Green Deal - Platinum Principle

Green Deal needs a Platinum Standard

Platinum brick

The Green Deal, about to be launched in October 2012, is the scheme whereby housing occupiers will be able to fit a variety of energy efficiency measures to their homes. This will commence with insulation but possibly/probably moving on to renewable generation such as heat pumps and other technologies. This will be paid for out of a loan secured on the meter point/property rather than the individual. The law enabling this is expected to get Royal Assent in autumn 2010.

To get a feel for the scale of this opportunity the plan is to encourage the financing of investments of the order of £5000 in 14 million homes. A £70 billion market which is more than 6 times the Smart Metering programme.

The aim of the scheme is to allow energy consumers to be able to take out loans at very low rates of interest to pay for capital investment in approved measures in the properties concerned. The low rate of interest will be assured by making the investments as risk free as possible. The loan will be repaid through a premium on the gas and electricity supply to the premises over a specified time period, believed to be 25 years. The loan remains with the meter point so that if the bill player changes on change of tenant or change of owner the premium continues to be paid by the new beneficiary of the installed measure – the new tenant or owner of the property.  The repayment monies collected from consumers by energy suppliers will be forwarded to the financial institution (which could be the energy supplier themselves) who provided the loan.

Whilst there are still many practical, and highly important, questions still to be answered regarding liabilities for payment defaults, ensuring the interests of tenants and landlords are aligned, assuring the quality of installation, impacts on new energy market entrants etc.

There is currently a large team in DECC looking at all these issues and more. Good progress is being made in designing the scheme such that these issues are addressed. Details on the latest proposals can be found here:

http://www.decc.gov.uk/en/content/cms/tackling/green_deal/green_deal.aspx

A guiding principle has been that the Green Deal loan must meet what is now being called the “Golden Rule”. This states that the capital and interest payments on the loan must be less than the energy savings enjoyed by the customer who takes out the loan.

This is of course impossible to guarantee since the customer could take the energy savings in extra comfort e.g. higher temperatures in the home. This is not necessarily a bad thing since there are many people who are too cold in winter and who suffer not only a reduced quality of life but  also experience adverse health problems. So let us take a practical interpretation of the principle to be that the “potential” savings must be more than the capital and interest repayments over the term of the loan.

Assuring and proving this so that consumers are not mis-sold green deal investments will be a challenge in itself but assuming this is done well, will this be enough to incentivise mass uptake of Green Deal measures?

Whilst the “Golden Rule” is a necessary condition for consumer protection, and therefore should be applauded, we do not think that it is sufficient to ensure critical mass is achieved in the roll-out of the Green Deal.

A proposition that simply says you will not lose money is not compelling – what is needed is a “Platinum Principle” as well as a “Golden Rule”.

This is because mass take-up requires the general public to be enthusiastic. And enthusiasm comes from a clear economic incentive to play the game.

Hence, without a clear positive incentive the Green Deal will become a niche market for those who are environmentally driven.

So what might a clear financial incentive to participate in the programme look like? 

It needs to be that you will save a significant amount of money per year for no up-front cost to be truly compelling.

So if the “Golden Rule” is that the Net Present Value (NPV) of the savings minus the investment and repayments must be greater than zero then the “Platinum Principle” could be that the NPV should be greater than, say, 15% of the investment.

That in itself may not be ambitious enough since 15% on a £4000 investment is £600 which over 25 years is just £24 a year – but it is much more compelling than simply saying you will break even. Delivering savings from day 1 for no capital outlay must be the compelling proposition.

Going for a “Platinum Principle” equal to or even more ambitious than that described above both gives a chance that we will see mass take-up of the “Green Deal” and also ensures that “Golden Rule” is unlikely to be breached by building in a decent safety margin.

The challenge for all of us operating in this area is to find the solutions to the issues faced and to deliver against the “Platinum Principle”.

Published by: Enstra Consulting

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