Rui Cardoso

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 emphasise the need for targeted financial support. 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.

The report estimates that 55% of Scottish homes (1.4 million) have an EPC rating of D or lower, meaning they require upgrades to meet band C - the energy efficiency standard necessary to reach net zero.

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. These improvements could cost homeowners up to £15,000.

Analysing anonymised consumer financial data around disposable income in combination with housing and energy data, the report found that while 20% 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% of Scots would be able to afford it with the help of a grant but 42% would only find it affordable with both a grant and a medium-term loan.

It highlights that a further 12% 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 urgency of this affordability crisis became clear last week when the Climate Change Committee, the UK Government’s independent climate adviser, advised that half of UK homes must install heat pumps within 15 years to stay on track for Net Zero by 2050.

Rui Cardoso, head of public sector engagement at Smart Data Foundry, said: “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.

“Our data-driven insights can guide policymakers in targeting financial support where it’s needed most, creating tailored solutions that address both emissions and financial inequalities.”

Research shows that the postcodes where affordability is at its lowest are Dumfries and Galloway, Galashiels and Kirkwall.

Across the country, the data shows 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.

The financial data used in the report consists of weekly aggregated transactions for 5 million current account holders of NatWest Group (NWG) banks across Great Britain.

This data is curated by Smart Data Foundry within a Trusted Research Environment and is strictly licensed for research for social good. SDF 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.

The ‘Estimating affordability of net zero retrofit for homes in Scotland’ report is the latest publication from Smart Data Foundry, a subsidiary of the University of Edinburgh established in 2022 to unlock the power of financial data to tackle big issues and create positive impact across society, the economy, and the environment.

SDF was recently awarded £3 million funding by Smart Data Research UK – part of the UK Research and Innovation (UKRI) to operate a new Financial Data Service, enabling more researchers to study the financial health of millions of households across the UK, by providing secure access to financial behaviours, economic resilience, and regional economic activity.

Mr Cardoso added: “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.”