All posts from: October 2011
Welcome to the week of green smoke and mirrors.
A week that - for me - will forever be etched into memory by the looping words ‘…the details of which will be published in a consultation shortly’.
Name a query about any area of sustainable concern – the feed-in-tariff, the green deal, energy company obligation, energy performance certificates – and the government will inform you that the answer to question will be out ‘shortly’ in a forthcoming consultation.
We know that. We are used to it. But when the consultation is delayed, it doesn’t make it any less frustrating.
Before I go any further there is something I want to make clear.
Behind the scenes there appears to have been a series of u-turns, leaks and contradictory statements that the government would like to characterise as the rumour mill spinning out of control.
The reality is that many of the stories that have emerged this week have come from official briefings and documents (admittedly ahead of a final decision being made).
This means that either there are healthy disputes between the Treasury and DECC or there is spinning to manage expectations.
Take the saga that has caught the headlines most this week: the news that the government is intending to carry out an early review of the FIT.
In short, there isn’t much left of it as uptake has massively exceeded government projections and there is a very real threat that the pot will be empty by the end of the year without a government intervention.
First of all, rumours were flying that the FIT would be slashed back to 9p, which would have been devastating.
Then, in an apparent accidental leak, a fact sheet conveniently posted on the Energy Savings Trust website today showed that the 43p/kW FIT level is to be halved for PV at 4kW or smaller as of 8 December to 21p/kW.
DECC tweeted that this was neither final nor accurate.
Taking us from apocalypse to a kind of purgatory within the space of a week to me feels calculated.
We find out on Monday what the reality is, but regardless of the extent of the cuts damage has already been done.
The solar market has been rocked by uncertainty - a word that sends investors running to the hills.
As we report, one company has frozen a £175 million investment in PV on social housing roofs as a reaction – and warns that the social housing sector will be hit hardest by any cut to the tariff.
This many well be as few landlords have come close to installing as much PV as they would have hoped – in part due to the ongoing troubles in getting bank sign off for their rent-a-roof deals.
It was a major subject of discussion at the fourth annual Sustainable Housing Awards at London’s Park Lane Hilton last Friday where one provider told me: ‘solar PV on social housing is like sex when you are a teenager: everyone is talking about it but no one is actually doing it’.
Fingers crossed this scenario will change soon because, otherwise social housing could die a solar virgin compared to other sectors.
Millions of social tenants funding the subsidy will not benefit from it at all.
On top of the existing problems facing the sector in hauling their rent-a-roof deals across the line, this investor uncertainty combined with a halving of the FIT could be the final nail in the coffin for landlords’ PV aspirations.
One rumour that crossed my path was that there had been some talk in government circles about exempting ‘socially focussed’ PV schemes out of the crosshairs.
Were this the case, then social landlords may well be exempt from an early FITs cut.
It would also compliment the government’s more thoughtful ‘fabric first’ approach to the FIT and renewable heat incentive tariff outlined by climate change minister Greg Barker yesterday whereby homes will only be eligible for the FIT if they have undergone energy efficiency works first.
Don’t hold your breath, though. All eyes will be on the announcement in parliament on Monday.
So, on to the next area of uncertainty. Yesterday, many in the sector had been led to expect that the government would release its long-awaited consultation document on the green deal.
In fact, the Energy Efficiency Partnership for Homes even held their conference around it.
An impressive line up of speakers including policy leaders from the Department of Energy and Climate Change, Secretary of State Chris Huhne and junior housing minister Andrew Stunell turned out to an equally promising catalogue of delegates – many of which were potential green deal providers including retailers like M&S, B&Q, BSkyB.
Unfortunately, many of the questions they had about the green deal remained unanswered because the consultation has been pushed back.
The press office at the Department for Energy and Climate Change contend that there was never a formal date announced so therefore it can’t have been delayed. Hmmm.
Tell that to the National Housing Federation, which, also expecting the consultation announcement, attacked the government over its plans to exclude social landlords from affordable warmth funding in ECO subsidy this week.
