The Green Deal is a market led initiative which will enable people to make energy efficiency improvements to their houses and businesses at no upfront cost. An innovative new finance mechanism sits at the heart of the Green Deal, enabling people to repay the charge through their electricity bills and the costs covered by savings on the electricity bill.
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What has happened?
On 18 October 2011 the Energy Act 2011 (the Energy Act) came into force, setting out the “Green Deal” framework. The Green Deal is aimed at improving the energy efficiency of the UK’s ageing building stock. The elements of the Green Deal and draft legislation were subject to a recent consultation which closed in January 2012.
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Why is the Green Deal required?
The Climate Change Act 2008 requires a reduction in the UK’s carbon emissions (from 1990 levels) of 34 per cent by 2020 and up to 80 per cent by 2050.It set legally-binding carbon budgets for the next 12 years across all sectors of the UK economy (including homes and workplaces).
Three quarters of the energy used in households, most of which comes from gas-fired boilers, is for heating buildings and water. Households account for 13 per cent of the UK’s CO2 emissions while workplaces account for 20 per cent. The Government considers that to help meet the carbon budgets there needs to be a reduction in emissions of 29 per cent in households and 13 per cent in workplaces by 2022 (reductions being calculated on 2008 levels).
Britain has some of the oldest building stock in Europe. Improving the energy efficiency of buildings through retrofitting could make a considerable contribution towards the UK’s reduction commitment.
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What is the Green Deal?
The Green Deal allows energy consumers to enter into a Green Deal Plan to retrofit buildings to reduce energy consumption at no upfront cost to the consumer. The Green Deal proposes an innovative financial mechanism which provides that the costs of retrofitting are financed through charges made on energy bills and recouped through the energy savings achieved.
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Who is eligible?
Entry into the Green Deal is voluntary and the scheme will be available to domestic and commercial owners and occupiers. The Green Deal will only be available to buildings that have been assessed by an accredited Green Deal adviser. The adviser will make recommendations for energy efficiency improvements in a building and predict the likely energy savings if the improvements are installed.
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What measures are eligible and how are buildings assessed?
The appropriate measures will be different for each building and will depend on a number of factors, including the energy efficiency improvements already undertaken, usage and the characteristics of the building. Measures that generate electricity, as well as energy efficiency measures will be eligible.
Green Deal measures may include (for example) condensing boilers, under-floor heating, cavity wall insulation, draught proofing, water efficient taps and showers and solar photovoltaics, but this list is not likely to be prescriptive.
Domestic Green Deal assessments will be based on a strengthened and improved version of the current energy performance certification scheme (EPC). The Department of Energy and Climate Change (DECC) is reviewing the Standard Assessment Procedure (SAP), which will be applied to the possible measures.
Non-domestic buildings are likely to be more varied than domestic buildings, so the assessment method will be more complex. It will build upon the existing Simplified Building Energy Model methodology for EPC certification. In addition it will allow the actual use of the building to be captured as part of the assessment to produce more accurate predictions of the likely energy savings available.
The Green Deal adviser will draw up a Green Deal Plan, recommending energy saving measures which have been approved for the Green Deal. The criteria for approval of energy saving measures will be set out in secondary legislation during the early part of 2012.
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Green Deal plan finance and payment
Once the Green Deal adviser has made recommendations, a Green Deal provider will then make a finance offer based on an assessment of the estimated energy savings that will result from the measures, and the likely costs for the installation work (including finance costs). The payments will be made in instalments and agreed as part of the Green Deal Plan and will be:
- paid by the energy bill payer of the building
- collected by the relevant energy supplier through the energy bills for the building
- recoverable as a debt through energy bills by the relevant energy supplier
- held by the relevant energy supplier as agent and trustee for the Green Deal provider
- beneficial to the energy bill payer who will receive attendant energy savings through a reduction in energy bill costs for the building.
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What measures are there to protect consumers and encourage take up
A summary of the key measures are discussed below:
- Golden Rule: Charges for retrofitting should not exceed the expected savings in energy costs. Payment periods should not exceed the expected lifetime of energy saving measures recommended in a Green Deal Plan. However, there is no guarantee that the charges for retrofitting will not exceed the savings in energy costs.
- Accredited advisers: The energy saving measures installed in a building must have been recommended for that building by an accredited adviser who has carried out an assessment of the building.
- Accredited installers: The energy saving measures must be installed by an accredited installer.
- Protection under the Consumer Credit Act: The Green Deal is not a loan but a fixed-term credit arrangement. Therefore, for the domestic sector, it falls within the Consumer Credit Act 1974 (CCA) and Green Deal providers must ensure that they offer credit under the Green Deal on terms that meet with the requirements of the CCA. Therefore credit must be offered responsibly and repayments must be affordable. The CCA usually applies to business credit under £25,000. However, an exemption from the CCA will apply to all Green Deals offered to business customers, including sole traders and small partnerships, to avoid the commercial market getting segmented.
