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Whitepaper: Net Zero Neighbourhood Funding Model.

Making the Case: Our Net Zero Neighbourhood (NZN) Funding Model for Decarbonising UK Housing Stock

BwB first conceived the NZN funding model with a variety of partners in 2020, when we published an outline of how it could work[1], and has since been collaborating with Eunomia[2], Arup[3] and a range of UK cities to refine the concept and make the case for proof-of-concept funding[4]. It is complex, will cost significant sums and still has several open issues/questions that need to be resolved, but has generated significant interest from multiple stakeholders. Why should funding be allocated to advancing this approach?

The principal reason is that at present this model appears to provide the best value for money to government (and therefore taxpayers) for delivering the 2050 Net Zero target and creates a tangible mechanism for our collective pension funds to finance the transition.

Ideally, we would compare various counterfactual approaches to demonstrate which offered best value for money. But, put simply, those counterfactual approaches do not exist. We do not yet have, globally, a model that successfully delivers the scaled deep housing retrofit and energy system transition that is required to meet net zero targets.

It is tempting and dangerous to think of building decarbonisation as a low-cost problem because we can conceive of individual, existing technologies being deployed in individual properties. A few thousand pounds on some insulation here and a heat pump installation there. It is critical that we keep in mind the overall scale.

The built environment represents 25%[5] of annual UK emissions, 42% if surface transport emissions are included. Delivering decarbonisation of this stock is therefore a critical component of the UK’s 2050 net zero target. Most of our c.28 million homes plus c.2+ million commercial buildings in the UK must be retrofitted, ideally over the next decade or so, but at a minimum within 25 years. Even if delivered at the slower rate, this requires completion of at least 23,000 deep retrofits a week or 4% of our stock a year. Additionally, the longer we wait, the more expensive the problem will become. Current rates are 0.1 – 0.2% pa at best. The key accepted counterfactual approach both in the UK and other geographies is what we could term a “market-led” approach. The design of a slew of policies and subsidies focused on individual technologies and asset deployments that we hope will collectively induce mass individual take up of deep retrofit and energy system transition. This would be funded by a combination of individual indebtedness (green mortgages) and taxpayer subsidy. There is no evidence, globally, that this model can work.

Italy, a country with 26m households, is perhaps the most promising global example where retrofit rates have indeed accelerated in response to the country’s “Superbonus” tax-credit-based subsidy scheme. 122,000 deep retrofit subsidy applications had been approved in the 20 months between July 2020 and February 2022 at a cost to the state of £17.5bn. The key reason is that the state subsidy is 110% of the total cost. But this rate is only 1,400 per week or 6% of the required rate in the UK[6] at a cost of £140k per home.

Even if that rate could be increased 16-fold while the average cost is brought down 75% to the £35k per home that we propose, for the UK that model would involve the deployment of close to £1.2 trillion of subsidy which is not conceivable as the solution.

We believe our place-based approach would reduce the required subsidy from the taxpayer to decarbonise the entire UK housing stock to £430 billion of which at least £270bn would be recouped in additional near-term tax receipts. In addition, at no extra cost, it would fund £220bn of investment into communities beyond the building interventions. Collectively these investments would deliver a wide range of valuable public benefits ranging from improved healthcare outcomes to increased productivity and job creation.

We believe this constitutes compelling value for money, and therefore justifies the outlay for the next phase of the programme, to demonstrate the concept in practice.

Five Key Advantages of the Net Zero Neighbourhood Model

1. Deployment at Pace - “planned & co-ordinated” vs “market-led”

Core to this approach is the co-ordinated design, funding and implementation of deep retrofit and energy transition by local partners at a whole neighbourhood level, involving approximately 1,000 homes / commercial properties being transitioned at a time in each project. If each of the 333 local authorities in the UK[7] could be supported to complete 3-4 projects a year this would deliver the required rate of retrofit, enabling the meeting of Net Zero targets alongside delivering levelling up as described below.

2. Consent – a more engaging offer to residents and asset owners

It is easy to lose sight, amongst the detailed technical and funding discussions of this work, of the reality that it involves disrupting people’s lives and coming into their homes. We need their consent.

There are two ways to improve consent: Provide a compelling offering (positive) and minimise the challenges (avoided negative). This model delivers both.

I. Compelling Offering - By adopting a place-based approach, in addition to retrofitting the buildings, we can also “retrofit the spaces between the buildings”. Co-designing with the community a combination of transport, green, circularity and community infrastructure into the neighbourhood not only generates increased public benefits and greater decarbonisation, but also turns these projects into regeneration investments with the potential to create much greater buy-in and engagement to achieve that consent.

II. Minimising challenges. Two factors are likely to drive down consent: Amount of disruption, and trustworthiness of the organisation. For the disruption element, the proposed model coordinates all the changes at one time, disrupting the neighbourhood once only, making it a much less demanding experience. For the trust component, the proposed model emphasises local place-based interventions with Local Authority leadership, bringing the delivery to a localised level rather than being a largely anonymous national programme.

3. Supporting Levelling Up – avoiding regressive individual debt

The cost of delivering deep retrofit is broadly similar per square metre across the whole country. Incomes and property values are not. Funding this work through individual debt supported by income levels or asset values therefore will have a deeply regressive impact. Conversely, creating a centralised funding mechanism based on collective taxpayer funding and pension assets will enable a just transition.

Furthermore, the model enables a portion of energy savings to be passed back to the residents. This can be both a financial incentive and a tool for levelling up, if those savings are targeted at residents in fuel poverty, for example. There is also the impact of a national portfolio of projects that spreads risks and costs, meaning that residents can benefit from the programme regardless of the individual costs associated with their building. By building a portfolio it is not necessary for every neighbourhood to deliver exactly the same return – this enables a much better offer to those in neighbourhoods that will be harder to decarbonise.

