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Social Housing Decarbonisation Fund (SHDF): Demonstrator and Wave 1: Accounting officer assessment 2021 (HTML)

Updated 12 June 2023

Department for which the accounting officer who made the assessment is responsible:

Department for Business, Energy and Industrial Strategy

Project title:

Social Housing Decarbonisation Fund (SHDF): Demonstrator and Wave 1

Main scheme project stage:

SHDF Programme Business Case approved by Project Investment Committee and HMT Approval (TAP) in March 2021. Updated SHDF Programme Business Case approved in June 2022.

Full Business Case for Demonstrator approved by Project Investment Committee and HMT (TAP) in December 2020.

Full Business Case for Wave 1 approved by Project Investment Committee and HMT Approval (TAP) in January 2022.

Introduction

It is normal practice for Accounting Officers to scrutinise significant policy proposals or plans to start or vary major projects, and then assess whether they measure up to the standards set out in Managing Public Money. From April 2017, the Government has committed to make a summary of the key points from these assessments available to Parliament when an accounting officer has agreed an assessment of projects within the Government’s Major Projects Portfolio.

This Accounting Officer Assessment was made of the Social Housing Decarbonisation Fund (SHDF) programme and the projects that sit within the programme (Demonstrator and Wave 1), following their full business case stage. I have made the assessment as the Accounting Officer for the Department for Business Energy and Industrial Strategy (BEIS).

Background and Context

The Social Housing Decarbonisation Fund (SHDF) will upgrade a significant amount of the social housing stock currently below Energy Performance Certificate (EPC) C up to that standard, making homes warmer, reduce carbon emissions and improve the comfort, health and well-being of social housing tenants. Following an initial Demonstrator fund, Wave 1 of the scheme went live in February 2022 marking the start of multiple waves planned against a 10-year manifesto commitment.

The Demonstrator fund provided £62 million in financial year (FY) 2020/21 in grant funding to projects to bring forward investment in domestic energy performance and low carbon heating, supporting an industry impacted by COVID and enabling social landlords to demonstrate innovative approaches to retrofitting social housing. Learnings from the Demonstrator were designed to help inform the policy design and delivery model for Wave 1 as well as future policy and delivery models of future waves and scaled-up HMG schemes.

Wave 1 was estimated to deliver energy performance improvements to up to 20,000 social housing properties. It has provided £178.5 million in grant funding, with delivery expected to continue into 2023. The investment supports a worst first, fabric first, least regrets approach to retrofit social homes below EPC C up to that target; informing the policy and delivery model of future scaled up government schemes.

Assessment against the Accounting Officer standards

Regularity

The SHDF Demonstrator and Wave 1 funds are within the Department’s legal powers under section 31 of the Local Government Act (LGA) 2003 and Section 8 of the Industrial Development Act (IDA).

At full business case stage, the focus has been on compliance with public law and procurement regulations. I have assessed the programme in view of relevant public law and procurement regulation and found it be compliant.

The programme is supported by scrutiny from external and BEIS legal advisers to ensure best practice has been applied across the programme development. The Social Housing Decarbonisation Fund has been on the Government’s Major Projects Portfolio (GMPP) since April 2021.

Overall assessment: My assessment is that the regularity test is satisfied.

Propriety

The Demonstrator and Wave 1 projects have been approved at Full Business Case (FBC) stage by the BEIS Project Investment Committee (PIC), the Infrastructure Projects Authority (IPA), the Cabinet Office Commercial Spend Controls, and the Treasury Approval Point (TAP) process. As a result, this has my approval to proceed.

Overall assessment: My assessment is that the propriety test is satisfied.

Value for money

The government has set an objective to ensure that as many fuel poor homes as is reasonably practicable achieve a minimum energy efficiency rating of EER Band C by 2030. 19% of households in the social housing sector are fuel poor according to the Low-Income Low Energy Efficiency (LILEE) metric^{[footnote 1]}, but below EER band C, 61% of social housing households are fuel poor. Due to the prevalence of fuel poverty amongst these energy inefficient properties, government intervention is required to ensure that there is appropriate funding to lift these households out of fuel poverty to meet the government’s fuel poverty objectives, alongside the Net Zero targets.

There are three main explanations for the lack of sufficient investment from social landlords in energy efficiency and clean heat measures:

• Without any government intervention, there is a misalignment between interests of the bearers of the costs – the social landlords - and the primary beneficiaries, the tenants. Indeed, the most direct benefits of such investments are energy savings, which translate to increased comfort and financial savings for the tenants.
  
• A large part of these measures’ benefits are positive externalities – these are social benefits that are not internalised by the market: reductions in greenhouse gas emissions, better air quality, and wider health benefits.
  
• In addition, there are competing pressures on the social landlords’ budgets (e.g. fire safety and structural remedial works, housing supply).

The SHDF programme has been appraised using HMT Green Book guidance. For both SHDF Demonstrator and SHDF Wave 1, options have been appraised against a counterfactual ‘Do Nothing’ option in which no Government intervention occurs.

