The Green Deal: 'A catastrophe from start to finish'

A year after the coalition government came to power, the then energy minister Greg Barker made an extraordinary speech to the Royal Society. The subject: the Green Deal. He told his audience the coalition policy was going to be quite simply the most “ambitious home improvement programme since the Second World War”, a 20-year crusade which would upgrade the entire domestic building stock by 2030 - in excess of 20 million homes. Of these, he claimed, 14 million homes would be made more energy efficient by 2020 alone, which would have made it the most far-reaching programme in Europe.

The message was clear: the government meant business, and it needed industry to gear up to deliver it. “The Green Deal is not another stop-start, government-driven and government-owned programme of works,” he said. “Government will put the framework in place, but you will make it happen. Your leadership will enable us to marshal the resources that are commensurate with the scale of the challenge we face.”

The consequence of this call to arms was soon apparent. According to government figures, more than 2,000 mostly small firms invested to qualify as Green Deal installers to fit Green Deal-approved kit, with more than 4,000 spending money to register as assessors in order to advise consumers on what work can qualify. Lastly, 179 companies big and small - including major energy utilities and the likes of Carillion and Mark Group - did the work necessary to act as Green Deal providers.

But four years on all this investment lies in tatters. Because after the ailing policy had been limping along with barely 1,000 consumers signing up each month, it was finally cancelled late last month with just shy of 10,000 people having benefitted from it from start to finish - less than a thousandth of those Barker had originally claimed it would help.

In the long and inglorious history of political humbug, Barker’s contribution deserves a special mention. For the industry the damage had already been done before this announcement, as those that had geared up to deliver Green Deal work had laid off staff, refocused, or in many cases, simply gone bust. One small Green Deal provider contacted by Building this week simply said, angrily: “I’m not going to talk about it. I’ve said my last breath on the Green Deal.”

Amid talk of legal action against the government, how did such lofty ambitions - supported across parliament and the industry - end in such miserable failure? And what hope can the industry have that when the government reviews its energy efficiency policies, anything more effective will be forthcoming?

How the deal was done

While the Green Deal was the coalition’s flagship energy efficiency policy, it was actually an idea that had its roots in the industry itself, for finding a way to overcome the cost barrier that many assumed was stopping homeowners undertaking work that would ultimately make their homes cheaper to run. A proposal from materials firm Knauf and renewable energy company Camco for an idea called “pay as you save” was worked up with the UK Green Building Council into a detailed and workable policy idea, with the full proposition laid out over 116 pages in August 2009, just as the main political parties were working up their manifestos for the 2010 election.

In essence it was a simple idea - offer householders a loan to install measures that would improve the energy efficiency of their homes, and thereby save them money on their energy bills. The loan, secured against the house, would be paid back through the householders’ energy bills - but still save the householder cash.
It was an exciting suggestion with huge potential. Crucially, though, the paper recognised the mechanism’s limitations: while a limited number of environmentally aware households (somewhat overestimated at 4-20%) might take up the basic Green Deal offer, for it to become a mass-market programme “strong incentives” would be needed, including “cash-back”, reduced VAT rates and/or stamp duty reductions.

It was, however, easy to ignore these caveats. For a Conservative Party determined to boost its green credentials, the proposal had huge appeal, demonstrating environmental commitment through a market mechanism that would not weigh too heavily on the public purse. Policy supremo Oliver Letwin and then shadow environment secretary Greg Clark (now communities secretary) seized on it enthusiastically, and George Osborne leant on the idea heavily in his November 2009 Green Budget while in opposition. It is easy to forget now, given the Liberal Democrats’ perceived coalition role of promoting environmentally-friendly policies, but the Green Deal was a flagship manifesto promise of the Conservatives, not the Lib Dems. It was hardly a surprise, therefore, that when the Coalition Agreement was published, the Green Deal was part of the programme for government. It quickly predicted the policy would create 65,000 industry jobs and create a £14bn pipeline of work.

An over-complex scheme

Right from the start, however, there were industry voices concerned that there was a danger the policy was being over-sold. A useful mechanism to cover upfront costs of retrofit for a limited number of cash-poor households, yes, but the basis of a huge nationwide programme of a scale not seen for generations? Unlikely.

Top of the list of concerns was the dawning realisation of the sheer complexity of the policy, and the infrastructure of organisations, checks and balances needed to support it. In order to ensure the right work was done, assessors would have to be trained, with recourse for consumers to protect them from disreputable traders promoting particular products or builders. Likewise, the actual builders carrying out the work would have to be trained and accredited, as would a raft of bigger companies that would be the consumer-facing firms householders would turn to in the first instance.

Finally, in order to offer householders loans at reasonable rates, lenders would have to be brought in to support the companies undertaking the work. These lenders would underwrite the so-called “golden rule” under which homeowners were promised that they would save more on their bills than they would spend on loan repayments.

As well as all this, primary legislation was needed to reassure mortgage lenders that the presence of Green Deal loans against properties wouldn’t make them unsellable. Insurance companies worried about what would happen when the equipment failed (most only had warrantees of 3-5 years and could be expected to fail multiple times before the loan was paid back), or if faulty installation or equipment ended up harming consumers.

The government was aware of the experience in Australia, where a national insulation programme ended up with a £285m remediation bill to protect consumers from faulty installations that had resulted in the accidental death by electrocution of four householders.