Their argument is that social tenants – many of which are the worst hit by fuel poverty – will be paying for ECO through their fuel bills but they won’t stand to benefit.
Following the publication of the interim report on fuel poverty from Professor John Hills last week, the NHF published figures from consultancy Camco that warn around 1.03 million social homes - the equivalent of 2.5 million people - will be vulnerable to fuel poverty if landlords miss out on the affordable warmth cash.
As Inside Housing reported last week, the Hills review has already warned the government that ECO could exacerbate fuel poverty and have a regressive impact on the poorest families if it’s not carefully designed.
As we report this week, the NHF, which has been explicitly briefed by DECC that landlords will be excluded from affordable warmth, pulls no punches:
‘Housing associations are ready, willing and able to play a key role in delivering the government’s Green Deal,’ begins NHF chief executive, David Orr.
‘But if ministers do exclude social landlords from the ECO fund set up to tackle fuel poverty then millions of the poorest and most vulnerable people in the country will miss out on warmer homes and lower fuel bills.
He builds momentum: ‘To make this even more difficult to stomach is the fact that these hard up tenants will still have to contribute to the fund even though they will not benefit from it.
‘We’re not asking for any special treatment. But if low income social tenants have to pay a levy to fund these improvements then they and their landlords should have fair access to the fund.’
Given there is no other funding available for tackling fuel poverty, this is an understandable reaction.
Certainly the logic in the context of the Hills review stands that everyone should access the benefits of ECO if they are paying for it.
At the EEPH conference yesterday there were very mixed messages emerging about the government’s thinking on this.
When asked about the plans to exclude landlords from the affordable warmth element of ECO, Chris Huhne appeared to poo-poo the idea.
‘I am absolutely astonished, being on the inside of many of these discussions, to see some of the rumours that have managed to get some traction out there,’ he said before explaining that he wanted the green deal available for everyone regardless of tenure and ending with the words ‘wait and see, but I think I have given you as much as an answer as I am able to ahead of the consultation.’
One landlord asked me ‘did we just get what we want or was Mr Huhne just badly briefed?’
Another ran up and claimed that he had just directly contradicted a senior civil servant.
A shell-shocked Andrew Warren, deputy chair of the EEPH, took Mr Huhne’s apparent u-turn as a clear win for the sector and pointed out that he makes the policy decisions.
However, a closer look at his exact words makes for less convincing reading than his enthusiastic delivery might have implied.
He actually spoke more about the green deal than ECO and there is considerable ambiguity in what he said: ‘The reality is that we want this to be a programme that extends right across the country.
‘The ECO subsidy is essential for both hard to treat and fuel poverty homes because it’s also what makes the green deal a universal offer.
‘We want people to be able to market the green deal for everyone and anyone regardless of their tenure and their region and their personal circumstances… ‘
And then a civil servant, asked the same question later, sounded much less convinced stating ‘there were questions’ to be asked’.
Clear as mud, then.
Regardless of the situation with affordable warmth funding, there is another problem, though.
As we report this week, the NHF also warns that landlords could find themselves largely excluded from the larger portion of hard to treat funding too because of a narrow government definition that focuses on solid wall properties.
At the moment it is understood ECO is likely to be around £1.3 billion and most people expect it to be split roughly 70 per cent hard to treat, and 30 per cent affordable warmth.
Landlords can’t make green deal work without ECO – more in fact than the private sector – so this could undermine the sector’s ability to deliver savings for its tenants and the government.
The government has the problem that it needs to get the best value it can for the limited ECO pot.
Affordable warmth was previously for private homes, and the social sector is perceived to have already benefited from CERT and CESP as well as Decent Homes funding, and therefore are warmer and more efficient already.
Backing this up, Grant Shapps called on social landlords to undertake their own ‘pay as you save’ schemes ahead of green deal’s launch in a year’s time.
