The Green Deal is the government’s flagship energy efficiency programme. It is due for a “soft launch” next month, with Green Deal assessments allowed to be undertaken from 1 October. Enabling legislation that will allow finance arrangements to be entered into with customers will not take effect until 28 January 2013 (payment flows will not start until March 2013).
Meanwhile, the passage of the Energy Company Obligation (Eco) Order has been delayed while the Department of Energy and Climate Change (Decc)consults on Eco “in use factors”. Decc plans for it to come into effect on 1 January 2013. Many people have expressed concern about the transition from existing energy efficiency schemes Cert and Cesp to Eco, and jobs may be at risk if there is further delay.
The Green Deal Oversight and Registration Body (Orb) is open for business and interested participants are in the process of obtaining the relevant authorisations. However, it remains to be seen whether the Orb can deal with the applications in time for the soft launch.
Industry arrangements between Green Deal providers and energy suppliers need to be finalised and systems implemented in time to support the rollout and the start of charges collections next year. While Decc has driven negotiations of the Green Deal Arrangements Agreement, progress is lagging on other ancillary agreements that are further removed from its influence.
Smaller players may be deterred by the administrative burden of being a Green Deal provider, including the process of obtaining the necessary Green Deal and consumer credit authorisations, entering into complex energy industry arrangements and ensuring that robust internal and supply chain compliance procedures are in place. However, there should be ample opportunities for small and medium-sized enterprises in the supply chain, if not in the role of Green Deal provider itself.
Assuming these challenges are met, the biggest hurdle is whether private finance will be available early next year to fund Green Deal plans and, if not, how the funding gap will be plugged. If lack of funding significantly delays entry into Green Deal plans after the initial soft launch marketing efforts, there seems a real risk that the programme will lose momentum, consumer interest and trust.
Likely players in helping to deliver the Green Deal, including Carillion Energy Services (CES) whom we work with, stress that access to low cost Green Deal finance will be crucial to its take-up. Philip Arend, strategic liaison executive at CES, says finance costs must be kept low for the programme to be successful and to maximise what can be delivered while still meeting the “golden rule” (the principle that finance should only be offered where borrowing does not exceed estimated energy bill savings resulting from installing the measures). The Green Deal Finance Company (GDFC) is seen as key to this.
The GDFC, as national aggregator, aims to bundle Green Deal finance arrangements and refinance in the capital markets. However, it requires investment to make finance available to Green Deal providers at the outset, and funding has been slow to materialise. It now seems the GDFC will not be in a position to provide finance until some point after the first quarter of 2013, although options are still being worked through.
The GDFC is working uphill to attract private finance at the outset because the Green Deal concerns unsecured consumer finance for an innovative and untested programme. There are many unknowns: the level of Green Deal plan defaults; how smoothly charge collection arrangements with energy suppliers will function; and the level of uptake from consumers. All of these factors may affect the GDFC’s credit rating and the appetite of capital markets to refinance its bundled Green Deal finance arrangements.
Decc will loan £7 million to fund the GDFC’s set-up costs and the company may benefit from the government’s £40 billion infrastructure guarantee scheme. Guarantees could underpin some of the risks faced by the GDFC, helping leverage private finance at a reasonable cost. The Green Investment Bank may also provide up to £260 million funding, but this is subject to state aid approval. So long as details of and timing for these additional forms of support for the GDFC are unclear, members may be forced to provide some initial funding (this is contrary to the GDFC’s aim to be off-balance sheet for members) or fund initial Green Deals themselves.
Another key area where implementation arrangements seem to be lagging is the Eco brokerage scheme. The scheme would help leverage and combine Eco finance from energy suppliers with Green Deal finance being provided under Green Deal plans. Industry is keen for the scheme to be set up as soon as possible, given Eco will be key to stimulating consumer interest, particularly given the challenge of attracting affordable Green Deal finance at the outset.
The government wants suppliers to make a significant proportion of their Eco spending fairly available to those Green Deal providers who are able to deliver most cost-effectively (possibly by making the scheme operate on a blind basis). Price would be the only variable driving competition (with quality assured through Green Deal legislation). Suppliers may be concerned at the lack of control in selecting partners in such a proposed process, but the government considers that if Eco suppliers are committed to delivering a significant proportion of their obligation through such a mechanism, it is likely to introduce liquidity and transparency into the Green Deal market.
Birmingham City Council is running a pilot scheme that seeks to overcome some of the challenges described above. The successful bidder on Birmingham Energy Savers will be branded as the preferred delivery partner for a large-scale Green Deal campaign, targeting council-owned and private domestic and non-domestic properties. The city council is looking at prudential borrowing to kick-start the Birmingham Energy Savers programme until the GDFC or other private funding becomes available.
In fact, pilot schemes may be the catalyst to successful implementation of the Green Deal on a large scale. Local authorities provide consumers with a recognisable and trusted brand, reducing the unknown risk factor. The private sector and local authorities, working together, can act as lenders until such point as the GDFC comes on line.
Despite notable challenges, the Green Deal has huge potential to transform the energy efficiency of our buildings. We are hopeful that local authorities, working with private partners on pilot programmes, can create and sustain community appetite in the transition between the soft launch and a privately-financed Green Deal rollout.
Tresna Tunbridge, partner, and Rachel Crosier, solicitor, at DLA Piper UK
This article first appeared in Utility Week’s print edition of 28th September 2012.
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