Will the Green Deal change the complexion of the merchant industry? Lisa Arcangeli asked four companies to comment about how they believe this scheme will impact on their particular business sectors.
The Westminster coalition Government has proclaimed that it will be the greenest Government ever.
At the heart of its green ambitions is the Energy Bill, which is expected to receive Royal Assent before the Parliamentary summer recess thus making it the Energy Act 2011. The flagship policy stemming out of the Energy Bill is the ‘Green Deal’.
“Britain has some of the oldest housing stock in Europe. Our draughty homes are poorly insulated, leaking heat and using up energy.
“As consumers, we pay a high price for inefficient housing – and so does the planet. A quarter of the UK’s carbon emissions comes from the energy we use to heat our homes, and a similar amount comes from our businesses, industry and workplaces.” Chris Huhne, Secretary of State for Energy and Climate Change.
There is “significant concern from the insulation industry at the current shape of the Green Deal as a model”, according to Michael Beard, sales and marketing director of Superglass Insulation.
The insulation sector through trade body MIMA (Mineral Wool Insulation Manufacturers’ Association) and ACE (Association of Conservation of Energy) has made vigorous responses to the consultation.
It has stated that while the industry accepts the principles of the Green Deal, the switch-over between the current obligations that the energy companies have with the CERT model to Green Deal will create major problems in the future.
“The CERT model is based on subsidised insulation by the energy companies, to which we, as consumers, all contribute through our energy bills – averaging £40/year by energy type,” Mr Beard explained.
“It is generating significant activity in insulating lofts and cavities throughout the country to reach the Government’s ambitious carbon reduction targets as well as to eradicate fuel poverty.”
In January 2012, ACE published its ‘Dead CERT’ report. It focuses on two main measures used in CERT: cavity wall (CWI) and loft insulation (LI).
The construction industry accepts these measures as proven and Mr Beard believes they offer a huge opportunity when CERT ends and Green Deal commences alongside the new Energy Company Obligation (ECO) at the end of 2012.
“As the Green Deal model stands, its main thrust is market-driven and targets more expensive solid wall insulation solutions.
“This change in model, virtually overnight, will mean that an awful lot of lofts and cavities will remain unfilled for many years,” he said.
“If treated, these lofts and cavities would assist significantly in achieving our target reduction in energy usage.
“We believe there are 6.2 million cavities and 8.5 million lofts which at the end of this year, will still remain to be filled. Under the current Green Deal model it will take 10 years to complete the work.
“A framework must be built to allow a sustainable transition for the insulation industry, while ensuring the Government’s own carbon budgets, fuel poverty targets, and the wider ambitions for the Green Deal can be met,” said Mr Beard.
“My personal view is that Green Deal could work well for the householder who wants to spend significantly on energy efficiency for his property, for example, with PV or solar.
“However it doesn’t get away from the fact if you haven’t got the fabric of your building in good condition in the first place, for example well insulated walls, then whatever you are putting on it you are wasting. It’s like buying a superb bath without the plug.”
The Green Deal will not happen overnight. Results of the consultation are due at the beginning of April which leaves about five months for planning and implementation. CERT runs until the end of 2012. Where does that leave the merchant?
“Merchants are not benefiting massively from CERT at the moment,” said Mr Beard. “They have some of the DIY loft insulation market, much of which is subsidised through schemes like Superglass’ ‘SuperDad’.
“Under the Green Deal, these schemes are likely to disappear and that will be good news for merchants because at present the perceived value of a roll of insulation is around £10 when it should be more like £20.”
For merchants to benefit from the Green Deal its final shape has to be seen before they can model their business to take their share.
“Merchants may find themselves facing stiff competition from professional contractors who will be delivering the Green Deal using strong brands to lead it, like M&S, B&Q and Tesco. I think the merchant will find it challenging to get a share as the Deal stands at the moment.”
Neil Schofield, head of government and external affairs at Worcester, Bosch Group, is well placed to comment on Green Deal. Mr Schofield sits on one of the Deal’s four fora – the one looking at the maximisation and take-up of the scheme. Mr Schofield chairs the sub-group for owner-occupiers.
“There is no doubt that the Green Deal is going to happen. As far as DECC is concerned, for energy and environmental policy, it’s ‘The One’.
“Minister of State Greg Barker has said it is going to be so big ‘that you will be able to see it from outer space’.