Cheeky, if the government does exclude social landlords from fuel poverty funding.
Either way, this does show two things that the sector should be aware of: that the government is a) sensitive to the political fallout of being seen to get poor people to subsidise the wealthier (those who can own their own home) and so wants to be seen to acting, and b) it feels that that the social housing sector can adjust rents and service charges and use surpluses to invest in protecting their tenants from fuel poverty instead of using public funding.
Tempering these two points is a third; the government needs the social housing sector to make the green deal work.
As we report this week, the NHF has been in talks with DECC over signing a pledge in which the sector would deliver retrofits to an agreed number of homes.
For the government this would be a terrific early win; landlords offer retrofitting at scale and could attract bulk finance to the green deal giving it the early kick-start it will certainly need.
Therefore, the sector has leverage. It should use it.
The decision to exclude social landlords could see fuel poverty rise to unprecedented levels and leave elderly and vulnerable people with little choice but to risk their health or even lives by leaving their homes unheated during the cold winter months, according to the National Housing Federation.
This week the Energy Bill received royal assent. That is an important milestone; the green deal has taken another important step towards becoming a reality in a year’s time. What still needs to be done is considerable and for a different blog post.
However, the significance of this is that on 27th of this month, assuming there are no delays, the Department of Energy and Climate Change will release a consultation document outlining more detail on the green deal and also on the structure of the Energy Company Obligation, more commonly known as ECO.
This is effectively a levy on all our fuel bills that is collected by energy companies and used to tackle fuel poverty and improve energy efficiency. Right now it is still being designed by DECC and will replace existing suppliers obligations such as carbon emissions reduction target – CERT - and community energy saving programme – CESP.
ECO is a deal breaker for the social housing sector – especially as far as the green deal goes. Without considerable ECO funding, landlords will simply not be able to meet the ‘golden rule’ which the green deal is based on in which savings on energy bills must exceed the costs of the works. Research from Affinity Sutton’s FutureFit programme and BioRegional’s Pay As You Save pilot show that social landlords need more, rather than less, ECO if they are to make the green deal work because social homes are already more energy efficient than the private sector thanks to the decent homes programme and CESP and CERT works. As many in the sector would say, the so-called ‘low hanging fruit’ has already been picked – so the savings needed to meet the golden rule in social housing is harder to achieve.
Inside Housing has revealed not only what ECO is set to look like, but also that social landlords are set to be excluded from some of it.
The government is planning to split ECO into two pots; one for hard to treat homes, and another to tackle fuel poverty. The government is planning not to allow social landlords to access this latter pot, which is to be called ‘affordable warmth’ – despite there being 17 per cent of the 4 million fuel poor in England living in social housing.
So how bad is this news? Until we know how big ECO will be and what the split between the two pots is likely to be, it is going to be very difficult to quantify the impact on landlords.
WWF reckons that ECO needs to be between £3 billion and £5 billion to make the green deal work – but also fear the eventual sum is likely to be between £1 billion and £2 billion. In terms of the split, sources suggest that the affordable warmth element of ECO will be much smaller than the hard-to-treat element, so perhaps, from a green deal perspective, being excluded from this pot won’t hinder landlords too badly.
That said, from a fuel poverty perspective, this must be a huge blow. For many social landlords, their main motivation for undertaking energy efficiency measures is to reduce fuel poverty. Given it is a major part of their social purpose, it could be considered quite short sighted to exclude them from funding on the basis they have already done good work. While it is easy to understand the government’s thinking that they can get more bang for their buck by tackling the private sector, it is also worth looking behind the fuel poverty figures. Just because social tenants homes are generally have better average SAP ratings than those in the private sector, doesn’t mean they necessarily require less help. Social homes, contain some of the most vulnerable people on low incomes – many of whom are elderly, unemployed or requiring care. This means they also spend much more time in their homes than in other sectors.
