New research shows UK wants innovative financial products to enable energy efficiency upgrades and lower energy bills

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New research released today by the Green Finance Institute reveals growing consumer appetite for a new financial product to improve the energy efficiency of homes.

The discoveries of Property-Linked Finance: Growing Consumer Demand for Energy Efficiency and the Need for Financial Innovationa survey carried out in 2022, showed that almost 9 out of 10 people considered the energy efficiency of their home to be “important” or “very important”, compared to 83% during the previous data collection before the price crisis ‘energy.

However, only 20% of respondents this year were likely or very likely to use existing types of funding to carry out upgrades, and about 50% were somewhat or very unlikely. The data indicates increased consumer demand for product development to provide the financing owners need for upgrades.

In direct response to this, the Green Finance Institute is developing a new financial instrument adapted to the needs of owners: Property-Linked Finance (PLF). PACE, a similar financing mechanism for home renovations in the United States, has to date mobilized more than $9.8 billion in financing for energy efficiency improvements in 323,000 homes and created 141,000 skilled jobs. .[1].

What is real estate financing?

Property Tied Finance will support homeowners by funding up to 100% of the initial costs of energy efficiency upgrades, with the unique feature that the finance is ‘tied’ to the property rather than the landlord.

This directly attacks the “payback period barrier” whereby, although savings payback times are getting shorter due to rising energy costs, homeowners are deterred from retrofitting because the savings on the energy bill during their expected life time in the property are not enough to make it financially worthwhile. The PLF is also a secure financing, which allows much longer repayment periods and lower individual repayments.

Why is Property-Linked Finance an attractive solution?

The introduction of this product could provide a significant opportunity for financial institutions looking to support the transition to net zero, particularly given the necessary growth in the UK refurbishment market pipeline to 2050. The concept, even s new, is attractive to consumers: 63% of Property-Linked Finance: Growing Consumer Demand for Energy Efficiency and the Need for Financial Innovation respondents were likely to consider or were neutral about using a PLF scheme to finance their energy efficiency work.

The GFI repeated the study in 2022 following rising energy bills in the UK; he found that while interest in traditional finance had declined slightly, the attractiveness of the PLF remained constant: more than half of respondents said that current and future socio-economic pressures would cause them to consider using the property financing.

It is estimated that there are 15 million homes in the UK with an EPC rating of D or less[2]and the investment needed to upgrade them to energy efficiency standards, tackle fuel poverty and reduce fossil fuel emissions to Paris agreement levels, is estimated at £250bn[3]. While subsidies will be needed to help low-income households, the mechanisms for homeowners to access private capital to finance the renovation of their homes will be transformational, and their development by the private sector is clearly essential.

Encouraged by the survey’s indication of consumer appetite, which is reflected in the growth of similar products in several other countries, the Green Finance Institute will now explore viable delivery models for property-linked finance and assess how a local pilot program can be launched in the near future.

GFI’s partnership with the Greater Manchester Combined Authority, announced in August 2022, will include Property Linked Finance in its portfolio of pilot solutions to enable property owners and owners in the area to finance energy upgrades.

Establishing PLFs in the UK will require coordinated collaboration between the financial, legal, installer and property sectors, as well as local, devolved and central governments. To facilitate this collaboration and further develop the product framework, the Green Finance Institute plans to bring together a small group of experts to rapidly develop a prototype PLF model. More information and data from his research will be available in a technical appendix, to be published shortly.

Emma Harvey, Program Director, Green Finance Institute, said: “We are pleased to share the results of new research published today, which clearly demonstrates the need to develop new solutions to help homeowners access the financing needed for energy efficiency improvements. At a crucial time, given the pressures of energy security, the cost of living crisis and net zero, all of which require solutions, Property Linked Finance provides an innovative and scalable financial mechanism that can mobilize capital for upgrades. We look forward to developing PLF as a solution to decarbonize homes and improve energy efficiency, while making real progress on net zero.

Pete Gladwell, Group Head of Social Impact and Investments, Legal and General, said, “We are delighted to see the Green Finance Institute’s increased focus on product innovation. As institutional investors, with human-centric values ​​and a long-term perspective, we realize both the global scale of the challenge and the real, concrete solutions needed to help property owners transform their homes into future buildings that are durable, resilient and comfortable. Property-linked finance has the potential to be one such solution, with enormous potential and replicable scale, and the growing role of PACE structures could support its growth.

David Cowdrey, Director of External Affairs at the MCS Foundation said: “This type of innovative financing will allow households to borrow 100% of the money in advance to insulate their homes and install renewable energy. Not only will it keep homes warm and increase their value; it could also make them more attractive for green mortgages. The unique feature is that the financing is tied to the property, rather than the owner, so when moving, the loan stays with the property and removes individual risk, a barrier to renovation.

Caroline Holme, Senior Director, Globescan, said, “It is encouraging to see from the research that, although property linked finance is a completely new concept in the UK, there are surprisingly high levels of interest among consumers. The underlying concern about cost of life and energy bills is building appetite for improving home energy efficiency, and research suggests that the PLF can help homeowners feel more confident to use the financing to take action.

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