All posts from: May 2012
Since October social landlords have been baying for some certainty around the future of the feed-in tariff so that they can firm up their solar plans. Last week the government took the biggest step it has taken to date towards providing that certainty.
Last Thursday climate change minister Greg Barker announced that the FIT will be cut from 21p/kWh to 16.8p/kWh on 1 August. This has given landlords a welcome extra month to install PV before the next cut. Most importantly, the FIT will decline by an average of 3.5 per cent every three months – although, sensibly, there will be no cut if less than 200MW is installed. This is exactly the kind of response that will give investors some comfort and, frankly, something the government should have come up with six months ago.
Significantly for landlords Mr Barker has said that multiple PV installations will be able to claim 90 per cent rather than 80 per cent of the FIT. This is clearly good news for social housing schemes. However, the sector is still hanging on for the response to a second parallel consultation about introducing a community tariff that would recognise the benefits to tenants and communities in terms of tackling fuel poverty etc, that would allow landlords to claim 100 per cent of the FIT. It is difficult to know whether the change in heart on multiple housing schemes is ominous, though. Will it mean that the government feels more able to back-track on its plans for a community tariff if it has given some ground on multiple PV schemes?
Fingers crossed not. As Pippa Read, policy leader at the National Housing Federation this week argues: ‘While the new regulations do provide more certainty, they still do not recognise the social housing business model, where the electricity goes free to the tenant to help cut fuel bills and reduce fuel poverty. A higher tariff is therefore needed if some of the poorest in society are going to benefit at any scale from a scheme that they assist in paying for through their bills. We hope to see this reflected in the government’s proposed community tariff later in the year.’
While, the housing sector has cautiously welcomed Mr Barker’s reforms, the solar sector is characteristically unimpressed by the government’s slashing of its solar ambitions from 22GW by 2020 to installing 11.9GW. There have also been some grumbles about the reduction in the length of the FIT from 25 years to 20 years. At the heart of the matter is the improved investor certainty, though.
DECC reckons that the new FIT should offer investors a return of around 6 per cent. Not anywhere near the previous 10 per cent, but still not too shabby. Interestingly solar developers seem to think this should be sufficient to revive some of their ‘free PV’ offers.
As we report this week, Empower Community, which before November last year had deals with eight social landlords to install PV on 22,000 roofs, has agreed a deal with York Council to install on 700 homes before 1 August. Empower were hit hard by the earlier than expected cut to the FIT and ended up losing £175 million of institutional backing from Aviva Investors as a result of the saga. Now they are back with a new institutional investor and, albeit with slimmed down returns, have been able to make their ‘free PV’ model work. Under their offer, Empower share the profits from the tariff with the investor and the landlord through a community fund. The company says it is still in talks with the remaining seven landlords that put schemes on hold amid the uncertainty last year.
The real test is whether the company can continue to extend this offer to social landlords for free (and with a return for landlords) after 1 August when the FIT is cut. Alex Grayson, managing partner at Community Empower, is relatively confident that this is going to be doable. As he tells Inside Housing this week, the company is now in talks with a new institutional investor at 16p/kWh and with under the new FITs regime, ‘prima facie it looks like we are still in business’.
‘It won’t be as lucrative as it was going to be, but for most landlords it should still be worthwhile,’ he says.
Mr Grayson also suggests that investors have also reduced their expectations around returns from PV schemes as it has become less of a ‘novelty’ asset class and there is more experience around the solar and housing sector.
However, he warns that schemes further north than York could become a thing of the past due to the slimmed margins. Mr Grayson says there is a 16 per cent difference in the amount of sunshine between the north and the south. Given that fuel poverty is often more of a problem in the north than the south, this is a sad outcome.
Today climate change minister Greg Barker tweeted: ‘Terrific meeting with PM & DPM on #GreenDeal at No10. Strong support but lots more to do before launch in autumn, so full steam ahead!’
For me, this prompted the question: is the green deal in crisis? It hardly lacks problems, but do they present a collective crisis to the extent that the policy is really on the ropes? Against all the weight of headline-based evidence, and charged by blind optimism, I am going discard my usual journalistic scepticism, roll the dice and say no.
