The "Green Deal" launches today, providing loans to pay for energy efficiency measures for buildings recouped through a levy on electricity bills. The "Golden Rule" is the test that the measures will save more on the energy bill than spent on efficiency. The theory is sound, but in practice the plans are flawed and will not be taken up by householders in great numbers.

There are two key problems to be fixed: First, the interest rate set for the loans is at commercial rates (6.96%). Second, the calculation is based current energy prices rather than factoring in future energy price rises. This makes the Green Deal "Golden Rule" hard to meet.

Most householders have savings on which they are getting little more than 2% return, so it would be better to use these. Others will be able to increase their mortgage at a rate less than 7%. So there is no incentive for better-off householders to use the scheme. This high cost of green deal finance will fall on the poorer people who don’t have the available cash or the ability to borrow at low rates. It is not just the cost of finance that makes the Golden Rule a high hurdle but working out the figures on current (low) energy bills makes it exceptionally hard to make the figures balance. This is unfortunate because energy efficiency measures are exactly what are needed. Can the Green Deal be made to work?
Fixing the Green Deal requires dealing with both the interest rate on the loan and the price of energy used in the calculation. There is a simple economic way to deal with this, but the politics are complex. The government should abandon its disingenuous claim that energy prices can be held down and tell us the truth that energy prices will rise steeply. Well- off people will then invest in efficiency measures without the need for government support. The government should not wait for fuel prices to rise but implement taxation on the fossil fuel used to heat our buildings. These receipts can be used to drive down the interest rates on Green Deal loans for the less well-off and invested in direct intervention to install efficiency measures such as better insulation in the homes of the poorest and most vulnerable people such as the old and infirm.
The Green Deal will be a damp squib of a policy unless it is fixed soon. Politicians should find the courage to be truthful and push through high energy prices whilst the additional price can be kept in the UK economy to invest in efficiency measures. The virtuous circle of taxing fossil fuel to invest would make the golden rule easy to meet, at a time when the economy could do with a boost, and transform the standard of UK buildings.