The UK’S Green Deal becomes law with great hopes and remaining incertitude

energy consumption, green deal, house renovation The UK’s Energy Act 2011 officially became law last fall, thus kicking-off the countdown to implementation of the coalition government’s flagship initiative, the Green Deal, which we first introduced here on this blog. The Green deal will allow households to borrow funds to implement energy-saving refurbishment. It is specifically designed to avoid upfront costs, through a system where repayments will be directly collected via gas and electricity bills. One of the novel features is also that the investment is paid for by the occupier and not necessarily the owner.

The UK government’s level of ambition is high, with the objective to refurbish millions of homes in hope that it allows the UK to meet its national carbon targets. The buildings sector uses about a quarter of the country’s total energy consumption, according to the Housing Energy Fact File 2011 for Great Britain. The Green Deal also tackles fuel poverty by providing additional funds for refurbishments to poor households via a savings obligation on energy companies.

Getting implementing measures right for the Green Deal

As Adam Corner writes in The Guardian, the idea of the Green Deal was to ‘nudge’ people into adopting energy saving measures, rather than trying to persuade them to do so. The UK’s approach is original and thought-provoking, however some commentators have raised concerns that the Green Deal would encourage the so-called ‘rebound effect’, which affirms that when energy bills get lower consumers are tempted to use more energy. As we learned from the first REXEL/Harris Interactive Energy Efficiency barometer, British consumers have a high level of awareness of the importance of energy efficiency. However in practice, Britons admit that their habits are not so energy-efficient.

Campaigns and incentives to tackle a culture of waste amongst consumers are a necessity in order to reap the full benefits of refurbishments and avoid the much-feared rebound effect. The UK government’s priority is first and foremost to improve the performance of existing buildings, by a significant margin to pave the way for a low-carbon building stock by 2050. To achieve such long-term objectives, the upcoming secondary legislation will be crucial to avoid another adverse effect of energy efficiency policy, the ‘lock-in effect’. Indeed, the renovation cycle of a house being about 30 years, one major risk is that the Green Deal encourages shallow refurbishments producing sub-optimal energy savings, thereby locking in future necessary investments.

‘Nudging capital markets into financing Green Deals

Many grey areas remain around the UK’s Green Deal, but it is worth noting the creation of the so-called ‘Green Deal Finance Company” (GDFC), a consortium of private sector companies including retailers and financial institutions. The GDFC aims at financing and delivering green deals, relying solely on private capital. Ultimately the consortium should open the door to an important market and stimulate private capital to invest in green deals, promising both a comfortable return on investment and a very positive end-goal: stopping fuel poverty and reducing carbon emissions in the building sector.

The shape of things to come

The coming months will be decisive to get the Green Deal right, as secondary legislation must be introduced to allow implementation at the end of 2012. Expectations are high and some observers still point at weaknesses related to interest rates that will be applied to Green Deal loans, or to the fact that the government will only have a small role to steer the Green Deal scheme once in place.

In any case, the UK’s experiment, by its magnitude and sophistication, will undoubtedly inspire policymakers in other countries. It is already a major step in the world of energy efficiency policy. At a time where governments struggle with budget deficits, the Green Deal could bring a credible answer to the climate challenge, whilst having a very limited impact on the government’s budget.

Learn more about the UK Green Deal

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