Looking at the media coverage, it is clear that the problem that has received the most attention in the past week is one that I have not covered in enormous depth in the pages of Inside Housing: the potential collapse of the loft and cavity wall insulation industry during the transition from CERT and CESP subsidies to the £1.3 billion ECO fund in January. Much of the headlines around green deal crisis have stemmed from the insulation lobby. This is absolutely understandable as, from their perspective, the green deal spells crisis – DECC’s own impact assessment predicts a 93 per cent fall in installation of loft insulation and a 70 per cent fall for cavity wall insulation. However, it does not constitute a life and death problem for the green deal.
A report today in Building magazine suggests that the government is considering extending CERT and CESP to smooth over the interim period. Although this would make an enormous amount of sense for a lot of people, it would also be problematic. Right now some energy companies are on track to meet their CERT and CESP targets while others are looking like they will miss them. It would clearly be unfair to let some firms off – especially when they had been threatened with fines of up to 10 per cent of their global turnover. Indeed, you can bet the family silver that were CERT and CESP targets to be extended, some of the big six giants would be on the blower to their lawyers pretty sharpish and the government would, in turn find itself in some very hot water.
The option Building reports is being mooted is an interim measure that could ‘smooth over’ the transition from CERT and CESP to the £1.3billion ECO in January. In short, this would be a CERT and CESP mark two – an extension or a bridging subsidy that would carry the sector over.
This would be equally unpopular with the big six. Energy companies are still lobbying for the current targets to be relaxed or dropped and ECO to be reduced in size – the chances are they would balk at the prospect of having to pay for a second target. In any case, they would simply pass on the costs to consumers through bills – a move that the government would oppose. As one source told me, ‘it is being discussed, but I haven’t seen any documents to suggest it is going to happen, though.’
It is true that interim measures are being considered. But it is far from certain that this is the route the government will go down. The problem facing the DECC is that for every action, there is a reaction. The more that energy company obligation costs people’s energy bills, the worse the regressive impact on fuel poverty. This might not be such a priority for the insulation sector, but it will be at the top of the list of concerns for the government which right now is realising that ‘green taxes’ on energy bills are not vote winners (see the ridiculous saga around ‘conservatory tax’ for evidence of how fickle it can be on this front). Indeed, the BBC’s green deal crisis story is much more closely bound to the fact that green deal will fail to tackle fuel poverty than it is to its failure continue subsidising the insulation sector sufficiently. The fundamental problem is that retrofitting homes to cut carbon does not necessarily mean reducing fuel poverty. This has long been flagged up by the Hills Report which was commissioned by the government. It strikes me the only change is that number 10 is now engaging with the sector with these concerns ahead of publishing secondary legislation next month.
There are plenty of other concerns that have barely received any page space that are all potential deal breakers: the absence of any State Aid sign off from the European Commission (which was only presented to the EC a month back and can take up to 18 months) for either the Green Investment Bank, the Green Deal Finance Company, or even some of the huge council tenders for green deal programmes, for instance.
All this said, I think that casting the scheme as being in a state of crisis is something of an exaggeration – perhaps an element of spin from industry bodies with vested interests is creeping in here. At the end of the day, the green deal is the government’s flagship energy efficiency scheme. While concerns will be taken seriously ahead of the introduction of secondary legislation, the idea that the PM is on the verge of binning the scheme lacks credibility. If anything, the sector should be pleased that number 10 is listening to industry fears rather than interpreting this as a green deal Armageddon. There are some massive hurdles still to overcome, but I am marginally enthused that the government appears to be making an effort to do something to overcome them.
What is still most disconcerting is the persistent grumbling from senior Tory ministers about some of the most fundamental aspects of the policy. It undermines a lot of the work DECC are putting into creating some sense of momentum for the policy.
So, it’s great to hear that the PM and his deputy have nothing but ‘strong support’ for their flagship retrofit programme – now let’s hear some similar sentiments from the PM himself who so far has been too quiet by far on the subject of green deal. Although, if he were to lend his voice it would doubtless be considered proof that the green deal really is in crisis.
