So what is the Green Deal?

16/Jul/2010
Brian Scannell

The “Green Deal” has been making headlines for months.

High profile Conservatives, including David Cameron and Grant Shapps, have talked about homeowners being entitled to spend up to £6,500 improving the energy efficiency of their home. Repayment will be from savings in future energy bills – but with the homeowner still seeing an overall saving. Crucially, if the property is sold, the repayment will continue to be made through the energy bills by the new owner.

Another key feature that has cropped up in all of the speeches has been the involvement of well-known retailers such as Marks & Spencer, Tesco and B&Q as well as the energy companies. The assumption being that when these companies applying their marketing and customer service skills to the problem, consumers will be keen to sign up.

The generic term for such schemes is Pay As You Save (PAYS) and various proposals have been made along these lines by a range of different organisations, in particular the UK Green Building Council. The key benefits are that the barrier of the upfront cost is removed and the savings exceed the costs irrespective of how long you are in the property – so it always makes sense to act.

So that’s the basic idea, but there are inevitably an awful lot of questions that still need to be answered.

The most immediate questions for NHER members are: will this create a demand for Energy Performance Certificates; will this create opportunities for energy assessors; and where does the proposed Home Energy Advisor (HEA) qualification fit into this?

The signals from CLG have been very positive. The indications were that an EPC would be required, the HEA qualification would be an upgrade of the DEA qualification and only HEAs would be able to agree Green Deal measures with homeowners. This implied that Green Deal would create lots of new opportunities for the existing industry as well as helping to get lots of energy efficiency measures installed.

Unfortunately, the signals from DECC have been much more ambiguous. They seem to think that the retailers (M&S etc) should be driving this initiative. If that is the case it is difficult to predict what might be decided in terms of qualifications, accreditation and the need for EPC. Indeed, it might mean that the individual companies adopt different approaches.

Worrying signs.

Words in Westminster

In search of enlightenment, I read my way through the Hansard transcript of more than six hours of parliamentary debate in the House of Commons “on the matter of progress and prospects in energy efficiency”, introduced by DECC Minister Greg Barker on 30th June.

The Minister formally announced the extension of the CERT scheme to the end of 2012 and the refocusing of the scheme on insulation, with “more than two-thirds of this new carbon target … delivered through approved, professionally installed loft, cavity wall and solid wall insulation”. The changes announced are extremely welcome and, arguably, long overdue..

But what about Green Deal?

What is clear is that the Minister – and indeed the Coalition Government - is optimistic that Green Deal is going to have a significant impact. There were repeated references to previous initiatives being fragmented and insufficient, whereas Green Deal will be a “real game changer” and help to “reach the remaining 14 million households in the UK in a meaningful time scale”. What is more Green Deal will “unlock billions in new private capital to support energy efficiency”. Ambitious stuff.

As expected, he confirmed the basic structure of the scheme.  He was particularly keen to emphasise that “it will not be a personal loan, a green mortgage or a charge on the property”.  You can read his description of the scheme here:

“What will happen is that the right interventions for that particular property will be delivered and the costs of those interventions will be rolled up in their entirety and repaid through the energy bill for that property over 25 years. If that owner moves away, the cost will simply transfer to the energy bill of the next occupant. If the occupant changes energy company, the cost will simply transfer to the new energy company. We will make sure, through legislation, that it is impossible for a new energy provider to come in and provide energy without taking on the costs associated with the green deal finance.

“There is a real golden rule.  We cannot guarantee that this will be the case in all instances, because behaviour change is also relevant, but the guiding principle is that the savings in every household that receives such interventions on the pay-as-you-save model must always be greater than the financing costs. The householder, be they in rented or private accommodation, should see not only an increase in the insulation in their home, a reduction in their carbon emissions and an increase in warmth and quality of life for them and their family, but - and this is an important point - a reduction in their total energy bill. That needs to be put clearly and fairly on the bill. We must scotch the idea that the green deal is a loan, a mortgage or a charge, because it is not, and it is really important, in order to get consumer confidence, that we communicate that message.

“… Some companies will choose to take the charge on to their balance sheets, but others will choose to participate in partnership with a financing company. I think there will be a real appetite among UK institutions-this is the game-changing element-to purchase what will in effect be a form of bond with a 25-year life. I think they will be securitised together and parcelled up, and will then make attractive investments for UK pension funds, which currently suffer from a relatively limited choice of secure, long-term investments from which to fund their annuities.  I can guarantee for the hon. Gentleman that, just as the green deal is not a personal loan, mortgage or charge, nor will it sit on the Government balance sheet or require a Government guarantee.”

So after wading through the entire session what more do we now know? 

