The Green Deal: failure is almost guaranteed

The UK’s houses are poorly insulated. The proposed Green Deal is the central part of the government’s plan to encourage householders to improve the energy efficiency of their homes. Instead of paying for improvements immediately, homeowners will be able stretch their payments over many years, paying less than the savings they accrue through lower energy use. What the government calls the ‘Golden Rule’ is that people will be able to borrow as much as they want as long as the energy bill savings are more than the repayments. Sounds too good to be true? It is. At the expected implied interest rates, only cavity wall insulation achieves a large enough energy efficiency benefit to meet the requirements of the Golden Rule. Except in exceptional cases, no other energy saving measures will save homeowners more than the cost of the improvements. The much heralded Green Deal will be a spectacular flop. In late November, the Department of Energy and Climate Change (DECC) launched the open consultation on the new proposals. A dense 200 page document goes into huge detail on the way the new scheme will be regulated and householders shielded from aggressive sales tactics. The concerns about consumer protection are justified – from autumn 2012 energy advisors selling insulation measures will be trying to persuade homeowners to take on thousands of pounds of debt for insulation measures that make no financial sense if the consumer has to pay anything like a commercial interest rate.

The consultation document doesn’t make any attempt to show that it makes financial sense for householders to invest in energy efficiency by borrowing money. In the many hundreds of pages of dense official reports on aspects of the Green Deal, I haven’t been able to find any analysis that shows how much efficiency improvements will cost or what will be the benefits for the average homeowner. Expectations for the scheme run high at DECC: ‘The Green Deal will put consumers back in control. By 2020, we will have seen a revolution in British property’ says the November document. But it contains no numbers and no calculations. So let’s look at a few figures here – I’m sorry if the arithmetic is a little dense.

How much do households spend on heating?

The typical UK house uses about 14,000 kilowatt hours (kWh) for space heating each year. (The average gas bill is higher but this includes about 4,000 kilowatt hours for cooking and water heating). Today’s prices for kilowatt hours of gas start at around 3.5 pence. (You may pay more – this is the lowest rate I could find for gas from a large supplier). All the space heating needs for the average house can be provided for about £490 per year. We’ll call this a round £500.

The gas we use for heating keeps our rooms warmer than the outside world. In a perfectly insulated house, we’d not need any central heating – the heat from our bodies, the warmth from lights and appliances and the energy from the sun getting in through the windows would keep the house heated. The typical UK house isn’t well insulated and leaks heat in approximately the following yearly amounts.[1] (Fans of this type of data can find much, much more in my book How to Live a Low Carbon Life.)

Walls 6,500 kWh
Windows 3,300 kWh
Ventilation (‘draughts’) 3,300 kWh
Roof (loft) 1,300 kWh
Doors 800 kWh

 

In addition, the typical central heating boiler loses about 2,500 kWh in hot air expelled to the outside world.

The government has provided a long list of energy efficiency measures that householders could plant to introduce under the Green Deal. These range from air source heat pumps to better central heating controls. But the table above gives a good sense of where the savings might actually be worth achieving. If, for example, the walls of a house could be better insulated then it might be possible to save a large fraction of the average heat loss of 6,500 kWh per annum.  Cutting this in half – approximately what can be achieved by adding insulation to cavity walls - would save 3,250 kWh, saving about £115 a year.

Today, cavity wall insulation is subsidised and it will generally only cost about £250 for the average house. After the Green Deal is introduced, the subsidy will go and the full average cost of about £500-£600 will be applied. But even at this higher level of cost, it makes financial sense for the homeowner to pay for insulation of cavity walls. With an interest rate on the loan of 7%, the insulation pays for itself in 7 years.

Although the expected interest rate that will be charged by commercial providers is never specified by the government, the implied figure has risen from 3% mentioned in the early DECC market research to a couple of examples in the footnotes of the November 2011 consultation document that use the 7% figure. Standard personal loans might cost 11% today, meaning that even the 7% figure may turn out to be optimistic.

The crucial fact is that no other piece of house improvement is financially viable. There is either no payback within twenty years at today’s energy prices (double glazing is a good example) or even a small interest rate renders the energy efficiency measure financially unattractive (such as improving the thickness of loft insulation).

Here’s some numbers to back up these assertions.

Double glazing

Cost of double glazing for a medium sized three bedroom semi-detached house  - perhaps £6,000.

Energy saving if this measures cuts heat loss from windows by two thirds – 2,200 kWh per year.

Financial benefit of energy saving - £77 per year.

Payback – about 80 years, by which time the seals on the glazing will have been lost, reducing the efficiency gains.

Loft insulation

Cost of extra loft insulation. (Almost all homes have at least 10 cm of existing covering) – perhaps £320 including the fee of the Green Deal adviser who has to approve the measure.

Energy saving if this measure cuts heat loss from the loft by two thirds – 870 kWh.

Financial benefit of energy saving - £30  a year

Payback with a 7% interest rate – 21 years.

The other major potential cost saving investments are boiler replacements and solar panel installation. Neither come close to achieving a 20 year payback with an interest rate of 7%. A new efficient boiler pays back in two decades (by which time it will probably have had to be replaced again) with a 5% interest rate  and a typical solar panel installation only works with interest rates of 4% or below. This figure assumes that the proposed Feed In Tariff reductions are actually applied.

The very unhappy fact is that with the exception of cavity wall insulation there is no energy efficiency improvement that a family can take that makes strict sense financially if the household has to borrow to make the change. The government’s hypothesis is that British homes are poorly insulated because people don’t have the ready cash to invest in improvements. Sadly, DECC is wrong. British homes remain badly insulated because it is extremely expensive for most people to make real energy saving improvements and few households will want to take on the burden of more debt when the reductions in their energy bills are so small.

The Green Deal as presently configured by DECC will fail. But we must cut household energy bills and reduce the 25% of UK carbon emissions coming from domestic housing. What should we do? First, we need a national well-publicised programme of free cavity wall insulation, with contractors moving street by street to improve every household.

This won’t happen under the Green Deal: it is a hugely complex and a bureaucratic nightmare even a year before it starts. Just to give one example of the costs imposed: the doorstep advisers established under the Deal will be highly regulated and will have supervisory bodies checking their work. Amazingly, on top of these institutions will be a further regulator superintending the activities of the supervisors. The chance of significant success, even at getting large numbers of houses to install cavity wall insulation, are close to zero when the overheads are so great. Only a countrywide programme of free insulation stands any chance. Simplicity can succeed where the Green Deal will not.

Second, we need to have national scheme for insulating solid wall homes. Even the supporters of the Green Deal know that solid wall insulation does not make financially sense. But such measures can make the single greatest difference to fuel bills in money terms. Millions of solid wall houses need external or internal insulation and a nationwide campaign to train an army of people to do the work would have major potential employment benefits. As the economic situation worsens, a campaign to insulate – for free – all the eight million solid walled homes in the country makes increasingly good sense.



[1] The total comes to more than 14,000 kWh because our home heating is supplemented by the heat from lights, people, appliances, hot water and solar energy.