The Green Deal may not be attractive enough to entice small businesses

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5 October 2012, Gas, Electricity

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To help meet carbon budgets, emissions need to be reduced by 29% from residential properties and by 13% at workplaces by 2022 compared with 2008 levels, according to the Department of Energy and Climate Change (DECC). The Green Deal, which is part of the UK's energy market reform, is designed to bring energy savings to domestic and non-domestic properties at rates that are greater than the cost of the loans needed to install energy saving measures. The upfront cost of energy saving products is provided under the Green Deal, and is paid back in the future energy bills of the property on the basis that bills, inclusive of the cost of the loan, will be reduced overall by the energy saving measures.

Before the introduction of the Green Deal, loft and cavity insulation has been subsidized under the Carbon Emissions Reductions Target (CERT) and Community Energy Saving Programme (CESP) schemes, allowing homeowners to install energy saving measures at next to no cost. As a result, the vast majority of properties have already had loft and cavity insulation economically installed through British Gas, and only a relatively small number of eligible properties remain untreated.

According to Rhys Kealley of Datamonitor, with the phasing out of the CERT and CESP schemes "the big question is how anyone will manage to end up in an un-insulated cavity-walled house at the end of 2012. British Gas will do it today even if you're not one of their customers." The schemes have proven very effective, and it is not surprising that the number of installations will fall by as much as 80% as the market for eligible properties diminishes, according to an impact assessment by the DECC. The successful CERT and CESP schemes are being phased out at the end of 2012 and replaced by the Energy Company Obligation, which will function alongside the Green Deal finance market.

Moving forward, if the UK is to meet its carbon dioxide reduction targets the more difficult solid wall insulation needs to be tackled. The cost of solid wall insulation needs to come down, and as companies gain more experience in delivering it the costs could fall by up to 15%.

If the Green Deal is to be a success then there are many issues that need to be addressed to unlock consumer demand and make sure that real benefits are achieved, such as the interest rates on the loans.

Interest rates for domestic properties will be set between 6% and 8%, with an average rate of 7.5%. Additional support will also be available for poorer households, and Green Deal finance may be paid back in part or in full at any time. On the face of it, the Green Deal provides a beneficial scenario for consumers and providers of finance. However, interest rates for small businesses will be in line with much higher commercial rates of interest that will extend payback periods to a maximum of the lifetime of the energy saving measures, delaying any real benefits for small businesses.

Owing to the introduction of the UK's carbon price floor plan in April 2013, UK industry and businesses will be paying GBP16 per tonne, while the rest of Europe will probably be paying even less than the current GBP5-6 per tonne according to the Federation of Small Businesses (FSB). The FSB suggests that the cost of wider energy market reforms in the UK could increase energy bills for small businesses by as much as 34%, and taking a Green Deal loan to pay for energy saving measures at commercial rates of interest will be of limited benefit for most small firms. With as many as 45% of small businesses in the UK suffering from cash flow problems, and rising costs of energy, high interest rates for energy saving measures need to be addressed if the scheme is to prove attractive enough for benefits to be realized by small businesses.

Source: MarketLine

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