or do not wish to take such a risk.

At the same time, some loan schemes such as Belgium’s Brussels Green Loan regulate access through income criteria; the idea is that only those who cannot afford to retrofit their homes are eligible for the loan or subsidy. There are definitely merits to this approach. However, if the scheme aims to have the greatest impact and reduce carbon emissions at scale, then it should be open to ‘able to pay’ groups as well.

Some high-profile schemes (including the UK’s own Green Deal from the early 2010s) have attempted to include loan repayments on the consumer’s energy bill. The thinking goes that savings from the energy efficiency upgrade will be higher than the cost of repayment and customers will be better off — this was referred to as the ‘golden rule’. Needless to say, this is not always the case; in fact, most retrofit options leading to higher energy savings have longer payback periods. In practice, in the context of the UK’s Green Deal, this meant that mostly low-cost and high-return measures were eligible for funding. This drastically reduced people’s options and the scheme’s impact.

A home retrofit is useful even if it does not lead to savings in financial terms. The financial constraints of the golden rule prevented retrofits that increased general thermal comfort such as reducing drafts and damp, reducing energy use, and measures that provided secondary amenity value such as improving aesthetics or decreasing sound transfer. At Nesta we think the golden rule needs to be rethought, and that future schemes should be designed around the other benefits retrofit brings, such as increased comfort, overall demand reduction, and reduced carbon emissions. Retrofit for decarbonisation is a social value investment, and arguably a good space for the state to invest directly rather than expecting householders to bear 100% of the cost.

Finally, short-term policies and a lack of trust in the government can truly derail such schemes. Supply chain actors need time and resources to adjust to government policy. Fears that policies will be abandoned quickly, or concerns with policies themselves, can be very strong disincentives for supply chain actors to participate and adapt.

What works well

Surprisingly, setting a primary aim for loan schemes has not always been a priority for policymakers. A catch-all scheme aiming to simultaneously reduce emissions, create jobs, develop the supply chain, promote single measures, and deep retrofit, whilst appealing, is significantly more challenging to design, allocate resources to, implement and create impact at scale. Policymakers should be clear about their strategic objectives and which of them are the biggest priorities. Communicating those priorities clearly and sticking with them is also important for effective scheme design, and consumer buy-in.

Attractive loan terms and conditions are at their most basic what people are looking for. Curiously though, loan terms have at times been very unattractive. The UK’s Green Deal offered a 7–7.5% interest rate that understandably put off many potential customers. This is especially true given the low-interest rates elsewhere in the market. A challenge for policymakers here is to design a loan that is more attractive than high street finance, or to add a small sum to homeowners’ existing mortgages.

But not everything is about attractive loan terms and conditions. A simple and transparent process to apply for a loan is a deal-breaker for many customers. At Nesta, we put a lot of focus on understanding what people want and their journey through policies, green home improvement loans in this case: fundamentally, most people want a warm and comfortable home. Whilst the specific financial offering is important, focusing the messaging on people’s needs and desires is key.

At the same time, any scheme needs to receive significant public backing both in terms of funding and public support. People need to be aware of it and understand it well if they are to apply. If the scheme is sponsored by a well-known body, as is the case for KfW in Germany, this instils further confidence in it.

Concluding thoughts

There is no panacea to designing a home retrofit loan to make retrofitting more affordable and attractive. But there are learnings from international examples that indicate what works well and what could work better.

As such, whatever the loan terms, purpose, and application form look like, policymakers should start small, testing their offer with real customers and adjusting to design something that people want. In doing this testing, we should keep the ethics of debt and borrowing in mind — and not lose sight of those households who cannot afford to take on more debt, but who still need help to play their part in decarbonising our homes.

This blog has focused on scheme design, but what we haven’t explored is the impact of government-backed retrofit schemes on demand. This is a chicken and egg problem. Householders’ underlying motivation to upgrade their homes is not high and we’ve not found compelling evidence that the existence of accessible finance in and of itself is enough to drive demand from the general population. Other clear dependencies are advice about the right choices, guarantees of good works, and redress when something goes wrong. To overcome this, finance providers should explore innovative ways to offer a whole package of support around retrofit and green home upgrades, and tie them into other key moments when people are upgrading their homes for lifestyle reasons.