How to finance energy efficiency in buildings – Green Deal – ahead of its time? or never to rise again?

We are still waiting for the UK climate plan (aka the emissions reduction plan), it’s now well overdue.  Government are struggling to find a plan to fill the carbon gaps in the 2020s. Green Deal (GD) should be relaunched and the energy companies forced to back it. That could kill two birds with one stone: forcing the Big Six to redistribute some of their profits and driving forward the carbon mitigation agenda.

The GD policy was ahead of its time, it was let down by poor planning, poor evidence and poor implementation; can we learn the lessons and relaunch it?

The UK Government put in place a framework to enable private firms to offer consumers energy efficiency improvements to their buildings at no upfront cost.

GD formally started in January 2013, then pulled in July 2015.  At the heart of the Government’s proposals was a new financing mechanism which allowed consumers to pay back through energy bills. Consumers were to see the energy savings on the same bill as the Green Deal charge. Accredited assessors and installers and GD providers were going to liaise with potential clients to identify and install the appropriate energy efficiency measures. Those residential consumers less able to pay were to be supported by the Energy Company Obligation (ECO).

Poor planning, evidence and implementation:

  • Evidence about consumers’ energy behaviours is poor and the effectiveness of energy efficiency measures is often obscure. So assumptions about consumers’ choices are usually highly uncertain. Unfortunately, this wasn’t reflected in Ministers’ and officials’ thoughts and pronouncements.
  • An earlier post suggested that perhaps consumers are rationally sceptical about energy efficiency investments, because, in practice, the savings have, in fact, turned out to be well below the claimed levels, although usually still significant.
  • Another problem for the Green Deal was the supply-chain shambles that prevented many consumers signing up. GD assessors could: neither agree on floor area of properties, nor its thermal properties, nor what measures were required!
  • All that could have been handled if the energy companies (the big six) had got behind the scheme to support the parallel Energy Company Obligation (subsidised energy efficiency and fuel poverty measures). However, the big six managed to argue that their targets were too expensive (Ed Milliband surprisingly had a role in this!) and got them watered down, so did not need the Green Deal to support their ECO targets.
  • Of course the GD 7% rate of interest was seen as too high by some consumers; it was undermined by monetary expansionism (which reduced wider interest rates). Case of one hand not knowing what the other was doing.
  • Another aspect of the fiscal squeeze was the poor and delayed marketing of GD. Incredibly DECC adverts were found to be misleading consumers! (by the ASA).

If a relaunch is to succeed, the new Green Deal will need to be much more streamlined – to make things simpler and more secure for consumers. It will also need to be backed wholeheartedly by the energy suppliers: to generate economies of scale, particularly for Green Deal finance.

Climate-related risk – Preparations should start now

Warning from Carney and Bloomberg…

Mark Carney and Michael Bloomberg are warning of the growing climate-related risk we face, but also highlighting the opportunities[1] for strategic minded entrepreneurs.

Is your organisation exposed to climate-related risk without appropriately managing the implications?

Organisations issuing financial instruments have an obligation to disclose material risks, and lenders, insurers and investors should take those risks into account in capital allocation and financial decisions.

Few organisations are well-placed to account for climate-related risk: preparations should start now.

Their Task Force recommends disclosure

The Michael Bloomberg led Task Force on Climate Related Financial Disclosures (TCFD) is recommending that organisations disclose how they intend to manage climate-related risk. This will boost stakeholder confidence in individual organisations and the whole financial system. Disclosure should include the elements shown in the graphic below[2].

Can your organisation meet the challenge?

GovStrat Diag

Please consider the questions below, if you can’t answer in the affirmative, it’s time to take action!

Do your governance arrangements include responsibility for transparent management of climate-risk? (e.g. investment risk in, potentially, stranded fossil fuel related assets)

Is your organisation aware of the implications for its balance sheet if society gets on track to achieve the UN greenhouse gas targets?

If governance and strategy are in place, has the organisation implemented a monitoring and reporting regime to manage the climate-related risk?

CCE supports climate-related financial disclosures

Climate Change Economics Ltd (in association with risk experts PSPC Ltd) provides advice and analysis so organisations can better manage the climate-related risks they face.

If you would like to bring your organisation up to global best practice, or simply know more about the issues, then please contact Peter Roscoe for a no obligation discussion.

Peter Roscoe

Director, Climate Change Economics Ltd

Web: www.climatechangeeconomics.co.uk

email: peter@climatechangeeconomics.co.uk

Twitter: @PeterRoscoeCCE

Mobile: 07496121623

[1] https://www.theguardian.com/commentisfree/2016/dec/14/bloomberg-carney-profit-from-climate-change-right-information-investors-deliver-solutions

[2] TCFD (2016) ”Recommendations of the TCFD”, https://www.fsb-tcfd.org/publications/recommendations-report/

Should we be dialling back our energy efficiency plans?

The UK Government recently stuck some sticking plaster on its energy efficiency strategy by extending the Energy Company Obligation (ECO) to September 2018.  But we are still waiting for the approach through to 2020 and beyond. This is becoming urgent as the Government is behind with its new Carbon Plan (it was due before the end of 2016).  This is supposed to take UK emissions through to 2032 (the end of the Fifth Carbon Budget).

But is energy efficiency all that it is claimed?  Perhaps the Department for Business, Energy and Industrial Strategy (BEIS) should be dialling back the potential returns and considering a greater emphasis on low carbon heat?

Below is a graphic from the Government’s 2016 National Energy Efficiency Dataframeworks (NEED) publication. The blue bubbles show the observed savings from the measures described.  The bIack boxes contain data based on the Green Deal Impact Assessment (data from 2010) and the Boiler Scrappage Scheme (2010) for comparison. The numbers are not fully consistent but give a good flavour of how expected energy efficiency savings are not materialising on the ground.  As the savings are a lot smaller than expected, the cost of saving energy and Carbon will be commensurately larger.

screenshot-4

The estimates from 2010 are physics based estimates for a three-bed semi-detached house.  The NEED 2016 data is observed data from actual households that installed one of the measures.  It appears that a combination of factors is depressing the results of the energy efficiency policies. Quirky building fabric may be preventing fully effective insulation being installed; optimism about new technologies (see below) probably led to overambitious assumptions and unexpected consumer behaviour is leading to greater energy use e.g. running the central heating in summer.

There is some new evidence on condensing boilers that helps to explain the disappointing savings experienced by households.  Sustainable Homes has recently produced the “National Energy Study 2”.  This study shows that combination boilers use 13% more energy than a system boiler (i.e.with a cylinder), which was not foreseen earlier.  Over two thirds of the Sustainable Homes sample had the combination or “Combi” boiler. It seems that this trend is undermining savings from condensing boilers.

If energy efficiency can’t cheaply fill the carbon gap, then more expensive measures, including low carbon heat are going to be needed.  How to finance those will the subject of forthcoming posting on this blog.

Pete Roscoe, Climate Change Economics Ltd, 22 Feb 2017

References:

BEIS 2016, “NEED Report”:

https://www.gov.uk/government/statistics/national-energy-efficiency-data-framework-need-report-summary-of-analysis-2016

Sustainable Homes 2016, “National Energy Study 2”:

http://www.sustainablehomes.co.uk/research-project/national-energy-study-two/

DECC 2011, “Green Deal Impact Assessment”:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/48196/3223-EA2011-green-deal-impact-assessment.pdf

House of Commons Library, 2010, “Boiler Scrappage Scheme”:

http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN05253