Green Deal: Does it add up for homes?

01 / INTRODUCTION

The 2011 Energy Act, which received Royal Assent in October 2011, has now put the legal framework in place for the government’s flagship “Green Deal” energy efficiency initiative. The framework is scheduled to go live from October 2012. To facilitate this, the Department for Energy and Climate Change (DECC) formally issued the consultation on 23 November 2011.

Apart from reducing energy consumption, the consultation launch heralded other benefits of the scheme including no upfront costs to the owner, massive business opportunities, stimulating private sector investment and offering bill payers protection from global fossil fuel prices.

In tandem with the Green Deal, DECC also launched details of the Energy Company Obligation (ECO) which will place an obligation on energy suppliers to provide additional support for hard to treat homes and tackling fuel poverty. ECO will replace the current Carbon Emissions Reduction Target (CERT) and Community Energy Saving Programme (CESP) initiatives and is only eligible on certain domestic properties.

The Green Deal and ECO “carrot” is supported also by the proverbial “stick” in the Energy Act. From no later than April 2018, a residential or commercial property cannot be let if it has an Energy Performance Certificate rating of “F” or “G”. Therefore landlords will be required to improve their buildings before letting to achieve an “E” rating or carry out the maximum package of measures available under the Green Deal and ECO. This will potentially affect up to 680,000 severely energy inefficient homes and 18% of all commercial buildings as suggested by government figures. The finer points of this proposal are expected to be fleshed out in secondary legislation.

02 / GREEN DEAL UPDATE

The Green Deal consultation document did not spring any major surprises, only subtle changes and a lot of detail of how it will work. Home owners can contract with a Green Deal provider to carry out energy efficiency improvements to their properties and then repay the cost through savings in their energy bills.

DECC has confirmed that the energy savings are not guaranteed to fully cover the annual repayment charge because it would be extremely difficult to implement and enforce. Instead, only charges in the first year will be restricted to the estimated annual savings based on standard energy usage at the property.

Future energy savings and repayment charges will be kept on the conservative side because only energy prices rising in line with inflation will be modelled in the initial assessment and the interest rate will be fixed for the period of the loan.

As before, all eligible improvements must meet the “golden rule” which has now been tweaked so that the amount of Green Deal finance available is limited to the total estimated energy bill savings resulting from the improvement. The golden rule is now more flexible to allow Green Deal finance to part fund the cost of improvements with homeowners, bill payers and/or other sources of funding, such as the ECO, picking up the remainder of the cost.

03 / GREEN DEAL ELIGIBLE MEASURES

DECC’s publication in May 2011 “What measures does the Green Deal cover?” listed the following indicative list of measures eligible for the Green Deal (see Figure 1). To undertake the modelling for the consultation document DECC produced a Green Deal Household Model (GDHM).

It focuses on some of the measures in Figure 1:

• Insulation measures: cavity wall, loft, solid wall;
• Other: boilers and central heating.

Other additional measures which are included in the analysis (but not in the GDHM) are double glazing; secondary glazing; floor insulation; and flue gas heat recovery.
The remaining measures in Figure 1 are not included in the analysis. This is because the payback for many is expected to be longer than the lifetime of the measure. With respect to microgeneration technologies the Green Deal and ECO are expected to drive very little additional take-up as it is hoped that the Renewable Heat Incentive (RHI) and feed-in tariff (FIT) will be the primary driver for these.

It should be noted that DECC still recognises that the other measures in Figure 1 not included in their analysis (ie. flat roof insulation) can still be eligible if the golden rule can be met in the future.

The consultation document presents the data on the technical potential for energy efficiency measures included in the analysis (Figure 2).

The analysis within this article focuses on the measures in Figure 2. It investigates how they perform against the golden rule and those which offer the most significant benefits. In addition, it looks at some of the measures excluded by

DECC, namely draught proofing and heating controls to test whether they can offer an attractive benefit.

Flue gas heat recovery has not been modelled due to the limitations of the modelling software. It is recognised that these are highly effective technologies and should be implemented wherever boilers are upgraded.

