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What's the Big Deal? A Green Deal Research Piece.

A REPORT BY www.greendeal.co.uk


What Is The Green Deal?



The Green Deal is the UK Government’s new financial mechanism for enabling energy efficient retrofit in buildings to be widely implemented. The secondary legislation has now been finalised and the scheme is one step closer to launch.

The Green Deal enables owners and occupiers of buildings to access upfront funding for improvements to the energy efficiency of their home.

This report brings together interviews with key industry professionals including assessors, installers and providers to give what we believe is the first overview of the Green Deal seen from the perspectives of the individuals involved.



How Does The Green Deal Work?



The finance will be provided by Green Deal Providers through the Green Deal Finance Company.

Green Deal measures that are suitable for a specific building will be identified by Green Deal Assessors and installed by Green Deal installers.

The ‘Golden Rule’ ensures that the energy cost savings of applying the measure will be equivalent to the cost of installation.

The Green Deal will be attached to the energy meter in the property and the cost of the measure will be paid back over time through the energy bill.


The flow of finances under the Green Deal is shown in the diagram below.

Green Deal financing

EXECUTIVE SUMMARY



The scale of the improvements that the UK’s building stock needs to meet its 2050 carbon targets is enormous. The Carbon Trust report “Building the Future Today” identified that: “Almost all of the carbon reduction measures that are available today will need to be implemented to achieve an 80% reduction by 2050 – there is no ‘either or’.”


For this report, interviews were conducted with professionals who will be involved in the Green Deal. They work mostly in the built-environment and low-carbon industries. From our analysis of these interviews we have established four key themes relating to perceptions of the Green Deal:

  • 1. Confusion, skepticism and need for marketing
  • 2. Concern over attractiveness and affordability
  • 3. Need for clarity over role of planners and planning
  • 4. Legal and Technical issues

The key conclusions for each of these themes are shown in the diagram below and are explored in detail in the following chapters.



Report overview diagram

1. CONFUSION, SCEPTICISM AND NEED FOR MARKETING



The Green Deal requires collaboration on a large scale and will require specific training and regulation. It is a complex piece of legislation so unsurprisingly there is some confusion.


Across the majority of the interviews I conducted, there was a degree of scepticism about whether the Green Deal was well enough formed to be delivered. However, many of those we interviewed noted that the Green Deal is a landmark step in the right direction and with modifications and clarifications will have the power to affect necessary changes.


Dan Widdon Dan Widdon Lead Sustainability Consultant, Elementa Consulting

“To develop secure funding in a volatile world energy market, the Green Deal and investment bank must develop sharp mechanisms to cut through complex detailed issues on the ground. The outcome is not clear at this stage”.


Chris Jofeh Chris Jofeh Director, Arup

“It’s an aspirational programme at the minute. However the goals are right and so although its flawed it should be made to work. Funding seems to be a problem with the Green Deal. The Golden Rule seems a very sensible one – but payback is not the only way you can get value [from improving the fabric and services in a building] and the Green Deal doesn’t take that in account.”


Tatiana Bosteels Tatiana Bosteels Head of Responsible Property Investment, Hermes

“I’m concerned that the Green Deal is being thought of by Government as a ‘silver bullet’.”



Chris Hopkins Chris Hopkins Managing Director, Ploughcroft

“I think its brilliant - the whole scheme will benefit anyone who works in the low carbon economy [as there will be] benefits and spin offs for everybody. There is a lot of bad press [but] the reality is that when it comes together [it will really make a difference for] people already in renewables. The Green Deal is an excellent opportunity for businesses. We are in the process of becoming one of the first accredited Green Deal installers.”


Nic Wedlake s Nic Wedlake Environmental Sustainability Manager, Peabody

“The Green Deal links to ‘a strategy imperative’ [for retrofit] in our sustainability strategy from the point of view of improving stock, fuel poverty and carbon [...] We are now in a 9 month feasibility project [regarding the viability of becoming] a [Green Deal] provider. Also, we are letting a new stock contract for long term investment programme which includes Green Deal clauses and specifications.”


John Beadmore John Beadmore Managing Director, T4 Sustainability Ltd

“My gut feeling sounds like it’s on a plate to the usual suspects - the big bank finance houses. Work may then trickle down... [Until then it’s] in hands of those who create problems not solutions! Work on Green Deal seems to favour big business not detailed knowledge.”


Patrick Brown Patrick Brown Assistant Director Sustainability and Construction, BPF

“A number of the challenges are actually for the industry to overcome. In order to overcome these challenges, the Green Deal needs to be attractive. We need [to see] first Green Deals on the ground [there are certainly] some grounds for optimism but this isn’t a silver bullet.”


While some interviewees felt that they had not been consulted in enough detail regarding the shape and structure of the Green Deal, others reported the opposite: “consultation fatigue”.

Many interviewees are seeking clarity over what is actually happening. This is most likely because the Green Deal is evolving in parallel to being consulted upon and communicated to industry and the general public.

