Energy efficiency in the workplace: what does the Green Deal mean for business?

Published by Louise Bateman,

It’s just seven months before the launch of the Green Deal, the biggest energy efficiency programme to hit the UK. So is it shaping up to be a good deal for business?

As anyone connected with the Green Deal will tell you, there is much work still to be done before the Government’s flagship energy efficiency programme launches in October – just seven months from now. That’s a tight timeframe in anyone’s book for a multi-billion pound scheme that is setting out to insulate 14 million homes by 2020. As its original architect, Climate Change Minister Greg Barker, puts it, “the Green Deal is the largest home improvement programme initiative since the Second World War”. Others have spelt out the challenge more starkly: retrofitting a city the size of Cambridge each and every week over the next 20 years is what is required to get our homes energy efficient to meet tough 2050 UK carbon emissions reduction targets.

The UK has some of the oldest – and ‘leakiest’ – housing stock in the world, responsible for 24 per cent of the UK’s total CO2 emissions. And most will still be standing in 2050, the target year to reduce UK carbon emissions by 80 per cent. No wonder then that much of the focus of the Green Deal – everything from how it will be financed through to how to incentivise take-up – has been centred, up to now, on the homeowner market.

So where do businesses figure in all of this? Non-domestic buildings are responsible for a sizeable 18 per cent of the UK’s carbon emissions and most are occupied by small to medium-sized enterprises (SMEs), the backbone of the UK economy, and a sector, by all accounts, most in need of help when it comes to energy efficiency. Energy costs are expected to rise considerably for businesses over the coming decade, yet most have done little to improve their energy efficiency to date. Recent research by energy company E.ON found four million out of the 4.8 million SMEs in the UK are not implementing any energy efficiency measures, translating into costs of up to £2000 per company.

Ministers have said they want businesses – in particular SMEs – to take up the Green Deal to improve their energy efficiency. But most business bodies agree that, even at this stage, many questions still remain unanswered.

“The Green Deal is a great idea to break down the upfront finance barrier to energy efficiency, but if we are really going to build energy efficiency in of the market we need a coherent package,” says Dr Matthew Brown, head of energy and climate change policy at the CBI.

How the Green Deal works

The idea behind the Green Deal is to enable business owners – as well as homeowners – to gain access to upfront capital, expected to be capped at about £10,000, in order to complete energy efficiency measures, such as insulation, draught-proofing and lagging. (Other measures such as green technologies and water efficiency are also likely to be funded with the help of the Green Deal, Ministers have indicated).

Key to the scheme is the ‘Golden Rule’, which guarantees loan repayments will not exceed the cost savings brought about by the energy efficiency improvements throughout the financing period.

Green Deal loans: risk to businesses of being squeezed out

The Green Deal Finance Company (GDFC) is a new mutual that is being set up to ensure Green Deal loans are cheap enough to meet the ‘Golden Rule’. But Paul Davies, a senior partner at PwC, which is co-coordinating the GDFC, admits that the venture will not apply to everyone and that some businesses could find themselves squeezed out of the Green Deal altogether.

“We are first and foremost aimed at households, but as smaller SMEs have much the same characteristics as the household market, we will be able help them,” he explains. “Where we break down is with the larger corporates, which have significant exposure – they will be the domain of the banks.”

But larger SMEs could find themselves out in the cold completely, because as Davies puts it, they are “too big to have the same characteristics as households but too small to have the characteristics of big corporates.

“There is an obvious opportunity there for some banks to focus on [this market],” he suggests.

On the financing front, the Green Deal throws up another potential concern for businesses, according to David Caro, Environmental Policy chairman at the Federation of Small Businesses (FSB). “There are several issues that haven’t been put to bed yet. One of those is to ensure any Green Deal loan has a Chinese wall between it and any normal trading loan. If there’s a £10,000 debt against a business, you don’t want the banks to look at it and say we can’t loan you any money to grow your business.”

Green Deal incentives

One of the biggest headaches facing policy-makers is how to get people to ‘buy into’ the Green Deal when it launches. DECC’s own research shows that two out of three consumers think their home is wasting energy, but only one in three is prepared to do anything about it. Businesses are no better, with recent figures from British Gas showing that nearly half the electricity used by them is out of office hours – suggesting much of it could be wasted energy.

The Government is throwing everything it can at the Green Deal to ensure it goes off with a bang. It’s even making the Green Deal one of the priorities of the £3 billion Green Investment Bank. The Treasury, meanwhile, has committed £200 million of extra funding in a bid to get the scheme off the ground when it launches. One possible ‘sweetener’ for early adopters could be £150 cashback for householders that take up the Green Deal.

But it is less clear what incentives are being considered for businesses.

“We’re working with the sector to find out what the best incentives will be to encourage uptake,” says Barker.

Offering discounts on business rates or stamp duty are just some of the ways businesses could be encouraged to take up the Green Deal, says Brown. “If £200 million is about making the Green Deal go off like rocket, longer-term – and although we haven’t proposed this – helping with stamp duty and business rates would help to embed it into the market.”

Caro is skeptical about what the Government will be able to offer businesses in terms of incentives given the financial deficit it faces, and says policy changes to other incentive schemes, such as the Feed-in Tariffs, are likely to act as a disincentive for many businesses considering the Green Deal.

“Investors in the Green Deal are going to be more wary too, rather than risk another Feed-in Tariff,” Caro notes.

The landlord tenant relationship

The reality for most businesses is that they don’t own the premises they operate from – often working out of multi-occupier buildings. Barker says landlords will be encouraged to invest in energy efficiency measures through the Green Deal because they will be able to do it with no upfront costs and cheaper, warmer buildings will be more marketable to potential tenants.

But he acknowledges that there will always be disagreements between tenants and landlords. “We are therefore continuing to explore options to make uptake of the Green Deal in the rental sector as easy as possible,” says Barker.

On of those is to make it impossible from 2016 for landlords to refuse any tenant or their representatives asking for their landlord’s consent to make reasonable energy efficiency improvements. In addition, from 2018 the rental of the very worst performing properties – those rated F and G – will be banned through a minimum energy efficiency standard.

More immediately, though, some in the property sector are raising concern about the complex nature of the consent within the current framework of the Green Deal. Stephen O’Hara, chairman of the Property and Energy Professionals Association (PEPA), which represents business that is engaged in the provision of Energy Performance Certificates (EPCs) and Display Energy Certificates (DECs), says for non-domestic properties there is often a complex title, with sub-tenants, trustees and freeholders all involved. “If consent from all parties is required the process is likely to be lengthy and cumbersome, often resulting in a failure to secure consent from all parties,” he says.

PEPA has serious concerns about the “number of unanswered questions” around the Green Deal and how it relates to non-domestic properties. It is therefore calling on the Government to delay the introduction of the Green Deal until the issues are resolved.

“We are calling on the Government to introduce a staged introduction of the Green Deal, which would see the Government press ahead with its planned implementation programme for domestic properties, while delaying the introduction for non-domestic properties until a number of areas have been further explored and defined,” says O’Hara.

For now, such action seems to have limited support among the rest of the business community. What happens in the next few months will determine whether the Green Deal launches with a bang or grinds to a halt, however.

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