Is it time to take the “Low Carbon” initiative?

As 2013 approaches we will begin to see an increased focus on a low carbon economy with the introduction of the Government’s Green Deal potentially changing fit-out requirements within private and commercially let property, and increased focus on low carbon cities seeing a public sector led, city-wide, carbon reduction programme and a potential move towards decentralised energy across the UK. 

10 September 2012

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As 2013 approaches we will begin to see an increased focus on a low carbon economy with the introduction of the Government’s Green Deal potentially changing fit-out requirements within private and commercially let property, and increased focus on low carbon cities seeing a public sector led, city-wide, carbon reduction programme and a potential move towards decentralised energy across the UK. 

The Government’s Green Deal

The Green Deal has been dubbed by the Government as a "revolutionary programme to bring our buildings up to date" (DECC – The Green Deal – A Summary of the Government’s Proposals 2010) however such improvements, although widely regarded to be long overdue, require significant investment at a time where resources are limited and sources of such investment are extremely restricted.  The Government intend to overcome this hurdle by creating a system which enables private firms (most likely large utility companies) to offer consumers energy efficiency improvements to their homes or business premises at no up-front cost and then allow these firms to recover the “cost” of the improvements via an additional levy charged on top of the consumers’ energy bills.  Effectively, a consumer borrows the required funds to make improvements from Green Deal provider and then repays such borrowing over a period of time, at above base cost (i.e. cost + interest) with the provider determining the payment period and level of interest (within Government set thresholds).

The Government intend to ensure that the energy efficiency savings created as a result of the improvements are always greater than or equal to the cost of the levy, and therefore at no additional cost to the consumer (the Government’s “Golden Rule”).  The Government also intend to ensure that the repayment period does not extend beyond the lifespan of the measures introduced.  

Given the current low interest rates available to home owners in relation to their mortgages, one would suspect that the interest levels of "Green Deal borrowing" would require to at least match mortgage rates to appear attractive to consumers. However, given that such "Green Deal borrowing" will be unsecured and not subject to a credit check it is unclear how Green Deal providers, on assessment of the risk of non-repayment, can possibly offer interest rates which are any lower than those used currently by banks in relation to unsecured loans (i.e. 6%-10%).  In order for the system to be attractive it may require to be significantly subsidised by the Government so that the "return" to the user and the actual cost + financing become attractive to all parties.  At a time when public spending is facing widespread cuts in areas which consumers are likely to deem "more important" such as healthcare and employment is such "subsidising" the correct area for Government funding? 

Furthermore, there lies a difficulty with the Government’s proposed "Golden Rule".  The danger is that only older, poorly performing properties which are significantly upgraded will generate potential energy savings which can allow effective (cost free) repayment of the Green Deal borrowing.  Such savings are unlikely to be generated in relation to modern properties sitting just below Government set thresholds for energy efficiency which require a smaller scale retrofit.  Given the likely high cost of the required kit and the potential use of untested technologies (such as air source heat pumps which often require regular maintenance to continue working efficiently), projecting potential savings is unlikely to be accurate.  As such consumers should remain wary of "guaranteed" energy savings being offered by providers with some even hinting that there is even potential of a future "mis-selling" scandal if consumers are not provided with accurate estimates what the savings can actually be achieved.  The Government will continue to point towards their proposed certification policy for Green Deal assessors as their method for ensuring all recommendations under the scheme are reliable however the market appears concerned that such certification process is not rigorous enough given that some organisations are already offering accreditation courses lasting little more than a couple of days of training. 

It is clear that the Green Deal is likely to face challenges, mainly in relation to creating a product which is both attractive to the consumers and providers while not requiring such a significant level of subsidy from the Government that such initiatives become unachievable.  However, the move towards a low carbon economy is likely to have significant implications on how large scale landlords (both public and private sector), in particular, operate, and the changes are likely to create new opportunities in this area with an increased interest in low carbon initiatives. 

