How the Green Deal and UK energy policy needs to change if the market is going to succeed.
By Steven Heath; external affairs director of Knauf Insulation Northern Europe
Stephen Hawking recently revealed his career 'Plan B'. Had a life in theoretical physics not worked out, he would have joined the Civil Service. UK government's loss may have been the world's gain, but are his services still needed to sort out the energy efficiency policy mess we find ourselves in? Our view is below; but first a little background on black holes.
A black hole's gravity is so strong that anything, even light, cannot escape its pull once sucked passed a point of no return. That point of no return is called 'the event horizon'! Should you find yourself on an event horizon, your feet will be pulled in faster than your head and you will resemble a stretched elastic band. If, however, you travel into the black hole at such a speed you avoid the elastic band issue, the X-rays will cook you or, at the centre, a rather dark purgatory with no remission awaits.
So, how is this relevant to energy policy?
We in the UK are the Cold Man of Europe according to Association for the Conservation of Energy (ACE) research, yet we have some of the lowest gas and electricity prices and highest household incomes in Europe. How can this be? ACE provides the answer:
The UK is ranked 14th out of 15 on space heating affordability, 7th out of 8 on the gap between current thermal performance and what the optimal level of insulation should be in each country, and last for fuel poverty out of 13 Western European countries.
Conclusion; the energy efficiency of homes is to blame! So, welcome or not, an energy price freeze, group switching, breaking the big sixes' stranglehold, or even separating out the energy supply and generation markets do not constitute sole or even collective long term answers. Instead, we need a low energy retrofit revolution and not just in the 14 million homes originally quoted by the government. There are cheap and cost effective savings to be made in all the UK's 27 million properties.
The size of the task has been recognised by successive governments, but the big questions are how to do it well, and how to pay for it. The coalition has offered us the Green Deal scheme as a private loan mechanism supported by the Energy Company Obligation (ECO). Labour has recently announced a rebranding of Green Deal, perhaps with a subsidised interest rate, and a re-focus of ECO on area based schemes.
But so far, the headline statistics dont look good:
- Only 57 Green Deals plans are currently live
- 96% of cashback money is going to boilers
- 0.9% cavity wall and 2% loft insulation installations through the Green Deal Cashback Scheme
- Few contractors are offering solid wall Insulation (SWI) to owner occupiers
- Energy suppliers are complaining the cost to them and energy bill payers of delivering their obligation will be three times the £1.3bn per year estimated by government
So what state is the low energy retrofit revolution in? And what does the black hole have to do with it?
The reality is that key elements of the policy framework required to deliver energy efficiency are on the wrong side of the event horizon. Without re-tweaking, they have no prospect of escaping to the right side. But, the revolution, despite the low numbers of take ups, needn't necessarily join the list of government plans gone horribly wrong, along with the InterCity West Coast Rail Franchise tender, the Child Support Agency, or the national NHS IT programme.
Indeed, much of the hard work has been done. Internally, Knauf Insulation at a global level has a five-point plan through which we view a country's readiness to deliver large scale low energy renovation. Ironically, for all the poor numbers listed above, the UK has more elements nearly ready to go than almost all other European states.
Our five point plan to get retrofit right is as follows:
1. Do we have the supply chain to deliver the work required? Or rather, do a decent proportion of the 55,000 boiler installer companies and the 12,000 glazing companies etc offer whole-house solutions rather than single measure options?
Answer: No the building supply chain is highly fragmented, siloed and used to delivering single measures. But this could change if the demand was there.
2. Is relatively low cost private finance available for retrofit? The public purse can't cover the £7bn to £11bn needed to do the job. We need institutional investors (or our pension money) invested in delivering warm homes.
Answer: Yes - The Green Deal or perhaps Labour's re-branded Energy Save Scheme
3. Is a subsidy available to cover installation costs where measures are not cost-effective for individual householders (ie it can't be repaid over a 25 year loan period)? This is neccessary as the measures offer a societal benefit as well as a benefit to the homeowner, so it's appropriate to use public money. Remember, if much of our heating is to be powered by electricity in the future, cutting home heating demand by a third impacts on how many power stations you need to build. Even if gas remains a major part of the energy mix, demand reduction reduces exposure to wholesale gas price rises and their knock on impact on all our bills.
Answer: Yes - The Energy Company Obligation
4. Can the refurbishment offer guaranteed energy savings to homeowners?
Answer: No - it is unlikely we will ever get to that stage as the people who live in homes are unpredictable. But a thriving market will drive innovation in products and installation processes, meaning we get close to predicted savings in enough homes to gain the trust of both homeowners to retrofit and of bond markets to buy the Green Deal debt. An appropriately incentivised market will close the performance gap between predicted and real savings.
5. Are homeowners given a strong reason to renovate? What's more, is that demand driver more than a simple monetary sweetener, but creating a real shift in mindset to stop the usual discounting or ignoring of future benefits? How many people are still saying "I'd rather go to Magaluf/Tuscany than insulate my loft"? The four other points enable someone who has already made the decision to improve their home to do so. Mechanisms must also be put in place to persuade people to take the decision to improve their property in the first place.
Answer: No there are a few monetary sweeteners in the current Green Deal offering, although at the time of writing only £1.8 million of an available £40 million has been spent. Labour suggests they may put in additional monies or use the government's balance sheet to enable a subsidised interest rate. This is welcome, but on its own doesn't create the mind-set shift required to get the revolution going.
I've talked before about my favoured demand driver (Green Deal: Why it's not working, and how to fix it); linking Stamp Duty to the energy efficiency of the property can be cost neutral to the Treasury, drive a steady uplift in the efficiency of the UK's stock and create jobs. For those interested in the mechanics, read the UK Green Building Council paper.
This is where the black hole comes in. Stephen Hawking tells us that nothing, not even light, can escape the gravity of a black hole to the right side of the 'event horizon' the line of no return. At the moment, if we are to have an energy efficiency policy that is fit for purpose, one that can deliver warm comfortable homes that are affordable to live in despite future price rises - all five points need to be credible; they need to start off on the right side of the event horizon.
For all the criticism of the Green Deal and ECO schemes, once the demand for retrofit is there, the market, consumer organisations and the press should bash them into shape pretty quickly.
To return to ACE's Cold Man of Europe research, the stinging conclusion was that 'no other country of the 16 assessed performs as poorly as the UK'. To borrow a few party conference slogans, 'Britain can do better for hardworking people and others'.
Retrofit policy hasn't yet become a mess to consign to the darkness. It doesn't take a theoretical physicist to work out what is needed; political bravery to bite the bullet and bring in a demand driver worth the name. Labour may have the appetite, given references to Minimum Energy Performance standards, but the coalition currently holds the reigns and they may yet decide to reclaim the ground on energy bills by taking energy efficiency policy passed the event horizon.
From the industry's point of view, they had better do it soon as current market inactivity means investment is placed elsewhere and much needed skills are lost to other sectors or the dole queue.