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Green Deal: Deal of the day or deal of the decade?

Posted by Adam Hewson on 24 January 2013 at 9:06 am

For those of you who are reasonably well read on all things energy efficiency and renewables, you could be forgiven for being confused about the success of the Green Deal. A simple search will give a plethora of articles, forum comments and blogs about the subject but my guess is that 80-90% would suggest that the Green Deal is not working, it's failing, it’s a disaster, the world is coming to end … and it's coming quicker!

But beware what you read online (the irony of how you are reading this view is not lost on me!).  Might I suggest a couple of important considerations: firstly, the Green Deal has not been launched yet. Determining failure before launch is perhaps a particularly British trait, but the official launch date is Monday 28 January 2013. Secondly, prevailing opinion seems to be that unless a Government initiative is instantly available to every UK citizen, it has failed. But to launch a new scheme, particularly one that challenges people’s behaviour and asks them to borrow more money so soon after the biggest borrowing crisis since the Great Depression, would suggest a careful, phased or gentle roll-out might be more appropriate than a big bang.

And this is THE thing. The Green Deal is, at its heart, a lending scheme that facilitates the borrowing of money at no real or effective cost for the purposes of energy efficiency improvements. Wrapped around it are strong customer protections over advice and assessments, installations, product warranties and selling. But at its heart it is really all about borrowing money. For the scheme to work its needs people to “want” to borrow money, and it needs organisations to “want” to lend money.

In the current environment, neither of these should be assumed to be easy. People are cautious of taking on more liabilities; poor economic times do this to you. But banks are even more reluctant to lend money; they got into an awful lot of trouble doing this too freely and now are paying the price.

So is this likely to change? Of course it is. We are all the product of history, and history shows we like to improve our lives and are increasingly more comfortable borrowing money to do so. We have done so in the past and will do so in the future. And banks need to lend money to make money; they are commercial enterprises after all.

But will this happen on the 29 January 2013? I think not.

So in answer to the question, is this the Deal of the Day? No it is not. But is it Deal of the Decade? I think it really is. When Green Deal has some time underneath it, when we have stopped calling it the Green Deal because green has become mainstream, and when we have all found the cost of energy so extraordinarily expensive, I think we will look back and say “of course I borrowed some money to improve my house, why would I use my own cash?”!

Photo Credit: lumaxart via Compfight cc

About the author: Adam Hewson is director of ReEnergise Ltd

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

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Comments

12 comments - read them below or add one

Nigel9000

Nigel9000Comment left on: 4 February 2013 at 4:35 pm

Dear All

ive been working out some figures on renewable s on the green deal:
 

Let’s assume a householder needs all these energy saving products and services. So not including any tariff incentives etc and assuming existing property was heated by oil.

 

Example 1.

 

                                                            Cost                Savings

Solid Wall Insulation 3 bed semi           £12500            £475 From EST. per year

Loft Insulation 170mm top up                £350                £25 From EST. per year

Solar PV Panels 16KW                       £12000            £88 Money saved on bill EST

                                                                                £77 Money on grid export EST

 

Total Cost:                                         £24850            £665 A YEAR

 

If interest rate is 7.67% over 25 years the householder will have to pay back

 

That is:

 

Monthly:                                             £183

Total Interest Paid                              £29821

Total pay back                                     £54671

 

So the householder would gain £665 a year (£55.42 month) at present bill rate per year but have to pay £183 per month at interest rate 7.67%

 

This would not fit under golden rule and could not be financed under green deal. Unless the householder was allowed to contribute money towards the cost or the interest rate was dropped or cost of equipment was lower.

 

Example 2:

 

Same size house gas and with out Solid Wall Insulation but has cavity walls filled.

 

                                                            Cost                Savings

Loft Insulation 170mm top up                £350                £25 From EST. per year

Solar PV Panels 16KW                       £12000            £88 Money saved on bill EST

                                                                                    £77 Money on grid export EST

 

Total Cost:                                         £12350            £190 A YEAR

 

If interest rate is 7.67% over 25 years the householder will have to pay back

 

That is:

 

Monthly:                                             £91

Total Interest Paid                              £14821

Total pay back                                     £27171

 

So the householder would gain £190 a year (£15.83 month) at present bill rate per year but have to pay £91 per month at interest rate 7.67%

 

This would not fit under golden rule and could not be financed under green deal. Unless the householder was allowed to contribute money towards the cost or the interest rate was dropped or cost of equipment was lower.

 

Key Facts from Bank of England

 

Current Bank Rate

0.5%

View decisions and minutes

Next due:
7 Feb 2013

Quantitative Easing Asset Purchase Programme

£375 bn

More information

Next due:
7 Feb 2013

Current Inflation

2.7%

 

Next due:
12 Feb 2013

Inflation Target

2.0%

 

 

 

The interest rate from building societies for your savings of £12 000 is 2% to 2.5%. So you could assume that the lending rate for the green deal loan could be brought down to a lower figure if it was truly non profit making.

 

Would be glad to see someone’s realist equations that do work.

 

Thank you

Nigel

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banjax

banjaxComment left on: 25 January 2013 at 2:40 pm

Having worked in the retail sector of technology for a number of years it has been my experience that the consumers buy finance and then the purchase choice of product is secondary. If the finance fits their lifestyle then the product will be successful. With renewables requiring back up or hybrid technology to replace oil or gas then the getting the finance balance is crucial. The GD smacks of an expensive personal loan. 