How many green deal groups does it take to change an energy saving light bulb? There is no glib punchline to deliver on this (that I am aware of). But I feel like maybe someone has told a joke along these lines within the walls of DECC HQ at some point in the last year or so.
To date, within each sector, there have been several groups of organisations trying to make sense of the green deal for their respective industries. Many of these have been made up of existing membership bodies and lobby groups – all with their own agendas. Within these groups there have then been splinter groups and sub-groups.
This was inevitable and, to a large extent, positive (it reflected interest in the green deal). However, civil servants doing the rounds, spieling the same spiel, and answering the same questions must have laughed at the enormous overlap between the groups.
Then came the UK Green Building Council and Green Deal Finance Company’s efforts to unite cross-sector organisations in two heavyweight groups. This made sense. But finally, as Inside Housing revealed last week, there is now a new super group in town – a hybrid of both.
Enter the aptly titled Green Deal Providers Group. Members of this organisation are players hoping to make the scheme work – socially and financially. In the larger associates group there are some of the big boys the government have long touted as being the deliverers of green deal (M&S and Tesco etc) that are interested, but are not yet sold on its viability of its business case. And then within this are an especially committed selection of would-be green deal providers including energy companies, contractors and social landlords Gentoo Group and Affinity Sutton. These companies have each put £5,000 on the table to pay for project management costs over the next 10 weeks as they try to iron out the many creases that remain in the government’s flagship energy efficiency policy. Unlike previous groups, this one has the ear of DECC and is working with the Green Deal Finance Company and other associated parties so that the problems they work through have a constant sounding board to hand – one that can influence the final policy landscape accordingly with the top players all at the same table.
Ironically, on the same day that we revealed this group had been formed there was also another one. The Energy Efficiency Partnership for Buildings, was also launched. It is effectively a relaunch of the Energy Efficiency Partnership for Homes, run by charitable organisation the National Energy Foundation and features several of the same members as the Green Deal Providers’ Group. The overlap is clear, but this group will also form a different function. This one will link various parts of the green deal supply chain – from finance through to installers – in one network body. While the Green Deal Providers Group is intended to be a short term means of organisations helping DECC shape the final policy landscape before it launches, the EEPfB is a much more long-term proposition to help the industry hit the ground running.
It strikes me as excellent news that both groups have been formed. For the green deal to work, it needs to work for every party involved – all of whom are going to have to get used to building a working relationship rather than in sectoral silos. There needs to be detailed discussion that steers clear of hazy concepts and focusses instead on hard numbers and viability.
That said, there is still a place for individual sectors to have their own green deal groups too. As we reported last Friday, social landlords are also taking the bull by the horns and trying to work out how they can make the green deal work specifically for them. A group of landlords of varying size and location have come together to crunch numbers and turn the ‘theoretical into the practical’. They are finally working out what a social housing green deal provider would look like so that they will be in a position to start bidding for frameworks that are emerging from local authorities such as Newcastle, Nottingham and Manchester. Places for People, Gentoo Group, Southern Housing, Black Country Housing and Accord are all very different organisations. Each one will have different tenant needs and different housing stock – not to mention different financial muscle. By sharing their concerns and problems and working out solutions with practical cost impacts they hope to form at least three separate costed green deal provider models. Once again, they have a DECC representative sitting in – something that three months ago would have been a struggle to achieve.
While many are worrying about how the government will apply any stick to herding private sector households towards the green deal after the Prime Minister kicked consequential improvements into the long grass last month, these groups are thinking long-term and helping the government generate some answers. The likes of UKGBC and ACE are using the ‘conservatory tax’ saga to push harder than ever for VAT cuts for green deal measures. This is a message that the new industry bodies are especially well positioned to pile drive home with one clear and powerful voice.
This one issue, more than the many others out there, might answer the question of how many green deal groups it takes to influence change.
For all the attention focused on the green deal, it is easy to forget there is already millions of pounds of retrofit funding waiting in the wings. In fact, one particular £350 million pile is burning an increasingly fearful hole in energy companies’ pockets.
