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The Green Deal: a good idea riddled with flaws

A few of the trickier obstacles facing the Green Deal

October 29, 2012

The Green Deal has fought for its existence since it was merely a twinkle in the eye of David Cameron who declared in 2010 that his would be the “greenest” government ever. Since then it has faced constant criticism both from within the Tory party, from  climate change sceptics, and from environmentalists who said it did not go far enough. Personally I was hopeful. A scheme which would simultaneously slash the energy bills of millions of homeowners as well as the country’s carbon footprint could only be a good thing. The problem is that a twinkle in the eye, or an inspiring headline, contains very few specifics, and it is when these are introduced that the trouble begins.

The rocky road led to October 2012 when it launched with zero fanfare from DECC. Having called all of the approved Green Deal Assessors, the HOA team discovered the most immediate problem with the scheme – the assessment software has not yet been released by government. As a result no one could offer a homeowner to do a Green Deal Assessment today.  OK, well the Green Deal is supposed to last 20 years and teething pains are to be expected when a scheme has such ambitious plans. However, this isn’t the only issue.

The Green Deal loans will have an interest rate of about 7% attached. This apparently is an unusually low rate thanks to the formation of the Green Deal Finance Company which will act as a “national aggregator” that can bundle Green Deal loans together to a level where they can access capital and bond markets. There are currently personal loans (notoriously expensive) for up to £15,000 that are significantly less than is being offered by this scheme. The Derbyshire building society and Sainsbury’s are both offering loans of between £7,500 and £14,999 at 5.6%. Indeed with the Bank of England base rate still at rock bottom if homeowners could extend their mortgage to cover improvements the interest rate is likely to be a lot less than if they went for Green Deal financing.

Things don’t get any better when one examines the viability of financing the more expensive items on DECC’s menu of energy efficiency measures. Internal wall insulation costs between £5,000 and £7,000. According to Juliette Jowit of the Guardian the repayments on a “mid-range quote” of £6,250 are £875 per year for 10 years or £530 per year for 25 years. And the estimated cut in energy bills if internal wall insulation is installed? £380. The caveat to this is that energy prices are expected to continue to rise faster than inflation for many years so this annual saving will increase in real terms over the lifetime of the loan. Despite this, the gaping hole in the “Golden Rule”  is there for all to see. The sums just do not add up. If the figures quoted above are correct it would take 35 years to make back the amount the work cost in energy savings.

Germany provides an informative example of how the Green Deal model can work, and the limitations of such a scheme.  Germany has had a heavily subsidised programme for several years which offers financing at 2.65%. This has been fairly successful. Homeowners have saved money and Germany now has one of the most energy efficient housing stocks in Europe. However, despite the very reasonable rate of interest only about 100,000 homes per year have been retrofitted. Our government claims that 14 million homes will be improved in the first phase which lasts till 2020. That’s 2 million homes a year, almost 5,500 every day. For 7 years.

I want the Green Deal to be successful and it may prove to be, but there are some large and looming obstacles to overcome if it’s going to be the vehicle that homeowners choose.

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