8.4 Overview of the UK housing stock

1. The scale of the UK retrofit challenge

The UK has some of the oldest and least energy efficient housing stock in Europe and our building stock is only replaced very slowly, less than 1% per annum in the domestic sector*.

At the current replacement rate 80% of the dwellings that exist today will still exist in 2050*. Therefore in order to meet the UK’s CO₂ reductions targets, address the problem of fuel poverty, and build a society more resilient to energy price rises, we need to accelerate the rate of energy efficient building retrofits. Furthermore we need to maximize the proportion of retrofits which are ‘deep’ retrofits i.e. result in a high percentage of energy savings, rather than rely on ‘shallow’ retrofits.

Much of our housing has either little insulation and/or insulation that is often poorly executed. UK homes are notoriously colder compared to other European homes, yet still expensive to heat. Unfortunately, partly due to ownership patterns, house type and construction characteristics of the UK dwelling stock – it is also perceived as ‘expensive to retrofit’.

Houses were, and still are, often built for the lowest capital cost – minimising running costs not being generally considered. In addition, that other notorious factor – the performance gap – has led to a deeply embedded over-optimistic view of what level of comfort can be achieved for a given investment in heating fuel, requiring some more sensible expectation management to avoid unfairly damaging the reputation of the very real benefits of energy efficiency retrofitting.

Optional listening: A webinar by Steven Fawkes ‘Finance: Improving Buildings’ Performance – How to Scale the Market’, can be found on the AECB Webinar Recordings page on our website, here: https://aecb.net/webinar-recordings/

2. Characteristics of home ownership and renting in England & Wales

In 2011, there were 23.4 million households in England and Wales. The majority, 15 million (64 per cent) were owner occupied, bought either outright or through a mortgage. The remaining 8.3 million (36 per cent) were rented, either privately from a landlord or letting agency, or from a social landlord such as local authorities, housing associations, housing co-operatives or charitable trusts.

Below: Percentage of households owning and renting homes in England and Wales:

Source: http://www.ons.gov.uk/ons/rel/census/2011-census/detailed-characteristics-on-housing-for-local-authorities-in-england-and-wales/short-story-on-detailed-characteristics.html

Below: Percentage of households per accommodation type:

Source: http://www.ons.gov.uk/ons/rel/census/2011-census/detailed-characteristics-on-housing-for-local-authorities-in-england-and-wales/short-story-on-detailed-characteristics.html

Below: Age distribution of household reference persons across ownership and renting:

Source: http://www.ons.gov.uk/ons/rel/census/2011-census/detailed-characteristics-on-housing-for-local-authorities-in-england-and-wales/short-story-on-detailed-characteristics.html

3. The condition of UK dwellings before retrofit

We need to understanding the condition of dwellings (generally and specifically) before retrofit, to make the economic assessment of retrofit more realistic and reliable. If you know what you’ve got, you have a better idea of what it will cost to fix, and can work out how much there is to gain. Buildings most in need of an energy retrofit often have underlying problems that will require remedial action and repair in addition to any planned energy efficiency measures.

Some building defects are fairly obvious e.g. leaking gutters, rising damp, surface mould or consistently low room temperature. Others remain hidden and hard to appreciate – for example decay of timber components, or poor indoor air quality (IAQ).

Figures for visible, more easily surveyed moisture related problems (ventilation, rising and penetrating damp related) are reported in the English Housing Survey Headline Report 2012-13. The survey shows many buildings in a poor state of repair because of being inadequately maintained.

Source: English Housing Survey Headline Report 2012-13 (page 48):
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284648/English_Housing_Survey_Headline_Report_2012-13.pdf (See also p44)

4. Hidden defects

However it is possible, even likely, that the damp problems indicated above are an underestimate, as many pre-existing unhealthy conditions and defects remain invisible and unrecognised. Some of these are uncovered during remedial or retrofit work whilst others remain unrecognised during or after retrofit. The unrecognised defects may be ‘latent’, with for example rising damp or condensation being ‘managed’ by over-ventilation – generally at the cost of excessive draughts, discomfort and unwanted heat loss. However, what might be ‘manageable’ levels of dampness in a cold and inefficient dwelling may become – without due care, problematic moisture reservoirs and consequently more critical and potentially less manageable after implementing airtightness and insulation measures.

A thermally effective, healthier, moisture robust and economic approach to retrofit requires us to take a more responsible approach to building maintenance (ideally in advance of retrofit work) than is often the case. Hence responsible retrofit requires more consideration, combined with an acceptance that any maintenance and repair costs to the existing pre-retrofit building need to be identified and allowed for.