“Unlike the Feed-in Tariff and RHI, for which this government has little enthusiasm, because it is associated with the previous administration, Green Deal is a coalition policy. But, whether it will happen in October 2012 is debatable.
“Government is now saying it will happen ‘at the end of the year’, which is civil servant speak for 2013,” he observed.
Worcester, Bosch Group welcomes the Deal. “It’s not just an insulation scheme, as originally envisaged. The big opportunity, as we keep telling government, is heating.
That message has now got across, as has the understanding that a whole- house approach is needed.
“With 1.5 million boilers sold every year, in a good year, that means 5000 boilers installed every day. There’s a massive opportunity for heating to be the in-route to have other energy-saving measures done on the back of it.” This line of thinking has definitely got some traction, Mr Schofield said.
“Within the Green Deal, there is the pronouncement that £200m will help to kick-start it. I know that this has got to be a capital project. And that involves kit,” he added.
“Government is also looking a a cash-back incentive. The one that keeps popping up is another boiler scrappage scheme,” he explained.
Among his concerns are that DECC officials don’t understand how the market works.
“People don’t buy energy-efficiency products in great numbers. They get these products through CERT and CESP for almost nothing.
“They do buy heating, but that is chiefly as a ‘distress purchase’. The boiler packs up and they get a new one. What they don’t do is plan.
“The Green Deal is all about planning. You get an assessor around, he makes an assessment, he lists various measures, he signposts the homeowner to a Green Deal provider who comes up with a financial package which is paid back over a number of years.
“People don’t normally buy like that. They also do not buy through the suggested market – like M&S, Tesco or John Lewis or the utility firms.
“Consumers may buy through British Gas. But only 7% of all boilers sold are through that route,” Mr Schofield pointed out.
“The vast majority of heating systems sold are through one-off independent heating installers but they do not feature strongly in the Green Deal.
“The message that I and others are getting across is: don’t forget heating and the route to market – the small installer. Don’t isolate him, use him.”
This message, Mr Schofield said, is something that has now been picked up by the CBI.
Are merchants over-intellectualising the Green Deal? “It is very complicated,” Mr Schofield said. “There are warranty issues. What happens when the homeowner sells their house and the kit they had taken out the loan for?
“What if that kit has packed up? For estate agents selling a house with a Green Deal loan, it will be the equivalent of selling a home with a sitting tenant,” he commented.
The back-office legal aspects will have to be examined.
“We believe that if it is sold to the customer as an opportunity to get new kit in their home and if it is subsidised through a loan over a 15-year period, that could help. If you start looking at what the problems could be, the scheme will be killed at birth.”
In final analysis, if the merchant is going to be a Green Deal provider, they will be looking at the risk and that, said Mr Schofield, “is enormous”.
If merchants can overcome these risk issues, Green Deal will be a very worthwhile scheme and its take-up will be huge, he added.
“Our biggest worry is that government is trying to change the supply chain. In our industry, this works very well.
“Manufacturers make the products, they sell it to builders’ merchants, they sell it to installers who put it in people’s houses. The person who makes the biggest decision is the installer.
“If the Government tries to change this, then the installer is still going to be called out for the distress purchase.
The householder will say ‘I’ve heard about this Green Deal scheme...’ and the installer will reply ‘I wouldn’t go anywhere near it’.”
Government, Mr Schofield said, needs to include the supply chain.
“If they try to re-invent it, the scheme will back-fire on them.”
Initially, Green Deal was to do with insulation and high efficiency boilers. Now renewables/microgeneration is included. “The merchant is well placed to be a Green Deal provider,” said Ian Stares, product group manager – renewables and sustainable energy products at national merchant, PTS.
“A provider will need a wide range of skills – financial, distribution, product and dealing with and talking to the installer and customers.
“Whatever shape the Green Deal provider becomes, certain merchants – depending on their size – would need to have the appetite as well as the financial strength to take on this role,” he said.
The likes of Tesco and John Lewis are being mentioned as keen to take up the scheme, as are the utilities companies, he added.
“But they will need specific skills. Utilities may have the customer base, but they may lack distribution. Tesco and John Lewis will have a customer base but will need product and distribution, but will have the finance.
“If you start with a blank piece of paper and ask ‘what type of organisation could be a Green Deal provider?’ you could be looking at a ‘hybrid’ model.
