green_deal_logoThe Green Deal is the UK government’s initiative to support energy efficiency measures by making borrowing available for both the domestic and non-domestic sector. The scheme was launched in October this year, but it is still unclear to what extent small business will be able to benefit from the Green Deal.

What is green deal and how does it work?

The initiative primarily aims to transform the energy efficiency of 14 million homes in the UK and is likely to be integrated into the implementation of the EU’s Energy Efficiency Directive. The directive aims to reduce Europe’s primary energy use by 20% by 2020, a target which is not legally binding.

The scheme will enable homeowners and small businesses to take out a loan for energy efficiency measures and repay over time by a charge on their energy bill. The Green Deal covers 45 measures or areas of building improvement, including:

  • Insulation
  • Heating and hot water
  • Glazing
  • Microgeneration (generating your own energy)
  • For the non-domestic sector lighting, mechanical ventilation and heat recovery measures can also be covered

If you decide to take up a Green Deal offer you have to sign a Green Deal plan, an offer from a Green Deal provider (a number of certified companies). This is a financing mechanism that lets consumers pay for energy-efficiency improvements through savings on their energy bills.

 

The central idea of the Green Deal is known as the golden rule: the expected financial savings (from energy efficiency gains) must be equal to or greater than the costs attached to the energy bill.

Early adopters of the energy efficiency scheme may benefit from a £125 million incentive package introduced by the Department of Energy and Climate Change (DECC). The Green Deal cashback offer will start on 28 January 2013.

Opportunities for businesses that seek to cut their energy consumption

The green deal is designed to tackle energy waste of households as well as small businesses.

Small firms will be able to access funding for energy efficiency improvements, which could be an attractive opportunity for businesses looking to reduce their energy consumption.

The scheme allows firms to make investments in energy efficiency of their buildings at no upfront cost (repaid through energy bills) and with lower than commercial interest rates.

In addition, there is no upper limit for Green Deal loans. The amount borrowed is agreed between the Green Deal provider and the business owner.

Potential problems with the Green Deal plan

There are a number of uncertainties, however, that might deter small businesses from applying for the Green Deal plan.

Firstly, many difficulties arise with calculating the golden rule. Although, the rule states that the loan repayments must be offset by the energy savings, actual net savings cannot be guaranteed by government, particularly if a household or a firm responds to building improvements by using significantly more energy.

This is particular relevant to businesses applying for Green Deal loans. The complexity of energy use in the business sector means that it takes longer for assessment processes to be developed for commercial properties.

Some analyses have suggested that high interest rates may deter businesses from getting involved. The typical rate is expected to be between 6-8% but details of interest rates and payback period will be decided between the applicant and the green deal provider. Small businesses fear that the longer payback period for businesses will make them pay back the initial cost of the scheme at commercial rates of interest.

Moreover, calculating net savings is more complex due to environmental regulations and existing schemes that businesses are involved in. There are several schemes, such as Climate Change Agreements and the Carbon Reduction Commitment Energy Efficiency Scheme, that already provide companies with financial discounts provided they meet specified targets for improving their energy efficiency. The Green Deal will have to be integrated into these schemes.

Despite the concerns, some Green Deal service providers (e.g. Yorkshire Energy Services and Ampere GDP) offer business-focused green deal services. Some reports have suggested that the scheme so far has not attracted much attention from either householders or the small business community. It is still unclear whether the green deal will drive take-up of energy efficiency measures, particularly for commercial properties.

Examples of practices and feedback from Green Deal beneficiaries could encourage or deter wider engagement of small businesses. It is crucial that government support early adopters while the Green Deal providers ensure favourable conditions for small businesses.