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The Green Deal explained

Posted by Adrian Wright on 17 October 2011 at 3:23 am

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 (ECO - clicking this link will download a pdf document) 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.

Example (based on accurate savings figures):

The example is based on a four-bed detached house with an old oil boiler (with no controls), solid walls, single glazing and no loft insulation. Costs and savings estimates for a number of possible upgrades are outlined in the table above. Double click on it to view a larger version.

It is an extreme example based on a very energy inefficient home heated by oil, which is now one of the most expensive fuels to use. Where homes are heated by a cheaper fuel such as mains gas, the energy costs are lower to begin with and consequent savings are also smaller. This makes it more difficult for measures to meet the Golden Rule without additional contributions from the householder or from ECO funding.

Bundling upgrades together

The figures here are shown for the upgrades individually. However, under the Green Deal it will be possible to ‘bundle’ the works together to maximise the funds available. If the above works were taken as an entire package, the annual savings of £2,566 used as a loan repayment (at 7% interest) would allow a potential upgrade charge of £30,000: enough to cover the works in full without any upfront contribution.

Going ahead with a Green Deal package

 

Once you have your Green Deal report you can either shop around for multiple quotes for the works, or allow the Green Deal Provider to manage the entire end to end process. It will be your responsibility to ensure that all relevant permissions are secured, including things like planning permission or in the case of rented property, the tenant’s (or landlord’s) approval to have the Green Deal charge added to their electricity bill. Failure to get these permissions could invalidate the Green Deal package and leave you footing the entire cost of works in one go.

Once the contract is signed with the GDP, the Green Deal charge is centrally registered. This will ensure that, regardless of who supplies the electricity to the property, the charge will be added to the bill and the money passed over to the GDP.

The Green Deal charge must then be notified in writing to any new tenant or owner of the property as part of the conveyancing process or again the costs could fall entirely back onto you.

Green Deal FAQs (please ask other questions in the comment section below)

Q: Will the GDP run credit checks on me or am I guaranteed to get the works?

A: It is possible that the GDP will run a credit check but there is currently a large fund being established backed by major banks and the hope is that everyone in Britain will get access to Green Deal at the same low rate regardless of their credit rating (subject to affordability and responsible lending rules)

Q: What if the product breaks down or fails in some way whilst I am still making loan payments?

A: It is likely that DECC will insist that all works installed will be required to have an insurance backed warranty covering breakdown or premature failure. This warranty will not however cover fair wear and tear of parts within a boiler for example. Equally there may be conditions in the Green Deal plan that will require the bill payer to service products or risk invalidating the warranty.

Q: I pay through a key meter; can I still get a Green Deal upgrade?

A: Yes – Green Deal charges can be added to a key meter but if there are any arrears on the account it could affect your ability to benefit from a package.

Q: What if the property is empty for a year, who will pay the charge then?

A: At this stage it is likely that the owner of the property will have to pay the charge which will require a large central database to be established of property landlords

Q: What if I rent a property and the previous tenant has left without paying the electricity bill, will I have to pay off the arrears?

A: No. All debts remain with the person whose name is on the electricity bill so you will just pay the charge from the day you take over the property

Q: What if the energy savings turn out to be lower than repayments, can I stop paying the charge?

A: No. Unfortunately there is no guarantee that the savings will be made and the Green Deal charge cannot be separated from the rest of the bill. If you choose to withhold part of the payment for your electricity bill the energy company will still be obliged to pay over a pro rata amount to the GDP so you will end up in arrears on your electricity bill too. If, however, you believe that you have been mis-sold the Green Deal package and/or the GDP has falsified savings, you could overturn the charge entirely. GDPs will be required to offer an independent arbitration service and ultimately the case could be referred to the central Green Deal ‘police’ body.

Q: Will it be more difficult to sell my home with the Green Deal charge attached?

A: DECC hopes not! It is hoped that the saving on energy bills will be beneficial and may make the home sell more easily. If however the purchaser demands the loan is cleared there will be an option to do this and the GDP will be obliged to provide a settlement statement.

photo by Will Clayton

More information about the Green Deal from YouGen

Green Deal information page

Is the Green Deal right for me?

Green Deal finance will work with FITs and RHI

About the author: Adrian Wright has more than 20 years experience in the energy efficiency industry and acts as a consultant to Enact Energy.

If you have a question about anything in the above blog, please ask it in the comments section below.

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Comments

8 comments - read them below or add one

NorthGlosEPC

NorthGlosEPCComment left on: 29 December 2011 at 12:49 am

I'm an Energy Assessor (DEA) and I'm gradually finding out a little more about the extra training and the exam requirements for me to continue as an EPC provider after April 2012.

It seems the extra training covers changes to the EPC format and the incorporation of "Green Deal" factors. Don't think however this gives me the additional qualification of Green Deal Assessor (GDA) which is a shame because earning a living as a DEA in the current climate is to say the least a challenge.

I'm in two minds as to whether I go for the additional GDA qualification because although the general principle of the Green Deal seems a good idea I have some serious concerns. I'm not at all sure that in reality this "Government flagship initiative" is going to work anything like as well as is hoped.