Right now energy companies are struggling to offload their community energy saving programme cash before December. If they fail to spend it all on retrofitting 90,000 of the most vulnerable homes then they will face fines that could be as much as 10 per cent of their global turnovers. This is a multi-billion pound hit that the big six desperately want to avoid.
Of course, it is extremely unlikely that fines would ever reach that level because the government knows that there is a reasonable chance that energy companies would end up passing the cost of penalties back to their customers, thus worsening fuel poverty. And this is probably the main reason that climate change Greg Barker has agreed to intervene. As we revealed last week, the minister is hosting meetings between energy giants and council bosses in order to marry their interests and ultimately broker CESP deals and get the cash out the door before December.
The race against the clock means that right now there are some incredible deals out there for landlords that are willing to work quickly.
To quantify this, one landlord told me yesterday that six months ago energy companies were offering to pay landlords £15 a ton for carbon savings. Now ‘you don’t have to shop around’ to get energy companies offering £48 a ton. Energy companies have gone from demanding landlords match fund CESP to the tune of 80 per cent, to now offering 100 per cent funding in the space of six months. You would probably expect me to be excited about the prospect of social housing retrofit schemes that have been gathering dust for the past two years are coming off the shelf. And I am. It’s a great opportunity for the fleet of foot to take advantage of these offers.
But, how can this approach be the right one? At the end of the day it is bill payers – i.e. nearly everyone in the country – who is getting a raw deal as a result of energy companies’ lethargic and somewhat greedy approach to meeting their supplier’s obligation to date. Schemes that get the green light now will be far smaller and less ambitious – not to mention riskier – than they would have been two years ago when energy companies were dragging their heels in an effort to off-load their delivery costs. This bodes especially badly for the newly unveiled £190 million pot of fuel poverty funding that was allocated from the £1.3 billion ECO fund last month. Like CESP, this pot is to work on an area wide basis targeting the poorest 10 per cent of households. Lessons have to be learned and learned well.
I have made a big fuss in the past about landlords having equal access to ECO and not being excluded from any aspect of it, on the basis that social tenants pay for it through their fuel bills. The same logic would suggest that only social tenants have benefited from CESP to date, and some will have got much better deals than others. Energy UK, the body that represents energy companies, says that its members have struggled to meet the ‘ambitious’ targets because it has proven especially difficult to identify the Super Priority group of households that are eligible for CESP. This largely explains why social landlords have received most of the subsidy: they know who is eligible, and can spend it at scale getting energy companies more bang for their buck.
This is understandable to some extent, but it doesn’t help the perception around Whitehall that social landlords gobble up a disproportionate amount of subsidy compared to the private rented sector so don’t need as much ECO in the green deal. Apart from the fact that this doesn’t take into account just how much of their own cash social landlords have already ploughed into these schemes, it sets a very bad precedent for the administration of ECO.
In this week’s news analysis we examine exactly what lessons need to be learned from the shortcomings of CESP to make sure they are not repeated for ECO – making it simpler and easier to access being just two.
However, this piece doesn’t attempt to answer a question that is popping up increasingly at conferences and in the national press: are energy companies going to hit their December targets? The answer is that some certainly will. Others are far from certain. Whispers around the energy sector suggest that two of the big six definitely will. Despite their complaining and lobbying for the ‘unrealistic’ CERT and CESP targets to be relaxed, there is also thought to be behind the scenes pressure from individual companies that are on-track to hit their targets to make sure that their peers are not let off the penalties if they fail to.
Of course, the much bigger and far more concerning question people should be asking is: if you can’t give energy efficiency measures away for free now, how are you going to get people to pay for it through their energy bills with the green deal? Somehow, the plain-Jane, wholly unglamorous prospect of insulation has to be made aspirational and attractive to consumers. Like double glazing – only sexier. Energy companies are more than just failing to give it away; they can’t give it away with free cash too. Some are handing out cheques for £100 to customers that sign up to CESP. This is a move that betrays just how desperate some energy companies and ultimately devalues insulation as a product. And at the moment, it isn’t really working.