04 / EXPLAINING THE ENERGY COMPANY OBLIGATION (ECO)

Under the ECO, each major energy supply company has an obligation to meet targets by encouraging householders to take up energy-saving measures. Each supplier will have two separate targets, with one set in terms of carbon savings and the other in terms of reducing the cost of heating for vulnerable consumers.

Proposed targets were announced in the consultation document:

• 0.52 MtCO2/yr by 2015 (equivalent to 2.0 MtCO2/yr in 2022 pro-rata)
• £3.4bn reduction in notional lifetime costs of heating for low income and vulnerable households by 2015.

It is estimated that delivering these outcomes will require an annualised investment by energy suppliers of about £1.3bn.

The primary aim of the ECO carbon target will focus on driving delivery of insulation systems for solid walled properties that cannot receive straightforward cavity wall insulation. According to DECC’s figures, 59% of homes in Great Britain are insulated with cavity wall insulation and/or 125mm of loft insulation. Only 1.4% of homes have received internal or external solid wall insulation. ECO funding will be available for these ‘hard-to-treat’ homes because it is envisaged that the golden rule under the Green Deal can’t be achieved without additional subsidy.

It is likely that in many cases consumers will be incentivised to take-up these measures with combinations of ECO subsidy and Green Deal finance. Suppliers and Green Deal providers will need to work together to provide an offer to the consumer that comprises the optimum mix of support between Green Deal finance and ECO subsidy.

05 / ANALYSIS OF CASE STUDIES

To align with the modelling undertaken by DECC the properties modelled within this analysis are assumed to be three bed units. To highlight how the measures / payback periods will differ depending on the type of construction, solid walled and cavity walled properties have been reviewed as per these descriptions:

• House type 1: three bed end terraced unit with solid wall construction (built in about 1930), floor area of 108m2 and EPC rating of “G”.
• House type 2: three bed semi-detached unit with cavity wall construction (built in approximately 1960), floor area of 122m2 and EPC rating of “D”.

For each house type a number of Green Deal measures were investigated on the following
basis:

• The cost of the measure (£)
• The energy savings available (gas and / or electricity) (kWh)
• The payback available (years)

The results for each house type are shown in Figure 3 and 4, attached.

06 / ANALYSIS OF RESULTS FOR HOUSE TYPE 1

Most improvements are shown to meet the golden rule because the payback period is shorter than the life of the improvement. In other words, the total energy savings exceed the initial cost of the improvement including finance costs. Notable “quick wins” include tank insulation, heating controls, loft insulation and internal wall insulation. Although insulating the solid wall internally offers an excellent payback it must be remembered that this will reduce the useable floor space of the property.

Our findings demonstrate that draught proofing measures can qualify for the golden rule providing the life time of the measure can be demonstrated to be at least five years. This is an important message of the manufacturers and developers of such measures.

Neither upgrading the glazing, nor upgrading the ground floor insulation offers a payback within 25 years. This is a reflection of the cost versus the savings available. These measures are more effective once other major upgrades are deployed first (ie. post implementation of solid wall insulation).

The results above demonstrate that solid wall insulation (both internal and external can meet the golden rule). This is in contradiction to DECC’s findings. This is largely due to the disparity in assumed costs (with DECC’s projected costs between four and six times higher). This difference is likely to be due to the cost data above assuming bulk purchasing power. It highlights the need for industry to establish an efficient and cost effective supply chain and delivery body.

07 / ANALYSIS OF RESULTS FOR HOUSE TYPE 2

As with expectations, addressing cavity wall insulation is an essential facetof reducing energy consumption / carbon emissions. The payback for the loft insulation is less obvious when there is already some in place as the relative energy savings to cost decrease (albeit due to the lifetime of the measure the golden rule is still met).

The results display that an effective heating system is a key factor in reducing energy consumption and can offer excellent payback.

