The UK thermal insulation market has demonstrated erratic development over recent years. This has been exacerbated by changes and cuts to government programmes promoting home energy efficiency measures and the UK construction sector’s stuttering recovery. The frequent changes to energy efficiency policy have resulted in a stop-start insulation market and have had a damaging effect on investor confidence in the sector.

In 2015, demand for thermal insulation fell by an estimated 8% to £1,330 million. This mainly reflects reduced demand for key building thermal insulation measures (cavity wall, solid wall and loft insulation) in light of the government’s cut backs to the Energy Company Obligation (ECO) programme and the closure of the Green Deal, which had been plagued by low take-up levels since its conception in 2013. Reduced demand for retro-fit thermal insulation measures has been partly offset by renewed growth in new construction activity, with a number of companies recently shifting their focus from retro-fit to the new build sector.

During the five-year review period, demand in the industrial market was also affected by reduced construction output and difficulties in the manufacturing sector following the economic downturn, although moderate growth was sustained in most years.

Figure 1: The UK market for thermal insulation, by sector, 201115

Source: MBD and trade estimates

The UK market for thermal insulation, including building and industrial insulation, is expected to decline by 4% in real terms in 2016, followed by a marginal decline in 2017, continuing the downward trend witnessed in 2015. The anticipated decline in the current year and 2017 is largely a reflection of reduced demand for building thermal insulation.

The building thermal insulation sector is anticipated to contract by 6% in 2015, largely due to cuts in the ECO scheme. A stronger decline in building thermal insulation demand is expected to be avoided thanks to increased new construction activity, with insulation companies increasingly turning their attention to the new build and commercial sectors. However, the period of uncertainty created by the Brexit vote has made the construction sector’s outlook more uncertain.

The industrial thermal insulation sector is expected to demonstrate modest annual growth of 1% in 2016 and 2017, although the sector may also be negatively affected by the referendum vote, with the associated uncertainties likely to affect investment decisions.

Between 2018 and 2020, the total thermal insulation market is expected to demonstrate moderate annual growth of between 2% and 3% in real terms. In the building thermal insulation sector demand for retro-fit installation is expected to remain suppressed, reflecting the lower delivery targets proposed for the replacement scheme of ECO.

Figure 2: Forecast UK market for thermal insulation, 2016-20

Source: MBD Forecasts

The thermal insulation sector is primarily influenced by legislative measures, particularly building regulations, government programmes promoting the improved energy efficiency of homes, and trends in new construction activity.

Figure 3: Construction output in Great Britain, 2011-15

Source: MBD analysis of ONS data

Thermal insulation is mainly affected by Part L (Conservation of Fuel and Power) of the building regulations. Part L has undergone a number of changes in the last two decades, with each resulting in improved thermal insulation standards for buildings. The amendments have therefore constituted a significant driver of the thermal insulation market over the last decade.

The government’s Energy Efficiency Commitment (EEC) programme has had a significant impact on demand for thermal insulation over the last decade. It began in 2002 and became known as the Carbon Emission Reduction Target (CERT) during its third phase, running from April 2008 to December 2012. The programme required electricity and gas suppliers to achieve targets for the promotion of improvements in energy efficiency in the household sector, with a focus on low income consumers. The CERT programme significantly boosted demand for retro-fit loft insulation and cavity wall insulation, which were the primary measures used by energy suppliers to achieve carbon savings targets under the obligation.

In January 2013, the CERT programme was replaced by a new energy company obligation programme, known as ECO. Together with the Green Deal, this became the main initiative promoting retro-fit insulation installations in the residential sector. cavity wall and loft insulation installations carried out under ECO have been significantly below the levels achieved during previous programmes, with only solid wall insulation showing notable growth. This is largely due to the ECO programme focussing purely on low income areas and hard-to-treat properties, such as solid wall properties. Activity levels are likely to remain below initial projections until 2017, with the government recently announcing cuts to the programme.

The uptake of Green Deal Finance has also been disappointing and failed to have a notable impact on the thermal insulation market between 2013 and 2015. In July 2015, the Conservative government announced that it will axe the Green deal, citing low take up and poor workmanship. This further highlights the uncertainties faced by the thermal insulation industry and a revival in retro-fit activity will strongly depend on renewed government support for the sector.

In his 2015 Autumn Statement, the chancellor announced that the ECO scheme is to be replaced by "a new cheaper domestic energy efficiency supplier obligation" in 2017. Under the new scheme, about 200,000 homes a year will be upgraded, which is considerably lower than the number helped each year under ECO.

35% of homeowners have had some form of thermal insulation installed in the last two years. Cavity wall insulation and loft insulation were the most popular types of insulation measures: 16% of respondents had cavity wall insulation installed, 15% had professionally installed loft insulation, and 12% have installed DIY loft insulation.

Homeowners have primarily installed thermal insulation measures in the past two years to make their home warmer and reduce the cost of energy bills. Home improvements - such as loft conversions, extensions, basement rooms and renovations - are also important drivers of thermal insulation demand. Nearly a fifth of people (18%) who have installed thermal insulation in the last five years did so as part of a home improvement work, while people living in London (35%) were most likely to have installed thermal insulation as part of a home improvement work in the last two years.

26% of homeowners would consider installing thermal insulation measures over the next two years. Cavity wall insulation is the most popular measure (9%), followed by draught proofing (8%), loft insulation (8%), and solid wall insulation (6%). Loft insulation and draught proofing represent popular options as they are relatively low-cost, easy-to-install measures.

The thermal insulation contracting sector is highly fragmented, with small, highly localised contractors dominating. However, some larger, national contractors also exist, although their presence in the industrial insulation sector is greater than in the building sector.

Many contractors are now offering consultancy services to advise customers of specification requirements and regulations, including advice on building regulations, SAP, and Uvalue calculations to assist in delivering carbon reductions, energy savings, or thermal upgrade obligations.

Installers are increasingly adopting a multimeasure approach as demand for thermal insulation remains volatile, largely due to the stop-start nature of government funding initiatives. This approach enables them to provide ‘whole house solutions’, ranging from insulation to heating, plumbing and renewables. Insulation companies with transferrable skills are also branching out from the retrofit market to different new build and commercial sectors.

In the UK, there are still seven million homes with inadequate loft insulation, just under five million homes have potential for cavity wall insulation, and 7.5 million solid wall homes are still uninsulated. Moreover, the Association for the Conservation of Energy (ACE) claims the UK’s housing stock is one of the least energy efficient in Europe.

This suggests significant growth potential for retro-fit installations going forward, despite current government policy pointing towards a further significant reduction in retro-fit activity over the next five years. The Conservative government has so far committed to insulate an additional one million homes during the current parliament, which represents a substantial reduction on the last five years.

The Committee on Climate Change (CCC) has also recommended that insulation delivery rates need to be increased. In its central scenario for meeting the fifth carbon budget, the CCC said in 2016 that insulation rates must increase in the UK, and that two million solid walls and the majority of remaining cavity walls and lofts must be insulated to 2030.

Government policies and initiatives therefore need to be renewed and strengthened to revive activity in the sector and unleash the full potential of thermal insulation to improve residential energy efficiency and reduce carbon emissions.