On 18 October 2011 the Energy Act 2011 (the Act) received royal assent and passed into law, less than a year after it was introduced to the House of Lords on 9 December 2010.
The Act is, in essence, framework legislation that the Department of Energy and Climate Change (DECC) describes as the ‘first step in its legislative programme’. The Act deals with the following key themes: energy efficiency, security of energy supplies and measures for reducing carbon emissions. The largest part of the Act introduces the coalition’s flagship ‘Green Deal’ policy to encourage and facilitate the retrofitting of existing properties. Burges Salmon has played and continues to play a significant role in the development of this policy, which is the focus of this article.
The whole Act will be of interest to those in the energy sector. The parts that relate to the Green Deal and energy efficiency measures will be relevant to a wide range of additional businesses, including those in the real estate and retail sectors – there is active work being undertaken on the details, including an upcoming consultation and it is important that those affected engage with this process.
STRUCTURE OF THE ACT
The Act is divided into five parts of which the four key parts are as follows:
- Part one deals with the Green Deal policy.
- Part two deals with the security of energy supplies and:
- includes measures requiring Ofgem to report annually on how much electricity capacity Great Britain will need in the future;
- gives Ofgem the power to review current gas emergency arrangements and to direct modifications to be made to the Uniform Network Code to ensure sufficient gas is available to meet demand;
- streamlines existing provisions for third-party access to oil and gas infrastructure;
- creates a special administration regime to improve on the current arrangements, which apply on the insolvency of an energy supply company; and
- extends the provisions relating to the management of the continental shelf.
- Part three deals with measures for reducing carbon emissions and includes the following provisions:
- extends the time for amending offshore transmission and distribution licences and provides the secretary of state with powers to make an order to make property transfer schemes relating to the transfer of transmission assets to offshore transmissions system owners by the generators that built them;
- brings nuclear construction sites and equipment used or stored on such sites within existing security regulation;
- amends the powers granted to the secretary of state under the Energy Act 2008 to approve and propose modifications to funded nuclear decommissioning programmes;
- facilitates carbon capture and storage projects by amending existing legislation in relation to the liability for decommissioning pipelines and allowing the compulsory acquisition of rights to transport carbon dioxide from the owners of land through which pipelines pass; and
- allows Northern Ireland’s Department of Enterprise Trade and Investment to make regulations to facilitate and encourage a renewable heat incentive scheme in Northern Ireland.
- Part four of the Act extends the remit of the coal authority to use their acquired skills and knowledge to alleviate effects of subsidence and treatment of water discharges from causes other than coal mining.
INTRODUCTION TO THE GREEN DEAL
The Green Deal is the coalition government’s flagship environmental policy and was a commitment in the coalition agreement. The jury is currently out on how effective the scheme will be. The Act establishes the framework but, as ever, the devil will be in the detail that is to be included in the secondary legislation. At the time of writing, a consultation on the secondary legislation was expected in November 2011.
In order to understand the scale and importance of the Green Deal, it is necessary to consider some statistics:
- The Climate Change Act 2008 requires a reduction in the UK’s carbon emissions of 34% by 2020 and 80% by 2050.
- Almost 50% of the UK’s carbon emissions come from the built environment (approximately 27% from non-residential buildings and 20% from commercial buildings).
- It is estimated that 80% of the buildings that will be in existence in 2050 are currently built.
- There are currently approximately 1.8 million commercial buildings and 26 million homes.
From this it can be seen that, for the UK to come close to its targets under the Climate Change Act, the issue of addressing energy efficiency in existing buildings has to be tackled. It is recognised that there are a number of barriers that prevent people from retrofitting properties with energy efficient measures. These include the long payback period of the measures on current energy prices, which will almost inevitably exceed the time that the occupier intends to remain in the property.
The Green Deal is a scheme designed to overcome these barriers and to provide upfront finance to enable the installation of energy efficiency measures. It is, to a large extent, based upon work undertaken by the UK Green Building Council in 2009, which led to a report entitled ‘Pay As You Save – Financing Low Energy Refurbishment in Housing’1. However the Green Deal proposed by the coalition and enacted in the Act extends the principles to the non-domestic sector and also makes some other significant amendments.
If it takes off, the Green Deal offers a significant opportunity for industry. Greg Barker, minister of state for energy and climate change, said when the Act received royal assent:
‘The Green Deal will revolutionise the energy efficiency of the nation’s homes and businesses. It will help people insulate against rising energy prices, creating homes which are warmer and cheaper to run. As well has helping people save money through home energy improvement, the Green Deal will be a massive business opportunity.’
The government is aiming to catalyse £7bn of investment annually and create 250,000 jobs. The statistics above bear out this business opportunity and it is sobering to think that for 80% of the existing 26 million homes to be retrofitted by 2050, a home would have to be retrofitted every minute between now and then.
WHAT IS THE TIMETABLE FOR INTRODUCTION OF THE GREEN DEAL?
DECC is currently engaging with various stakeholders through various advisory forums. In addition, the UK Green Building Council has arranged a ‘hot house’ with DECC2 in which key personnel from all stages of the Green Deal journey will stress test the mechanism. All of the information obtained through stakeholder engagement will be fed back into the consultation and guidance process.
DECC is intending that the first Green Deals will take place in the autumn of 2012. In order to achieve this it has proposed the following milestones:
- November 2011 – formal consultation on the secondary legislation.
- Early 2012 – consultation will close.
- Early 2012 – government response to consultation will be published.
- Early 2012 – the secondary legislation will be laid before Parliament.
