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Supporting domestic energy efficiency action in the private rented sector

The private rented sector in England & Wales, accounts for around 4.2 million homes, but it has never been properly targeted or incentivised for energy efficiency. Action to improve the energy efficiency of private rented properties is badly needed, because:

  • One in five households in the English private rented sector is fuel poor – almost double the national average.
  • Around one in ten properties are in the lowest EPC bands [F&G].
  • One in ten private rented sector households has excess cold problems – a major cause of ill health for occupants.

Investment in energy efficiency in the sector has been slower, because landlords own the properties and as such are responsible for paying for any improvements, but it is the tenants who will benefit from having warmer homes and lower bills.

The Green Deal is a win-win for landlords and tenants

Green Deal finance can be a game changer for homes in the private rented sector, because the Green Deal’s “pay-as you-save” principle creates a win-win for both landlord and tenant. The tenant enjoys a warmer home, while they help to meet the cost of the energy efficiency measures through the savings made on their electricity bills. Meanwhile landlords benefit from having an improved property, paid for with help from the tenant.

Earlier this month a clarification on how consumer credit legislation works with Green Deal finance took effect giving Green Deal finance providers the confidence they need to lend at scale. This means landlords can now improve their properties for the benefit of themselves and their tenants – and the sector is keen to get going.

This is a double win for landlords, because research shows that even a relatively modest jump in Energy Performance Certificate (EPC) rating can increase a property’s value.  

What’s in it for Tenants?

Families in private rented properties will have more comfortable homes and lower energy bills. Warmer homes can help combat the effects of cold on health and wellbeing too.

Under the Green Deal, tenants who give consent for energy efficiency measures to be installed, pay for the cost of those measures via their electricity bill, while benefitting from a cosier home.

The amount that can be borrowed to pay for improvements using Green Deal finance is protected by the Golden Rule. This limits repayments to the level of expected energy savings. Tenants will only pay for Green Deal repayments while they live in the property and are benefitting from the improvements.  When a tenant leaves the property the responsibility for repayments will pass to the new bill payer or the landlord if the property is not re-let.  

Helping fuel poor households

Installing energy efficiency measures can have an impact on fuel poverty, helping more families achieve an acceptable level of comfort without fear for their energy costs soaring.

The Hills Review recently identified poor energy efficiency as a key driver of fuel poverty.  In 2011 there were 190,000 private rented sector households  in fuel poverty in England  and living in a house with an F or G EPC rating.  Fuel poor tenants can’t afford to heat their homes adequately.  Of course, the Energy Company Obligation (ECO) is there to help the poorest and most vulnerable to access the benefits of energy efficiency. However, for those households that don’t qualify for help under ECO, improvements installed using Green Deal finance enable them to benefit from warm and more comfortable homes.

How does this benefit Landlords?

Properties that have had energy efficiency improvements may be more  attractive to prospective tenants, helping the landlord to rent out the property more easily and reduce costs incurred through periods where the property is empty.

Under Green Deal finance landlords do not have to cover all the costs upfront to install energy efficiency measures to their properties, as some of the costs are repaid by the electricity bill payer through savings on their energy bills. The landlord would only have to cover Green Deal charges during periods when the property is empty.

Landlords could also see a return on investment in energy efficiency as properties with higher EPC ratings attract higher prices when they are sold. Research published by DECC shows a link between a home’s energy efficiency and its sale price:

  • Dwellings with an EPC rating of F and E sold for around six per cent more than those with a G rating.
  • Those rated D sold for eight per cent more than a G rated property.
  • Dwellings rated C sold for ten per cent more than a G rated property.
  • And those rated A or B sold for around 14 per cent more than G rated properties.

Doing more to help landlords and tenants

The Government wants to encourage landlords to improve their properties. Later this year it will set a new fuel poverty target to improve energy efficiency in the coldest, low income homes. It plans to consult on a new Fuel Poverty Strategy to refocus our efforts at the most vulnerable. This will provide certainty about the Government’s long term aims. We want to ensure that the very worst homes are improved, and following initial engagement with the sector we intend to consult shortly on new regulations to take effect in 2018.

