Steven Heath, Technical Director at Knauf Insulation, on why we should transition to a pay-for-performance retrofit model.
A colleague asked of a government energy minister: “what’s the one thing you want from the energy efficiency industry?” “Cheaper prices” was the response. Echoes of the energy efficiency ambition in Theresa May’s 2018 Industrial Strategy Grand Challenges: “We could reduce the energy bills for [new building] occupants by as much as 50%. And we will aim to halve the costs of reaching the same standard in existing buildings too.”
So make energy efficiency products like loft insulation (LI) and cavity wall insulation (CWI) cheaper, and reduce their install cost. This aspiration to “halve the costs of halving home energy bills in existing homes” looked unlikely then and less likely now. Or at least the aspiration looked destined to fail if your focus was on cutting the cost of installed measures.
The graph’s numbers represent indicative estimates for an example property. Retrofit schemes currently rely on guesstimating the blue box – the size of the savings from efficiency measures. The same software that underpins the Energy Performance Certificate (EPC) assesses the heating costs under typical occupancy before and after insulation measures are installed based on ‘look-up’ tables. Nothing is physically measured. This approach leaves no room to innovate; no innovative measurement approach is permitted to show that actually these measures, when well-installed, offer two or three times the home bill savings than those seen in current retrofit schemes.
We and others can now measure the savings under ‘averaged occupancy’ derived from fabric retrofit in the blue box. In our ‘real performance’ retrofit projects we have measured heat demand savings well beyond that predicted by the EPC software.
Consider the graph below. There is a cost to the metering element that can drive better performance – sensor boxes supported by machine learning to calculate a home’s ability to retain heat. But we have seen where measurement takes place and a high efficiency targeted, a significant leap in the energy bill savings can be achieved. The overall payback reduces from 5 years to 3.
Attacking the savings side of the equation rather than the ‘cost of insulation installed’ gets you closer to genuinely ‘halving the cost of halving the home energy bill’.
The potential doesn’t stop there. The red box (red tape) includes both the cost of finding and persuading households to accept retrofit, as well as the compliance costs to ensure retrofit standards are met. Specially qualified people – retrofit assessors and coordinators – must assess whether insulation has been installed well & the correct amount of ventilation maintained. So one person installs it, while another check it’s been done right.
This compliance cost is required because retrofit schemes fail to reward installers for doing it correctly. Installers may do so, but they are currently paid to install measures…anything else is red tape. The desired output from any retrofit scheme should be to reward actual measured efficiency improvement while showing key indoor comfort indicators such as relative humidity, CO2 intensity, internal temperature and even VOCs either remain at appropriate levels post-retrofit or are improved to acceptable levels by retrofit.
Current policy uses compliance schemes to police the installations, or ‘inputs’, rather than rewarding evidence of the desired outputs – lower bills in a more efficient home where a comfortable indoor environment can be maintained. Flipping retrofit schemes to ‘Pay for Performance’ unleashes already existing innovation on to the market. Red tape costs can be saved with no adverse outcomes.
A ‘Pay for Performance’ model likely sees the cost of retrofit uptick a little – there will be more attention to detail, greater diligence in air sealing and a desire to get those enabling works fixed – like a gutter leaking on an external wall or failed ventilation unit – because not managing these issues will reduce pay out. Innovation has meant risk of a poor outcome for householders is better managed through measurement with trust growing over time ultimately reducing the cost of persuading people to retrofit too.
Measurement cost will also reduce as its use scales, while retrofitters are incentivised to find that extra 10% of savings too. The orange box shrinks, and the blue box grows further.
We’ve reduced the 5-year pay back of our initial scenario down to under 2 years. In other words, innovation in both home efficiency measurement and policy design to reward measured outcomes turns our aspiration to ‘halve the costs of halving home bills’ into a distinct possibility. Indeed, barring any great material, or process, innovation, it is the only way. More expensive insulation measures such as Solid Wall Insulation may have potential to innovate around install costs but the ‘Pay for Performance’ principle set out above still reduces their payback time.
