Energy efficiency scheme gets the green light
Published: 22 January 2013 | Author: Bernard Clarke
In less than a week, the government’s Green Deal goes fully live. From next Monday, the initiative will enable householders to take out finance to pay for measures to improve the energy efficiency of their homes. If they do so, they will pay nothing upfront; instead, the initial costs will be paid through a Green Deal finance plan, with repayments attaching to their property’s electricity bill.
The finance plan will remain linked to the electricity bill as a consumer energy debt until it is paid off. If the house is sold before then, any outstanding commitments will pass to the new owners through their fuel bill.
The Green Deal is being introduced by the Department for Energy and Climate Change (DECC) and is based on a “golden rule” that payments for improvements should be lower than expected savings in energy costs. But in practice costs must be met by the householder, irrespective of any benefits – and there is no guarantee under the Green Deal of any overall improvement in household finances.
In principle, lenders welcome measures to reduce household energy costs, whether funded through the Green Deal or not. However, the new initiative raises a number of issues for lenders (and other property professionals) including:
- The extent to which lenders will want to know about any changes made to the property as a result of the Green Deal. Individual lenders will have their own views on what they need to know about improvements carried out under the initiative. We are therefore amending our Lenders' Handbook, which sets out requirements for conveyancers acting on behalf of lenders, to allow firms to seek information about Green Deal commitments. Green Deal regulations require householders to get their lender’s consent for major schemes, and some firms may want to consider requests for more substantial alterations like solid wall insulation or solar installations. But for many minor improvements, like loft insulation or replacement windows or boilers, lenders may decide that they do not need to give consent.
- Any effect of Green Deal commitments on the affordability of the mortgage. In most cases, lenders assessing new mortgage applications will be able to treat Green Deal commitments as “basic essential expenditure” under the Financial Services Authority’s (FSA) rules for assessing affordability. But if a lender believes that a Green Deal charge has a material effect on a borrower’s outgoings, it may wish to treat it as “other committed expenditure” in assessing affordability. This approach has been agreed by the FSA, and will be reflected in DECC guidance.
- Any implications the Green Deal may have for a property taken into possession. If a lender takes possession, it becomes liable for any Green Deal charges on the property (even if it turns off the energy supply while the home remains empty). Green Deal finance will continue to be classified as consumer energy debt and not a charge on the property. It can also be paid off early (although perhaps at a cost) to make the property more easily marketable.
- The effect of Green Deal improvements and charges on the value of the property. Whether or not property improvements carried out under the Green Deal prove more or less valuable to customers remains to be seen. At this stage, the Royal Institution of Chartered Surveyors is not proposing any changes to its Red Book, which sets out rules and best practice for property valuation. Currently, surveyors will not therefore have to submit more detailed reports on energy efficiency measures carried out under the Green Deal. We will keep under review any effects of the Green Deal on property valuations as it rolls out and the market adjusts over time.
Although next Monday sees the formal launch of the Green Deal, there was a “soft launch” last October, allowing interested householders to carry out assessments to identify potential energy efficiency improvements. As a result, there may be a flurry of applications as the scheme goes live next week. Generally, however, the Green Deal is expected to make a steady start as householders become familiar with it over time and make their own assessment of its potential costs and benefits.
What happens in the longer term will also depend on the cost of Green Deal finance and the extent to which energy bills rise – or are expected to rise – in the future. But with many predicting that current trends in energy costs will continue for the foreseeable future, a growing number of householders may see the Green Deal as an attractive option – in line with the government’s aspirations.
The full effects of the Green Deal on the housing market will only emerge over time. We will continue to monitor developments, and work for measures that will enable lenders to support householders in seeking to make improvements to the energy efficiency of their properties, should they wish to do so.