Interestingly, adding the insulation to the tank and pipe runs does not offer a payback within 25 years, this is due to the time involved in accessing and lagging the pipes. This measure could be effective if combined with another activity (ie. if the floor boards have already been taken up due to fitting insulation).

Key findings

For measures that offer a payback of less than five years the level of interest rate on the finance does not have too much influence. When the payback for measures is longer term (ie. 10 years plus) the interest rate has much more influence.Combining measures is a sensible option as two or more items can be addressed hence reducing repeat work / disruption.

Modelling ‘bundles’ of measures

Within the Green Deal consultation, the impact of implementing a number of measures concurrently was put forward. These measures were grouped into “bundles” based on whether the measures would pay back within five years or not. Combining measures is a sensible approach, however, it was anticipated it would be more cost effective to group measures into bundles that complement each other in a practical way. The proposed bundles were as follows:

• Bundle A (major improvements): Ground floor insulation; external walls, windows
• Bundle B (quick wins ie. less disruptive): Loft insulation, tank insulation, draught proofing
• Bundle C (services): Upgrade heating systems; upgrade controls.

The results from the modelling for house type 1 (solid wall construction) can be shown overleaf in Figure 5. This house type was modelled on the basis that larger savings / more effective payback periods than compared to house type 2. It was assumed the overall cost of measures comes down by 3-5% compared with implementing the measures independently of one another. This is a result of the crossover of some activities ie. using the same scaffolding for the rendering of external walls and replacement of windows. As above, it has been assumed that the bundles are implemented independently of one another.

08 / KEY FINDINGS

Installing a gas central heating system and controls (Bundle C) where they are not present offers the biggest reduction in carbon emissions. However the limitation of this is the fact that a gas connection may not be available for rural properties.

Bundle B offers a good payback but still does not take the EPC rating above a “G”. This is due to the poor performance elsewhere (ie. with the building fabric).
Bundle A meets the golden rule - the payback offered is within the lifetime of the measures but a payback is not achieved within 25 years (the anticipated term of the Green Deal loan).

An investigation was carried out to review how much funding would be required (potentially from the ECO) to bring the payback of the all measures within bundle A within 25 years. The results from this are shown in Figure 6 (note that as displayed above in Figure 3 the external wall insulation did payback within 25 years).

09 / CONCLUSIONS

This analysis investigated the measures within DECC’s Green Deal Household Model plus the additional measures DECC identified that should offer good payback. Furthermore, a couple of measures not analysed by DECC have been reviewed.

The results show that most improvements including solid wall insulation can meet the golden rule. This is contradictory to DECC’s findings albeit our cost data has assumed a significant discount due to the establishment of an efficient supply chain and work force.

Certain measures, namely ground floor insulation and glazing, do not offer a payback within 25 years (when applied as standalone measures) therefore would benefit from some form of subsidy. On this note it would be useful if the ECO could be applied to wider measures beyond just the solid wall insulation.

This finding is consistent with the message of the Committee on Climate Change (CCC). The CCC is concerned that if the ECO focuses on just solid wall insulations areas where arguably more carbon savings are available (ie. insulating lofts and cavity walls) may be neglected.

Bundles of measures will offer more substantial savings in cost and energy due to the avoidance of repeat work and the complimentary influence the measures will have on one another. However, the bundles of measures will not be effective unless the most significant areas of heat loss / inefficiency are addressed as a priority.

The influence of the heating system is significant. Even if the building fabric is addressed, considerable energy will be wasted if the heating system is inefficient with limited control(s).

The Green deal / ECO is potentially a low cost source of finance, however the longer the payback the more influential the interest rate.

Once uptake gathers momentum the overall cost of the upgrades should decrease hence improve the viability of measures to meet the “golden rule”. Manufacturers and product suppliers should ensure that the lifetime of their products and materials are guaranteed to be as long as possible.

At present, there is a pressing need to address the energy efficiency of existing stock and access to finance is limited. Notwithstanding a few teething issues, the Green Deal / ECO is potentially an attractive source of funding and innovative way to reduce energy consumption and the associated carbon emissions.