The ‘Green
Deal’ launches today providing loans to pay for energy efficiency measures for
buildings recouped through a levy on electricity bills. The ‘Golden Rule’ is
the test that the measures will save more on the energy bill than spent on
efficiency. The theory is sound but in practice the plans are flawed and will not
be taken up by householders in great numbers. There are two key problems to be
fixed: First, the interest rate set for the loans is at commercial rates (6.96%).
Second, the calculation is based current energy prices rather than factoring in
future energy price rises. This makes the Green Deal ‘Golden Rule’ hard to
meet.
Most
householders have savings on which they are getting little more than 2% return
so it would be better to use these. Others will be able to increase their
mortgage at a rate less than 7%. So there is no incentive for better off
householders to use the scheme. This high cost of green deal finance will fall
on the poorer people who don’t have the available cash or the ability to borrow
at low rates. It is not just the cost of finance that makes the Golden Rule a
high hurdle but working out the figures on current (low) energy bills makes it
exceptionally hard to make the figures balance. This is unfortunate because
energy efficiency measures are exactly what are needed. Can the Green Deal be
made to work?
Fixing the
Green Deal requires dealing with both the interest rate on the loan and the
price of energy used in the calculation. There is a simple economic way to deal
with this, but the politics are complex. The government should abandon its disingenuous
claim that energy prices can be held down and tell us the truth that energy
prices will rise steeply. Well- off people will then invest in efficiency
measures without the need for government support. The government should not wait
for fuel prices to rise but implement taxation on the fossil fuel used to heat
our buildings. These receipts can be used to drive down the interest rates on
Green Deal loans for the less well-off and invested in direct intervention to install
efficiency measures such as better insulation in the homes of the poorest and most
vulnerable people such as the old and infirm.
The Green
Deal will be a damp squib of a policy unless it is fixed soon. Politicians
should find the courage to be truthful and push through high energy prices
whilst the additional price can be kept in the UK economy to invest in efficiency
measures. The virtuous circle of taxing fossil fuel to invest would make the
golden rule easy to meet, at a time when the economy could do with a boost, and
transform the standard of UK buildings.
I agree with you, Peter, that the Green Deal won't work as there will be insufficient take up. I said this in a paper sent to MPs and Ministers in September 2011 (you can read it here - http://kenneal.blogspot.co.uk/2011_09_01_archive.html).
ReplyDeleteThe government have set themselves a legal target of achieving an 80% reduction in fossil energy use by 2050. If they go down the home insulation route to attain this that involves insulating 25 million homes in less than forty years; that's over 625,000 homes per year. We're only building about 150,000 new homes per year at the moment and renovation is more labour intensive than new build. We need a huge training program for insulation installers in the first place.
Regarding the financing, the government thinks nothing of putting £320 billion pounds into the banks to refinance them. This is not borrowed money it is NEW money, that is money which they have conjured up out of thin air in the same way that a bank does when it gives you a loan. The money is an entry on a ledger after the click of a computer mouse (actually it is two entries on two ledgers so that balance is achieved). The government could do the same thing and pay for the insulation of all our houses with no increase in borrowing: a cost of about £10 billion per year.
One of the biggest problems we have with our national finances is the loss of North Sea oil and gas and its replacement with imports. This is adding to our balance of payments deficit by at least the 6% per year decline in North Sea output. As 40% of our energy use is in the home a substantial reduction in this bill would make a very big difference to our balance of payments deficit. It is possible to reduce the energy bills of our houses, even quite modern ones, by 80%.
A client of mine took £30,000 of his pension lump sum and used it to insulate his house and saved 82% on his previous energy bills. He is getting a better rate of return on that £30k than if he had bought an annuity with it. The other advantage to him, or at least his family, is that that £30k will not die with him as an annuity would. It is value locked up in his house and his estate.
All that new money in the economy would work its way around the system and end up in the banks but in doing so it would have done some good for the economy. We would all have seen our little bit of it rather than it going on *anker's bonuses and shareholder returns. It would give a temporary boost to the cancer that we call growth but it would leave a wonderful legacy of no fuel poverty in the future as we would all have easy to heat housing.
I agree that the Green Deal in its current form will have little attraction for individual house owners. However it still seems that it could have a role to play for landlords, particularly those with multiple older properties for rent.
ReplyDeleteOur civil servants who seem unable to do the simplest arithmetic, have let us down again. We had the same with water. Be careful and save water and you use about 1 m³ and it costs well over £80 from Thames Water, use (squander, waste, etc) 100 000 m³ and it will cost less than £2 per m³. Point out the stupidity of this pricing structure and you get Sir Humphrey at his best. but of course the landlords do well out of it, just as they will with the Green Deal. They have the money and the business acumen to afford lawyers and lobbyists who will make sure that the ordinary fellow Forever has their jackboot on his throat.
ReplyDeleteNow let me address the *anker's bonuses and shareholder returns. There is a popular misconception that the latter have and are doing well. Far from it. I bought RBS at over £4 a share to supplement the miserable pension of less than £70 a week I got. Ever since I have not had a penny in shareholder returns while the shares were decimated because their value had shrunk to about 20p, the new share worth 10 of the old, are even now not what I paid for 1 old share. Go to a shareholders meeting and you realize that the mafia have nothing on this legalized robbery.
There is an interesting press article for the general public regarding the Green Deal relating to insulation for homes including cashback opportunities for early adopters of the UK Government's home energy saving scheme.
ReplyDeletehttp://www.greenbuildingforum.co.uk/forum114/comments.php?DiscussionID=9406&page=5#Item_24
ReplyDeleteI cannot see anyone in their right mind taking up the Green Deal, those in the poorest sectors of our society with whom I already work are penalised on all fronts and will find that they cannot take advantage of it anyway which in my view is a good thing!
If you are made of strong stuff have a read through the above thread