The Government is already helping private landlords to improve their properties. Last year a £450 million package was announced for the next three years to boost household energy efficiency. New schemes, which will be aimed at households and private landlords, will be designed to dovetail with the Green Deal and stimulate the flow of more private finance into energy efficiency.  We will be providing more detail on these schemes in the coming months.

10 Responses to “Supporting domestic energy efficiency action in the private rented sector”

  1. Tom Fletcher says:

    It is generally accepted that The Green Deal has failed up to now, however it will be very interesting to discover the actual take up with the new PRS and other Green Deal incentives.

    I was a speaker on the Green Deal and ECO at the RICS Wales Energy Conference, where I did focus on the new regulations coming in from 2018. There was excitement for the schemes then – however that quickly waned and particularly for the Green Deal. However the ECO element prompts action due to limited or no costs to both landlord and tenant. Now we can supply free insulation for most properties and interest is now increasing once more.

    Property Management and letting agencies can gain new, and keep existing, clients by aligning with local insulation installers like my company, who can help their clients, and tenants, save on costs and assist in up-grading EE ratings via the ECO route first. Additionally savings on the energy bills and reducing individual carbon foot prints all help the bigger picture.

    In the difficult financial climate we are all experiencing – Free invariably is more attractive than NOT.

  2. David Rose says:

    OK DECC. So Green Deal with this. In Brent there are a significant number of larger properties converted into multiple flats – up to four or five per building. So, now we have four or five, long term tenancies each in differently sized flats, with differing heating and insulation needs. Four or five electricity meters. Possibly four or five old heating systems. And one Landlord.

    Technically speaking the holistic solution for the building would include EWI to the side and back (we’re in a conservation area), a central heating upgrade for the whole building (ie one boiler sufficiently scaled to heat the whole building), additional draught proofing throughout and loft insulation, – there is 5cm old insulating felt installed.

    How does this work?

  3. Rick says:

    In the rental market the value of a house is directly related to the monthly rental income that can be achieved. If the landlord wants to sell on the property at a higher value (which the article implies will be possible because of the GD funded improvements) then the landlord is incentivised to increase the rent months beforehand, to evidence the possible rental income to prospective buyers. The tenant’s elec bill may stay the same, and their rent could go up. Total cost of occupancy goes up. A smaller pool of tenants would be able to pay. Void periods may turn out to be longer. (Landlord foots the GD repayments charges during the voids.) Landlord could realistically feel compelled to drop the rental price back to what the local tenant market can afford.

    Alternatively, having GD funded improvements to an inefficient house may be a way to prevent the house falling behind its peers in terms of rental income. In an ideal scenario, a prospective tenant would say, “This house is ok and I can afford it. However it feels cold and damp. So I’ll take the other one nearby that is marginally more each month on rent but feels cosier.”. If you are the landlord of the cold/damp house then you could drop the rent to attract tenants and keep the void periods short, as there will likely be someone willing to take it. However you’re now suffering with the mortgage repayments.

    So there is a small but important niche for the GD. If prospective tenants can really detect cosiness from viewings or pay regard to the EPC, then energy improvements may be a way for landlords to maintain the same rental incomes and void periods they are used to. Not making the property more valuable and not to increase the rent; but instead preventing the property slipping in the market and avoiding having to reduce the rent.

    Changing the communications language for landlords to “protect your investment and prevent it falling in value” would perhaps be more effective language than, “invest in your asset and increase its value”.

  4. Philip Hughes says:

    In order to tie in GD finace to renewable heating the calculations should also take into account the RHI payments.

