By the end of this lesson you will have learned about:
- The policy implications based on detailed investment appraisal
- Recommendations for retrofitters
- Overall Conclusions
1. The policy implications of detailed investment appraisal of retrofit
1.1 Carbon Mitigation Costs – Cost of Energy Saved
In 2011, there were 23.4 million households in England and Wales collectively emitting around 149 million tonnes of CO e each year (1970-2012 DUKES = 66 Mtoe converted to CO2).
Looking beyond the retrofit-related benefits to individual building owners to the UK as a whole, we have undertaken a modelling exercise to start to look at the role of mass retrofit in energy and climate change policy – a potentially large co-benefit for UK plc.
The study looked at the cost per tonne of carbon saved by retrofitting dwellings in the UK with a range of retrofit strategies, but we have included only those options that save at least 50% of the space heating GHG emissions.
The findings are summarised in the graph below. Different colours show alternative insulation strategies, based around internal or external wall insulation (IWI or EWI). Some internally insulated dwellings show far higher carbon costs – these would typically relate to the more difficult types of building e.g. in conservation areas.
Above: carbon mitigation costs resulting from retrofitting a range of UK dwellings at different stages in their maintenance cycles (follows standard lifetime costing as set out in the Treasury Green Book)
Thousands of whole house retrofit options were modelled in this exercise – the uneconomic combinations of energy efficiency measures have been removed and the remaining cost effective results used to create the regions – or envelopes – shown above.
Further reading: This work was used to produce the following briefing document as part of a recent joint campaign with The Sustainable Energy Association:
Putting a price on health was covered in Lesson 8.4, where BRE 2014 modelling was discussed. BRE suggested that:
“If the UK could find £10 billion now to improve all of the 3.5 million ‘poor’ homes in England, this would save the NHS £1.4 billion in first year treatment costs alone. It is estimated that such an investment would pay for itself in just over seven years and then continue to accrue benefits into the future.”
1.3 Investment Appraisal Sensitivity Analysis
Some of the assumptions underlying financial calculations have quite an effect on the results. Sensitivity analysis is an important tool for carrying out risk analysis on the investment decision. Although individual house owners may not carry out sensitivity analysis, external investors and social landlords considering investing in property portfolios would undoubtedly do so.
All project evaluations are sensitive to assumptions – the value of developing a flexible model such as the CLR model is that assumptions can be made explicit and varied in the model to get some idea of the risk profile. Any project will turn out differently to a model – the question is, ‘what is the spread of performance around that base case caused by variations of the input assumptions – and what can then be done about controlling those variables in practice’?
Generally, light retrofits are more affected by temperature changes and less influenced by financial ones (because borrowing is lower and bills are higher). Deep retrofits are the other way around, more borrowing makes them sensitive to financial variations in either direction, but high performance means bills are always small.
1.4 Policy options to improve the financial returns from energy efficient retrofits
Certain policy options, if implemented, may help improve the financial returns of energy efficiency investments. If they were implemented they should be included in financial modelling. Options include:
- reduced interest rates for borrowing for energy efficiency measures
- reduced mortgage rates which reflect the lower risks to the lender resulting from the householder having significantly lower energy bills
- reduced community charges for energy efficient houses
- reduced stamp duty if purchase is followed by an energy efficient retrofit within a certain period.
- an energy efficiency feed-in tariff (e-FiT) in which householders were paid per unit of energy saved compared to a base line consumption.
1.5 Maybe we need a different economics
It is often said that to promote energy efficiency and renewables we need to have “innovative finance” or change the way we make economic decisions. This may be true but for the foreseeable future conventional economic and financial analysis and investment decisions are likely to remain dominant in decision making. Given this, it is important to ensure that all co-benefits (as well as all costs) are included in any financial analysis.
Although co-benefits may be hard to value it is important that where possible they are valued and their value included in the analysis. They are likely to be more important to landlords, particularly social landlords, considering investment into portfolios of houses such as RSLs or local authorities. However even for private landlords there may be benefits such as a reduction in voids and an increase in asset value. For individual householders considering investment into retrofits the value of co-benefits may not be able to be financially valued and included in any analysis but their value in helping to sell retrofits should not be under-estimated. Factors such as improved health and well-being may take higher priority over pure financial considerations.
