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.
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).
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