The Green Deal – Just How Green a Deal is it?

Sean Lockie
With the Green Deal being the government’s flagship eco policy, a lot is riding on both the policy’s currently public consultation, and its wider uptake from householders and businesses.

Yet the need for such a policy is clear, with a quarter of the country’s carbon emissions coming from residential heating and a further quarter coming from commercial premises. So what kind of reception is the Green Deal being given by the industry, and is it really going to deliver the benefits the Government has promised?

The Green Deal certainly started out with a simple premise. That any home or business in Britain will be able to carry out a full energy refurbishment of their property and fund it through a loan from the policy’s start date of October 2012. The funding is in theory repaid through energy savings. Under the deal the loan will be lodged against the property, and not the owner or occupier and the loan repayments will then be added to a property’s electricity bill – meaning they will be passed on or tied to the property. Loans will be available up to £10,000 and they will be repaid over a maximum of 25 years. Rules over what qualifies for funding are covered under what is called the ‘Golden Rule’.

This policy allows the Green Deal to overcome three big barriers to increasing the uptake of energy efficient building improvements. Firstly, householders are often reluctant to install works which have a payback time longer than they hope to own the property. Secondly, it delivers a clear benefit to the landlord over and above the attraction to tenants. The third is that energy saving measures should be selected and installed in a ‘whole building approach’ which limits the trade interfaces and any potential disruption.

There has been some concern amongst landlords about the Green Deal’s proposed minimum levels of energy efficiency. It is now expected that, from 2018, it will be illegal for landlords to let property which does not achieve at least an E rating on the energy efficiency ratings scale. It is thought that this ban will affect some 682,000 properties – and landlords will in effect be forced to make changes to their properties if they wish them to be let, although there will be some get out clauses for listed buildings.

Through the Green Deal the government in effect has facilitated the payment of UK residents (both landlords and tenants) and industry to insulate homes and factories and install energy saving kit to reduce carbon emissions. As the deputy Prime Minister, Nick Clegg said, “People can now insulate their homes, save and all at no upfront cost.”, when he helped launch the initiative. A research consultation on the Green Deal has also been published (PDF, 88KB) which showed that homes will on average be cheaper to heat and light in the future, precisely because of the government pursuing this policy.

The Department of Environment and Climate Change (DECC) has published a list of expected works upgrades, including insulation, boiler improvements, double and triple glazing and more advanced heating controls.

To take advantage of the Green Deal you will have to have your home or business assessed by a Green Deal Assessor (GDA) who will produce a Green Deal Report. A GDA may be an independent assessor or they may be employed or contracted to a Green Deal Provider (GDP).

The Green Deal Provider will be an organisation which performs a range of key roles all underneath a single structure: sourcing quotes for all of the works, overseeing the installation and ultimately providing the actual loan. To protect consumers against mis-selling, and to make sure loans are not offered where the financial circumstances are not appropriate, both the GDA and GDP will be strictly accredited and monitored.

An Energy Company Obligation (ECO) is expected to provide around £1.3 bn/year of support, split between “affordable warmth” (c. £325m/yr) and energy efficiency improvements for “hard to treat”, largely solid wall homes (c. £975m/yr). ECO will replace both of the current schemes, CESP and CERT, by the end of 2012 placing a new requirement on UK energy suppliers to deliver against both CO2 and fuel poverty reduction targets.

Other than £200m of introductory support recently announced by the Government, ECO is likely to be the only form of long-term financial subsidy available to bolster the Green Deal and it will be utilised where homes fail to achieve the Golden Rule.

The Golden Rule means that any loan repayments must not exceed the expected monetary savings on energy bills. The savings will be calculated using a software package which will use Government-approved algorithms.

Even so, the savings will not be guaranteed. The theory is that the bill payer will always be saving more than they will be paying. However, this will be based on a set of standard occupancy and standard heating patterns which may not match actual energy use.

Recently there have been some very high profile criticisms of the Green Deal and, in particular, this Golden Rule. One common criticism is that the Golden Rule works best for high energy using households, which presumably are also the least likely to apply for the loan, whereas it penalizes low energy households. Problems could occur if, say, savings are modeled on perhaps a family of 4 occupying the property and if, say, this density and use changed to a single person. This would then affect the consumption and the payback levels.

Even more worrying about the rule though is its arithmetic. For instance, most of the suggested works to be implemented currently have very short guarantees or warranties, i.e. 3-6 years. However, businesses and consumers will be offered warranties through the Green Deal which cover the full 25 year period of the contract. While it’s entirely understandable the government has set the warranty of works at 25 years, to boost uptake and prevent people complaining that the product they’ve installed has failed yet they’re still paying for it, it also makes the arithmetic of the Golden Rule suspect.

If a particular product fails and requires replacing several times throughout the 25 year period, then some form of extremely complex ranking to assess the likelihood of future product failure will be needed. As David Strong, who is chairing the forum looking into accreditation for the Deal said, “Some measures might require replacing two or three times in the twenty five year period. If you add on that cost then it’ll completely blow the golden rule.”

So, is the government right to attract this criticism and is its flagship policy doomed to failure? Well, no. For a start the government has to do something, and aiming to reduce carbon emissions by 2 million tones is not a bad start. And as the Climate Change minister Greg Barker recently said, “The Green Deal is expected to attract capital investment of up to £15 billion in the residential sector alone by the end of this decade and at its peak, the Green Deal could support around 250,000 jobs.”

And we’re not alone in trying to implement this type of scheme. Several similar policies have already been implemented in G8 / G20 countries including Norway, South Korea, Australia and the US.

There is also the time and awareness element. Put simply, the Government knows the Green Deal isn’t perfect and is aware of its shortcomings. With the Government’s own consultation on the Green Deal just coming to a close, now is the ideal time to tweak it and rectify some of the problems which have been so publicly highlighted. It was particularly interesting to see the CBI’s recent consultation submission highlighting the need for the policy to be based on three clear principles: i) long-term certainty to investors and households, ii) simplicity to drive take-up for both households and businesses and iii) cost effectiveness to ensure that emissions reductions are achieved at the lowest cost to the economy.

So while it’s easy to carp and cavil about the detail with much of the scheme’s criticism being fair, this author takes the wider perspective of broadly supporting the Green Deal. It’s not perfect, but it’s a much needed policy to kick start a domestic refurbishment programme which will, hopefully, deliver clear benefits to the UK.