The SHDF Demonstrator options appraisal was focusing on options that were aligned with the objectives described above, and that provided a short-term economic stimulus in the summer of 2020, to support jobs. In addition, the approach was intended to pilot and test approaches to whole-house retrofit to provide evidence and learnings for future delivery in the SHDF programme. The options appraisal considered three policy options alongside the counterfactual:

1) a £50 million full subsidy,
2) a £50 million subsidy with 60% co-funding from landlords, and
3) a £100 million subsidy with 60% co-funding from landlords. Whilst Option 3 provided the highest NPV, Option 2 was chosen as the preferred option on balance based on the deliverability risks associated with delivering a larger amount of additional funding (£100 million rather than £50 million) from summer 2020.

SHDF Wave 1 options appraisal aligned with the objectives described above but changed focus from the whole-house retrofit approach in the SHDF Demonstrator scheme. Wave 1 is intended to support a larger number of social housing tenants with energy efficiency and low-carbon heating measures to get homes as close to EER Band C. The learnings from SHDF Demonstrator were used to develop the specific policy design options of SHDF Wave 1. The options appraisal considered four policy options alongside the counterfactual: 1) a fabric first approach with a fixed cost cap and low carbon heating where appropriate, 2) a varied cost cap with low carbon heating where appropriate, 3) a fabric first approach with a varied cost cap and low carbon heating where appropriate, 4) a fabric first approach with a varied cost cap and an emphasis on low carbon heating. Whilst Option 2 provided the highest NPV, Option 3 was chosen as the preferred option on balance based on strategic considerations, in particular the trade-off between number of homes treated and level of retrofit and the need to protect tenants from bill increases. Option 3 had a stronger fit with meeting the fabric first approach and thus more insulation measures installed, than Option 2.

Cost benefit analysis (CBA) has been undertaken for both the SHDF Demonstrator and SHDF Wave 1. The costs of the SHDF programme fall to BEIS through provisions of the 2020 and 2021 spending review, as well as estimated co-funding by Local Authorities (LAs) and Registered Providers of social housing (RPs).

The programme delivers several benefits including making homes warmer, reducing carbon emissions and improving the comfort, health and well-being of social housing tenants. There are wider benefits with the schemes, including those that are not monetised in the NPV analysis, including the development of the supply chain for energy efficiency retrofitting.

Social net-present values (SNPVs) and Benefit Cost Ratios (BCRs) have been estimated for both schemes. The SHDF Demonstrator has a BCR of 2.8 and SHDF Wave 1 had a BCR ratio of 0.95 and an equity weighed BCR of 1.17 at the point of approval of the Full Business Case. Following confirmation of the final successful bids at the point of scheme launch, the BCR was revised to 1.05, with an equivalent equity weighted value of 1.31. Given the focus of the schemes on low-income households, equity weighted SNPVs and BCR are larger and reflect the distributional impact of the schemes. The equity weighting has been undertaken consistent with HMT Green Book guidance.

The strong strategic case for government intervention coupled with the cost-benefit analysis mean the scheme is likely to provide good value for money.

Overall assessment: My assessment is that the value for money test is satisfied.

Feasibility

The Demonstrator and Wave 1 are currently in delivery, with the aspiration of treating up to 2,000 and 20,000 homes respectively, as estimated at FBC stage. There is a risk around meeting the full aspiration for the number of homes as set out at Full Business Case stage, especially given the inflationary costs and supply chain pressures, including labour shortages. This is an ambitious aspiration and, whilst there is risk in whether this number is feasible to reach, I do not judge this a sufficient reason not to proceed. This is because the overall scheme design is feasible to deliver, the programme will still deliver the strategic need and value for money even if the full targets are not met. The scheme scope and eligibility criteria will be kept under review, evolving from the initial go-live offering based on evidence, stakeholder views and user feedback.

There will be Infrastructure and Project Authority-led Gateway reviews, that will take place over the life of the programme to provide ongoing assurance on the programme’s ability to deliver the intended benefits and outcomes. For Wave 1, a midpoint review is planned for Autumn 2022 and an in-flight Gateway 5 review is planned in 2023, with a focus on the operational delivery phase and benefits realisation of the project.

Overall assessment: My assessment is that the feasibility test is satisfied, although I note the risk to achieving the full targets.

Conclusion

As the BEIS Accounting Officer, I have considered this assessment of Social Housing Decarbonisation Fund and approved it on 30 March 2021.

I have prepared this summary to set out the key points which informed my decision. If any of these factors change materially during the lifetime of this programme, I undertake to prepare a revised summary, setting out my assessment of them.

This summary will be published on the government’s website (GOV.UK). Copies will be deposited in the Libraries of the House and sent to the Comptroller and Auditor General and Treasury Officer of Accounts.

Sarah Munby Permanent Secretary, BEIS 30 March 2021

1. https://www.gov.uk/government/statistics/fuel-poverty-detailed-tables-2022 ↩