Deal or no deal?

So the June figures are finally out for the Green Deal (the Government’s flagship energy efficiency programme for the able-to-pay sector), which, as Andrew Warren of the Association for the Conservation of Energy notes, Minsters variously claimed would be a “game-changer”, a “massive economic and job opportunity which could help Britain’s economy turn the corner”, and the “biggest home energy efficiency drive since the Second World War.”

In fact, the scheme is off to a slow start. The Government wanted to see 10,000 homes signing up a month, but so far, in the first 6 months it appears that no homes at all have had measures installed under the Green Deal. So far, 4 homes are in the process of having loans finalised, and only 214 have confirmed they will proceed with financing. This is despite the fact that the Government made available £125 million for cashback offers in an attempt to kick-start the process. Around £263,000 of this been paid out so far, implying that unless things speed up, it will take almost 25 years to get through the introductory offer.

On the plus side, many more homes have been assessed (almost 40,000), and a recent DECC survey suggests that one in three of these have taken  up some kind of measure (although obviously the vast majority will not be through the Green Deal itself). However, for a scheme that aims to “deliver energy efficiency to homes and buildings across the land” and mobilise £14 billion of investment over the next 10 years, even this is not that impressive – at the current rate of assessment it would in fact take over 300 years to do every home in the UK.

Several reasons for the Green Deal’s rocky start have been widely identified. Rates of interest on loans in the scheme are high, at around 7-8%. There have been quite a lot of IT teething problems amongst the big energy providers. However, the biggest and most obvious reason that the Green Deal is not working well is that it simply does not address the most fundamental reason why energy efficiency measures are not taken up – lack of demand. There is a huge amount of evidence, partly generated by previous (more effective) schemes in the UK, that a combination of economic and behavioural factors, including hassle, information problems, search costs, lack of trust in energy companies, and a lack of belief in the effectiveness of measures mean that most people do not improve the energy efficiency of their homes, even when prices are relatively high.

The underlying idea behind the Green Deal, to try to overcome yet another barrier – i.e. high upfront costs – by using loan finance, was not a bad one, although it was badly executed, mainly because of the high interest rates (interestingly, at an event on European energy earlier this week, Denmark’s energy spokesperson, Pernille Rosenkrantz-Theil said that Denmark would be taking up its own version of the Green Deal, but as she put it, “in Denmark we have a different kind of finance system”). But in the end, no matter which way you look at it, even if you offer 0% finance on a product that people are not buying, sales are likely to be low.

One wonders in this case whether Ministers were poorly briefed by their civil servants, or (in my view more likely) carried away by their own ideological enthusiasm for market mechanisms. The problem of low demand for energy efficiency was widely known at the time the Green Deal was conceived. In the lead up , energy suppliers who had worked to delivery insulation under various supplier obligations were telling everyone and anyone that they couldn’t give the stuff away when it was free, so they couldn’t see how offering it at 7% was going to work. I myself remember debating this issue at the Conservative Party Conference in 2010, but enthusiasm for the Green Deal was far too high for anyone to listen.

So, what next? I am sure that the Green Deal will continue to limp on for a while – the Government will not give up on a “flagship piece of legislation” quickly. However there are already straws in the wind that strategy may change looking ahead, and in particular that policy will start to engage with the demand problem. There are various potential options, including much stronger incentives than currently exist, but in the end it is likely that there will have to be some form of stick (i.e. regulation) to go along with any carrots. This should not be so surprising; as the Stern Review itself notes, regulation is a sensible approach in many cases to energy efficiency type problems. It currently works very well for upgrading boiler efficiency in the UK, and of course for energy performance in new housing. Regulation can be politically challenging (especially for Conservatives), but it is a very interesting sign that Greg Barker, the climate minister, has started talking in these terms. Watch this space.

– By Matthew Lockwood, Senior Research Fellow with EPG

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