Indeed Rob Wellman, Network Operations Manager at NSAET - an organisation actively involved in the development of Green Deal training - noted that even in the course of a week, announcements from Government can change the state of play, with each new announcement bringing more clarity to a specific aspect.

Wellman also noted that the launch date is shifting, having moved from a launch in ‘autumn 2012’ to a discussion regarding a soft launch in the fourth quarter and wider roll-out at a later stage.

This perception was backed up by Chris Hopkins, Managing Director of Ploughcroft who told me that he is, “working on [the presumption of a] soft launch in October [whilst full] public awareness won’t come until Spring of next year.”


A key area of concern was the marketing of the Green Deal. Although the training providers, installers and assessors have begun to develop business plans and skills relating to the Green Deal, none had started advertising or marketing this work properly. Chris Hopkins at Ploughcroft suggested that their marketing would not pick up until Spring 2013: “As the whole Green Deal is about attaching finance into the electricity meter and the Big 6 energy companies haven’t yet decided how to [do this in practice], we are waiting [to understand] the final piece of the jigsaw so not actively marketing yet as we don’t want to confuse customers with the Green Deal.” - Chris Hopkins, Ploughcroft


It seems unlikely that Government will lead by example with a national marketing campaign, and there was concern by Wellman that “publicity will be reliant on the provider and the supply chain [and therefore] won’t seem independent”.


The following question arose in these interviews: ‘What is the marketing for?’ Is it just to let the general public know about the Green Deal?


If so, what is the most effective way to get the message across? Paul Davies at PWC who is actively involved in the Green Deal Finance Company suggests one key message; “As the golden rule quite often won’t be met in full by savings made – this is why ECO* obligations exist. These are part of the energy companies’ carbon reduction targets, and the current figure being used (£1.3bn a year) is only an estimate. We need to make it clear to the public that the energy company is obliged to make these investments - if we can get that message across then I think there will be more trust in the finances. This really is a chance to invest in energy saving.” - Paul Davies, Partner, PWC


Many prior incentive schemes aimed at decarbonising the built environment, such as the The Low Carbon Buildings Programme, have suffered from a stop start approach to funding. As John Beadmore, an independent energy consultant puts it, the “perception that Government has generated is that all the funding has gone away.” To this end, marketing may be most needed to overcome public skepticism that the Green Deal is just another “Government fad”.


In the absence of Government funded-and-led marketing, some bodies are adopting a do-it- yourself attitude to providing information to the general public regarding the Green Deal: “We feel assessors, installers, and providers need generic overview material from an independent source and so are working on a number of information leaflets.” - Rob Wellman, Network operations Manager, NSAET



*ECO (Energy Company Obligation) = Subsidies from energy companies for low income households, and for situations where energy efficiency measures are advised but don’t comply with the Golden Rule.



2. CONCERN OVER ATTRACTIVENESS AND AFFORDABILITY



The scale of the investment required for the Green Deal is significant and making finance available has required innovative approaches:
“The Government ambition is for over £10bn worth of investment in retrofit ... this requires a scale of finance not available from bank finance. Therefore the scheme needs access to the bond market. The Green Deal Finance Company is therefore a single body established to aggregate Green Deals and access the bond market.” - Paul Davies, Partner, PWC


The Green Deal Finance Company is a not-for- profit company owned by industry and with no dividends. There are currently over 40 members including 10 local authorities. Despite significant effort to establish the Green Deal Finance Company and establish the financial mechanisms of the Green Deal, there is still uncertainty over the funding:
“We are currently waiting on loan from Government for IT systems and credit rating capabilities. This finance is the key uncertainty.” - Paul Davies, Partner, PWC

This uncertainty over the financial attractiveness of the Green Deal is wider spread than the question of whether initial start-up funding will be provided to the Green Deal Finance Company. A recent announcement gave examples that suggested the interest rate on funding received through the Green Deal would be in the region of 7.5%.


So how does perception of this suggested interest rate affect consumer confidence and appetite for the Green Deal? Angus Evers, a lawyer who works closely with commercial clients on property suggests that,
“Commercial clients don’t seem to be interested in the Green Deal because without exception [they] can access better interest rates that that”.
Bosteels at Hermes agrees with this, noting that, “At present it seems it will be cheaper for us to retrofit with our own capex”.


Interviews with professionals active in the domestic market confirmed there may be a similar pattern in residential properties:
“Our clients in residential buildings would probably invest upfront with their own capital anyway. Even if the technologies do comply with the Golden Rule, taking a Green Deal might not the cheapest way of getting the job done.” - John Beadmore, Managing Director, T4 Sustainability Ltd


Rob Wellman at NSAET suggests that it is not just the clients of installers, but also the likely target audience of “the potential major providers - John Lewis etc.,” whose market “might actually be the first people who say I don’t want a loan - I’d rather pay up front”.

