Green Deal: is there a financial 'black hole'?
13th June 2012
The various elements of the Green Deal have created a structural rigidity that makes financing the early developmental stages difficult, says Nathan Goode, head of Energy, Environment and Sustainability at Grant Thornton.
The Green Deal
allows energy efficiency
measures to be installed without the domestic householder having to pay for them upfront. Instead, you simply add a regular payment to your energy bill. This is the equivalent of a loan repayment, but cleverly it attaches to the utility bill so if you move house the new householder takes it on. He or she should be happy to do this, because the cost of installing these measures has been subject to the 'Golden Rule', according to which the cost savings for the measures are intended to outweigh the periodic repayment under the Green Deal loan.
So where is the issue? Put simply, the loan finance
for the Green Deal needs to come from somewhere. Early on in the development of the Green Deal, it was concluded that the lowest possible rates of interest would be needed to attract consumers. To achieve this, someone would need to aggregate the loans and take them to the capital markets. This is the thinking that led to the creation of the Green Deal Finance Company
(GDFC).Early stage risk
GDFC makes sense for a world where installing energy efficiency
measures is already the norm – the difficulty is that there is an interim world where Green Deal finance needs to be tested, problems identified and ironed out. This requires more expensive capital to absorb some of the risks. The difference between the idealised, low risk energy efficiency market that GDFC is looking to sell to the financial markets, and the series of half certainties that is the current status of the Green Deal is the potential 'black hole' faced by the Government and all prospective participants in the Green Deal programme.
Because meeting the Golden Rule requires a low rate of interest, there is no obvious mechanism under the Green Deal for the earlier stage, higher risk, higher cost pilots that would be a normal feature of building a market such as this. Mixing the ECO (Energy Company Obligation) subsidy with Green Deal finance can bring down the cost to the householder, but only for particular limited circumstances, namely relief of fuel poverty or particular house types. The £200 million early adoption money announced by Government could also be used to offset the cost of measures, but even if that is the intention, it is unlikely to go that far.
Green Investment Bank
The other proposed way of bridging the 'risk gap' is to call on the Green Investment Bank (GIB), but either GIB should be getting a proper return for the risks it will be taking, thereby pushing up the overall cost of finance, or GIB will be cross-subsidising GDFC. Neither option looks attractive – in any event, it all looks a bit circular from a Government perspective.
The various elements of the Green Deal have created a structural rigidity that makes financing the early developmental stages difficult. In the process, the focus has shifted from the strategic objective of delivering energy efficiency to domestic homes to the tactical objective of making the Green Deal work. To resolve this tension we need to create the conditions for diversity in delivering and financing energy efficiency projects. This in turn will establish the intrinsic value of energy efficiency and in so doing will help to support the implementation of the Green Deal itself.
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