Why is this transition to Pay for Performance so crucial? Other than the obvious benefit to householders, it will be the platform other key net zero and energy security aspirations must be built on. Successful heat electrification will be about affordability – the capital cost of a heat pump, its running cost for householders, the cost of upgrading the wires to manage higher electricity loads and building enough power stations and energy storage to ensure everyone is warm enough in a cold winter.
The heat and energy efficiency camps can get stuck in a ‘them and us’ argument. ‘Fabric first’ plays off against ‘heat pumps work in all homes’. Put the slogans aside and ask ‘why are we content that energy efficiency policy drives the results in our first graph rather than the last’? Drive ‘Pay for Performance’ models in energy efficiency policy and the supply chain hunts out where the cost-effective bill savings are. That makes the heat electrification numbers stack up faster allowing smaller heat pumps & higher running efficiencies for some with fewer wires to be upgraded and less peak generation demand and storage needed.
The potential to flip policy to reward outcomes is not lost on officials. Our measurement technology, alongside others, is going through an accreditation process for an ECO retrofit programme ‘Pay for Performance’ trial. Retrofitters will only be paid for the measured fabric improvement rather than for the insulation measures they install. Yet this element will likely be voluntary so there is no guarantee any commercial activity will come from it.
We are still at the stage where the great leap forward has been made on home efficiency measurement technology but not yet on the policy design side. ‘Guaranteed improvement’ or ‘pay as you save’ models can only flow if policy catches up.
We are told the window of opportunity to make that policy flip – outside of the ECO scheme – will be in the next 3-6 months with a consultation on Energy Performance Certificate reform. Work behind closed doors with the Building Research Establishment is ongoing with a ‘modular approach’ being considered. We take this to mean the software will be built with the capacity to unplug estimated numbers for fabric, or heating system, efficiency and plug in measured numbers from accredited technologies.
The work will likely inform both new homes in the Future Homes Standard and retrofitted homes through an upgraded version of the SAP software. In an ideal world, the software will have the capacity to run either traditional estimates of home efficiency or allow measurements from accredited technologies to be plugged in. This adaptability allows policy teams to decide the level of in-use performance required in specific retrofit schemes or new build policy. It will also allow a ratcheting up of those percentages as the benefits become clear.
Many in the ‘expert’ space have views on the integrity of the EPC process despite recognition in the EPC Action Plan that they must become more accurate, reliable and useful. Most are wedded to the notion of ‘independence’. Only independent advice, independent energy assessors or independent software can protect consumers.
This thinking will never unleash ‘Pay for Performance’ or ‘guaranteed savings’ business models that can grow our blue box and shrink the other boxes. Policymakers should ask who amongst those experts is willing to offer commercial ‘guaranteed savings’ models that move risk away from consumers. If the answer is ‘none’ – stop listening.
Independence can be built into the process. Government must validate, then accredit and support ongoing audit for measurement technologies and metrics. Consumers must have confidence the ‘accredited’ measurement is robust with ongoing oversight. Once that system is in place – innovation to ‘grow the blue box’ and ‘shrink the other boxes’ can begin. So, a new mantra – Validate, accredit, audit…Validate, accredit, audit. That’s already underway in parts of DESNZ, but it’s not clear it’s being considered in the wider EPC reform process.
Both major UK political parties have skin in the game here. Labour has committed to insulate 19 million homes in a decade and build 1.5 million homes in a parliament while the Conservatives are committed to reducing domestic total UK energy demand by 15% from 2021 levels by 2030. The parties disagree on the timing to decarbonise the electricity grid but both hold it as an aspiration along with commitments to electrify heat.
The question for those working on the EPC process reform is ‘will that reform allow policy makers to ‘grow the blue box’ by unleashing innovation in home fabric measurement whether for new build, or existing, homes? Or will it leave them stuck with high retrofit costs and unknown benefits? We may even have built 1.5m homes and retrofitted 5 million homes to an uncertain energy efficiency performance by the time the window of opportunity opens again.