- Consent: The Green Deal provider must have consent from all parties with an interest in the property (leaseholders and freeholders) and the express consent of the current energy bill payer for the building must be obtained if the bill payer is not the applicant.
- Change of ownership: Subsequent occupiers of buildings with Green Deal measures will continue to benefit from the energy bill savings. Liability to pay the Green Deal instalments transfers automatically to subsequent occupiers. Therefore the owner must disclose details about any Green Deal plans on their buildings before selling or letting the building. The relevant contract should include an acknowledgement by the buyer, tenant or licensee that the Green Deal plan is binding on the bill payer of the building.
- Collection of charges: Energy suppliers must collect the Green Deal charge and pass it on within the existing regulatory safeguards for collecting energy bill payments (including protection for vulnerable consumers). As the Green Deal falls within the CCA, energy suppliers would normally require a Consumer Credit Licence. However, they will be exempt from this requirement and their collection activities under the Green Deal will be licensed and regulated under the existing regulatory regime for bill payments under Ofgem. If an energy provider enters the market as a Green Deal provider it will have to obtain a licence from the Office of Fair Trading.
- Consumers who default on Green Deal payments: Consumers will be treated in the same way as consumers who default on their energy bills. Therefore in extreme cases buildings may be disconnected if Green Deal charges are not paid (although the protection that Ofgem offers to vulnerable consumers will be extended to those making Green Deal payments).
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What will be the impact on landlords and tenants?
The Green Deal is available to either landlords or tenants as long as all those with an interest in the property and the person who pays the energy bill give their consent. The Government expects that landlords will respond positively to the opportunity to improve the energy efficiency of their buildings. However, the Energy Act confers powers on the Secretary of State to make future regulations to require landlords to make such improvements.
Measures may include requiring domestic landlords to honour reasonable requests from their tenants for energy efficiency improvements available under the Green Deal. It is envisaged that by 2016 no landlord will be able to refuse a Green Deal request by a tenant.
Regulation of landlords may include introducing a requirement that their buildings be brought up to a defined threshold before they can be rented out again. It is envisaged that by 2018 there will be minimum standards to achieve before a building can be let.
In practice there may be difficulties with multi-occupied buildings with shared infrastructure. A change of one tenant may result in a landlord implementing energy efficient measures only to an individual unit, as the consent of sitting tenants in other units would be required to implement more generally applicable measures to the building. Therefore, the ability to roll out energy efficiency measures for the entire building at the same time will be reduced.
In the non-domestic sector the energy savings estimate takes into account the business type and therefore the charge may not be applicable to a future bill payer with a different use. The Green Deal provider will be able to adjust the general savings by mutual consent and the business will be made aware what the new estimate is based on. However, it is expected that Green Deals in the non-domestic sector will be on shorter periods and reflect the terms of relevant leases. Where a new business takes over a lease during an existing lease term, the Green Deal provider will be required to make the business aware of the terms of the estimate.
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What is the Energy Company Obligation (ECO)?
Green Deal finance will not be the only source of support for energy efficiency measures in homes. At the moment, the Government’s principal tools for driving uptake are the energy companies’ Carbon Emissions Reductions Target (CERT) and Community Energy Saving Programme (CESP). The Government has committed to replacing these programmes when they expire at the end of 2012 with a new ECO.
The ECO will be restructured to bring it up to date and enable it to function alongside the Green Deal finance market. The ECO will be focused on those households who need support over and above the Green Deal so there is potential for everyone to be involved in the proposed British energy efficiency transformation.
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What is the Green Deal Finance Company?
At the end of September 2011 a number of blue chip names in banking, building and energy signed a deal to create a unique not-for-profit financial company, the “Green Deal Finance Company” (GDFC), to support the Green Deal. It is intended the GDFC will deliver billions of pounds of energy efficiency investment to domestic and non-domestic premises. It will be available to any homeowner or local authority.
The GDFC, which will launch in 2012, is intended to be a national aggregator that can provide finance to all Green Deal providers. It will do this by bundling Green Deal loans so that Green Deal providers can access the capital and bond markets, and so reduce rates of interest from around 10-15 per cent to around six per cent. The creation of the GDFC indicates that financing opportunities may be available under the Green Deal.
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What will happen next?
- A recent consultation which closed in January 2012 sought stakeholder views on the details of the Green Deal and ECO policies that are to be implemented in secondary legislation and under the energy licensing framework.
- Detailed industry guidance will be prepared in Spring 2012.
- DECC has indicated that the Green Deal will be available from autumn 2012.
- The Green Deal will apply to England. DECC is in discussions with the devolved administrations on introducing the Green Deal in Wales and Scotland.
However, considerable preparation is required, in particular, in relation to the financing mechanism, assessment of properties and by the energy efficiency industry before the Green Deal can be introduced. The Government envisages that by 2014 the Green Deal will have created 65,000 jobs in the installation and construction sector.
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