2. Recommendations for retrofitters
The following section includes recommendations for retrofitters.
2.1 Whole house plan reports
It is recommended that retrofitters’ whole house retrofit plans are accompanied by a clearly set out business case for the retrofit, reporting the IRR, NPV.
The report should clearly identify all retrofit benefits of relevance and interest to the client – stating whether their value has or has not been factored into the appraisal. It is suggested that retrofitters start to (transparently) include the value of co-benefits relevant to each project wherever specific information or well informed estimates are available. The financial aspects of the business case for individual projects may not stack up, even for the minimum recommended CLR energy targets, in which case the case for deep retrofit rests on the co-benefits, or by (transparently) factoring in estimates of the value of the co-benefits identified by the client.
CLR encourages transparency and clarity of financial reporting and the sharing of formats to help the retrofit community develop consistent working and presentation practice.
Note: you may come across the term “retrofit ready” when discussing a proposed retrofit. Be clear about the meaning:
- To some people it means that the building is “ripe for retrofit”, i.e. in a generally poor condition and in need of retrofit.
- To others, it may mean that the building has undergone maintenance work (e.g. rain protection work followed by a specified drying out period) as a precursor to energy efficient retrofit in the future, and is therefore “retrofit ready”.
2.2 False economy
A cheap job can end up costing a lot more than an expensive one
Failed retrofits (like any improvement work where defects have to be rectified, or work redone repeatedly e.g. as with previous national programmes of kitchen and bathroom replacement that left underlying condensation and ventilation problems unaddressed) are obviously a poor use of resources.
Retrofit that goes wrong is (at least partly) a waste of the client’s money and that of any grant funder. Unintended consequences may include:
- A failure to deliver the anticipated energy savings
- Devaluing the building owner’s assets (actual or perceived medium to long term damage to property)
- Additional consequential costs e.g. health conditions
- There may be costs incurred by all sides in settling a dispute
2.3 Other recommendations
- Understand the decision making processes and influencing factors of whoever is making the investment decision.
- Understand key intervention points at which a retrofit may be easier to sell and to implement.
- Factors such as improved health may play a bigger role in house owner decisions than purely financial arguments.
- Understand financial appraisal methods, particularly Discounted Cash Flow (DCF) techniques.
- Understand the risk factors in any retrofit investment and carry out sensitivity analysis.
- Identify, and wherever possible, value the co-benefits that result from retrofitting.
- Innovation is required to reduce capital costs of retrofits and hence improve financial returns from energy savings alone.
3. Overall conclusions
Energy savings alone are not enough
Business cases for deep retrofit built on energy savings alone, using current capital costs and energy price scenarios, are not likely to be financially attractive. Business cases that attach value to co-benefits will be more attractive. Factors that are hard to value, for instance improved health and well-being, are more likely to be key factors in driving adoption of energy efficiency retrofits.
Landlords making investment decisions should identify and value all the co-benefits. Factors that are most likely to be important in landlords’ financial appraisals include; reduced voids (leading to more revenue which leads to increased asset value), reduced maintenance costs and reduced rent defaults.
Any assessment of retrofit investments by government should identify all co-benefits and value them. These will include: reduced health costs, reduced fuel imports, job creation and reduction of benefit payments, reduced sensitivity of the economy to global energy price increases and reduction in CO2 emissions.
This lesson has covered some key implications for UK policy that the financial appraisal of retrofit can provide.
It also provides key recommendations for retrofitters themselves, and some overall conclusions on the economics of retrofit.
This brings to an end the CarbonLite Retrofit course, which in previous modules has covered moisture robust, energy efficient retrofit as applied to the UK housing stock in the UK climate.
The Module 8 webinar presentation (from October 2017) by Tim Martel is given below. It includes an introduction to the Real Costing software. Tim’s contact details are on the final slide for those who wish to know more about learning to use the software or who are seeking consultancy where Real Costing results are calculated for your project.