Public sector driven green initiatives

Low carbon initiatives have always intended to be public sector driven, however, this has so far been difficult on various levels:

  • On a governance level, there remains a lack of confidence in the Government’s commitment to low carbon initiatives emphasised recently by the decision to reduce the Solar Feed in Tariff (FiT) resulting in many indicating that the move would “kill” the solar industry.  Even if the Government can create a Green Deal system which is an attractive opportunity to all parties, consumers specifically, are likely to be hesitant in pressing forward with any large scale improvement projects if there is a risk that the Government could dramatically alter the terms of such a deal with very little notice.  Given the current market, a private landlord would be unlikely to take a "gamble" on a wide-spread energy efficiency project across all of its properties if there was even the slightest chance that the Government may move the goalposts pre-completion and leave the private landlord to foot the bill.  This is especially significant given that, as discussed above; substantial Government funding may be required to ensure the system is cost effective for the consumer. 
  • From a practical point of view the installation of low carbon technology may not be straightforward. It is likely that mortgage and insurer consents will be required prior to installation.  Given the untested nature of some of the proposed equipment there may be a general resistance from insurers, in particular, to sanction the installation without altering insurance premiums. Consumers must also consider risks of potential damage to their properties.  Although the fitting of solar panels to one’s roof may be attractive in reducing energy bills, there is a risk that installing such equipment may damage your roof in both the short and long term.  The cost of such damage would significantly outweigh any potential energy bill savings and unless prior consent for the works was granted, the damage may not be covered by the owner’s insurance policy. 
  • Until the concerns of counterparty risk are satisfied, consumers are likely to remain hesitant.  Although installation by a large utility company may be less risky given their public profile, who will guarantee the work of smaller providers?  Given the Green Deal will be a Government-led scheme there is potentially a risk that consumers may assume that all providers are "Government approved" and therefore overlook the risks of potential defective or sub-standard workmanship.  It is unclear at this stage whether the Government will offer any avenues for recourse for consumers under the scheme but the Government will be unwilling to effectively "guarantee" the credentials of all providers that sign up, instead relying on their accreditation process to ensure the level of service is as high as possible.
  • From a practical point of view, many public sector bodies have found it difficult to take the initiative in relation to low carbon due to the constraints placed on such schemes by the EU Procurement Regulations. Large utility companies are (and are likely to remain) at the forefront of low carbon initiatives.  Therefore if a public sector body wishes to establish a wide scale improvement project of this nature, it may wish to form a “partnership” of some nature with a utility company to carry out the required works and obtain the necessary funding.  However, establishment of such a “partnership” is not a straightforward process with the EU Procurement Regulations preventing public sector bodies from quickly forming such links without carrying out a full procurement process.  Given that many of these improvement projects are likely to be "high value" such a process would include a lengthy (and European-wide) advertisement and tender process in which utility companies would be required to bid for the opportunity to become a public sector partner, with the most “economically advantageous” bid finally being selected.  Such a process is time consuming and often requires significant internal resource and external advice to facilitate. It can often also make initiatives unattractive prior to the actual concept and potential benefits even being considered by the public body.  There are however a number of different models which can be used to achieve a successful project in a cost and time effective manner. Without the correct consideration of these options any partnerships are likely to become "bogged down" by the Regulations highlighting the requirement for full consideration of all possible procurement routes available. 


Opportunities beyond the Green Deal

The effects of a push towards a low carbon economy will result in changes that extend beyond those directly related to the Green Deal.  There will soon be an increased requirement for property which meets specific energy efficiency standards (whether or not the Green Deal is successful) resulting in major considerations for all new build properties and retrospective improvements to existing properties.  In the current economy, and if the Green Deal structure appears unsuccessful, there is a concern that landlords will be unable to fund such improvements, or instead opt to pass the additional cost down to their tenants.  From 2018 in England and Wales (and potentially earlier in Scotland) there will be an obligation upon commercial landlords to ensure that their properties meet a defined threshold in energy efficiency, although at this stage the Government have indicated that this will only apply where there is no "up front" cost to the landlord, a concept which, as discussed, may only be achievable for a limited portfolio of properties.

