A series of White Papers from FACTA on the issues affecting the construction industry
To the casual observer, the Green Deal doesn’t sound at all appealing. You probably won’t save money, the loan is expensive and your house could fall in value. Some deal then…
The idea behind the Green Deal is obviously a good one. The UK has committed to reduce its carbon emissions; old houses waste energy but people are too skint to do anything about it; let’s give them a loan so they can make their homes more energy efficient – and more comfortable too.
Introduced in the Energy Bill 2011 and launched in January this year, Green Deal finance will provide loans for one of over forty energy efficiency improvements, or a combination of those improvements. The only caveat is that the improvements must pay for themselves over the period of the loan, usually 10 to 25 years.
The loan repayments are added onto the property’s electricity bills, although the savings are most likely to come from reduced gas bills for heating. (Electricity bills are being used for repayment because every home uses electricity).
Unlike a traditional loan, a Green Deal loan is attached to the property rather than an individual. Should you sell your house, or if you are a tenant and move out, the theory is that the loan stays with the property.
Why is the interest rate so high?
This seems to be the biggest gripe among commentators. The Green Deal Finance Company, set up by the Government to provide loans, is doing so at 7% APR. Add onto that administration costs of around £1500 per house and the assessment cost and you could be getting nearer to 8%. Compare this to Germany, where a similar Government-run programme offers loans closer to 2%.
“The original concept of 4% would have been more attractive,” says Nick Egdell who is Green Deal and ECO project leader for the Kinnell Group which provides consumer insurance protection to Green Deal Providers and Installing companies . “Now it’s nearer 8% so it’s no better than getting a personal loan out in your own name. As a consequence of that other organisations will step in and become lenders, alongside the Green Deal Finance Company; it doesn’t have the monopoly.”
For mortgage holders, the advice from some experts is to extend your mortgage if possible to make energy improvements. Some lenders are already gearing up. Nationwide is offering its Green Additional Borrowing Service loans at 2.29% to existing customers.
What’s the concern about house prices?
How will buyers feel about taking on a house with a loan attached? Chances are, not too happy. Estate agents have said that taking a Green Deal loan out could reduce the value of a property.
“Eco-conscious buyers may welcome energy-saving improvements and not worry about taking over the loan. But those who are already worried about loan repayments and getting a mortgage may be completely turned off and prefer to buy a property without it,” estate agent Paul Masters, director at Kinleigh Folkard & Hayward, told the Moneysavingexpert website. In the short-term, it is likely that any buyer will ask the seller to close the loan at the point of sale, according to Egdell.
For any retrofit programme to be successful, the value of a property should be maintained or enhanced, says Arup, in Delivering and Funding Housing Retrofit: a Review of Community Models, a research study for the Institute of Sustainability published in March. The Government must introduce energy performance labelling to make this happen, says Arup.
Another important factor in driving Green Deal take up will be the introduction of minimum energy efficiency levels for private rented property as laid down in the Energy Act 2011. “Setting this at an appropriately high level will be essential,” says Arup in the report.
What’s the pitch?
A Green Deal loan is not really for families who are struggling with their finances. Firstly they won’t be better off, certainly in the short-to-medium term, as the energy savings are paying for the loan. Secondly there’s a credit score system which, though less onerous than for a normal loan, is still expected to see 20% of applicants rejected. Originally we had thought that it would be a household’s record on energy bill-paying that was taken into account.
Apparently what is needed to sell the whole Green Deal thing is a trusted brand. We were expecting big consumer brands to become Green Deal providers because construction sector firms just don’t have the customer service skills. Or so the argument went.
To date, only B&Q has thrown its hat in the ring, but other big names may follow. “You may find that firms like Tesco, Sainsburys and M&S are offering the Green Deal, but they will be linked to one of the existing providers,” says Egdell. “They have got the consumers, but they don’t have the interest to build up the technical expertise.”
Other arrangements see contractors joining forces with local authorities. Carillion has signed a deal with Birmingham City Council, the Birmingham Energy Savers scheme, aimed to improve the carbon efficiency of 60,000 households, both rented and owner-occupied.
“Birmingham City Council has lent us their brand and reputation,” said John Swinney, Carillion Energy Services’ director speaking at the Ecobuild exhibition in March. “The plan is to sell 15,000 packages in the first year and ramp up. The challenge is around fantastic customer service. It’s more like running a restaurant, every meal has to be good. The first time you screw up, word of mouth gets round very quickly.”
The eight-year contract is said to be worth £600m with the potential to extend it to the wider West Midlands area, bringing in £1.5bn over the eight years.
Carillion’s model is to use local firms to do the work. There are two reasons for this, according to Swinney. First Birmingham City Council is just as interested in how bidders would help kick-start the local economy; and second, people in Birmingham tend to trust community-based firms and organisations more than outsiders.
“People can be persuaded to go for the Green Deal packages by their local plumber or decorator who always does their work for them. We think the local thing is very important,” said Swinney. “We will apply this as we go across the country.”
Without a way in like Carillion’s route in Birmingham, it’s not clear yet how the Green Deal providers will market the idea to householders. This is what they are all currently working on. Inevitably, it will involve some door-to-door action.
Once a householder thinks they might benefit from a Green Deal loan, an assessor comes round to work out how energy efficient the property currently is, what measures might be possible and ultimately whether they could be repaid using a Green Deal loan. The assessor has the task of trying to explain the Green Deal – together with any possible ECO contributions – to the householder.
Householders will usually have to pay around £100 for the assessment – although some organisations are offering it for free – a fee which is recoverable if work goes ahead. Assessors may or may not be attached to those that provide funding and carry out the work.
The next step involves a Green Deal Provider which will fund and organise the improvements. At the end of July there were 79 approved Green Deal Providers. The Provider then arranges for an approved Green Deal installer to do the actual work.
The Government is offering some cashback incentives to early adopters, but many people have suggested that they need to do more. UK Green Building Council chief executive Paul King, also speaking at Ecobuild, said: “Government should use other mainstream mechanisms such as stamp duty or council tax to incentivise its take-up.”
Where do ECOs fit in?
Energy Company Obligations (ECOs), also part of the Energy Act 2011, have taken over from the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP). All these schemes see some of the cash from our energy bills taken to make energy efficiency improvements.
The difference with ECOs, as Egdell points out, is that the majority – 75% – are aimed towards vulnerable properties, with 25% aimed towards vulnerable people. These will add up to £1.5bn a year of funding for the next two years.
The idea is that ECOs work with the Green Deal, so that measures which couldn’t pay for themselves in energy bill savings – for example external wall insulation – get ECO Carbon Saving Obligation funding. Some ECOs will also go towards low-income and vulnerable households (ECO Affordable Warmth), and on insulation measures for low income communities (ECO Carbon Saving Communities).
One way for energy companies to meet its obligations is by bidding for ECOs via a Government-hosted e-auction, held fortnightly. Here, Green Deal Providers can sell lots of ECOs in return for subsidy.
By the end of April, there had been eight auctions, but to date there haven’t been any of the Green Deal connected Carbon Saving Obligation ECOs on sale – of which, more later. Instead, Green Deal providers are focussing on offering ECOs in the other two categories.
It may be that the period for ECOs is extended beyond the two years, or new schemes are introduced, depending on how quickly Green Deal improvements get going.
So what’s the hold up?
By the end of July 58,124 green deal assessments had been carried out and there were 419 Green Deal Plans in the System. And – finally – just one project was underway.
The delays have been largely due to technical hurdles, says Egdell. First we were waiting for the Green Deal Finance Company to be set up, now we need an IT platform over which to transact Green Deals. Toriga seems to be leading the way