What’s wrong with the Green Deal and how to fix it

Knauf Insulation’s external affairs director Steven Heath on how to fix the Green Deal

Government decision making is based on outdated textbook economics; a reliance on economic modelling that can never truly represent us in all our complexity.

Rather we are reduced to rational calculating machines ‘always motivated by self interest and desire for gain’. These are the claims made in ‘Compassionate Economics’ by Conservative MP Jesse Norman MP.

Should those Whitehall economists have given the insulation industry a call, we could have let them know the population might not be the calculating machines they believe them to be.

Indeed UK Governments over the last two decades have recognised the fact by subsidising products like loft and cavity wall insulation, despite the payback for installing cavity wall insulation actually giving a better return on your investment than apple stock over the last few years. It is the reliance on ‘outdated textbook economics’ that delivered us the Green Deal in its current state; a mechanism that would appear sensible to the rational self-interested mind. Government has stuck to the line‚ ‘why would we force take up of Green Deal in large numbers when it makes perfect sense once you have explained the golden rule’?

What the uptake figures tell us is that Green Deal alone, or even combined with the energy company subsidy, will not deliver the improvement to Britain’s old and leaky building stock that it so desperately needs. But more than the limited interest in Green Deal giving the lie to a simplistic interpretation of human behaviour, it also gives a truth to Government’s willingness to believe an outdated economic model over the evidence.

The Department of Energy & Climate Change’s (DECC) own impact assessment for Green Deal broke the economic textbook mould, with DECC priding itself on actually polling real people on whether the Green Deal was attractive. The resulting low predicted uptake was then dismissed as the result of overly pessimistic DECC economists – and faith in the old textbook thinking was renewed. You might feel some sympathy for the economists in question.

So rather than accept the need for a real demand driver for Green Deal uptake, we have witnessed six months of positive spin about an ever growing number of assessments. Given the amount of insulation left on our forecourt, and the number of reported job losses in the installation industry, over 5000 and counting, we knew these assessments were not converting to real home renovation – more a version of the emperor’s new clothes for our homes.

With the release of these low numbers, the Government must now accept the naked truth;Green Deal needs a demand driver. People need a reason to take it out.

I’ve been working with the UK Green Building Council on what that incentive might look like and picked my own winner;

Linking the level of Stamp Duty paid to a property’s energy efficiency is to me by far the best approach. The amounts needn’t be huge; a small nudge for people to consider the energy efficiency of the property and build it in as a factor into their purchase decision.

In fact it would both encourage the purchaser to consider it when buying and push the vendor to consider before selling as it may affect the purchase price – two bites at the cherry. Actually, it would incentivise the estate agents to offer retrofit…three bites at the cherry, and surveyors… four …or even mortgage advisors … five. Unlike the other incentives often mooted such as a council tax link to property energy efficiency, it hits all the right buttons.

It can;

  • easily be built into existing processes
  • be cost-neutral to treasury
  • designed in such a way that it doesn’t penalise any demographic unfairly
  • comes at a time when people are most likely to be considering refurbishment

    It might also just pass the Daily Mail test as the cost to those purchasing energy inefficient homes will come at a time when finance is being arranged or existing equity released – i.e. it won’t hit the weekly or monthly budgeting in any significant way. What is even more attractive, is the charge is levied, or bonus paid, at a time when people are actually making the biggest financial decison of their lives; in other words people are most like the calculating machines the economic text books believe us to be.

    But then the Government played the emperor’s new clothes trick again! They released a study that suggested people already valued energy efficient homes. DECC research revealed’making energy saving improvements to your property could increase its value by 14% on average – and up to 38% in some parts of England. Closer examination of the study reveals a wonderfully, even beautifully, complex and baffling economic model. The model’s aim is to ‘isolate the effect of the Energy Performance Certificate (EPC) rating’ (ref p15).

    Alarm bells were already ringing as I followed enthusiastic tweets from Government and industry alike welcoming the report. Does this mean people do understand more than I give them credit for. That for years prospective buyers have not only been whispering into each other’s ears ‘I love the garden’ but also ‘that boiler is 15 years old! It had an efficiency level of only 60% when it rolled out the factory and is probably down at 30% now! We should knock a few thousand off the asking price’.

    The authors of the paper concede that ‘property condition’ is a potentially significant variable missing from the study. The outcome may therefore be that older dwellings which have been refurbished or are well maintained will have higher EPC ratings than poorly maintained buildings (ref p14).

    Were the above to be true, and I believe it’s likely, what the complex economic model appears to be telling us is; ‘People are willing to pay more for nicer homes!’. That headline might struggle to force its way on to the front page.

    I would have an even simpler test to get to the truth behind the study. How many estate agents are advising their clients to make energy efficient improvements to their properties before placing them on the market? This would help the seller realise the high prices listed in the study and increase the agent’s commission. If the answer is few to none, then the study is misleading.

    My concern is that, as the writer of Compassionate Economics points out‚ the Government is all too willing to believe economic modelling can represent the real world adequately and we, the public, can sometimes believe the modelling despite evidence to the contrary. Pushing the line that people already account for energy efficiency in purchasing decisions may well undermine the one demand driver that could yet mean the Green Deal delivers against its potential.

    If I were George Osborne, I would read the DECC study into housing prices and decide the invisible hand of the market will eventually deliver up the improvements in the housing stock we need; so no need for a stamp duty incentive linked to energy efficiency. I would quietly ignore the messy reality of such low Green Deal take up numbers and simply put it down to teething problems; sure in my mind that people will come to their ‘rational’ senses soon enough.

    As far as the Green Deal is concerned, the nuts and bolts need examining through the lens of what people actually might agree to; not what Government and economic models assume they should. The first step to achieving this is to put access to all cash backs and incentives behind generic multiple measure energy efficiency retrofit. Then see if people pick Green Deal as their route of choice to market. If they don’t, tweak it until they do?

    At an estimated cost of between £7bn-£11bn a year to deliver the retrofit to the housing stock we need (ref E3G Financing the Green Deal), and an estimated ECO subsidy spend of only £1.3bn a year, something needs to fill the funding gap.

    I believe that to be an attractive functioning Green Deal.

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