Green Deal

Any home or business in Britain will be able to carry out a full energy efficiency refurbishment of their property and fund it through a loan of up to 25 years from October 2012. Under the Green Deal, the loan will be lodged against the property (not the occupier). Repayments will be added to the property’s electricity bill as an additional charge in a similar way to a standing charge.

The charge will be paid for by whoever pays the electricity bill which could be subsequent owners of the property or even tenants.

This mechanism breaks down two of the biggest barriers to installing energy efficiency works:

1) Householders who are reluctant to install works which have a payback time longer than they expect to own the property.
2) The split incentive with landlords reluctant to install upgrades which would only benefit their tenants.

Eligible works

The Department of Environment and Climate Change (DECC) has published a list of typical upgrades that could be funded through a Green Deal charge. These include boiler upgrades, heating controls, double glazing and insulation (including solid wall insulation).

The process

To take advantage of Green Deal you will have to have your home or business assessed by a Green Deal Assessor (GDA) who will produce a Green Deal Report. A GDA may be an independent assessor or they may be employed or contracted to a Green Deal Provider (GDP).

The Green Deal Provider will typically be an organisation which carries out an umbrella role: arranging for the quotes for all of the works, managing the installation works and providing you with the loan. To protect consumers against mis-selling, and to avoid loans being offered in inappropriate financial circumstances, both the GDA and GDP will be strictly accredited and monitored to be allowed to be involved with Green Deal.

At this stage it is unclear whether customers will have to pay for the assessment, but there is some anticipation that GDPs will offer the reports for free and either add the cost to the loan or simply absorb it as a cost of marketing.

While the initial assessment and report must be impartial, the GDA and GDP will be able to switch hats once the report has been produced and provide you a price to install all of the recommended upgrades.

The ‘Golden Rule’

Under the Golden Rule, the cost of any loan repayments must not exceed the deemed savings on energy bills. The savings will be calculated using a software package which will use Government-approved algorithms.

Even so, the savings will not be guaranteed. The theory is that the bill payer will always be saving more than they will be paying. However, this will be based on a set of standard occupancy and standard heating patterns which may not match actual energy use.

Where a product does not meet the Golden Rule even with the full 25 year loan period, the customer has the option of paying some money in advance to reduce the cost of the works and only applying a charge for the part of the cost of the measure up to the point where it breaches the Golden Rule.

Certain measures such as solid wall insulation will receive heavy subsidy from energy suppliers under the new Energy Company Obligation ( pdf) thus reducing the cost to a level that meets the Golden Rule.

It is worth bearing in mind that, with energy bills rising at above the rate of inflation annually, savings that are marginal now, are likely to become more and more significant year on year, with loan repayments staying fixed and costing less in real terms.