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Sealing the deal

From the way it is funded to the technology it will use, many questions remain about how the green deal will work. Sustainable Housing gathered a group of eco-experts to work out the answers. Isabel Hardman reports on a very animated discussion

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Conor Hennebry, director of global capital markets at Deutsche Bank, has managed to silence a packed table of sustainability experts. Eleven people lean forward, almost open-mouthed, as the banker tells them that the City is practically champing at the bit to finance the government’s green deal.

Mr Hennebry is speaking at Sustainable Housing’s round table on the green deal in association with Mears and British Gas. His message is surprising given everyone around the table at London’s Park Lane Hilton hotel has thus far named securing low-cost finance as one of their key concerns about the government’s flagship retrofit programme.

The green deal is intended to offer landlords energy efficiency kit for their properties with no upfront cost. When the initiative launches next year it will run on private finance from green deal ‘providers’ - ranging from B&Q and Tesco to social landlords. The financiers will recoup this over 20 years by claiming the resulting savings on energy bills. The coalition is touting the scheme, which begins in October 2012, as a ‘revolutionary’ £7 billion a year private sector market that is fundamental to meeting the UK’s 2050 target of cutting carbon emissions by 80 per cent.

But our experts - representatives from energy companies, banks, landlords, contractors, the green lobby and even the shadow cabinet - are here today because with just a year-and-a-half until the green deal kicks off, there remains a host of unanswered questions about how it will work. And they have plenty of concerns (see individual expert boxes, below). The most fundamental of these is the financing of the green deal: first, there is the problem of demand from investors, second, deciding who will take on the default liability if energy savings don’t cover financing costs- the government, energy companies, or investors - and third, obtaining low-cost capital.

Mr Hennebry is clear that banks are interested - ‘but need something on the table to finance’. He says banks are attracted to the green deal by the low credit risk posed by loans which are paid off as part of a consumer’s energy bill. ‘The number of people who fail to pay energy bills is actually very low’, he says. ‘Even compared with things such as mortgages, it is very low. My strong belief is that energy debt is a better credit risk than mortgages.’

Mr Hennebry predicts that, to be attractive propositions to banks, the first few deals must be worth between £50 million and £100 million. ‘This is where housing associations could do very well,’ he states. ‘[Their large property portfolios] would provide that critical mass early.’

Furthermore, he agrees with the rest of the table that neither the government nor the energy companies are in a position to cover the default risks of the green deal. Instead, it should be the investor - and this is not a problem for most banks, according to Mr Hennebry.

John Alker, policy director at the UK Green Building Council, admits he arrived at the round table feeling rather despondent about the financial viability of the deal. ‘I was going to give finance a red light,’ he says. ‘But Conor has given me more confidence, so I’ll give it a reddish amber.’

So where’s the catch? While banks will accept the default risk, they will charge for it accordingly. ‘Financing the green deal is absolutely possible for us - but whether the figures will stack up for you is a different matter…’, says Mr Hennebry.

A suggested cost for capital bandied around the table is 7 per cent, although some suggest this may be closer to 8 or 9 per cent once an energy supplier has taken its cut. Inside Housing has already reported warnings from environmental groups that this level of interest may deter consumers and derail the green deal. While landlords could raise money on the capital markets more cheaply, they would also have to take on the risks. Suddenly, the financing problems don’t look so readily solved.

Spreading subsidy

There is another area of major contention for social landlords considering becoming green deal providers right now: securing the same access to energy company obligation funding as other providers - a levy which is pooled from consumers’ fuel bills. Several of our experts warn that if energy companies retain sole access to how ECO is spent, then the green deal will not work.

‘The model needs to be tweaked,’ says David Adams, head of retrofit at Wilmott Dixon and one of the architects of the UK’s pay-as-you-save model, of which the green deal is one example. ‘Otherwise, my fear is that energy companies will be confident but their competitors will be concerned about investing.’

Betsy Bassis, managing director of British Gas Community Energy, points out that energy companies are incentivised to ensure supplier obligation is spent as effectively as possible. ‘Ten per cent of our group revenue is at stake if we don’t hit our targets,’ she says. Despite this, she agrees that there should not be an unfair competitive advantage for energy providers.

