Tuesday 22 November 2011

Green Deal or No Deal

Selling Energy Efficiency

Government: “I will pay for you to make improvements to the energy efficiency of your house.  Don’t worry though – I’ll let you pay me back through your energy bills. The savings must exceed or equal the cost of the repayments and interest, so you may be better off.” 

 Homeowner: “Hmm.  Not the most persuasive sales pitch I’ve ever heard, but can you tell me more?”

Government: “Of course, we’re really excited about this initiative.  You’ll have to take time off work to be at home for the surveyor, and to let the installers into your home.  The installers may find stuff that needs fixing before they start work.  You know, wiring not up to current regulations, that kind of thing.  Of course, you’ll have to pay to put that right.”

Homeowner: “So I go through all this hassle and at the end of it my bills are about the same?”

Government: “Yes, clever isn’t it?”

Homeowner: “I’m not sure you’ve thought this through.”

Government: “Don’t worry about that, this programme is a main-stay of the government’s green agenda”

Homeowner: “Oh dear.”

The Energy Act 2011 passed into law on 19th October, providing the legal framework for the Green Deal which is due to start in Autumn 2012.  Under the scheme, homeowners and tenants will be able to install energy efficiency measures such as loft and cavity wall installation, internal and external wall insulation, new doors, windows and boilers without paying the upfront costs.  Instead the costs and interest are spread out over a number of years and the payments are collected through energy bills.

DECC wants financing for the programme to come from commercial lenders and anticipates that because non-payment of energy bills would result in the householder being cut off, interest rates will be lower than for unsecured loans as people are more likely to keep up payments.

The re-payment of the loan is linked to the property rather than the individual, so if someone moves house, the new owners have to make the repayments, but also benefit from the energy saving measures.

The Golden Rule

A defining feature of the Green Deal is the so-called “Golden Rule”, that the annual charge does not exceed the value of the energy savings, leaving the housholder better off.  Results of our financial analysis of various energy improvements show that very few measures are likely to meet the rule at commercial lending rates.
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Approx. Annual Saving
Annual Repayment
Net Saving on Energy Bill
Meets Golden Rule?
Loft Insulation 100-270mm
Timber floor insulation
-£ 12.68
Cavity Wall Insulation
Internal Solid Wall Insulation
External Solid Wall Insulation
New Boiler
£ 2,000

  The figures in the table were derived as follows:
Cost – source: Energy Saving Trust – where a range of values was given the mid-point was taken.
Approximate Annual Saving –  source: Energy Saving Trust – where a range is given, the mid-point was taken.
Follow the link in the table to see the source material.
Annual Repayment – assumed a 7% rate of interest, 20 year term.
Net Saving on Energy Bill – this is the Approx. Annual Saving less the Annual Repayment.

Check the workings here

The golden rule is only met by two measures – topping up loft insulation and cavity wall insulation.  The interest rate has been taken as 7%, which is an optimistic commercial rate considering that unsecured consumer loans are currently asking for around 10% APR.  In DECC’s Impact Assessment of the Green Deal, efficiencies of scale and learning are assumed for Solid Wall insulation, amounting to a 30% reduction in cost compared to those published by the Energy Saving Trust.

Even accepting DECC’s assumption that lower installation costs for solid wall insulation will emerge once installed in large numbers, internal solid wall insulation just meets the golden rule with 7% interest rate for a 25 year term (the maximum allowed), and external solid wall insulation only meets the golden rule with a very competitive 3% interest rate.

In the meantime, a trial by Sainsbury's demonstrates the challenge of selling the Green Deal.  When the supermarket offered 147,000 employees home insulation free of charge the offer was taken up by only 200 staff.

Of course if energy prices continue to rise, then the saving on the energy bill will rise too, making early adopters of the Green Deal look like investors of great foresight and acumen.  On the other hand, consumers may just choose to wait and see if energy prices reach a level that makes the Green Deal a deal worth the hassle.  Expect the Government to have to offer more incentives to sweeten this deal.