Incentives and drivers

However, despite this complexity, optimism remained that the government understood the importance of significant incentives to back the programme and it could succeed. In addition, the communities department’s desire to introduce the so-called “consequential improvements” policy, under which homeowners expanding their properties would be required to do work to meet current energy emissions standards, was expected to be a big driver of uptake.

According to Andrew Warren, honorary president of the Association of the Conservation of Energy (ACE), the Treasury had detailed conversations with industry before the 2011 Budget about introducing a scheme, under which house buyers could get cash back on their stamp duty bill if they undertook Green Deal work within 18 months of moving in. But when the Budget was presented, a last-minute change of heart meant it wasn’t in the document, merely a promise the government would “act to encourage and incentivise take-up” in advance of its proposed launch in October 2012.

The introduction of the Green Deal was always tied in to the end of the Labour government’s CERT programme of energy efficiency measures delivered by UK energy companies, and due to be replaced by a new policy, the Energy Company Obligation scheme (ECO).

As details of how the policy would work became clearer, Building secured government projections for the first time revealing that without significant incentives behind the Green Deal, the combined impact of the revised policies was to be a dramatic reduction in installations of cavity wall and loft insulation - the most effective types of insulation - falling 70% and 93% respectively. By late 2011 John Sinfield, managing director of Knauf, one of the companies that was behind the idea in the first place, was warning of a “cliff edge with massive implications” for the industry if significant incentives weren’t introduced.

Worse still, with the CERT policy that had supported 650,000 loft insulation installations and 53,000 cavity wall insulation installations annually coming to an end in October 2012, it started to become clear the Green Deal wasn’t going to be ready. Its introduction was ultimately delayed by 15 months, during which time, with the end of CERT, insulation workloads collapsed - the number of cavity wall jobs falling a staggering 97%. Meanwhile a £200m Home Improvement Fund to support the Green Deal was announced and welcomed, but the industry continued to wait in vain for the significant financial incentives that had been promised by Osborne in March 2011.

In April 2012 came the hammer blow: after a brief media campaign which had dubbed the proposed consequential improvements policy - seen as so vital for driving Green Deal uptake - “a conservatory tax”, prime minister David Cameron stepped in to kill the policy while it was still out for consultation. A ministerial briefing uncovered by Building later revealed this single policy shift reduced the Green Deal take-up by 2.2 million homes.

All this meant that by the time the policy was actually soft-launched in autumn 2012, it was clear to most people it was in serious trouble - effectively holed beneath the waterline by the government’s refusal to back it with cash, tax breaks or regulation. It immediately became apparent - with nearly 40,000 people undertaking assessments in the first six months, but fewer than 10 actually taking out Green Deal loans, that while demand for energy efficiency measures clearly existed, the Green Deal itself wasn’t going to fly off the shelves.

High interest rate

The chief culprit was seen to be the high interest rate - set by the Green Deal Finance Company at nearly 7%, way above average mortgage interest rates. This meant that in almost every case it would be cheaper for a homeowner to raise cash needed off their own house, than take out a Green Deal loan. By the time funding for the scheme was pulled last month, over 575,000 Green Deal assessments had been undertaken, and while many of these may have led to work of some kind, overwhelmingly it wasn’t under the Green Deal, with only 2% of those assessed signing up.

With the government in 2013 halving its ECO programme following political pressure over the price of energy bills, the situation for the retrofit industry was more and more desperate, with job cuts and company failures a regular occurrence (see box, previous page). The ACE estimated the cut to ECO cost the industry over 20,000 jobs.

While the number of households taking out Green Deal loans has slowly but surely crawled upwards, with the highest ever number - 1,295 - taking out loans in May, by the time of the election the industry had essentially written off its investment, so small were the figures. A “catastrophe” from start to finish was how Federation of Masters Builders’ chief executive Brian Berry summed it up, “the greatest flop of the last parliament”.

And while the numbers are now so small that its cancellation means there will be no immediate fallout in terms of jobs, that doesn’t mean there isn’t frustration at the way the decision was taken, particularly given it was in advance of a full review of domestic energy efficiency measures that was launched at the same time.

Pedro Guertler, head of research at the ACE, says: “It’s frustrating the government has pulled the Green Deal before coming up with an alternative. It’s putting the cart before the horse. It’s bizarre, as Green Deal loans are no burden to the department.”

Diana Montgomery, chief executive of the Construction Products Association, says: “The entire industry recognises the shortcomings of the existing Green Deal, so its cancellation was not a surprise. That’s not to say it wasn’t still a disappointment, but now the government needs to take time to consult with industry, take on board the many lessons learned and get the new policy right.”

With the number of measures that energy companies are required to install under ECO fast running out (the ACE estimates they will largely be done with their current programmes some time in the spring of next year), it is imperative the government prioritises bringing forward a new policy framework.

The irony for many in the sector is that with much of the infrastructure of the Green Deal remaining technically in place, such as the IT systems that sit behind the loan repayments, it seems likely that some form of the original “pay as you save” idea will have to be used.

UK Green Building Council policy director John Alker says: “Some element of ‘pay as you save’ has got to be part of the solution. If the government doesn’t want to pay for it itself, or regulate, then this has to be there.

“However, it’s difficult to be optimistic about what will emerge in the face of the announcements we’ve seen in the last few weeks. We will engage positively, but we don’t hold out a lot of hope there will be anything to radically stimulate the market.”