These costs may vary widely depending on the particular property. But it is not all bad news. The necessary repairs may in themselves improve the comfort and indoor environment of the building – and in most cases, will need carrying out anyway. But more to the point, if they are not done, the retrofit will not only underperform, it could end up harming the occupants and even leading to disputes – hardly economic. So they are not an optional cost.

5. Grabbing the opportunities for thermal upgrade

When improvements in thermal performance are carried out, they are most likely to be included within a general package of ‘improvements’, particularly to kitchens and bathrooms. However, opportunities to include energy efficiency measures e.g. as part of re-roofing, re-rendering or internal re-ordering works are all too often missed. Once ‘improved’, it is unlikely further work to the building will be undertaken for a long time. This makes it all the more important that when the building owner makes that ‘once in a lifetime’ investment, they really do get what they are paying for. If it was a car, you would expect it to move, the brakes to work and to be able to run it without consuming twice as much fuel to run as the manufacturer states. Alas, as we discuss later, ‘we get what we pay for’ and this is particularly true of energy efficiency retrofits if we want them to perform, perform safely and deliver close to predicted running costs.

6. Physical and financial complexity

The UK retrofit challenge is complex because there are many factors relating to UK dwellings that make it hard to generalise financial modelling results. The shape, condition, construction method, maintenance cycle, ownership pattern, site boundary constraints and planning constraints relating to dwellings vary widely.

The skill is to use retrofit strategies that are likely to be most cost effective for different types of building in different contexts. Selecting appropriate energy targets, taking advantage of opportunities and understanding marginal costs can help to simplify the options and contribute to a good financial assessment.

7. Quantifying the benefits and co-benefits of retrofitting

The benefit of retrofitting that is normally quantified and analysed is simply the reduction in energy use and hence energy costs. (And even then, some schemes e.g. the Green Deal and Energy Performance Certificates have not always delivered very accurate predictions.)

The value of co-benefits are rarely included in financial appraisals of deep retrofit and this creates a significant problem for building business cases beyond ‘shallow’ retrofit. This, particularly in the domestic sector, is helping create problematic ‘unintended consequences’ in buildings.

In the last few years there has been a growing recognition in the co-benefits of energy efficiency (also called non-energy benefits by the International Energy Agency) over and above the energy savings^1,2,3,4,5,6. More recently a number of initiatives to value these benefits have been started.

Co-benefits occur at different levels: the level of the energy user making an investment in energy efficiency, the level of the energy supply system, and nationally and internationally.

Ideally, we would want to quantify the following benefits for the energy user:

• reduced exposure to energy price volatility
• improved comfort
• improved health and well-being
• improved satisfaction with the built environment
• reduced risk of rental default
• reduced rental voids
• reduced absenteeism
• improved productivity of employees (in commercial and industrial buildings)
• improved product quality in a production environment
• improved productivity in a production environment
• improved sales in a retail environment
• improved building value.

We would want to quantify the following for the energy supply system:

• reduced need to invest in supply infrastructure, (generation, transmission and distribution)
• delayed need to invest in supply infrastructure (which has an financial benefit)
• reduced fuel costs
• improved collection rates (reduction in bad credit).

And we would also want to quantify the following benefits for the country:

• improved air quality
• reduced emissions of CO₂ (contributing to carbon reduction targets)
• reduced health costs (where these fall to the state)
• reduced energy imports
• reduced exposure of the economy to volatility in energy prices
• job creation.

Recently, there has been an increased interest in properly valuing these benefits, particularly in the retail world. Depending on who is evaluating the proposed energy efficiency investment, it is important to try and value these benefits and include them in the discounted cash flow model (see later section).

For example, if a national investment programme to combat fuel poverty was being evaluated it would be important to include the value of all the co-benefits in the national investment appraisal. These would include: the value of reduced health costs that would result from taking people out of fuel poverty (which in the UK are estimated at £1.36 billion⁸), the economic benefits of jobs created such as reduced benefits payments, increased tax receipts, and reduced fuel imports.

8. Putting a price on health

The Real Cost of Poor Housing, BRE Press ISBN: 978-1-84806-115-6

“The relationship between poor housing and poor health has been recognised for a long time, but until recently it has not been possible to estimate the cost to society of poor housing. Although the problems of disease associated with slum living have largely been eradicated in England, a significant number of health and safety hazards in the home remain.

“Poor housing is defined as housing which fails to meet the statutory minimum standard for housing in England, as assessed by the Housing Health and Safety Rating System. This report highlights weaknesses in existing models of the housing stock and proposes a new model which overcomes them.

