Earlier this year we wrote about the Coalition Government’s plans to promote improvement of energy efficiency of existing buildings, namely the Green Deal. Six months on, the statutory framework to facilitate the Green Deal has been given Royal Assent and, as of 18 October 2011, the Energy Act 2011 (the Act) is now law.

As well as dealing with securing energy supplies, the regulation of renewable energy resources and a number of other matters, the Act sets out the financial background from which the Green Deal will be launched, with the support of secondary legislation. It is anticipated that secondary legislation on the Green Deal will be published as early as Spring 2012 with Green Deals appearing in the market place by Autumn 2012. The speedy implementation (notwithstanding the belief that at least 50 pieces of secondary legislation will be required) is jump started with the “Green Deal and Energy Company Obligation Consultation” just commenced and which closes on 18 January 2012.

Green Deal

The rationale behind the Green Deal is the encouragement of householders and businesses to improve the energy efficiency of their properties by offering a “no upfront cost” in respect of the installation of energy saving measures. The initial costs of works are to be paid by registered and approved providers under the Green Deal. Repayment to them by the end user is to be made along with payment of energy bills for the property. The Green Deal is governed by what the Coalition Government refer to as the “Golden Rule”: the financial outlay for the energy efficiency measures should not exceed the energy bill savings calculated according to the level of reduction in the utility bill for the average lifetime of the product (the range mentioned is between 15-25 years, depending on the product installed). So far, it all sounds ideal.

So how will it all work?

The owner or occupier of the property needs to have an energy plan i.e. a plan to improve the energy efficiency of the property. This plan is then assessed to decide whether the works are eligible and the property is suitable for financing under the Green Deal. For improvements to qualify, they must exist on an approved and recognised list (still to be finalised). Provided these criteria are met, the test is then whether benefit of the proposed works adheres to the Golden Rule.

With eligibility assessed, a number of financial issues may still need to be worked out. Who will be responsible for the costs of the inspections and assessments? Will these be incorporated within the costs included in the cost:benefit ratio when establishing adherence with the Golden Rule? Will Green Deal providers be required to incur the costs for the sake of obtaining the business? Will the party with the energy plan be subject to a separate fee? Can the works be costed to balance with energy bill savings without compromising quality either of the product, the service or the performance? Who pays interest on the Green Deal loan? How much?

Various hybrids may form in relation to the implementation of an energy plan with some works not qualifying for the Green Deal and others qualifying in part or whole. It has been suggested that where the aims of the Golden Rule cannot be met, individuals would be required to make a top up payment to bring the cost:benefit ratio within the realms of the Golden Rule. This may lead to suspicion that the Golden Rule is not achievable in its own right, which may undermine the success of the scheme, but the matter will be explored in the Consultation.

In the event that the works proceed under the Green Deal, the obligation to repay the cost will attach to whoever is the energy bill payer from time to time, rather than remaining the responsibility of the individual who initiated the energy plan (unless he is also the current owner of a property and responsible for the costs of utilities). This will no doubt result in more enquiries prior to the purchase or lease of the property. It will be necessary to give full disclosure of the obligations that the new energy bill payer will be responsible for. In addition, the new energy bill payer will no doubt seek the benefit of any warranty available to successors of the initial customer. Negotiation on purchase price may also be likely to take account of the fact that there is an ongoing payment due in respect of the property, notwithstanding the long term energy saving benefits.

The Green Deal appears to be a workable system for domestic property. Its applicability to commercial properties, however, is still not clear. Concerns have been raised over consent to tenant improvements, negotiations at the time of dilapidations and the potential impact of energy efficiency alterations to a property at rent review. Analysis of the cost:benefit ratio could become extraordinarily complex in multi occupancy buildings. Again, there is an opportunity to express views in the response to the Consultation.

