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COLUMN-Will UK home efficiency plan work?: Gerard Wynn
May 30, 2012 / 3:22 PM / 5 years ago

COLUMN-Will UK home efficiency plan work?: Gerard Wynn

By Gerard Wynn

LONDON, May 30 (Reuters) - Britain’s prospective Green Deal, meant to drive upgrades in home energy efficiency, faces severe challenges in cutting risks for investors and in allaying public concerns about indebtedness and cowboy tradesmen.

The scheme aims to drive energy savings that would cut national carbon emissions and protect households from future rises in the price of energy.

In a step beyond limited, fully funded measures so far, it encourages people to borrow money to fund whole-home upgrades.

The scheme is slated to launch in October, and the government will announce details shortly, which could serve as a possible blueprint for other countries.

It faces public apathy and resistance to higher personal borrowing and intervention in household finances, which the government hopes to overcome with two commitments.

First, interest payments on home improvement loans should be no more than the value of the energy savings achieved, making it revenue neutral in what the government calls a “golden rule”, which is really more of a guideline.

Second, the loan attaches to the home rather than the occupant, who is then free to move house without paying off the principle.

INVESTMENT GRADE

The UK government believes the scheme will drive around 14 billion pounds ($22 billion) of investment through 2020.

Not all of that will come from Green Deal loans. Some capital-intensive jobs such as installing boilers and solid wall insulation are too expensive to meet the “golden rule”.

Some improvements instead will qualify for a limited cash grant from a 1.3 billion pound annual fund levied from energy suppliers (“Energy Company Obligation”), but it’s unclear how far the grants will spread, leading to some gloomy predictions of low uptake.

For the cheaper works that qualify under the “golden rule”, such as cavity wall and loft insulation, the interest payments must be kept low to ensure they are covered by energy savings.

A public-private consortium calling itself the Green Deal Finance Company plans to securitise pools of these loans on the capital markets, issuing investment-grade bonds that pay low interest rates.

Members include energy companies Centrica, E.ON and RWE, banks Goldman Sachs, Lloyds Bank and HSBC, and advisory firms such as Clifford Chance and PricewaterhouseCoopers.

But there are challenges to winning an investment grade rating.

First, there must be some kind of state subsidy.

The Green Deal Finance Company wants the UK’s fledgling development bank, the Green Investment Bank, to finance the first batch of loans and then take a first-loss guarantee on the subsequent, aggregated debt, to cut investor risk.

It seems likely the GIB will oblige, given the political capital invested in the flagship scheme.

Second, the loans will be repaid through household utility bills, helping lower default risk by introducing the threat of grid disconnection if consumers default (default rates on UK electricity bills are below 2 percent).

“Ultimately if bills are not paid, the billpayer’s energy supply can be disconnected,” says a government “green deal finance note”.

But such a threat may not win over consumers.

TRUST

The strength of the Green Deal is that it motivates households to make multiple improvements at once and so achieve meaty energy savings.

The flip side is a complexity that may lead to consumer distrust in the overall scheme as well as its components including the data on energy savings, the reliability of suppliers and the robustness of the contracts.

For example, the “golden rule” isn’t really a rule; it’s more an estimate of likely energy savings, which are translated into an annual interest payment charge.

“This is not a government guarantee, but a guideline,” underlines a government note.

And many actors are involved. The energy and climate ministry describes 11 steps the consumer must go through and up to six intermediaries that must be dealt with.

These include the Energy Saving Advice Service as first point of contact for information, a Green Deal adviser who visits the property to assess options, a Green Deal provider who negotiates what work the occupant wants, an installer who completes the work and the electricity supplier who takes payment.

The government has attempted to head off concerns by making assurances that installers must meet “a robust Code of Practice”, which includes procedures to redress complaints.

Assurances include warranties (a possible red flag to installers) and guaranteed “cooling off” periods, during which consumers can cancel contracts.

Overall, the scheme is brave in its sheer scale and ambition in the face of big risks, given that it is notoriously difficult to drive consumer spending on efficiency.

Its success may depend on early momentum, and that will be driven by the Green Investment Bank, whose low capitalisation at 3 billion pounds is a cause for concern.

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