Well, one thing is for sure – MPs are far more fascinated by electricity generation than they are by energy efficiency! A staggering amount of the debate was about coal versus gas and nuclear versus renewables, as well as micro-CHP, transmission pylons and interconnectors.  There was even a contribution about the inevitable transition to nuclear fusion – I kid you not!

Unfortunately, tangible information on the Green Deal was harder to find. The following points were pretty clear from the speech:

  • Legislation: Green Deal requires new primary legislation – it will be “at the heart” of the Energy Bill that will be introduced later this year.  This is needed to create the legal framework for the financing arrangement
  • Measures: Green Deal is about financing straight energy efficiency measures.  He appeared to rule out Green Deal financing for microgeneration and it is also unclear whether it will cover heating system upgrades – one could hardly justify 25 year financing on a replacement boiler.
  • Coverage: Green Deal will cover both homes and businesses – especially small and medium-sized ones.
  • Timing: Green Deal isn’t going to have any impact in the short-term.  It looks as though the intention is that Green Deal financing and the revised supplier obligation (CERT) will both come into force at the end of 2012.

There was also an intriguing suggestion that Green Deal might not be entirely optional. At one point the Minister said “through legislation and opening up new markets with new regulation, we can ensure that there is no cost up front to every single householder”. The idea of new regulation is very intriguing. In our report Seizing the Opportunity, we suggested that if other approaches didn’t work, it might be necessary at some point to make improving the energy efficiency of a property mandatory. However, it hadn’t occurred to me that this Government would ever countenance it – I’m trying to imagine the reaction of the Daily Mail…

A long way to go

Unfortunately, there is still an awful lot that we don’t know. Crucially, there was no indication of how the scheme would work in practice.  Perhaps that is unsurprising given that the challenge of figuring out the legal changes to enable the financing to work.

I am left wondering about the cost and complexity of the system being proposed. All of parties involved – retailer, installer, finance provider and energy company – will need to cover their administrative costs and expect the scheme to contribute to their profits. Surely this risks becoming an expensive way to install measures?

Then there is the 25-year period and the fact that the householder may move or change energy company at any time. I can envisage there will be a complex IT system needed to underpin this.  One possibility will be to link this to the plans for centralised data collection from smart meters. But any project that relies on integration with the billing systems of energy companies sounds like an IT nightmare to me.

All of which makes it even more surprising that the proposed scope of measures is so narrow.  Are they really suggesting 25-year financing (at an interest rate that has to be attractive to the finance companies) is the sensible way to finance cavity wall insulation or a loft insulation top-up?  As and when more details become available I will definitely want to see what the cost of scheme administration and finance on a few hundred pounds of insulation will be.

We will hopefully find out more when the Energy Bill is published – presumably after the summer recess.  In the meantime, there are lots of points to follow up with the various Ministers involved as well as MPs and the various companies that are expected to be involved.  I’ll keep you posted as and when I know more.

What now?

Given so much uncertainty, it shouldn’t come as a surprise that the implications of Green Deal for NHER members are still very unclear.

What is absolutely clear is that Green Deal isn’t a significant new opportunity in the short term.  For the next couple of years, we all have to focus on the opportunities we can create within the existing market.

But we will definitely be trying to influence the future shape of Green Deal.  It does have potential benefits for members and we will be fighting to maximise them.  But we’re not going to let tomorrow’s challenges distract us from fighting the battles of today – such as the drop in compliance, the lack of homeowner awareness of EPC and the need to get homebuyers acting on recommendations.

Comments

 

Nicely put together thank you. Legislation is probably needed and it's a good thing that savings must always be greater than the financing costs.
This could be the key selling point, starting now. More generally, I believe that public buildings should lead the way showing that savings (plus greater comfort and low carbon) are significant. The existing housing stock would follow, and here too I would favour a town-wide approach rather than the single household. The focus should be on pilot schemes.
My key interests are in education (food water energy). This includes raising awareness and indeed making a case for these very issues - not only generating energy, for instance, but not wasting it in the first place!
I could be contact if you wish to because I want to get involved.
Thanks again, mario.

 

I wouldn't want to buy a house that had what amounts to a green deal charge on it. I think you would only save more money than you pay if you have the central heating on quite high. I don't do this - it's too expensive these days & boilers are so expensive to repair.

During the recent cold spell I set mine to 7.5C Instead I wear a hat indoors & lots of layers indoors. My thermostat currently says 8.7C.

 

Very well written and researched.

 

I have read through the scheme and for me its life changing. To benefit from double glazing instead of old draughty wooden windows and maybe benefit from external cladded walls to keep in the heat in this old house... pure joy. My heating is currently set at 15 degrees and believe me its very cold in here. So its a yes from me.

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