A household is considered fuel poor if it spend more than 10 per cent of its household income on fuel bills. Within this, there are various measurements that can be used. The current method is modelled on consumption in specific property types. While there are strengths to this approach, there are also drawbacks insofar as it ignores a lot of the human variables – some of which would find social tenants are much more heavily impacted by fuel poverty than the current statistics might suggest. Groups like the National Housing Federation are interrogating the government’s figures and methodology as well as lobbying for equal access to ECO on the basis that all groups pay for it – so it is unfair if they don’t see the benefits.
Adding weight to this concern, on Wednesday Professor John Hills announced the interim findings of his independent review on fuel poverty and in it, warned that if ECO is not distributed fairly, it could exacerbate fuel poverty for the lowest income homes. Echoing the concerns of the NHF, he said lower income households needed higher levels of ECO funding and pointed out that for low income families, the green deal would not provide any short term relief from fuel poverty.
Professor Hills also said more needed to be done to tackle fuel poverty and suggested other means of measuring it: ‘The way we have measured fuel poverty painted a false picture about how well we were addressing it,’ he said - adding ‘things are hardly on track for the problem to be eradicated in just a few years’.
He also delivered a stark warning about what is at stake here. His report, which was commissioned by DECC, found that 2,700 people die every year in England and Wales as a result of fuel poverty – more than in road accidents. Time then, for the sector to buckle up, because as energy bills continue to soar along with inflation at the same time as unemployment rises, without full and fair access to ECO, many of these victims will undoubtedly be social tenants.
With just five months left until the government cuts back the feed in tariff, despite rent a roof deals on hundreds of thousands of homes having been agreed between landlords and providers of solar photovoltaic panels, not a single one has been signed off.
That is a poor statistic – especially given the level of hype as companies flocked to the market over the last year.
The furious effort that has gone into getting these agreements sorted before the April deadline – after which, the drastically reduced FIT will no longer be enticing enough to make many of these deals viable – could well go to waste if lenders’ consent is not obtained for these deals soon.
With potential £250 a year savings for each tenant with PV on their roofs at stake, it is easy to see why PV providers and associations alike have levelled their frustrations at the perceived source of their problems: their lenders.
Banks, somewhat unfairly, have been accused of jeopardising these deals. The hold-ups, associations, PV providers and their respective irritated lawyers claim, is a result of their being overly cautious and tabling ‘apocalyptic scenarios’.
They have been asking what impact the deals could have on values if an association defaults on a loan and the bank has to sell, the properties it is holding as security. In this unlikely event they are concerned that the PV deals in place could significantly devalue their security.
Well, the shoe has been put on the other foot now.
As Inside Housing reports this week, guidance published by the Council of Mortgage Lenders means that many landlords could have to return to the drawing board and enter eleventh hour renegotiations with their PV providers.
The guidance spells out the minimum requirements of lenders that landlords must meet in order to obtain their lenders’ consent to push on with these deals.
At the core of the recommendations is the advise that most banks will require the power to terminate contracts with PV providers ‘without compensation and without liability for any costs of removal’ in the event of a default by an association.
This is bad news for PV providers. But then again, if they really believe that this default scenario is so very unlikely then they will surely have no problem signing up to taking on the risk that the banks were previously concerned about.
Of course, they will also have their own risk adverse funders to please. Lawyers warn that many agreements will need to be amended in the wake of the CML guidance. However, they also say that when push comes to shove, PV providers will probably will accept this, but they may well try and factor the risk into their own pricing – hence possible renegotiations with housing associations.
According to Richard Petty, director at Jones Lang LaSalle, the impact these deals could have on the value of banks security is actually huge; up to 15 per cent.
On a £500 million portfolio this would mean a bank stands to lose up to £75 million in the event of a default on the value of the security simply because of the contracts in place.
‘But surely having an income producing piece of technology installed on home that reduces bills and increases energy efficiency of the property can only be a good thing for property values?’ I hear you ask. The answer is possibly. But the impact on values that banks are concerned about has nothing to do with the PV itself.
