Is there a Net Zero Poverty Premium?
Only 20% of people in Scotland can comfortably afford the home upgrades required to meet the Scottish Government’s ambitious net zero targets for buildings by 2045.
New research, carried out by Smart Data Foundry's data science team, used anonymised consumer banking data to study how the estimated costs compare with people’s disposable income. The goal was to understand homeowners’ ability to afford the costs associated with improving energy efficiency through retrofitting.
The findings highlight the affordability challenge posed by retrofitting and expose
the ‘poverty premium’ associated with making homes more energy efficient – as
those who can least afford upgrades end up paying more in the long run.
With urgent action needed to meet net zero targets, the findings highlight the need
for targeted financial support and data-driven policy solutions. By unlocking the power of financial data, policymakers can design targeted solutions that make retrofitting more achievable - reducing both emissions and inequality in energy costs.
“Data-driven decision-making is essential for policymakers to effectively address the major challenges confronting society, especially amid the current cost-of-living crisis. Real-time financial data empowers policymakers to deliver targeted, effective support where it's needed most.”
The findings
The report estimates that 55% of Scottish homes with an EPC rating of D or lower (1.4 million) require upgrades to meet the necessary energy efficiency standard C to reach net zero, which could cost homeowners up to £15,000.1
Among the changes required to achieve this are improvements to the energy efficiency
of buildings and the replacement of direct emissions heating systems, such as gas boilers, with electric systems, such as heat pumps.
Analysing anonymised consumer financial data around disposable income in combination with housing and energy data, the report found that while 20%2 of Scots
living in homes with a rating of EPC D or lower would be able to easily afford to make the upgrades required to reach a C rating, others would struggle even with the help of grant subsidies.
The report shows 26%3 of Scots would be able to afford it with the help of a grant but 42%4 would only find it affordable with both a grant and a medium-term loan.
It highlights that a further 12%5 would not be able to afford to do so at all, even with a grant subsidy, as the cost would be greater than their total disposable income over five years.
The report also finds that:
- those under 25 and over 59 are less likely to be able to afford the retrofit.
- those whose primary income source is a pension or benefits are least likely to be able to afford to retrofit their homes without a loan.
- postcodes where affordability is at its lowest are Dumfries and
Galloway, Galashiels and Kirkwall.
The net zero poverty premium
This affordability crisis comes as the Climate Change Committee, the UK Government’s independent climate advisory body, highlights the urgent need for half of UK homes to install heat pumps within 15 years to meet the UK’s Net Zero target by 2050.
One of the major challenges of decarbonising the 55% of homes in Scotland that have a D or lower energy rating is that homeowners will meet significant up-front costs even with government grants and loans. However they may not see a significant reduction in heating bills to offset this cost for many years to come.
Around 1.6 million homes in Scotland are owner occupied and a further 360,000 are
privately rented, so there is a significant challenge to understand the best
ways government can incentivise homeowners and enable suitable, targeted financial support through public grants and private lending.
“One size of support won’t fit all – those in the lowest income households will struggle most to meet the costs of upgrading their homes and find it more difficult to access affordable credit. However, having less energy-efficient homes means they will continue to pay higher energy bills. This is a clear example of the ‘poverty premium’ at play: additional costs for those least able to afford it."
Data-driven insights, such as those in this report, can guide policymakers in targeting financial support where it’s needed most, creating tailored solutions that address both emissions and financial inequalities.
About the data
The financial data used in this report consists of weekly aggregated transactions for 5.3 million current account holders of NatWest Group (NWG) banks across Great Britain.
Our data science team used information on income and expenditure within the dataset to derive estimates of disposable income (net income after essential expenditure) for a subset of 140,000 customers in Scotland for whom there is up to five years of continuous transactional information.
Read Estimating affordability of net zero retrofit for homes in Scotland here.
References
- “Easily affordable”: retrofit cost is less than total disposable income over 1
year - “Affordable with grant”: cost with grant subsidy is less than total disposable
income over 1 year - “Affordable with grant and medium-term loan”: cost with grant subsidy is less
than total disposable income over five years - “Not affordable”: cost with grant subsidy is greater than total disposable income over 5 years