Firstly if the GDA is contracted or works for the GDP (provider) there is an immediate and clear conflict of interest. The GDA will be turned into a commission only sales person. I've already had some experience of this when I did some loft and cavity wall insulation surveying (little EPC demand prompted this). Pressure to get a signature, no survey fee until the deal is done. End result was very often that a customer already plagued by cold phone calls is then further given the hard sell in his or her home. I didn't do this for long.

I don't think any amount of accreditation or monitoring will eliminate the possibility of mis-selling. I think the GDA has to be completely independant and his (or her) fee paid at a fair rate regardless of the final outcome. Only then can everyone be sure we'll be getting impartial, accurate, appropriate and perhaps most importantly assessments credible in the eyes of the public.

Anything less and I'd suggest credibility with the public will last about as long as it takes milk to go sour, and thus seriously threaten the ultimate effectiveness of the whole initiative.

My other concern is the "golden rule". Unless there is a very good possibility of immediate energy bill savings take up will be poor. Some efficency improvement measures may not meet the golden rule and be paid for within the "upgrade's" operational life. An example being perhaps a new condensing boiler. Unlikely to last 25 years, which would probably mean meeting the golden rule. However over a more realistic life of say 12 years annual payments may well in many cases fail to meet the golden rule leaving a customer effectively paying maybe much higher energy bills than before . So why when faced with this would they bother unless perhaps their old boiler has already failed? In which case they'd be faced with replacement green deal or no green deal.

Remember most people are more concerned about their bank balance than the UK's annual Co2 output so there has to be an incentive to upgrade efficiency

Issues of this kind need very careful consideration if the Green Deal is not to fall flat on it's face.

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@adrianenact

@adrianenactComment left on: 2 November 2011 at 3:47 pm

Further to the example below, DECC have now indicated that the Green Deal loan cannot exceed the useful life of the product, therefore each product will be given a deemed life by DECC which in the case of a boiler may be 15 years rather than the 25 years I have used in the example.

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@adrianenact

@adrianenactComment left on: 2 November 2011 at 3:31 pm

Hi Prashanth

The new Green Deal Assessor training has not yet been finalised but there are details on the Asset Kills Council website here http://bit.ly/t5rbsv  I would imagine that all of the current EPC software providers will be running Green Deal courses as soon as the specification is ready and any current DEAs will not only have to undertake further training for Green Deal but I believe will need to be tested again in April via an online multi choice questionnaire to make sure they can carry on producing EPCs even without the Green Deal element.

The GD Provider  requirements will be clearer when the consultation is released at some point in the ever extending future.  I am not aware of any requirement for experience before being allowed to be either of the above?

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Prashanth

PrashanthComment left on: 2 November 2011 at 2:53 pm

Hello Adrian,

Thanks a lot for the info. Can I ask you how would the assessors and providers be accredited and what will be the level of accreditation? For example, Will small SME's have to qualify with certain years of experience ?

Cheers

Prashanth

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@adrianenact

@adrianenactComment left on: 21 October 2011 at 2:21 pm

Hi Pete

 The FiT and RHI would be ignored under Green Deal in terms of the amount of saving that could be put towards the Golden Rule.  Therefore if you take a 4kWp PV system installed in the Midlands where 50% of the energy is used, the electricity bill savings will be somewhere in the region of £220.  As a 25 year loan at 7% interest this gives borrowing power of circa £2500 which would be less than a quarter of the cost of the system.  The customer would therefore have to either pay the balance as a deposit or take out a non Green Deal loan and use the FiT payment as a means of repaying this.  This loan would be in your name though and would not stay with the property.

If however other works were being completed at the same time it may be possible to 'gear up' the borrowing power.  If you click on the spreadsheet link above you will see that in this example loft insulation would save £411 per year.  By bundling the loft insulation with the solar, the total borrowing power jumps to £7300 as you can in effect have annual loan payments up to £631. 

Unfortunately most houses already have some loft insulation or are heated by mains gas so the savings will be lower than in my example.  Either way it would appear that the amount of money you will be able to borrow through Green Deal for solar will be a lot less than the installation cost. 

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Pete

PeteComment left on: 20 October 2011 at 11:58 pm

Hi Nick,

As the average rate of return for solar PV feed-in tariff is approx 8%pa index linked and the RHI is expected to provide a 12% pa rate of return, at first glance it would appear that the FIT/ RHI income would cover the 7% interest on a Green Deal loan. However the capital repayment of the loan as well as interest needs to be considered. Do you think that if a householder had half the capital available to install a PV system, would it be viable to top it up with a Green Deal loan?

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@adrianenact

@adrianenactComment left on: 17 October 2011 at 3:32 pm

Hi Nick, apologies for the confusion.  I have just double checked with DECC and whilst the FiT and RHI cannot be taken into account as part of the loan repayment, the renewables can be included but would struggle to meet the Golden Rule without further subsidy.  Have now amended the blog above.

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Nick Hanna

Nick HannaComment left on: 17 October 2011 at 3:12 pm

HI there, very interesting - however I did click through to the PDF on eligibility from DECC and it lists renewables - have I missed something?

thanks

Nick

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