The potential loss of value is a result of the contractual arrangements with third parties that could then make the properties harder to sell.
Mr Petty explains that if a bank finds that potential buyers don’t want PV on the roofs of the properties under the same terms that the HA has signed up to originally, then in many cases they face the prospect of paying a substantial termination fee to break and buy out the agreement, so that they can either sell unencumbered or remove the panels to achieve a sale.
In this scenario, banks would have to pay PV providers significant sums to break the rent-a-roof contracts, which have been drawn up to protect the PV providers’ security – which is the PV panels and equipment.
On top of this there is the prospect of long drawn out negotiations with lots of third parties, all with their own credit committees and sets of lawyers to appease.
When trying to sell huge portfolios, the prospect of legal wrangling is enough to kill a deal; hence the banks have said they want this get-out clause.
So housing associations are piggy in the middle right now. With no time left to start out entirely from scratch, they are at the mercy of their funders and their chosen PV providers.
The truth of the matter is that many associations probably should have approached their funders much sooner than they did. What on paper appeared quite simple has turned out to be painfully complicated.
Their complaint that banks have not acted with the urgency they required is may fall on deaf ears because, not only are these deals all different and immensely complicated, but also, banks – risk adverse profit driven organisations – are essentially being asked to take on more risk without any obvious reward. A big ask.
The CML guidance therefore should be considered good news. A line has been drawn. Everyone knows where everyone else stands.
Now that the CML has clarified lenders position, as unpalatable as it may be to PV providers and associations, changes can be made to contracts and the way is paved for the first deals to be done.
Watch this space.
For almost as long as the green deal has been conceived, those that have been considering taking part have had one principle concern: the cost of capital.
While there are many concerns and hurdles that the government have to overcome to get their £7billion a year flagship retrofit programme off the ground in a year’s time, it is this issue that will be an immediate deal-breaker.
From a banking perspective, Inside Housing has reported strong interest in the green deal.
According to experts, like Conor Hennebry, director of global capital markets at Deutsche Bank, the green deal is considered a safer proposition than offering mortgage finance.
The credit risk around energy bills will merely be costed into the price of the finance they are prepared to offer green deal providers.
At the moment the cost of capital available for the green deal is unknown. Depending on who you speak to, it will fluctuate between 7 and 9 per cent.
Assuming the position of the green deal - which hovers around 9 per cent - bears, this means that green deal is priced in a similar arena to personal loans – which will not achieve much in terms of energy efficiency works on homes.
Well, this week there has been a step in the right direction to overcoming the concerns around the cost of capital.
Some of the biggest names in banking, finance, retail and energy have come together and signed a deal that will see the launch of a cross-sector not-for-profit company that will reduce the cost of green deal finance.
The aptly named Green Deal Finance Company will work at scale in a genuinely unique way insofar as it will be open to any company or local authority.
Aside from the fact that many of its members are commercial rivals, it is interesting because it allows each of them to ensure the green deal loans do not appear on their balance sheets.
Crucially it hopes to be able to reduce the cost of finance from 9 per cent to as low as 6 per cent.
According to Price Waterhouse Coopers which is leading the consortium, each percentage point could equate to a 7 per cent increase in energy efficiency refurbishments possible.
That would really make a difference.
Furthermore, it is looking to build up a loan book of billions of pounds a year that could get an AA credit rating.
The consortium is in talks with the Department of Energy and Climate Change the European Investment Bank, and local authorities.
In the coming months it expects social landlords to join the 16-strong list of blue-chip members already on board.
In short, then, the people at DECC will be thrilled that the private sector is responding with such hunger to make the green deal – specifically the ‘golden rule’ whereby the cost of works can not exceed the resulting energy savings – work so that it is an attractive, viable and even lucrative proposition.
It remains to be seen whether or not TGDFC will be successful in its aims of reducing the cost of capital to the extent it hopes, but either way, progress is being made.
Now it is time for would be green deal providers in the social housing sector to get involved too.