Green Deal: key to overcoming apathy

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3 October 2011, Gas, Electricity

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The EU 20-20-20 legislation aims for a 20% reduction in energy consumption from 1990 levels by 2020, but at current rates, this will be difficult to achieve. A survey by Ernst & Young has highlighted how only 12% of business leaders polled had invested in costly energy saving measures despite the expectation of higher energy bills. The main reasons why uptake was not higher were the high capital costs and lengthy payback periods, with the latter being of particular significance in these turbulent economic times.

However, help will soon be at hand with the Green Deal to be launched in late 2012. The Green Deal will allow households and businesses to invest in energy saving measures for no upfront cost, and to repay the loan later via their energy bills. Furthermore, as not all of the savings will go on repayments, there will be a net benefit for the user overall.

A similar scheme has already been launched by British Gas for its customers, in the form of its Home Energy Plan. However, critics say that the interest rate on the Green Deal will be at commercial levels, meaning that the savings will not be enough to incentivize investment. The success of a similar scheme in Germany has been attributed in part to its low interest rates, although the need for such rates is diminished as energy prices rise, increasing the potential savings.

There are, however, plans in the pipeline to address the concern of high interest rates. According to a recent BusinessGreen article, PricewaterhouseCoopers is advising a new not-for-profit entity, which aims to lower the interest rate to around 6% as opposed to typical commercial rates of 10-12% by aggregating and refinancing Green Deal loans through the cheaper debt and capital markets.

The need for sufficiently large financial savings from efficiency gains is of particular importance for domestic consumers. A recent Ofgem survey suggested that around four-fifths of people simply do not search around for better deals on their gas and electricity bills. One possible reason given by behavioral economists is "status quo bias," whereby people continue to do the same thing unless there is a good reason to change, since in customers' minds the costs of acquiring new information and switching (including the hassle factor) can often outweigh the perceived gains to be made. This finding has wider implications for schemes that aim to encourage increased energy efficiency, such as the Green Deal.

Therefore, we can only hope that if similar surveys are conducted in just over a year's time, following the launch of the Green Deal, we will see a marked improvement in the findings. Ultimately, motivating consumers and educating them about the schemes available in the domestic and non-domestic sectors will be critical in ensuring that energy efficiency targets are met.

Source: Datamonitor

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