By Gerard Wynn
LONDON May 30 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
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
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
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
But such a threat may not win over consumers.
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
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.