- Spring 2012 – detailed industry guidance/codes of practice will be prepared.
- Autumn 2012 – first Green Deals appear.
HOW DOES THE GREEN DEAL WORK?
The basis of the Green Deal is that, once finance has been obtained by a property owner, the obligation to repay the finance attaches to the property (and therefore passes to the new owner on any sale) and is recouped by the energy suppliers from the owners or occupiers through an additional charge on their energy bills.
There are in effect five steps on the ‘customer journey’ in relation to measures installed under the Green Deal.
Step 1 – assessment of the property
In order to obtain Green Deal, finance the property will have to be assessed by an accredited advisor. The advisor will advise on appropriate measures for that property. In June 2011 DECC published ‘What measures does the Green Deal cover?’, which sets out DECC’s provisional view on which energy efficiency measures will be eligible. They vary from condensing boilers and mechanical ventilation through to solar PV and biomass boilers. The eligible measures will vary from property to property and the list will inevitably change through the consultation process.
Step two – obtaining finance at no upfront cost.
Although property owners will be able to finance any measures identified by the assessors themselves, Green Deal finance will only be available provided that the measures meet the ‘golden rule’. The golden rule is that the monthly payment under the Green Deal should always be less than the savings made on the energy bills as a result of the measures.
The Green Deal provider will make the offer of finance, which will stipulate the total cost, the charge to be attached to the energy meter and the repayment period. The interest payable will be subject to market forces.
Step three – accredited installers will install the measures.
DECC believes that for the Green Deal to work, the installers must provided trusted, accredited installation of the energy efficiency measures. It is currently working with the United Kingdom Accreditation Service to develop a Green Deal accreditation.
DECC believes that there is a significant opportunity for the supply chain to develop and grow and the numbers referred to above bear that out.
Step four – repayments through the energy bill.
Once installed, the installer will provide details of the measures to the Green Deal provider (if it is a separate organisation) that will arrange for details about the Green Deal to be included in an updated Energy Performance Certificate (EPC) or other appropriate document and lodged on the appropriate database. The Green Deal provider will also pass the relevant details to the energy supplier. The energy supplier will then recover the payments by including a separate item on its energy bills and pass the payments to the Green Deal provider.
Step five – moving on.
In order to avoid the disincentive of the payback period exceeding the period of occupation, a crucial element of the Green Deal is that the obligation to pay remains with the property that has benefited from the energy efficiency measures. It is therefore imperative that those buying new properties are able to gain access to information about any Green Deal on a property. There is an obligation on the seller/lessor to provide information about any Green Deal relating to the property before the sale or lease.
THE GREEN DEAL – KEY ISSUES AND QUESTIONS
There are a number of key issues and questions that need to be resolved if the Green Deal is going to be a success. There is not space in this article to deal with all of them but some key issues are discussed below.
What is the cost of the finance package?
For the Green Deal to work, the cost of finance needs to be low enough so that the golden rule applies and the financial providers are confident enough in recovery to provide the finance. Many people are sceptical that the cost of finance can be brought low enough to make a Green Deal attractive or meet the golden rule. This is particularly true of commercial properties3.
In October 2011 it was announced that the Green Deal Finance Company (GDFC) had been established. GDFC is a consortium of energy companies, banks, retailers and others, and has been set up to develop a business plan to finance the best value Green Deal plan for consumers. The intention is that GDFC will act as a national aggregator that can bundle Green Deal loans to a level where they can access the capital and bond markets, reducing rates of interest from retail levels of around 10% to 15% to around 6%.
Are there any incentives to encourage take up of the Green Deal?
The Act requires the secretary of state to make regulations to prevent landlords from April 2018 (both in the domestic and commercial sectors) from being able to rent out property that has too low a rating on its EPC. The detail of this will be fleshed out in secondary legislation but currently it is suggested that it will apply to properties with an EPC rating below an ‘E’.
It has been suggested that further fiscal incentives are required to encourage take up. These suggestions have included grants and subsidies or reductions on stamp duty, rates or council tax for those properties that have installed energy efficiency measures. We will have to wait and see whether any such measures are included.
Is there any assistance for properties that are harder to treat?
The Act introduces a new energy company obligation (ECO). The ECO will replace existing obligations to reduce carbon emissions (the Carbon Emissions Reduction Target (CERT) and Community Energy Saving Programme (CESP)) which expire at the end of 2012. The ECO requires energy companies to offer assistance to those on lower income and vulnerable households to install cost-effective measures that do not meet the golden rule.
Will the Green Deal work for commercial properties?
The Green Deal was developed for domestic properties and does not fit easily with the way that the commercial real estate market works. There are other drivers to encourage commercial landlords and tenants to improve their properties and there is scepticism that the Green Deal will offer enough of an incentive for the majority. Further, there may well be implications on rent reviews and lease renewals as a result of works done.
The Green Deal is a very ambitious scheme. If it is successful, it will form a major part of the economy going forward. However, there is a significant risk that one or two major failures in the scheme in the early days will affect customer confidence, which might lead to little customer take up.
There remains a considerable number of questions to be answered and details to be ironed out and, as such, we are at a crucial stage in the development of the Green Deal. The consultation is important to ensure that workable secondary legislation is produced and those who might be affected should engage with this process.
- Michael Barlow chaired the legal working group of the UK Green Building Council task group that produced this report.
- Being hosted by Burges Salmon.
- Cyril Sweett examined four commercial properties and identified that the improvements that had been carried out did not meet the golden rule even with an interest rate of 0%.