Friday, September 16, 2011

The Green Deal will fail under current arrangements

The Green Deal, flagship of the Government's Energy Bill and intended to help the housing sector contribute to cutting UK carbon emissions by 80% by 2050, is likely to be underfinanced and will fail by not attracting enough support from residents.

That was the message from MPs as the House of Commons debated the Energy Bill again on Wednesday, before it moves back for the final time to the Lords.

But they were unable to obtain any guarantees from Energy Minster Charles Hendry, of the value or interest charged on loans to residents or the degree of support that may come from the Green Investment Bank, factors that will have a massive effect on the degree of take-up of the scheme.

The green deal is the “pay as you save” scheme for retrofitting energy efficiency measures to every one of the 28m homes in the country.

A new amendment was passed to force the Secretary of State submit proposals on the ways in which the Green Investment Bank could maximise its take-up and to enable the consumer to compare recommendations and estimated costs and savings.

This is in effect limited by the 'golden rule' that the cumulative cost of the rate of interest and the cost of the installation should not exceed the amount that people are currently paying on their energy bills.

The percentage game

It's the interest rate of the loan repayments that is one of the crucial factors.

The Great British Refurb campaign's survey of about 2,000 people found that whereas 56% saw the green deal as attractive, only 7% said that they would be prepared to take it up if a 6% interest rate applied; if it were set at 2% per annum, they would be “very” or “fairly” likely to take it up.

MPs said they wanted the scheme to have a single interest rate in order to provide clarity, fairness, stimulate mass demand and, crucially, force green deal providers to "compete for customers on the cost and quality of the energy efficiency measures and installation, rather than on the headline interest rate of the finance".

Green MP Caroline Lucas (this week voted MP of the Year in the Scottish Widows & Dods Women in Public Life Awards) wanted the Green Investment Bank to be able to ensure a common and low interest rate - below 2% if possible - pointing out that a (very) different scheme in Germany offers publicly subsidised interest rates of 2.65% and has achieved 100,000 residential retrofits in a year - and the Government must achieve 145,000 every month to have a hope of meeting the required targets.

But Barker said the legislation will not place restrictions on the level of interest charged, instead relying on the market to decide.

Nor could he guarantee that the Green Investment Bank could support the interest rate, although its priorities are to address market failure.

Barker said that it is up to the market to set the interest rate, however, although there will be some protection for the fuel poor, and in order to prevent subsequent owners of a property being penalised for the fact that the previous residents were not considered credit-worthy.

The Government has yet to undertake consultation on the secondary legislation that will bring in the regulations, and this is what will determine the degree of willingness of financial backers to climb on board.

Barker added that the Government's own consumer research showed that the biggest factor in their taking up the green deal would be "a desire to make their home nicer".

The Energy Company Obligation and fuel poverty

The Energy Company Obligation (ECO) for energy companies is supposed to target the needs of vulnerable consumers, and the green deal is supposed to tackle the issue of fuel poverty, but with an unprecedented 1.9 million people in arrears with their energy bills in this country and 5.5 million living in fuel poverty - both numbers rising by the day - it is unclear whether any financier is going to want to touch them.

Barker admitted as much, saying "I cannot give a universal commitment" that they will all have access to the deal.

Barker tried to provide reassurance by saying "Many of the families and individuals [in arrears or fuel poverty] will be captured by community roll-out and street-by-street roll-out of energy efficiency improvement schemes."

ECO is expected to offer insulation and home improvements to whole streets, regardless of income, to ensure improvements are made at scale - which is far more cost-effective than house-to-house, especially where external insulation is required.

But the crucial question is how much finance it will have available.

Lucas certainly doesn't believe that as things stand there will be enough cash available to make the green deal work.

"Yes, we have the ECO £1 - 2bn," she said, "but this is a small proportion of what will be required".

In fact, as MP Barry Gardiner pointed out, the Committee on Climate Change estimates that up to £17 billion of support will be required through the ECO to insulate 2.3 million solid walls alone by 2022.

Similarly, he said "we cannot keep pushing up the ECO" because of its impact on every energy bill payer.

In addition, it is unclear whether the Treasury levy cap on DECC's spending will cover the ECO, and limit the support it can give to tackle fuel poverty still further. The two departments are still locked in negotiations over that one.

All Barker would say at this point is that DECC will publish in the autumn its expectations of how DECC policies, taken together, will impact on consumers through to 2020.


The green deal, as MP Andrea Leadsom pointed out is, essentially, a financial services product. As such it is regulated by the Office of Fair Trading, which will be expected to ensure that any mis-selling is stamped out at the outset and full compensation is paid to any victims.

However, MPs raised concerns over whether the OFT will have sufficient resources to undertake this extra work, which could be considerable.

Market research has shown that customers would welcome and are therefore more likely to trust the involvement of local authorities, community groups and third sector organisations when thinking about entering into a green deal.

The legislation will allow for this and contain "a clear enforceable framework within the green deal code of practice" to ensure impartiality of advice and prohibit high-pressure sales tactics, as used infamously by energy companies recently.

Greg Barker said, "one of the most exciting things about the green deal is its potential to give rise to new third sector involvement in delivering energy efficiency services."

DECC is now setting up a new workshop to look specifically at how the provisions can best work with older buildings and for service family accommodation, particularly older historic buildings.

Contrary to MPs demands that it makes more sense for repayments of the loans to come from a gas bill (used more for heating than electricity), Barker said it will not be possible to specify whether the instalments will be paid via the customer's electricity bill or gas bill, as this would double the cost of administering the scheme.

He also said that liability for green deal payments should sit on the balance sheet not of energy companies, but of the green deal provider, such as B & Q, Marks & Spencer or John Lewis.

The amendments include one, brought by Luciana Berger, Lab/Co-op MP for Wavertree, Liverpool, to clarify and encourage green deal installation apprenticeships to create the necessary skilled workforce.

However, there was no discussion of standards of insulation and energy efficiency that will be required. That, too, will have to wait until the secondary legislation.

With the implementation date 12 months away for the green deal, there is still plenty of work to do before stakeholders will even be able to estimate how effective it may turn out to be, but there is certainly much concern that it will not be as attractive as it needs to be.


DavidF said...

Interesting post - I was struck by this bit:

"ECO is expected to offer insulation and home improvements to whole streets, regardless of income, to ensure improvements are made at scale - which is far more cost-effective than house-to-house, especially where external insulation is required."

I hadn'tr heard this but welcome it - but (a) how is this going to be squared against the govt's commitment to making sure that only those most in need are beneficiaries of ECO and (b) does a simultaneous scheme which carries out insulation measures for free street-by-street encourage people to sit tight and shun the 6 or 7% loans on offer from B&Q?

David said...

Good point, David. Whole-street schemes are not new - there are examples carried out by local authorities and include whole tower blocks of course. One can't expect these occupants to insulate externally themselves!

The type of homes treated this way are commonly rented and 'hard-to-heat', and the landlord is the council or a housing association.

Residents will often collectively fall under a definition of fuel poor because of the standard of housing.

They would therefore typically not be in a position to take advantage of DIY store loans.