Perhaps then, the Green Deal is really of most interest to groups who have less access to capital or less access to debt with lower rates of interest. Discussions with Patrick Brown, Assistant Director of Sustainability and Construction at the British Property Federation suggest this may be the case in the non- domestic market:
“Large property owners and investors are aware of the Green Deal and market leaders are looking at it and trying to understand whether there are opportunites for them [however it seems] this is really more focussed on SMEs - some who are upgrading with cash rather than debt.” - Patrick Brown, Assistant Director of Sustainability and Construction at the British Property Federation


In the domestic market, the equivalent groups who may benefit from a Green Deal might be owner-occupier families with lower incomes or young professionals who are financially stretched first-time owners.


3. NEED FOR CLARITY OVER ROLE OF PLANNERS AND PLANNING


The responses that identified planning as a key issue fell broadly into one of two types:


1. Firstly, the need to establish how Green Deal measures that are recommended by assessors are treated and how planning applications for these measures will be treated by planners.


2. Secondly, concern over the awareness and ability of planners and the planning system to respond to these requests.


Indeed, Chris Bowden, a Director at Navigus Planning noted concern that, “in planning conversations and press and networking the Green Deal is not a hot topic.”


There was concern among many interviewed that planning could easily become an obstacle to implementing the recommendations of an assessor. Clarity from Government regarding which Green Deal measures will require planning permission and consistency across local authorities would significantly reduce this barrier to implementation.


Concern that planning would be an issue was especially strong around the subject of applying Green Deals to buildings in conservation areas or to older buildings. Bowden suggests that:
“Applying a Green Deal in a conservation area could be an issue – although the new system reduces paper work, I feel its likely the planning system is likely to side on protecting heritage over environmental sustainability.” - Chris Bowden, Director, Navigus Planning


This means, suggests Evers, the question of the “weight” given by planners to “energy efficiency improvements brought about by Green Deal works” should be addressed. This will be critical to do before the Green Deal goes live, in order to give a consistent message to the public, otherwise it is possible that if Green Deal measures are not able to be applied in conservation areas, then it is likely the public and media will pick up on this and the negative press could affect application for Green Deals in general.


4. LEGAL & TECHNICAL ISSUES


Many of the people interviewed raised concern about specific legal or technical issues relating to the Green Deal, citing these as barriers to effective implementation. Perhaps the most significant of these is the concern that the Green Deal is not making the most of the opportunity for cost and time efficiencies that could be achieved by working at scale:
“I think [the Green Deal] is missing a trick because its not designed to do large volumes of repetitive tasks.” - Chris Jofeh, Director, Arup This reflects Arup’s work on promoting and developing the idea of ‘community retrofit’ where whole streets and areas are targeted for improvement, rather than individual buildings.


Jofeh raises a second compelling technical issue with the Green Deal, namely that the programme’s effectiveness and transparency is “disadvantaged because no one has a set of data on the technologies and their performance.”This mirrored concern from other interviewees that there needs to be clear evidence of the scale of savings made and the reliability of the technologies installed. A clear evidence base would also address concerns regarding the bias of installers acting as assessors.


The third and final issue raised by interviewees covered both technical and legal aspects of applying the Green Deal to non-domestic buildings. Patrick Brown, Assistant Director of Sustainability and Construction, BPF suggests that:
“Its fair to say the Green Deal has been designed with residential buildings in mind... non-domestic buildings are quite different.” He suggests that the Green Deal aims to address the split incentives for owners and occupiers, and although it addresses some of the financial complexities, it doesn’t resolve key legal and practical issues, “such as disruption to occupiers, rights of access for landlords to complete works under the Green Deal.” The issue of consent was elaborated further by environmental lawyer Angus Evers of SJ Berwin:
“I have looked in to the issues around having to get the consent of everyone else with a legal interest in the building i.e. tenants need landlord consent - so if you’re looking to carry out alterations to a building as a tenant you will invariably have to get the landlord’s consent under your lease. This raises questions regarding if it is reasonable for a landlord to refuse alterations made under the Green Deal. Hopefully this could be resolved with legal guidance and so will not have to be addressed for the first time in court.” - Angus Evers, Environmental Lawyer at SJ Berwin Evers notes that this legal guidance would need to be provided prior to the first Green Deals being issued.


Interestingly, all the interviewees who work with non-domestic buildings felt that the minimum energy performance standards will be a greater driver of energy efficient retrofits than the Green Deal: “The Green Deal isn’t such a big thing, however... Not being able to let an F or G rated building... Then they become obsolete much faster... The fear of not being able to trade the asset... are all great motivators... These minimum standards may be the best opening [to incentivize retrofit] that we have.” - Patrick Brown, Assistant Director Sustainability and Construction, BPF


Bosteels, Head of Responsible Property Investment at Hermes reported that rather than work directly on how the Green Deal applies to her portfolio, she is instead focusing on, “the key ‘moments’ for retrofit in the lifecycle”. She noted that void periods between tenants and the period before and after an asset has exchanged ownership are the key moments for a “deep retrofit”.
To this end, the minimum requirements (which effectively restrict the trading of poorly performing buildings) are likely to be critical for driving upgrades to the energy performance of non-domestic buildings.



A report by www.GreenDeal.co.uk Lead Author & Research: Sara Turnbull Design: Thomas Brushwood With thanks to all companies and individuals interviewed.