Nicholas Doyle, project director at 60,000-home Places for People, puts forward a solution: ‘We need an auction system to make sure that there is equal access to ECO.’ This, he explains, would entail setting up an ECO trading company which would sell energy or carbon savings from providers to the energy companies.

Either way, Ms Bassis speaks for the room when she says that without a ‘robust’ ECO, green deal funding alone will not finance the cost of the works needed to hit 2050 targets. ‘The green deal is not going to work for hard-to-treat homes and the golden rule [which states the cost of the improvements must not exceed the savings made on energy bills] is not going to work for people in fuel poverty,’ she says. ‘For those that fail to meet the golden rule, we are really adamant that we are going to need some energy company obligation.’

Willmott Dixon’s Mr Adams adds: ‘With ECO, you [green deal providers and investors] can make a return, but without it you can’t unless you are doing lofts and cavities.’ He explains that this is the case across all tenures.

There is, however, some debate about where ECO money should go to as a priority. ‘The ECO must be targeted at vulnerable households first,’ argues Olivia Powis, London regional manager at the National Housing Federation. ‘There are concerns that it will be used for hard-to-treat homes from a finite pot. But it will get used up very quickly if it is just used on those properties.’

Sally Hancox, director at Gentoo Green, suggests that anyone in a hard-to-treat home who can afford to pay for the improvements themselves should, rather than relying on the ECO funding. Indeed, she has research which demonstrates 84 per cent of her tenants are prepared to pay. ‘If you are able to pay, why should you get the benefit of ECO when there are so many people who can’t?’

Stewart Fergusson, managing director at Orbit Heart of England, adds that landlords could tie in improvements with the advent of the affordable rent regime. ‘I don’t mind [charging 80 per cent of market rent] if I’m saying to the person moving in that “your total housing costs are going to go down because I’m upgrading your property”.’

Prioritising finance

Mr Doyle calls for some realism towards what the green deal is and for landlords to start crunching numbers so they can assess the risks.

‘The green deal is first, second and last a financing mechanism,’ he states. ‘It has got to work as a financing mechanism. All the things around savings, assessment, consumer confidence are secondary to making sure this thing works, and this market does not exist at the moment.’

The table agrees.

But, if the government offers incentives for taking up the green deal, says Meg Hillier, Labour’s shadow secretary of state for energy and climate change, then consumers will start to take it seriously. She criticises her opposite number, environment minister Chris Huhne, for his firm belief that the market is strong enough to sustain the green deal all by itself.

‘There is a gap, but Chris Huhne is very confident that the market will decide,’ she says. ‘It is interesting to hear what Conor says about when private finance will kick in: maybe it will - but actually there has not been that much thought about consumer behaviour yet.’

So how can you market insulation to the general public who, as Ms Hancox admits, find it ‘boring’? Our experts have a few ideas. Andrew Eagles, managing director of Sustainable Homes, suggests that some of the more dramatic measures, such as photovoltaic panels on the roof of a home might be necessary to attract people in the first place. He says: ‘If it was tied with PV, then they could see themselves taking up these energy efficiency measures.

‘Obviously, we want to do those cost-effective measures first, but if it is a way of tying people in initially when a lot a commentators are saying it is going to be very low take-up initially then PV is a way to get people involved.’

‘I don’t understand why you wouldn’t allow feed-in-tariffs and renewable heat incentive to be linked to the green deal,’ agrees Mr Adams.

But Alan Long, executive director of Mears, warns that flashy technology might look a little less flashy in a few years’ time. ‘Some of the technology that we are working on now: in 10 years’ time, we are going to have radically different technology which will make what we have got now look almost caveman,’ he argues.

Andrew Mellor, director of external services at PRP architects, also warns that the sector needs to look carefully before leaping to use other retrofit technologies. ‘We could really damage our housing stock here,’ he says. ‘One of my biggest fears is through external wall insulation that we’re going to cover the whole of the UK with white insulation. We might also do physical damage to the homes as well in terms of condensation and overheating.’