  5. Rebecca says:

    Hi David
    Thank you for your answer. Unfortunately as a long term renter I can see how this scenario will be played out. Tenant and Landlord agree to Green Deal – all measures brought in, the property now energy efficient. Tenant leaves – new tenant moves into a property where due to the new improvements the rent will more than likely be put up and the new tenant is effectively paying twice. I wish I had more faith in the private rental sector but as regulation over it is so lax I would personally hesitate to move into a property that has the Green Deal attached to it.

    • John says:

      I appreciate that the energy paid for the bill would once again be the same as the tenant was paying before the building upgrade. However, this does not mean the saving have been “wiped out” in reality if the work hadn’t been carried out then the tenant would be paying significantly more for their bills (probablem be less comfortable as well?). My main concern is one of increasing rents once the propoerty has been upgraded – until 2018 when all the properties which have poor energy ratings cannot be rented?

  6. We are working with many clients with rental portfolios and upgrading energy efficiency whenever there is a suitable opportunity, but we are not going anywhere near the Green Deal.
    Our clients invariably find they can both finance the capital at a lower rate of interest and undertake the work more cheaply without going through the Green Deal contractors.
    We suggest simple grant aid (without green deal red tape) for hard to insulate properties would have a much higher take up – but client’s own contractors must be able to do the work.

  7. David Rose says:

    DECC and the Govt have got it all wrong yet again!

    Q. Who do you think lives in the PRS lowest EPC rated homes?

    A. The Poorest.

    But often they only occupy one or two rooms in a larger house. So they don’t save enough to get the measures in the first place either under the GD or the ECO.

    And because of their credit history, negatively affected by their living in the coldest of homes in the first place, will not get the GD finance offer anyway.

    The bulk of the responsibility to maintain a minimum standard of EPC (rated at D) should fall on the landlord, not the poorest and most disenfranchised families in the UK. So that is where the incentive to upgrade lies, that and the need to upgrade before a legal obligation falls on them in 2018.

    Why not offer the landlord the higher level of Cashback based on a match funded basis?

    If this does not reach the cost of a whole house improvement package up to and including: loft and cavity wall insulation, draught proofing, Gas Central Heating where supply allows, and installation of non prepayment meter, then the ECO could then step in to top up the costs via the savings on bills. But this would be a very much lower contribution as it would be split between all the bill payers in the building (could be up to 4 or 5 bill payers).

    If as suggested those bill payers were paying by direct debit instead of pay as you go, then maybe – just maybe, they might get some benefit from the measures and minimum repayment for a small proportion of the costs protected under the Golden Rule.

    But that still doesn’t provide protection from the unintended consequences of upgrading a flat or building from G, F or E to D rating – which is the landlord throwing the tenant out and upping the rent to new tenants.

    So there needs to statutory protection for tenants as well.

    DECC, please, just think it though for once.

    All this high level discussion and so called consultation is flying in the face of what we see every day on the doorstep.

    Get real, and try to understand how this needs to work, at the grass roots.

  8. David says:

    Hi Rebecca

    Before i start i should add that i do not own any rental properties. You are correct that this needs to be handled carefully but the tenant should also benefit from this incentive. The green deal finance should not add any extra cost on to the bill, this is the core of the golden rule on which the finance is based. Therefore the tenant should not need to pay anything extra. Plus as energy prices rise ( which is likely) the saving for the tenant will become greater, due to the fact the property will be using less energy. What is critical to this is that tenant are proper informed of the work planned to be done and educated as to how they can live more efficiently after the work is complete.

  9. Rebecca says:

    With rents in the private sector rapidly rising with few rights and little security the Green Deal is not a good deal for the tenant. Landlords reap the benefits (as shown in your examples of selling properties at a higher value) but tenants have to pay for the upgrade and any benefit for the tenant would be effectively wiped out by a few more price rises in energy costs.
    Minimum standards in private rental accomodation are not being met at the moment, yet rents are more expensive than mortgages Making houses more energy efficient should be at the cost of the landlord as they see the wholesale cost benefit, not the tenant. How can lumbering more debt on to fuel poor households possibly help them? With 25% of MPs profiting from buy to lets it is clear who the Green Deal favours.

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