Long-term Private Finance for Social Housing Retrofits

In this article, we explore how SHPs can overcome these barriers by leveraging a shared savings model and innovative insurance-backed financing to unlock large-scale, flexible private investment.

The Need for Scalable Private Finance

To meet the UK’s net-zero mandate, SHPs must source over £90 billion to upgrade their housing stock. This challenge is compounded by the fact that SHPs’ own budgets, which have been stretched by the cost of living crisis and emergency repairs, fall far short. As such, most SHPs must look toward private finance. However, traditional financing routes have proven costly and often require additional security that SHPs are unwilling or unable to provide.

One major obstacle has been the lack of data available to funders about how retrofit projects will perform financially. This uncertainty drives funders to increase the cost of capital, making it even harder for SHPs to afford retrofits. To solve this, SHPs need to provide funders with clear and quantifiable data on potential energy savings from retrofits.

Financing Retrofits Using a Shared Savings Model

To make retrofit projects viable, SHPs are increasingly turning to a shared savings model, where future energy bill savings are used to finance the cost of the works. This model enables retrofits to pay for themselves while ensuring that residents still see meaningful financial benefits. However, funders are cautious about this approach, as it leaves them exposed to the risk that savings will not materialise as predicted.

To mitigate this risk, SHPs need to create detailed energy baselines using pre-project metering and monitoring. This ensures that energy savings can be accurately measured and provides a reliable framework for funders to calculate potential returns. Solar and storage technologies, for example, generate consistent income streams and can simplify the initial phases of the retrofit process. This phased approach enables SHPs to generate positive buy-in from residents while minimising risk for funders.

How Insurance Unlocks Long-term Finance

One of the most powerful tools SHPs can leverage is Energy Savings Insurance (ESI).

This policy guarantees retrofit projects’ performance, ensuring that both residents and funders are financially protected. If energy savings fall short of expectations, the insurer compensates residents and funders for the difference. This not only de-risks projects but also encourages funders to invest by providing a reliable income stream.

Insurance-backed financing is a game-changer for SHPs because it allows projects to be financed off balance sheet. By creating a separate entity (the Project Vehicle) to own and manage the retrofit project, SHPs can avoid the liabilities associated with traditional debt. This, in turn, makes it easier for SHPs to meet their existing financial obligations while unlocking the large-scale private finance required for decarbonisation.

The Role of Technology in Financing Retrofits

Technology plays a crucial role in making the shared savings model work. Software platforms can analyse a project’s potential cash flows and provide funders with a clear picture of the risks and returns. By running thousands of simulations, these platforms can accurately estimate how much private finance is required, the savings that will be left with residents, and the payback period for the project. Tallarna’s model, for instance, can guarantee that 20-50% of energy bill savings are left with residents from day one. 

In addition to quantifying savings, technology also enables ongoing optimization of energy usage. Metering and monitoring systems allow SHPs and funders to track the performance of retrofit projects in real time. This not only ensures that residents continue to benefit from energy savings but also allows for immediate detection and repair of underperforming assets.

Maximising Resident Impact

While finance is critical to making retrofits happen, the ultimate goal is to improve the lives of residents. By implementing a shared savings model supported by insurance and technology, SHPs can ensure that residents see substantial and guaranteed reductions in their energy bills from the first day of installation. This not only alleviates the financial burden on residents but also builds trust between SHPs and their communities.

Conclusion

To decarbonise the UK's social housing stock, SHPs must embrace innovative financing models that leverage private investment while protecting residents and funders. The combination of a shared savings model, insurance-backed guarantees, and advanced metering and monitoring provides a scalable and sustainable solution. By ensuring that residents benefit financially from day one, SHPs can unlock the billions of pounds in private finance needed to achieve net-zero housing.

James Williams, CEO, Sero

Tim Meanock, CEO, Tallarna