“Different organisations with different skill sets like for instance a merchant and a utility, etc, could collaborate to become a Green Deal Provider.
“The Green Deal has the power to re-shape the market, but as with everything from government, it needs to be implemented correctly.”
Mr Stares envisages that the Feed-in Tariff and RHI, although previous government initiatives, will somehow be merged into the Green Deal.
“Before he stepped down, Chris Huhne said ‘no’ to another boiler scrappage scheme. But, that scheme certainly boosted sales.”
Merchants like Travis Perkins, he said, will be looking into how they would wish to engage in the process.
“There is a very real possibility that this process will change how we do things and organisations will want to strategically position themselves to benefit,” Mr Stares stated.
A provider must offer finance, independent energy assessors, a product, distribution and the organisation behind this to look after the liabilities of the entire process.
“It is unlikely that one organisation will be able to do this, unless it is backed with financial strength to buy those skills in,” he said. “Unless there is a merger with another organisation, creating a hybrid operation. Small independent merchants may well feel left out at this point,” he said.
Another thing which needs redefining is the Golden Rule – the financial savings derived from the Green Deal energy-saving measures recommended by the accredited advisor.
“These must be equal to, or more than, the cost of implementing the energy-saving measures and the repayments must not be longer than the expected lifespan of the measure.
In the consultation document, questions have been asked by the industry.
“Whether the Golden rule need to be looked at again is one question.
“It may be applicable when you are installing cavity wall and roof insulation and boilers,” Mr Stares explained, “but, if you are looking at renewables, the cost of capital will be higher and the savings need to be examined more much more carefully.”
John Sinfield, managing director of Knauf Insulation, believes that the Green Deal will be consigned to the dustbin of history.
“It’s a nice idea, but I feel it is destined to fail. Until we hear the follow-up to the consultation, we can only base our views on what we have seen in the consultation document and the impact assessment and what that says is that insulation activity and upgrading of properties will virtually stop next year.
“Some reports have claimed that there could be up to a 90% drop in loft and a 60% drop in cavity insulation. This is because of the way the Green Deal and the energy company obligation legislation is structured.”
According to DECC’s own data, the level of loft insulation installation work being carried out under the Green Deal is forecast to be 93% lower than under the present system.
“The Government has a strong ideological view that those who can pay, should pay. That is fine, if you give people the incentive to do it,” Mr Sinfield stated.
“At present, the Treasury has allocated £200m to start the Green Deal off, but there is no incentive to take up an upgrade package.
“With CERT and CESP, there’s energy company e.on which, if the householder is in receipt of certain benefits, offers to pay £100 for them to have their insulation upgraded. British Gas and Carillion Energy are offering loft and cavity insulation for free.
“My question to DECC is ‘if you cannot incentivise people to take up the offer when it is free, how are you going to do it when they have to have a Green Deal finance package, assessment and potentially, a much more expensive and larger package of work?’
“The best case interest rate I have seen is 6.5% to 7.2%. The Government says there is no upfront cost because it is paid through a customer’s energy bill. But that is an unknown. How can you make sure those savings are there?”
Mr Sinfield concluded: “Then, there’s the human factor. The customer may decide to have new a new boiler and heating controls installed, but may choose to turn the heat up by a few degrees. In that case, any savings that that have been generated by having an upgrade, are gone.”
Mr Sinfield added that a policy must be established “that does not create lots of government debt”. It must finance the deep reftrofit of housing stock and also deal with more expensive measures, such as boiler installation.
“The Green Deal is a good concept. But, you have to offer measures to make the general public take it up.
“I have sat through a number of meetings chaired by Minister of State Greg Barker.
“He has made it abundantly clear that the Government will not promote or market the Green Deal. The Government sees that as the industry’s job.
“It has been proposed that there should be stamp duty or council tax incentives to drive people to take it up. Of course, these may come forward in the consultation responses, but, so far, they haven’t.
“In January, the Minister seemed convinced that the proposition was so attractive that consumers will want to take it up. If you can’t give home energy upgrades away, why will people find the disruption of fitting solid wall insulation attractive?”
Rumours have been circulating thoughout the merchant industry that despite the consultation, much of the Green Deal has already been written.
Mr Sinfield lends credence to this. “Prior to the consultation document being issued, I was involved in a conversation where officials stated that ‘they really were consulting on some of the Green Deal’.”
This article first appeared in the February 2012 edition of Builders' Merchants News.