“The model uses data from the English House Condition Survey to illustrate the effects of various scenarios and repair options. It allows all the hazards measured in the Survey to be compared, and identifies repair solutions which provide direct benefit to the NHS through reduced injury rates and treatment costs. This model allows the total health cost of poor housing in England to be estimated as over £600 million per year. The total cost to society each year may be greater than £1.5 billion.”

The Real Cost of Poor Housing, published by BRE in 2010 demonstrates the relationship between hazards in the home and health and thus assesses the costs of poor housing. The report analyses risks derived from key hazards and the costs to the NHS of tackling these. The BRE then uses these risks and costs to develops a cost-benefit model for unsafe and unhealthy housing.

Further reading: ‘Fair Society Healthy Lives’ (The Marmot Review) from:
https://www.instituteofhealthequity.org/resources-reports/fair-society-healthy-lives-the-marmot-review

An illustration of the kind of financial values that could be attached to some health-related co-benefits of improving homes (i.e. by attaching a value to risk) is illustrated in the table below, based on the BRE’s development of the report into a Housing Health Cost Calculation methodology (HHCC). The table below that shows the BRE cost-benefit analysis – a simple calculation demonstrating very favourable ‘payback times’ to the NHS if investment were to be made to remove these hazards.

NB, This BRE research was revisited in 2014 and as a result the value of improving the condition of sub-standard homes across the risk categories was found to have increased partly as a result of measuring more hazards, partly improvements to the model and due to increased NHS treatment.

The costs, and benefits to the NHS, of reducing HHSRS Category 1 hazards to an acceptable level includes much work that overlaps with work associated with making energy efficiency improvements. Given that many co-benefits from deep retrofit help reduce costs to the NHS e.g., excess cold, dampness, lighting, excess heat it is obvious that if this value was factored in the marginal costs of a deep retrofit would decrease making deep retrofit look even more economically attractive – to differing degrees, depending on your viewpoint.

The BRE 2014 modelling described above suggests 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.”

9. One vision of the future

To date, the UK government’s energy efficiency schemes have focused on the cheaper and easier efficiency measures, along with some more costly measures (e.g. external wall insulation).

However, they have not yet incentivised deep, robust retrofit where the whole house is treated, giving specific attention to minimising cold bridges and moisture issues, and improving indoor air quality.

Financial analysis in Lesson 8.8 based on the CLR examples detailed in Lesson 8.1 suggest that deep retrofit is a better long term strategy. How might such an approach evolve?

Looking back after the next few decades – if the UK pursues a policy of large scale ‘deep’ retrofit – we would expect to see a small number of deep retrofits representing very unprofitable investments (perhaps listed buildings being one example), a small number of very profitable deep retrofits (homes with a good form factor and ready for extensive repair and maintenance prior to retrofit) with the majority lying in a band between these extremes.

It would be sensible as part of any UK retrofit programme and policy to initially focus on (i.e. incentivise) those buildings that could be deep retrofitted most cost effectively (‘profitably’). Those identified as the least cost effective types (‘least profitable’) e.g. those built, maintained or ‘recently improved’; those perhaps with poor form factor etc. could be reserved for later retrofit programmes or special policy treatment.

Re-aligning policy to aggressively promote efficiency would bring with it many benefits, both economically and environmentally. To do this, however, would require aligning the interests of commercial energy suppliers (which necessitates a change of business model), commercial investors (seeking a return on investment) with those of building owners, occupiers, tenants, (indeed all UK citizens) in order to find that win-win-win outcome – the dramatic improvement of the UK’s buildings that deep retrofit so tantalizingly appears to offer.

Steps that might encourage this include:

• Retrofitters and advocates of robust low energy retrofit using appropriate financial appraisal methods and additional qualitative and quantitative information on co-benefits to support this approach.
• Policy makers and investors understanding more about buildings and the various performance gaps that progressive retrofitters are increasingly overcoming through better retrofit practice.
• Retrofitters, policy makers and investors all learning more about co-benefits and developing ways of valuing them.

Crucially, all groups need to work together to agree how best to factor into financial appraisals of deep retrofit:

• The costs of not retrofitting, or underinvesting in shallow retrofit (costs currently picked up in a number of ways by building owners, the wider community and the State)
• The value of co-benefits from retrofit accruing to building owners, the wider community and the State, not currently factored into the business cases for retrofit.

This would not only help realign market forces to drive deep retrofit, for example by allowing innovation in retrofit finance, but could in principle minimise the need for subsidies such as grants. It would not remove the need for high level integrated policy changes.