An energy boost for property

The Energy Act 2011 provides a framework to combat some of these issues. For the private rented sector (both domestic and non-domestic), secondary legislation will be in place prior to 1 April 2018 which will prohibit a landlord from letting property that falls below a specified level of energy efficiency (as determined by the Energy Performance Certificate for the property). Other regulations, to apply from 1 April 2016 at the latest, are proposed which will prevent a landlord of domestic property from refusing consent to a request by a tenant to carry out energy efficient alterations to a property. This “stick” approach is coupled by the Green Deal “carrot” offering financial arrangements to help combat any cash flow crisis.

Providing the energy

The Energy Act 2011 also refers to an Energy Company Obligation (ECO) which takes effect from the end of 2012. ECO is replacing the existing energy company obligations to support energy efficiency in the home, namely, CERT (the Carbon Emissions Reductions Target) and CESP (the Community Energy Saving Programme). ECO is expected to be a different type of obligation and its operation will be tailored to work with the Green Deal.

The intention is for households who cannot afford energy saving measures or properties where the Golden Rule cannot be met, to be entitled to apply for ECO funding to support the measures. Efficient central heating systems and insulation are some of the options that ECO is likely to support, in the cases of those identified as being in need of support. Householders may also call upon ECO for financial support in circumstances where the recommended method of cutting emissions from a particular property cannot ever adhere to the Golden Rule, for example solid wall insulation.

It has been recognised that the costs of ECO may be passed on to general consumers by way of a general uplift in energy prices. Keeping the costs to a minimum is therefore a priority but analysing benefits overall will be a complex and difficult task with yet another indirect cost coming the consumer’s way.

Run out of energy yet?

Quality standards and consumer protection are important focuses. The full impact for both providers and consumers is not yet known, but it is anticipated that providers will be sufficiently regulated by a range of consumer protection legislation to ensure fair dealings. The Green Deal intends to implement a Code of Practice to ensure adherence to strict principles to increase consumer confidence.

The Government is aware of the great variety in housing stock and the non-domestic building stock and so it is anticipated that the secondary legislation will not be prescriptive as to the day-to-day workings of the system. The Government is limiting its involvement to ensuring the Golden Rule is complied with, and is otherwise leaving the Green Deal to be a market-led initiative. The ultimate consumer may therefore be at the mercy of the usual vagaries of the market, such as increases in interest rates, high labour costs for works and a potential lack of quality in services or products, which may result as part of cost-saving measures by companies whose profits are not being realised as they might otherwise have expected. The good news in relation to interest rates for funding is that the market is responding favourably. An organisation known as the Green Deal Finance Company consisting of some major banks, lawyers, companies in the energy industry and retailers, is to support the Green Deal finance providers to enable them to offer lending at lower rates of interest than would otherwise be the case. This organisation expects to have the ability to obtain finance in global markets and then in turn offer finance at a reduced rate of six percent (rather than 10-15%).

Time will tell whether the Green Deal becomes a trusted source of finance to encourage energy efficient improvements to existing property. The response to some initial surveys on the Green Deal show that most individuals would consider green initiatives under the Green Deal if interest rates were capped at two percent, though fewer feel they would commit when the interest rate is six percent. All participants await the “flesh on the bones” of the secondary legislation with anticipation. The recent change to the workings of the Carbon Reduction Commitment Energy Efficiency, as a result of which the system for revenue recycling payments never materialised, and more recently the Government’s decision to half the incentives available to households in relation to solar activity may contribute to a cautious approach to this latest scheme.

The Department of Energy and Climate Change are very aware that the aims are far reaching but equally, they are essential to promote a reduction of carbon emissions from existing building stock. The Consultation provides extensive guidance as well as posing a number of probing questions on their proposals, both generally and in respect of the draft statutory instruments and Code of Practice for the Green Deal. They will be relying on as wide a response as possible to ensure the secondary legislation takes account of individual and industry views on matters such as their stance on accreditation and quality standards, the proposals for low cost finance and the mechanisms generally.

To view the Green Deal consultation and related documents click here.

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