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Adam Hewson

Adam Hewson from ReEnergise LtdComment left on: 25 January 2013 at 11:49 am

The comments below are excellent and I believe show the right thinking. That being, what is the right way to fund energy efficiency works. Green Deal is an option, 0% on a credit card is a far better interest rate, mortgage funding at a low rate and over 20-25 years is also very good. Problem to date has been the only options were really cash (economics would tell you this is a very inefficient way to pay for long term assets) or grants (free to the end recipient but pretty expensive for the person actually funding it). I think the debate, either in your own head or on a forum like this, is one of the most important likely products of the Green Deal initiative because it gets us thinking about energy efficiency products like we do all other products we buy, and not as something new different and slighty out there.

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Prescient Power Ltd

Prescient Power LtdComment left on: 25 January 2013 at 11:35 am

This is a very interesting discussion which backs up what we have been saying about the GD internally for the last year. 

We agree that a mortgage is a better way to fund projects due to lower interest rates. 

Notwithstanding the fact that an assesor may get the savings calculation wrong (as happened in the piklot study), our main worry is that those who cannot access mortgage increases - normally the more disadvantaged - will be able to take up the GD and end up paying an investor handsomely at 7.5-8%, and mis-selling alarm bells are ringing in my head.

However one might argue that at least it enables everyone to improve their home, not just the well off.  We can also hope that international financial competition might squeeze down interest rates.

Carl Benfield

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banjax

banjaxComment left on: 24 January 2013 at 11:57 pm

Yes , I too am looking at changing my A rated oil boiler because of the cost of oil. However the economics are that I can replace the oil boiler with gas on 0% credit card. I canot see why a consumer would use the Green New Deal. The interest rates are a deal breaker. 

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ChrisDavis

ChrisDavis from Kensa Engineering LtdComment left on: 24 January 2013 at 6:36 pm

I must admit to being a Green Deal sceptic, but this is mainly because a supplier of renewables I don't think GD will do much to drive opportunity in this area. Arguably its not really meant to.  

However one point that I don't think is being raised/questioned enough is whether the measures will deliver the savings anticipated to really allow people to "pay as they save".  

Many people who take out a Green Deal loan will do so because they can't currently adequately heat their home to a comfortable level affordably.  The idea of "Comfort Taking" is where people end up using pretty much the same amount of energy but are now able to heat their homes to a more comfortable level and is an issue I know several potential Green Deal Providers are concerned about.  I do think in some cases it could be a real problem and a potential PR disaster for the Green Deal if it becomes a common problem.

I'm also slightly concerned that assessors may not always necessarily give good advice. This relates a bit more to renewable heat, but what do you think good advice to someone with an ageing oil boiler should be - replace it with a new condensing one, or maybe look at a renewable heating system and the benefits of the RHI?  

I think the default advice is always going to be what the GD Assessment software says stacks up best under the GD, irrespective of what other schemes or options are out there but are not necessarily encapsulated within the GD measures. (yes I know renawables are included as measures but decisions around the golden rule and RHI makes them virtually mutually exclusive schemes).

 

 

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Sims Solar Ltd

Sims Solar LtdComment left on: 24 January 2013 at 2:57 pm

Adam. To borrow on your morgage will only be cheaper if you pay off over the same time frame as the Green Deal 'loan'. If you were to pay off over the remaining term of the morgage you may well pay more. Also your house is at risk if you do not keep up payments.

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Adam Hewson

Adam Hewson from ReEnergise LtdComment left on: 24 January 2013 at 2:31 pm

Very good point Nicole, and one I was going to cover in a future blog. If you have access to mortgage funding, you should use that every day of the week. I see Green Deal as a scheme for people seeking alternatives to cash or mortgage. As I said in my blog, this is going to take time to take hold.

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Adam Hewson

Adam Hewson from ReEnergise LtdComment left on: 24 January 2013 at 2:29 pm

Interest rates are important, Nick, but remember the total cost of borrowing can only be the same as or less than the savings you are making ie no new cash required. The rates may however act as a bit of a cap on how much can be borrowed. But cost of materials and installation margins are also just as important to the calculation. I would agree with you on interest cost if you were having to pay the interest out of your own pocket (although if you look at credit card borrowing, many people have different views on acceptable levels of interest). But your not going to incur severe penalties on repayment, Consumer Credit legislation prevents that (trust me, I checked).

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Cathy Debenham

Cathy DebenhamComment left on: 24 January 2013 at 12:54 pm

I completely agree Nicole - Pay as you save was a much better name.

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Nicole

NicoleComment left on: 24 January 2013 at 11:18 am

I definitely preferred the "Pay as You Save"  name which seemed to be the forerunner of Green Deal.  And I agree, it is mainly the interest rate that is putting people off.  However, I wonder if it might benefit those who don't have a mortgage to borrow against or can't normally get credit, so for once perhaps helping people that don't already have pots of cash, unlike e.g. the race for PVs last year, enabling those with money to make huge returns on their investments. 

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Nick Hanna

Nick HannaComment left on: 24 January 2013 at 10:48 am

Adam, the problem is the rates of interest being charged, which as far as I can see are going to be very high. I badly need external wall insulation and secondayr glazing but no way am I going to sign up for these rates of interest and, guess what, if you repay early there are severe penalties. I think the public is just going to look at it and say 'no thanks'

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