A green recovery: unpicking the Green Homes Grant
With governments worldwide looking to stimulate economies in the wake of COVID-19, there appears to be wide support in the UK for a “green recovery” with the aim of stimulating the economy and addressing climate change in parallel. In this spirit, the UK government recently announced a £2bn Green Homes Grant, which offers up to £5,000 in vouchers to homeowners to make home energy efficiency improvements such as insulation, eco-friendly boilers, and heat pumps. Grants will cover two thirds of the cost of such measures, and 100% of the cost of measures for lower income households.
On the face of it, this sounds like a reasonable policy. Decarbonisation of the residential sector needs to play a significant role in the UK’s overall decarbonisation efforts, with residential buildings representing 10-15% of the UK’s greenhouse gas emissions (primarily relating to use of natural gas for heating and cooking). The UK has even previously been dubbed the “Cold Man of Europe”, reflecting the poor quality of its housing stock and high levels of fuel poverty compared to its European peers. A key barrier to households improving their energy efficiency is the large initial capital outlay required relative to fuel bill savings, which are both uncertain and will only be realised over many years. Subsidising improvements should in theory increase uptake, with carbon emissions reduced and households benefiting from lower energy bills and warmer homes. Additionally, the grant money should filter through the supply chain for energy efficiency improvements, benefiting businesses and supporting jobs.
However, there are potential flaws to the proposed scheme. Whilst the scheme should provide incentives for homeowners to invest, it will provide little such incentive for the 37% of households who rent their homes - renters typically have little control over home improvements and do not retain the benefits of any investment when their rental agreement ends. Grant funding is also relatively expensive, with the government effectively covering most of the capital outlay on any improvements made.
An alternative policy which could address several of these issues might be a zero interest rate loan scheme, with loans provided by banks and only the loan interest subsidised by government. Not only might this encourage credit-constrained households to invest in energy efficiency measures, but it may also unlock significantly more retrofits from the committed £2bn than a grant scheme. Loans could be repaid over time by households, ideally in line with realised savings, and a mechanism could be explored whereby loans are tied to a specific property rather than individuals (for example, through council tax bills), increasing incentives for renters to invest. The zero or low interest rate element of the scheme would help avoid one of the key flaws of the Green Deal, where consumers were deterred by high commercial interest rates. Whichever approach is undertaken, uptake needs to be driven by proactive marketing and provision of information, with households given confidence that the scheme represents value for money through the offer of a retrofit assessment of the property and regulation of potential suppliers.