4. Improve Challenging Economics – significant scale economies of a place-based approach

We estimate that the upfront cost per property of reducing energy demand, degasifying heat sources and adding distributed renewable electricity generation is around £35k per home. The expected £1,950 pa energy cost savings that are delivered represent a poor investment return even at elevated forecast 2024 energy prices.

Carrying out the work in a holistic, systemic, place-based scheme creates 3 key economies that drive costs down and improve returns.

I. Procurement – around 40% of the purchase cost is the equipment to be installed. Procuring in the thousands will generate savings vs individual procurement.

II. Delivery – around 60% of the purchase cost is the sales and installation process. Delivering to whole streets at a time generates significant savings in reduced selling costs and logistics for the installer.

III. System Design – assets can be shared when systems are being designed for co-located properties – shared battery storage, ground source heat arrays, local area energy systems, etc., further reducing cost per property.

5. Scaling for Capital – aggregation allows mobilisation of private capital

Based on the high upfront costs and low returns described above, even ignoring ongoing maintenance costs of the installed assets and with no financial return even in nominal terms, the payback of capital is 18 years.

But even this payback period is a mirage. Over the 18 years, to retain the savings, the installed assets would not only need to be maintained but several would reach the end of their useful lives and would need to be replaced requiring further investment and increasing the payback time. Adding in a financial return, even just to the level of inflation, further extends the payback period. Together this requires even more of the installed assets to be replaced. In fact, all the installed assets would need to be replaced at least once, increasing payback even further.

The average UK homeowner has 25 years to live (average UK life expectancy is 81 years[8] and the average UK homeowner is 56 years old[9]). The real payback period of retrofit is in the region of 35 to 50 years. Put bluntly, the maths is not conducive to individual personal investment even if everyone had access to capital.

Structurally therefore, decarbonising housing is not an appropriate investment for individuals. It requires investment over very long periods of time more suitable to the investment time horizons of the £2.4 trillion UK pension fund industry as well as the large insurance asset managers. We have had strong engagement from asset managers indicating significant investment demand.

To create an investible model for these sources of capital requires significant aggregation to allow investment decisions of at least £30-£50m at a time. This model delivers that aggregation and could support c.60% of the costs being covered by these sources of private finance, significantly reducing the public finance requirement.


The Net Zero Neighbourhood (NZN) Funding Model & it’s Implementation

The Net Zero Neighbourhood approach combines a blended finance mechanism, designed to leverage private sector capital on top of public finance, with practical place-based implementation. This delivers a range of technical interventions together, that are collectively needed to decarbonise population centres in line with the UK’s net zero ambitions. This will overcome the many challenges associated with large scale decarbonisation (Figure 1), to enable rapid orchestrated roll out, creating a strong localised demand signal for the supply chain. Nationally this would create a £500bn+ investment opportunity for the pension fund industry to invest into net zero delivery and will deliver significant broader public benefit. Representatives of the pension industry have already indicated strong interest in this funding model.

Figure 1: Challenges to decarbonise population centers

Source: BwB

In this model, building decarbonisation measures are combined with a range of broader community measures; they include: deep retrofit, energy generation, heat source change and potentially green / mobility / community / waste infrastructure (Figure 2).

Figure 2: Range of Interventions

Source: BwB

A funding vehicle is set up alongside local authority implementation and capitalised from a mix of funding sources. This vehicle then pays the upfront costs of deep decarbonisation for a neighbourhood at no cost to the residents and/or property owners (Figure 3).

Figure 3: Mechanism Overview

Source: BwB

The resident retains part of the energy & maintenance saving leaving them in a better economic position with a more comfortable house and enhanced neighbourhood (Figure 4).

Figure 4: Residential cashflow

Source: BwB

The remainder of the savings are captured through on-utility-billed, property-linked, long-term service contracts creating an annuity income stream for the funding vehicle to support the capital structure (Figure 5).

Figure 5: Allocation of savings

Source: BwB

Additionally, co-benefit impacts of this holistic and systemic decarbonisation of place (e.g., healthcare, water management, carbon reduction, biodiversity, etc.) are tracked and measured to support financing actors willing to purchase specific outcomes (outcome buyers) (Figure 6 for overview funding flows).

Figure 6: Funding Flows

Source: BwB

The cash returns are not sufficient to fully capitalise the model through commercial funders, but there are other valuable outcomes (Figure 7).

Figure 7: Funders, Outcomes & Beneficiaries

Source: BwB

Therefore, the capital stack blends patient private repayable capital (pension/insurance investment management), public sector grant finance and private sector outcome-buying capital (i.e., repaid in outcomes rather than in cash) (Figure 8).

Figure 8: Capital Stack

Source: BwB


Rufus Grantham, BwB

Alex Massie, Eunomia

Steve Smith, BwB

Christine Zhou, BwB

Ben Hikmet, BwB

Will Shanks, Eunomia

About BwB: Bankers without Boundaries (BwB) is an innovator in finance: a not-for-profit powered by former investment bankers to assist high impact projects that benefit the environment and social good. BwB applies financial concepts and structuring expertise to align projects with the investment needs of the capital markets, working with governments, institutions, cities & foundations to provide advisory and research services to mobilize capital.

About Eunomia: Eunomia is an environmental consultancy working across waste management and resource use, climate change mitigation and adaptation and the natural economy. As a specialist in an array of environmental areas, Eunomia provides critical, independent advice to private organisations, NGOs and local, national and supra-national governments and their departments.


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