As summer recedes and the familiar grey drizzle returns, will companies start preparing for winter by making use of the Green Deal ask Charlotte Hill and Simon Keen.
The Green Deal is the government’s flagship programme introduced under the Energy Act 2011 and aimed at improving the energy efficiency of millions of homes and businesses without property owners having to pay all the costs up front. So far, the Green Deal has proved a bit of a damp squib.
Under the scheme, the government had hoped to have householders in particular queuing up to have an array of new insulation, double glazing, boilers, solar panels and heat pumps installed by specialist Green Deal providers, with the cost to the householder being recovered via their electricity bills. The package provides a funding mechanism of up to £10,000 repayable over 25 years for a range of energy-saving improvements, together with a limited cashback fund to incentivise early take-up of the Green Deal. The principle behind the financing, known as the “Golden Rule”, is that the cost of repayment in each period should not exceed the estimated financial savings achieved in the same period from the energy improvement measures funded by the Green Deal, and that the total length of the repayment period should not exceed the expected lifespan of the improvements.
However, between January 2013, when the Green Deal was launched to great fanfare, and late June 2013, only a handful of households had actually signed up to the Green Deal. In fact, the primary effect of the Green Deal so far has been a dramatic fall in the previously free or subsidised loft and cavity wall insulations (a 97% drop in April 2013 compared to the previous year) and resulting job losses (about 4,000) in the industry. The cashback element of the scheme, on the other hand, has proved more popular with many households buying costly items such as new boilers and claiming a discount through the cashback fund.
This poor take-up of the debt-funding part of the Green Deal can principally be attributed to the fact that, with current interest rates so low, the 7% to 8% being charged on Green Deal financing makes no sense for most property owners, for whom it will be cheaper to borrow on their mortgage or via some other form of commercial lending. Another issue is simply a fear of the unknown: some people are nervous about incurring debt that attaches to their property’s electricity bill, for fear it could put off future purchasers. For landlords, if the tenant pays the utility bills, there is little incentive at present to borrow money to reduce the bills and the combination of short leases and long payback periods means that Green Deal financing could fall to be repaid by the landlord when the property is empty. The landlord derives no benefit from this expenditure as no electricity consumption means no saving is achieved.
However, the Green Deal may well become more relevant to both residential and commercial landlords in the next few years. The Energy Act 2011 obliges the government to introduce regulations by April 2018 that will require both commercial and residential properties to attain a minimum EPC rating (probably an E) before the landlord can let them. In the case of landlords of commercial property, there is no cap to the fine that can be imposed for non-compliance. Only if a landlord has carried out all the improvements that will be identified in the regulations (which are likely to match the improvements available under the Green Deal) and the EPC rating still falls below the prescribed rating will the landlord be allowed to let the property. Although the detail of these regulations has yet to be fleshed out, this is already focussing some landlords’ minds on whether energy efficiency improvements should be undertaken in the next void period for their property.
The government also plans to introduce further measures by 2016 that will prevent a landlord of residential property from unreasonably refusing consent to a tenant making energy efficiency improvements funded by the Green Deal. This will not apply to commercial property but, if the Green Deal has the impact the government hopes, commercial tenants may nonetheless start exerting pressure on landlords to agree to such works as properties with low energy efficiency become increasingly unmarketable and expensive to run.
One major barrier to the Green Deal’s success has been uncertainty about the effect of the Green Deal on the attractiveness of a property to prospective buyers and tenants. Landlords might be keen for the payback period under the Green Deal to be within the period of a tenant’s lease so as to avoid any repayment liability falling on them during any void periods at the end of the term and to prevent it impacting its marketability. However, even putting aside the risk of early termination of a lease either through break rights or tenant insolvency, it is highly unlikely that the Green Deal would satisfy the Golden Rule if it is limited to, say, a five year repayment period to dovetail with a five year lease. If the Green Deal does take off then, in most cases, it should be expected to straddle the terms of several leases.
From a practical point of view, the key thing to bear in mind on a sale or letting of a Green Deal property is that there is a legal obligation to disclose the existence of the Green Deal to the prospective buyer or tenant and to obtain a written acknowledgement from the buyer or tenant showing that they are aware of the charge and understand that they will be bound by the terms of the Green Deal Plan and liable to pay the charge. In practice, the existence of a Green Deal Plan should be disclosed as the EPC of a Green Deal property should indicate that a Green Deal Plan is in place, but where the Green Deal energy efficiency improvement works have not yet been completed or inspected there may be a delay in the Green Deal Plan appearing on the EPC.
The painfully slow start of the Green Deal has been something of an embarrassment for the government. Although the Green Deal has so far been relatively unattractive to residential homeowners, who have not even been particularly tempted by the cashback element of the scheme, the Green Deal may have more success in the private rental sector as the government introduces its follow up regulations in time for 2016 and 2018. In the meantime, it would not be surprising if the government were to offer further incentives to homeowners and businesses alike to make the Green Deal more attractive. Options include lowering the Green Deal interest rates or providing tax incentives such as a council tax or SDLT rebate for properties that have taken advantage of the scheme, or even punitive steps for properties that remain steadfastly energy inefficient.