New Thinking Blog: Is the Green Deal a Good Deal?

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New Thinking Blog: Is the Green Deal a Good Deal?

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Photo of Tom StewardIs the Green Deal a Good Deal?

Tom Steward, IGov Team, 18th Feb 2013

About Tom: http://projects.exeter.ac.uk/igov/people/igov-team/tom-steward/

Twitter: https://twitter.com/Steward_T

It’s been a long time coming, but the end of January finally saw the Green Deal open for business. This is the coalition’s flagship policy designed to reduce energy demand by addressing Great Britain’s notoriously leaky (thermally speaking) housing stock. People are offered the opportunity to improve the efficiency of their homes at next to no upfront cost, by means of a loan which is repaid through electricity bills.

Uniquely, the loan is attached to the property, not the occupant. So if the home changes hands, the payments switch to the new occupier. This way, it is always the person who benefits from the measures that is paying for them. It has been suggested that this may have implications for individuals’ ability to sell their homes, but does mean that for the first time those in rented accommodation are able to (with landlords’ permission) apply for such energy-saving schemes.

Upfront Cost

The Green Deal is designed to allow investment in efficiency almost up-front cost. However, the first step of the Green Deal requires a payment of around £100 for the Green Deal Assessment, whereby a registered assessor will visit the property to calculate which efficiency measures are likely to be beneficial, and comply with the ‘Golden Rule’. Although following the assessment, it is possible for any Green Deal approved firm to carry out the renovation work, many that offer both services will give rebates on the initial assessment cost if they also carry out the work. This will heavily discourage people from shopping around, especially those that may be reliant upon the rebate to make the scheme affordable.

The ‘Golden Rule’

The Golden Rule is designed to ensure that those who sign up are not left out of pocket. Under the Green Deal, payments are made through electricity bills, and are fixed at a level so repayments never exceed the ‘expected’ savings from having these measures installed. For example, if the installation of double glazing in a property is expected to save £20 per month, the loan repayments will be set at £20 per month, until the loan is repaid – simple.

BUT, the ‘expected level of saving’ is based on the average household’s consumption given the size of property, and not the actual occupant’s usage. So, if you under-heat your home (as do many of the fuel poor), or you live alone in a large property, you may well end up out of pocket.

This whole situation would be marginally less infuriating if the initial Green Deal Assessment didn’t include an interview with the occupant about their current energy habits, which are then included in the Green Deal report informing prospective customers where they fit in terms of average, medium, or high usage. This is excellent in that it does alert customers to the possibility of their losing out, but given the information is not used to calculate the repayment schedule opportunities to uphold the ‘Golden Rule’, the apparent key-stone to the whole policy, will surely be missed.

Rebound & Cash-back

One of the real opportunities of the Green Deal was that it could avoid the rebound effect – the notion that people will spend financial savings from energy efficiency measures on either a) consuming more energy, or b) a new piece of kit that consumes more energy. As next to no cash changes hands under the Green Deal, and significant financial benefits only come after  10-25 years, the risk of the rebound effect is considerably reduced. However, DECC has now earmarked £125m for financial incentives for early-adopters of the scheme, which could somewhat undermine the scheme’s effectiveness.

Interest Rates

Possibly the most worrying aspect is the interest rate of the Green Deal loans. These vary depending on the loan period and the firm that the customer chooses to oversee their Green Deal arrangement (known as the Green Deal Provider). Speculations about possible rates vary but most suggest them to be somewhere in excess of 7%. This level of interest has met with wide-spread criticism, but Mark Bayley, the chief executive of the Green Deal Finance Company, maintains the levels of interest are competitive with comparable loans available on the high-street.

Competitive or not, these levels of interest could result in customers paying double the original cost of the efficiency measures. Given the financing structure of the Green Deal, whereby the loans will often be aggregated and refinanced on the capital market; placing such a hefty price-tag on a service aimed at those who can’t afford these measures themselves, is to say the least slightly morally questionable.

ECO – the Green Deal’s Supportive Sibling

The Energy Company Obligation (ECO) is the Green Deal’s sister policy. This offers £1.3bn per annum to support some areas of society which may not otherwise feel the benefit of the Green Deal: £190m per year will go to low-income areas, as based on the ‘Indices of Multiple Deprivation in England Wales and Scotland’; £350m per year will pay for grants for energy efficiency measures for those in receipt of some forms of benefit; £760m will NOT be means tested, and offers a partial grant to support the Green Deal’s Golden Rule in hard-to-treat homes.

Any policy that contains provision to give equal aid to the occupants of Highclere Castle, and the occupants of a damp 1-bed cottage in Cornwall, raises questions for me. It is not clear why the Green Deal was not designed so as to work for hard-to-treat homes (which in England account for 43% of the housing stock!). This could have allowed the £760m a year to go only to those that need it.

Overall…

It is possible that the Green Deal may help to reduce energy demand to some extent, and that it may help to insulate some consumers against future price rises. But all this is to be achieved by charging excessive rates to those who can’t afford it, and further over-charging those who already have lower than average demand. This is coupled with lower-than-necessary levels of support for Britain’s poorest. Ed Davey said that energy efficiency is the cheapest way of cutting carbon’, I must confess I lost track of when ‘cheap’ and ‘lucrative’ became so interchangeable.

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