Why the Green Deal Failed

The Government’s decision to end funding for the Green Deal early should not come as a surprise. Primarily offering loans to customers making energy efficiency improvements to their home, the scheme was lauded as “the biggest home improvement programme since the war”, but never took off on the scale Chris Huhne and Greg Barker had intended. Barker said back in March 2013 that he ‘wouldn’t be sleeping’ if 10,000 weren’t signed up to the Green Deal by the end of that year. As of February 2015, just 5,306 Green Deal plans had been completed.

Energy efficiency has been a priority for successive governments, because it contributes to every aspect of the energy policy ‘trilemma’: keeping energy affordable, keeping supply secure, and meeting carbon reduction targets. Previous energy efficiency schemes such as the 2008-12 Carbon Emissions Reduction Target (CERT) had delivered huge savings for millions of families. Overall, 19% of all domestic properties received a CERT measure over the course of the programme, which surpassed its target of 293 Mt CO₂ savings by the end of 2012.

Few commentators were as optimistic about what could be achieved by the Green Deal and its complement, the Energy Company Obligation (ECO). Before their launch, Jan Rosenow and Nick Eyre, from Oxford University’s Environmental Change Institute, predicted that the Green Deal would suffer from low uptake, and fail to deliver much more than a quarter of the carbon savings that the previous policies had delivered.

It was always going to be difficult to repeat the successes of previous schemes. As Britain’s housing stock steadily improved with each round of the home improvement programme, the marginal cost of further improvements increased. By mandating energy suppliers to make improvements and to absorb the costs, the Government deliberately gave suppliers an incentive to do the job efficiently, tackling the properties that could achieve the biggest improvements at the lowest cost. The success of the programmes meant that by 2012, fewer of these properties were left, leaving the harder-to-reach properties and more expensive improvements.

The Green Deal, unlike its predecessors and ECO, was primarily set up as a loan scheme for households to purchase insulation and other improvements with no upfront cost. As such, it relied on consumers making an active decision to have their home assessed to see if such measures could save them money, and then taking on the burden and disruption of installation, for gains that would only be realised in the long term.

Behavioural psychologists have observed a phenomenon known as ‘hyperbolic discounting’ in individual financial decisions. This is the tendency to massively discount benefits that might be made further in the future in exchange for more immediate gains, or the avoidance of costs. With energy efficiency, this problem is confounded by the fact that customers are rarely given timely, clear and accurate information about their consumption. The relationship between individual uses (such as cooking a meal or washing some clothes) and the monthly or quarterly bill is opaque, and this makes it difficult for people to make rational, long-term decisions about their consumption and spending. Just 59% of customers trust suppliers to provide accurate bills, and only half trust them to be open and transparent in dealing with customers. At those levels, it’s hardly surprising that few signed up to a scheme that would see their bills increase in the short term.

However, loan schemes have worked elsewhere. Unsurprisingly for far-reaching national programmes like this, it’s the Germans who have shown the way. KfW, the state-owned investment bank, provides loans for domestic energy efficiency improvements at below market interest rates, and has funded major retrofits on 10 million houses.

Perhaps the most important difference between KfW and the Green Deal is that the German scheme focuses on high cost, high performance refurbishments. By contrast, the more expensive jobs are left to ECO, Britain’s supplier obligation, while the Green Deal focused more heavily on the remaining low cost measures not already reached by CERT and its predecessors. As Rosenow and Eyre argued at the time, the previous Government had evidence showing that commercial loans for low cost measures have very limited attractiveness for most consumers. They claimed the Government should instead have followed the pattern of previous successful scheme:

‘A safer policy strategy, consistent with what has worked effectively in different countries, would be to retain a policy like CERT proven to deliver low cost measures and to seek to introduce other sources of capital for higher cost measures.’

In this way, those households interested in making bigger, more expensive changes to their home, either because they were willing to pay more in the short term for long-term gains, or because they wanted to reduce their carbon footprint, could have been encouraged to do so. Simultaneously, those households who still required more basic improvements not reached by previous supplier obligations (most likely those households least likely to be pro-active in seeking efficiency improvements) could have received the free work mandated through a more like-for-like successor to CERT.

We don’t yet know what will replace the Green Deal, and what the scale of its ambitions will be. Whatever form it takes, the next scheme must learn the lessons of what has worked in Britain and abroad, and be realistic in its expectations of consumers. Where consumers are required to be pro-active, the Government must ensure that they are effectively engaged and well-informed about the costs and benefits. Above all, it’s essential that the Government retains its commitment to energy efficiency and demand reduction. They remain as important as ever in meeting the challenges of energy policy in the 21st Century.