The Green Deal - Banker's delight
The Green Deal - Banker's delight
The Green Deal Finance company is the provider of investment finance for Green Deal Providers
who contract with consumers. They announced on the 25th of January 2013 that the effective interest rates that they would be charging Green Deal Providers on Green Deal loans would be between 7.67% and 9.34%. On top of this there may be administrative charges levied by Green Deal Providers. With mortgage rates being circa 4%, and sometimes less, it is blindingly obvious that the Green Deal is uncompetitive.
However it gets worse.
The only way to make the numbers stack up is to throw in some government subsidy. This will be primarily achieved through the Energy Company Obligation (ECO) which has been designed to integrate with the Green Deal. Further subsidy can be sought from schemes such as the Renewable Heat Incentive (RHI) and Warm Front. All of these subsidies are however funded by consumers either through increased energy bills, as in the cases of ECO, or through taxation in the case of the RHI. These schemes are, rightfully, very much targeted at the poorer and vulnerable segments of the population so it is for these groups where the Green Deal might just work.
Now the law of unintended consequences kicks in.
The subsidy makes a Green Deal contract work which means a householder can install a measure such as cavity wall insulation and be assured that, on the assumptions made in the Green Deal assessment, their capital and interest repayments under the Green Deal are less than the energy savings they will be making. So from day one they are saving money.
However, the finance provider – a bank or other financial institution – will enjoy interest rate receipts twice that available in the mortgage market, on a loan secured on the electricity supply. The loan may not be secured on the housing asset – but as long as someone is paying the electricity bill they are guaranteed their loan repayment…..and how many buildings can be used without electricity? It is a very low risk loan compared to an unsecured personal loan.
So effectively the engine enabling Green Deal measures to be installed in low income households will provide superior returns to banks primarily paid for by consumers through their energy bills.
If it was not such a sad fact it would make a splendid script for Yes Minister!
The solution is clear.
Cut the interest rate on Green Deal loans in half.
This could be done through adopting alternative finance mechanisms such as local authority bond finance to fund Green Deal investments in social housing (as successfully implemented in the US in the PACE program and in trials in the UK), or by making the Bank of England’s “Funding for Lending” scheme available to the Green Deal Finance Company directly thus circumventing the banks – although this will be difficult given that the major banks are themselves members of the Green Deal Finance Company.
Alternatively the Government could agree to make good any shortfall on Green Deal repayments thus rendering the debt equivalent to 20-30 year gilts which attract an interest rate of between 3 and 4%.
Cutting the interest rate in half would allow the Green Deal to take off and realise its £50-100 billion potential which would provide a strong boost to the economy. It would also cut energy bills by 25-40% (and reduce energy imports thus enhancing supply security) and reduce the UK’s Carbon footprint by 11-18%.
This would be a win-win-win. But will it happen? The jury is out.