Social housing snubbed

The government would do well to heed these warnings. But Ms Hillier says that ‘the social housing voice is not being heard’ at ministerial level. ‘It is not really being discussed. It would have been useful if someone from the Department of Energy and Climate
While DECC declined to attend today’s debate, Sustainable Housing will make sure Mr Huhne and his DECC colleagues hear social housing’s voice. Along with Mears and British Gas it will send them a document outlining some of the major concerns and constructive suggestions from our experts.

In a final philosophical moment we ask what a successful green deal would look like anyway. Eventually Mr Doyle hits on an answer: ‘It’s when we don’t even notice that it’s happening.’

Once again the table falls silent.

Key points: the panel members’ views condensed

Sally Hancox, director, Gentoo Green

  • The green deal must be delivered responsibly and tenants’ expectations should not be raised about the savings they can achieve
  • Selling the deal will involve telling people about savings on energy bills and the secondary benefits of retrofit measures
  • ECO should be targetted at the most vulnerable

John Alker, policy director, UK Green Building Council

  • Consumer confidence: I’ll be relatively generous and give it a green light
  • Incentivisation: around the Budget we were hearing some good things, but now all we’ve got are some very small things so this gets a red light
  • Finance: I was going to give finance a red but Conor [Hennebry] has given me more confidence, so I’ll give it a reddish amber

Conor Hennebry, director of global capital markets, Deutsche Bank

  • Finance is not actually going to take flight until reasonably late in the process
  • Credit risk is not a problem
  • An initial deal would be between £50 million to £100 million

Betsy Bassis, managing director, British Gas Community Energy

  • Availability of finances
  • Incentives for take-up
  • What products can we show to customers to attract them to the green deal?

Alan Long, executive director, Mears

  • The decent homes programme can teach social housing providers about how to implement the green deal
  • Technology is going to be radically different in 10 years’ time

Andrew Mellor, partner, PRP Architects

  • If assessments on what needs to be done to a property to cut its carbon emissions are just carried out by an energy performance certificate surveyor, then it is going to be a disaster. They do not have the level of expertise to do this
  • Green deal providers must be careful that they do not damage the housing stock when retrofitting
  • The industry needs to be educated about how to install the green deal measures

David Adams, head of retrofit, Wilmott Dixon

  • This [debate about the technicalities of the green deal] has been running since May last year yet questions are still being asked. It is really late to be worrying about this
  • Access to finance that’s off the balance sheet and low-interest rates are fundamental to the green deal taking off
  • I don’t think the understanding of some of the systems [such as external wall insulation and PV] we are talking about is sufficiently robust to be confident about doing these on thousands of homes

Nicholas Doyle, project director, Places for People

  • The green deal has got to work as a financing mechanism
  • The role of energy company obligation funding is critical: that could make the green deal fly, or could undermine it in future
  • Social housing has potentially a really large role in terms of market making, as we can work it through to make sure that it does work

Olivia Powis, London regional manager, National Housing Federation

  • The green deal is an opportunity for social landlords. They have a great record in engaging with tenants, have experts in sustainability, and their tenants are more vulnerable
  • We need a low cost of capital for the green deal to work
  • The energy company obligation must be targeted at vulnerable households first

Andrew Eagles, managing director, Sustainable Homes

  • Targets: the energy bill does not have any key goals in terms of CO2 reduction or fuel poverty reduction. We do not really know what its ambition is
  • The market: I’m not sure the deal is strong enough either in the initial loan or in the incentives that might be offered
  • Jobs: What we’re talking about here is a lot of jobs. There should be some requirement for local people and unemployed people to be involved. This is very hands on type work and you can very quickly train up

Meg Hillier, shadow secretary of state for energy and climate change

  • Social housing’s role has not been adequately considered
  • Consumers may not feel confident enough to take on green deal loans
  • We need more incentives to increase take-up of the green deal

Stewart Fergusson, managing director, Orbit Heart of England

  • We don’t want to keep putting rotten homes back in the pipeline
  • I’m very mindful that for the eco-levy everybody pays if you’re in fuel poverty, you pay, and if you’re not in fuel poverty, you pay. It’s equal - but that might not be fair
  • Converting properties to the 80 per cent rent model could work with the green deal if you can say to the person moving in that their total housing costs will go down because of upgrades to their property

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