How can the government fund a home insulation programme?

Government advisory body, the Committee for Climate Change, has described the government’s current insulation programme as “shocking” and urges swift action. At the same time, reports have surfaced suggesting that the Prime Minister has instructed ministers to divert more than £1.4bn from existing schemes to focus on insulating poorer households.

If that’s the case, then we’ve moved away from the magic money tree to the magic roundabout as a means to fund large-scale projects, but there is enough opposition to this to suggest that other methods will be needed.

The Great British Insulation Scheme idea from Boris Johnson is seen as deeply flawed by a broad range of organisations representing the energy sector, the environment and civil society who have been calling for the government to launch a national home insulation scheme ahead of winter 2022, just 24 weeks away.

The UK's housing stock is one of the least energy-efficient in Europe and, on top of the already breath-taking energy price increases, there is the possibility that Russia, already curtailing gas supplies, will call a complete halt, possibly this month (July).

The effect of that would be devastating for many households, according to data from analysts Aurora Energy, which suggests that wholesale power prices in Great Britain would be 38% higher on average in 2022-2027 than under a scenario in which Russian gas flows continue.

Even best-case scenarios map out a new era of very high energy prices and massive pressures on millions of bill payers.

These pressures might explain the magic roundabout methodology being unwisely entertained by the government. The idea is to divert funds from the £1bn public sector decarbonisation scheme, which focuses on making public buildings more energy-efficient, and the £450m boiler upgrade scheme in the main.

But raiding the funds in these schemes could have an unacceptable effect on job creation. The Department for Business, Energy & Industrial Strategy (BEIS) is forecasting that up to 30,000 new jobs would be created if the Public Sector Decarbonisation Scheme is implemented in full. Any movement of funds would also have an effect on carbon reduction targets.

The scheme would use the cash to top up the Energy Company Obligation (ECO) levy bills to fund energy efficiency measures for poorer households. According to the Resolution Foundation, the number of English households in fuel stress has doubled from 2.5 to 5 million as a result of the price cap rising in April 2022, with another 2.5 million households at risk in October if the price cap rises again to £2,800 or more.

There is sound evidence for insulation programmes. Energy efficiency measures installed in the past decade save UK householders nearly £1.2bn a year, according to the Energy and Climate Intelligence Unit.

But another half-baked energy-efficiency strategy is the last thing the government needs in the wake of the spectacular failure of the £1.5bn Green Homes Grant scheme.

So, what other options are open, given that swift and decisive action is essential?

The Conservative manifesto pledged to spend more than £9bn on insulating and retrofitting homes and buildings to high environmental standards. Last month the BEIS said, “we’re investing £6.6bn in total this parliament to improve the energy efficiency of homes and buildings across the country, benefiting tens of thousands of homes and delivering savings of £300 a year on average on their energy bills.”

Whatever the total figure is in the minds of ministers, there is a need to fund a national home insulation programme of between £4-6bn with a grants system the most effective delivery mechanism. An extra £4bn by 2025 to install heat pumps in place of gas boilers is also being promoted by environment groups.

Funding this could be achieved through three main sources: the £16bn Green Gilt programme, the UK Infrastructure Bank and an extension to the ECO levy.

The second sale of the UK’s Green Gilt last October raised £6 billion to add to the £10bn raised in the first sale a month earlier and the money is earmarked for energy efficiency, decarbonisation and renewables. It would make sense to allot a portion of the £16bn to a national grants scheme for insulation.

As a measure of the appetite for the Green Gilt, the order book was 12 times oversubscribed and the combined size of the two offerings means the UK is one of the top three biggest national issuers of green bonds in the world.

The UK has committed to reporting on both the environmental impact and the important social benefits of green expenditures financed by Greens Gilts, and the financing of a programme which improves the national housing stock while reducing domestic energy bills would be a perfect fit.

Less successful has been the Green Savings Bonds launch with only £288m invested in the products, according to the latest NS&I savings figures. The bonds were criticised for their low rates, paying 0.65 per cent over three years. Earlier this year, the government doubled the interest rate on the bonds but current appetite appears low.

It’s highly unlikely that the saving bonds would be a sound source for funding any significant element of a national insulation programme.

The UK Infrastructure Bank was launched in interim form a year ago and a new bill designed to finalise the set-up was introduced to Parliament in May. The government has tasked the bank with “accelerating investment in ambitious infrastructure projects, cutting emissions and levelling up across the UK”.

The bank will have an initial £12 billion of capital to deploy and will be able to issue £10 billion of government guarantees, helping to unlock more than £40 billion of overall investment.

The bank is a key element of the National Infrastructure Strategy and is already investing in infrastructure across the UK. The conditions are excellent for a focus on home insulation with potential distribution through businesses, local authorities and community groups.

It will harness investment tailored to the needs of specific infrastructure projects, offering a range of financing tools including debt, equity, and guarantees.

The Energy Company Obligation (ECO) is a government energy efficiency scheme focused on tackling fuel poverty and carbon-emissions reduction. Medium and larger energy suppliers fund the installation of energy efficiency measures in British homes. Each “obligated supplier” has an overall target based on its share of the domestic energy market.

The scheme was launched in April 2013 and the latest policy, ECO4, is due to start soon and will cover a four-year period until March 31, 2026. The ECO extension is backed by groups including the Sustainable Energy Association, Construction Leadership Council, National Insulation Association and EDF.

The ECO3, which ended in March, was central to the government’s flagship £6 billion energy-efficiency scheme announced in 2018 that was entirely focused on low income and vulnerable households.

The target was to fund energy-saving upgrades in more than one million homes by the end of 2021, with the overall target of £8.25bn of lifetime bill savings. Currently, this target is not being met, with £5.79bn achieved.

While it is not practicable in the current year, one longer-term source of funding for home insulation might be another windfall tax on energy company profits. The revenues from the Energy Profits Levy are charged at 25% and apply to profits arising on or after May 26, 2022, but that funding source has been already spent/allocated very largely in providing financial relief for household energy costs.

The levy is temporary and will be phased out when oil and gas prices return to historically more normal levels. There is also a “sunset clause” that will remove the levy after December 31, 2025. So, there is the potential for further revenues that could be channelled into home insulation.

There seems little doubt that the government will have to announce a comprehensive strategy for home insulation this year, as the pressure for action is intense and increasing rapidly in line with ongoing uncertainties in the energy markets.

At the same time, there are opportunities for businesses to respond overtly to the changing conditions and help ensure that UKI homes are fit for the future. The government’s Greening Finance Roadmap sets out plans for requiring companies, pension schemes, financial services firms and their investment products to report on the impact they are having on the climate and environment – as well as the risks and opportunities facing their business.

Being a part of the inevitable project to insulate UK homes would be a positive step with long-term benefits. And, as a Member Rewards partner with ICAEW, SaveMoneyCutCarbon focuses on providing effective ways to improve energy efficiency and other green actions, with its Home Club offering and essential advice through the Carbon Mentor free-call system.

*The views expressed are the author's and not ICAEW's.