Potentially a far more effective low carbon economy could be achieved by moving focus away from private home owners towards larger scale energy efficiency projects such as office buildings, shopping centres and even housing associations in control of large numbers of rented properties, although in some examples the cost of large scale energy efficiency improvements required in older buildings may outweigh any potential savings. If private homes remain the focus, a high percentage of private homeowners would require to be persuaded to sign up for the retrofit programme to achieve the desired level of carbon reduction.  Alternatively, the retrofitting of a large public sector office block, for example, has the potential to create an energy saving level equivalent to or greater than to the saving of retrofitting hundreds of private homes.  This may be especially successful if initial focus is placed on the poorest performing buildings which are also likely to be the best fit to achieve the "Golden Rule" criteria.  The Government must therefore seriously consider where its focus should lie and identify those buildings which can create the biggest carbon reduction for the lowest incentive, thereby protecting the public purse.  Currently tenders can be very project specific given that much of the work is procured via existing frameworks.  This has led to more small-scale retrofits and repairs rather than the establishment of large-scale, city-wide carbon reduction programmes of the type that could make a significant contribution to the reduction targets.

Relevant expertise for retrofit

Even if the Government can create a system which is cost effective and is attractive to the correct market, there still exists confusion within the market as to who actually has the relevant expertise or specialism to carry out any improvement works given that for property owners, investors or occupiers, such improvements are “non-core”.  The fragmented nature of the various options, technologies and the limited availability of robust data and potential counterparty risk in such arrangements further add to this uncertainty.  Wide scale training and apprenticeship schemes will be required by those private firms intent on participating in the Green Deal process.  However such firms (and in particular utilities companies) are extremely unlikely to initiate such a process of widespread training until they see evidence of real market demand for the product.  Some initial attempts have been made to profile the likely demand the available technologies, in the hope that this will give an initial picture as to where the private firms should focus their attentions however these have had with limited success.  As the Government mandatory targets for energy efficiency approach we may however see this demand increase.

Recent commentary suggests that the energy industry remain doubtful over the "Green Deal Revolution" (The Telegraph: "Energy Industry doubts over the Green Deal "revolution": 8 April 2012).  The main issue is persuading consumers to “buy into” the benefits of potential schemes.  The scepticism of the industry was clearly highlighted earlier this year when the Department of Energy and Climate Change named the first 22 Green Deal providers which did not include 3 of the 6 major utility companies and neither Marks and Spencer nor Tesco – both of whom the Government had been confident of persuading to become involved within the initiative. 

The future

Despite the obvious constraints, the Government remain optimistic about the success of the Green Deal and other potential schemes, insisting that the Green Deal will work long term and that substantial demand will be generated. Evidently, there have been a number of successful schemes across the UK already where public sector bodies (specifically local councils), private sector developers and land owners have formed partnerships with utilities companies to make energy efficiency improvements to their own buildings – in keeping with the belief that such projects are likely to have greater success than those without utility company involvement.  The majority of the schemes have been (until recently, given the FiT review) in relation to solar, particularly the installation of solar panels across local council offices and housing.  In many circumstances what appears to have begun as a relatively small scale retrofit project for a small number of properties has escalated into a fully blown partnership, one example being the creation of the International Sustainability Alliance (ISA), a global network which has been formed to bring together corporate occupiers, property owners and investors in order to achieve higher sustainability in the built environment.  ISA aims to help its member’s form a common understanding of how their buildings perform and what measures can be taken to improve this performance and increase potential for investment.

As further evidence of successful partnerships surface it is clear that an increased focus on sustainable energy projects will develop.  Discussions between public bodies and the various stakeholders in the "low carbon" space in relation to low carbon opportunities are already becoming more widespread, perhaps the first indicator that initial scepticism is declining.  Given that public sector opportunities initially appear most appealing it is likely that potential providers will need to move fast in order to grasp the best opportunities, although some private landlords would benefit from keeping their "ear to the ground" and remaining aware of the potential opportunities being made available.  Avenues for success exist, however there is a requirement for the correct strategy to be utilised given the number of options available, each with varying levels of risk.

Expect to see a wide range of new initiatives between the suppliers and both public and private organisations being announced with exponential growth to follow but in this new "green risk" projection there is a definite need to be wary and well advised.