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Posted Tuesday 18th October 2011 at 8.08pm
The green deal
I try to stay positive most of the time, but I've just read a truly awful article on the Guardian website: Sam Arie on "Five reasons the 'green deal' policy on energy saving won't work". To quote his explanation, there's "a new policy called the green deal, under which households will be able to borrow funds for energy-saving home improvements. Repayments will be collected through gas and electric bills, and if you move house, the new occupier takes over the debt."
Now here are his five reasons why the policy won't work, with my commentary in italics after each one. Pffft.
1. It does not address the problem of waste
In general, a culture of waste is encouraged both by energy prices that get cheaper the more you consume, and by a massive tax break for households – VAT for domestic energy is charged at the 5% rate, no matter how much you use. We should address these simple issues and get a grip on waste before we introduce more complex schemes.
Fair enough, but that's not a reason not to introduce the green deal, just a call to go further.
2. It targets the wrong households
Because the central idea is that you don't have to keep up repayments after you move house, the scheme will be most attractive for people in properties that change hands frequently, including for example rental properties. Yet it is the largest properties that have the largest carbon footprints, and 90% of larger properties are owner-occupied. Owner occupiers move house on average every 12 years, so there is that much less incentive for them to take part.
Er... no. The idea is that in the long term you save money by having these changes made to your house, but people aren't looking at the long term; so the government is encouraging them to look at the long term by taking away the short-term cost. If you're staying put long term then you get the long term benefit at no cost. If you're moving soon, then you don't get the long term benefit. Possibly it increases your house price so you get a short term benefit. OK, so both long-term and short-term occupiers get something good out of this. That's good.
3. It does nothing to improve the underlying economics of saving energy
If double glazing takes 50 years to pay back, it still takes 50 years under the green deal. All the deal does is reorganise the cashflows, and whether that leaves you better off in the end depends on how much you pay for the loan.
Since households with a mortgage can currently borrow at rates of between 2% and 5%, the green deal would have to be as good as interest free to offer a significant improvement. And if the loans come in at 6% to 9%, as the Green Deal Finance Company anticipates, the effect will be to make energy-saving investments even less attractive than they already are for most people.
In this scenario, Green Deal finance will only be attractive to households that cannot borrow at normal mortgage rates, for example because they have bad credit or no collateral. While it may be socially desirable to introduce green schemes for these households, it is not a good strategy for carbon reduction – quite simply because it is the richest households, not the poorest, which have the highest carbon emissions.
It may well be true that the green deal just reorganises the cashflows. That's the point: the short-term cost disappears, giving you no reason not to get the work done. If you think you can get a better deal by remortgaging your house then bully for you, do it! Again, good either way.
4. Many green deal plans will never be paid back
Payments will be collected via energy bills, but many energy bills go mysteriously unpaid, especially when people move house or change supplier. As of today, 3.2% of energy bills are in arrears, compared with 2.2% of mortgages. In the Commons debate, the minister for energy and climate change, Greg Barker, said the default rate for Green Deal loans "will be the same as the standard default rate for electricity bills generally", which he explained, "is a very low percentage".
But this is a catastrophic error of calculation: what he is overlooking is that everybody has an electricity bill, so the "very low" default rate he is talking about is an average including millions of households with excellent credit. But not everybody will take out a Green Deal loan. What the default rate turns out to be for the loans depends entirely on who signs up for them, and that in turn will depend on how much they cost.
Do we really think the government just said "ah, the default rate for this thing will probably be the same as the default rate for leccy bills generally, pull up the gangplank, let's set sail!"? Well perhaps they did, but we probably shouldn't criticize them for not thinking it through without asking whether they've thought it through. Assuming they're being stupid is tempting based on previous form, but let's give them the benefit of the doubt on this one for now.
5. Green deal loans may be expensive in their own right
According to the Bank of England, a conventional, unsecured personal loan currently costs between 11% and 16%. It is hard to see how a Green Deal loan, which is neither secured against collateral (like a mortgage) or credit checked against the individual (like a personal loan) could possibly be cheaper. The Green Deal will also have to cover the cost of a certified home survey and of administrating payments through the energy company. So the effective cost at market rates could easily reach 19% or 20% – in other words, about the same as a credit card or personal overdraft.
Taken together, the implication of these points is that the Green Deal will fail if it is offered at commercial lending rates. Take up will be limited to a segment of households that are less affluent, already economical in their energy usage, and which may well have difficulty repaying the loans in full. Meanwhile, the larger, more affluent households – which have the greatest potential to make carbon savings – will not participate, because they can already borrow the money elsewhere and at a cheaper rate.
On the other hand, if the green deal is subsidised by the government and offered at 0%, affluent households will be much more likely to take part. "Free" money would certainly boost the marketing of the green deal. But the cost to the taxpayer will be counted in the billions, while the beneficiaries, by definition, will be households who already have money.
This may make sense to politicians, offering as it does the prospect of a large handout to the middle classes just before the next election. But for the taxpayers who will foot the bill, it is a much less appealing prospect. Far better to forget about the green deal and focus instead on a simple rethink of energy pricing for high and wasteful users – which is, after all, what the Liberal Democrats promised us before the last election.
Like the first point, this is not a reason not to bring in the green deal, but an argument to possibly go further. If it only benefits the people who can't get cheap credit otherwise - well at least it's helped them, that's better than nothing, now let's go further. And if it's like free money for the middle classes - well then it's like free money for the lower classes and the upper classes too. So everyone benefits. Poor tax payer... looks like the people who pay most tax will be paying proportionally more so that everyone can stay warm more efficiently. Oh no! Redistribution of wealth from the top to the bottom! Oh hang on, that's kind of the point of taxes, isn't it?!
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