A Small Rant on the Green Deal and Interest Rates

Well, it’s apparently ‘all systems go’ – final approval for Green Deal’ according to Greg Barker Twittering earlier today.  Yes, it is, in that all the legislative hurdles have been cleared and all the regulations are in place.  That’s not quite ‘all systems go’ though, I have to say (in the most kindly way I can put it). Because as I have set out here, on more than one occasion, it remains difficult to see quite how the first 100,000 adopters who will be so crucial to the success of Green Deal in the longer term are going to take to the idea that they will be paying perhaps 7.5% interest for twenty-five years for improvements that, if they pay up front instead will cost far less, or alternatively will purchase far more and hence in the long term save more on bills.  Credit where credit is due, we’ve had some hard shifts put in to tackle this basic problem: the Green Deal Finance Corporation will, by aggregating loans cut the cost of capital somewhat. And if that finance itself is underwritten at least in part, by the Green Investment Bank than that cuts borrowing costs a little further. Local authority initiatives, like that of Birmingham, hopefully to be replicated by other local authority consortia, can cut overall costs by using the Public Works Loan Board to access borrowing at very marginal rates over Gilt prices, and hence potentially cut borrowing rates by up to 2%.

But even after all that we look like we are going to end up with rates of about 7.5%  – a level which even in the early days of the Green Deal discussions was shown to put off all but the most committed and  enthusiastic early adopters, or to put it another way, about 93% of potential individual Green Dealers. Local authority proactiveness could well push Green Deal/ Affordable Warmth well along the road, which will be a very good thing, but unless Green Deal itself is signed up to by a number of willing takers early on, I fear for its long term viability.

DECC itself has sourced £200 million out of Treasury with the aim, apparently, of throwing most of it in the general direction of early adopters as a ‘cashback’ in the hope, I imagine that early adopters + cashback = initial targets being reached. It might do so, but there remains the problem then of how the next lot of earlyish adopters will feel when the cashback runs out. Not very impressed, I would imagine, unless the scheme is such a wild success by then that their views won’t matter.  And in doing so, the opportunity is lost to put some or all of this hard –won ‘seed money’ to work in training up installers or underpinning local authority efforts to make area-based versions of Green Deal work well.

What remains a slight mystery here (£200 million notwithstanding because ‘cashback’ is not a Green Deal subsidy, is it?) is that already the very question of ‘subsidy’ is being trashed as a terrible and wasteful alternative to GD. Here’s Greg Barker, tweeting again:  ‘labour blunder into offering interest rate subsidy which would cost billions, stifle competition and push up family bills’.  I’m not sure that Caroline Flint’s relatively mild suggestion (here) that the Green Investment Bank might be used to push offered interest rates down (which is likely to be done to some extent anyway)  quite lands us with all the terrible outcomes that Greg suggests.  But even so, the idea of subsidy and an effective Green Deal-type programme are not incompatible anyway, as the German Investment Bank KfW has shown, by using underwriting from the government, not to jump clear of the market, but to introduce market based deals underpinned by lower rates.

We all know (well most of us do, I should think) that if we really want to gain the end of a successful Green Deal, which is a massive uplift in our collective home energy efficiency, then subsidies of some form will have to come into the picture – and indeed do as far as Green Deal ‘affordable warmth’ and ECO do anyway. One of the problems with that way of doing things, though, is that the subsidies fall on people’s energy bills, and further, in a regressive way, being placed as a lump sum levy on each bill regardless of its size and energy use.  And then Treasury, fearful of the effect on bills in the long term will place a ‘cap’ on the extent to which such levies can be introduced anyway. So that’s maybe a bit of a cul-de-sac.

What I think I would do, in the unlikely event of being in a position to decide, would be to declare a part of the future income arising from the Carbon Floor Price tax, EU ETS trading income and the Carbon Reduction Commitment ‘tax foregone’ in exactly the same way as a portion of the original ‘carbon-type’ tax, the Landfill Levy was when it was first introduced. That portion of the Landfill Levy was ‘donated’ by waste companies to an Environmental Trust and never reached the doors of Treasury or appeared on the books as ‘tax’.  The recipient Environmental Trust then used this income to promote worthwhile environmental activities.  I would have thought that an ‘Energy Efficiency Trust’ , which could be a modern-day recipient of such climate based ‘tax foregone’ would not have too much difficulty in working out how best to underwrite elements of the Green Deal without interfering with its operational principles or falling foul of levy caps or suchlike. It would, in effect be the operation of a real Green Tax in getting ‘bads’ one way or another, to pay for ‘goods’, without being hypothecated out of existing Treasury income in the process. Then we would have a real chance of Green Deal working well, without stifling competition or pushing up family bills. It probably wouldn’t cost billions either, and in any event far less than ending up doing nothing, or very little about home energy efficiency, whether by design or omission.

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4 thoughts on “A Small Rant on the Green Deal and Interest Rates

  1. Green Deal is doomed to fail. If people haven’t yet insulated their homes, they’re either not allowed to (renting) or they can’t afford to.

    If Green Deal is going to cost people money – the Golden Rule looks highly dubious – then it will fail. An interest rate of 7.5% when the Bank of England base rate is 0.5% is just a joke.

    The £200 million cashback scheme for early adoptors may end up giving a handout to those who ought not need one, though it’s probably just a political trick to ensure some people participate.

    Your former colleague Alan Simpson used to say that DECC are geniuses at delivering managed underperformance. The Green No-Deal is merely the latest example.

  2. The government was always likely to struggle to deliver a policy that could both improve home energy efficiency and come in within budget. But it looks like the government has made the green deal so unattractive that it will struggle to capture even the greenest imagination.

    I firmly believe that the policy could succeed but not under the current financial climate, where people are more concerned about having a job in twelve months, rather than having the noose of a five, ten or twenty five year loan repayment around their necks.

  3. Tom Pakenham, chairman of Green Tomato Energy, said: “It is notable that the equivalent lending rates in Germany are 1-2%, considerably reducing the cost of householder repayments. This has resulted in high levels of low energy works in Germany.

    “At the same time, we cannot hide from the fact that somebody has to pay for the energy efficiency improvements to our housing stock and with the public finances as they are the government is not in a strong position to pick up the bill. We must therefore start recognising the quality of life improvements that result from making your home more energy efficient and attributing a greater value to them.”

  4. I do think it is easy to look at all the negatives of Green Deal and the handling and implementation of it has been less than inspiring.
    The load repayment is not a noose and with the continued level of energy price rises real savings will be evident to the bill payer, even while the load is being repaid.
    Green Deal certainly has many problems ahead of it and it will I fear be a bumpy ride for the first year or so, hopefully though it will come good in the end, it’s a shame its being rushed through to launch when it is not yet ready.

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