New research released today by the Green Finance Institute reveals growing consumer appetite for a new financial product to enable energy-efficiency home upgrades.
Findings from Property Linked Finance: rising consumer demand for energy efficiency and the need for financial innovation, a survey in 2022, showed that nearly 9 in 10 people considered the energy-efficiency of their homes to be ‘important’ or ‘very important’, up from 83% in previous data collection before the energy price crisis.
However, only 20% of individuals surveyed this year were likely or very likely to use existing types of finance to do upgrade works, and around 50% were unlikely or very unlikely. The data points to heightened demand from consumers for product development to provide the funding homeowners need for upgrades.
In direct response to this, the Green Finance Institute is developing a new financial instrument tailored to homeowners’ needs: Property-Linked Finance (PLF). PACE, a similar finance mechanism for home upgrades in the United States, has to date mobilised over $9.8 billion of financing towards energy efficiency improvements across 323,000 homes and created 141,000 skilled jobs.
What is Property-Linked Finance?
Property-Linked Finance will support homeowners by funding up to 100% of the upfront costs of energy efficiency improvements, with the unique characteristic that the finance is ‘linked’ to the property, rather than the property owner.
This directly addresses the “payback period barrier” whereby, although timescales to recoup savings are shortening due to increasing energy costs, homeowners are deterred from retrofitting as the energy bill savings over their expected time living in the property are not sufficient to make it financially worthwhile. PLF is also secured finance, which enables much longer repayment periods and lower individual repayments.
Why is Property-Linked Finance an attractive solution?
The introduction of this product could offer a significant opportunity for financial institutions seeking to support the net-zero transition, especially given the necessary pipeline growth in UK’s retrofitting market to 2050. The concept, even though new, is attractive to consumers: 63% of Property Linked Finance: rising consumer demand for energy efficiency and the need for financial innovation respondents were either likely to consider or were neutral on using a PLF scheme to finance their energy efficiency works.
The GFI repeated the study in 2022 following the rise in UK energy bills; it found that while interest in traditional finance had slightly declined, the attractiveness of PLF has remained constant: over half the respondents stated that current and future socio-economic pressures would make them more likely to consider using Property Linked Finance.
There are estimated to be 15 million homes in the UK with an EPC rating of D or lower, and the investment needed to upgrade these to energy efficient standards, addressing fuel poverty and lowering fossil fuel emissions to meet Paris-agreement levels, is estimated at £250 billion. While grant support will be needed to help those with low household incomes, mechanisms that allow homeowners to access private capital to finance the retrofit of their homes will be transformational, and the development of these 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 the viable delivery models for Property Linked Finance, and assess how a local pilot scheme can be launched in the near future.
The 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 homeowners and landlords in the area to finance energy upgrades.
Establishing PLF in the UK will require co-ordinated collaboration across the finance, 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 convene a small group of experts to rapidly develop a prototype model of PLF. More information and data from its research will be made available in a technical annex, to be published shortly.
Emma Harvey, Programme Director, Green Finance Institute, said: “We’re pleased to be sharing the findings of new research published today, which clearly demonstrate the need to develop new solutions to help homeowners access the funding needed for energy efficiency upgrades. At a crucial time, given the pressures of energy security, the cost-of-living crisis and net zero, which all require solutions, Property Linked Finance provides an innovative and scalable financial mechanism which can mobilise capital towards retrofitting upgrades. We look forward to developing PLF as a solution to decarbonise homes and improve energy efficiency, whilst delivering real progress on net zero.”
Pete Gladwell, Group Social Impact & Investment Director, Legal & General, said, “We are delighted to see the Green Finance Institute’s increased focus on product innovation. As institutional investors, with people-centred values and a long-term perspective, we realise both the global scale of the challenge and the tangible, real-life solutions necessary to help property owners upgrade their homes to future-fit buildings that are sustainable, resilient and comfortable. Property Linked Finance has the potential to be one of these solutions, with huge potential and replicable scale, and the expanding role of PACE structures could support its growth.”
David Cowdrey, Director of External Affairs at MCS Foundation said: “This type of innovative finance will allow householders to borrow 100% of the money upfront 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 characteristic is that the finance is linked to the property, rather than the property owner, so on moving home, the loan stays with the property and removes individual risk, a barrier to retrofitting.”
Caroline Holme, Senior Director, Globescan, said, “It is encouraging to see in the research that, despite property linked finance being a completely new concept in the UK, there are surprisingly high levels of interest among consumers. The underlying concern around costs of living and energy bills are strengthening appetite to improve the energy efficiency of homes, and the research suggests that PLF can help homeowners feel more confident to use finance to take action.”