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A deal greener

The government has launched a scheme to help SMEs manage energy price rises by encouraging investment in energy-saving retrofits, writes Elisabeth Jeffries

30 Oct 2012

By Elisabeth Jeffries

Cooling towers at Didcot

WHEN BRITISH GAS announced in October that it was to raise tariffs by 9%, it failed to mention an unusual government scheme which will help SMEs and householders manage price rises. Known as the Green Deal and due in early 2013, the scheme packages loans in an unusual way in order to encourage investment in energy-saving retrofit in millions of buildings. 

With the aim of breaking down barriers to energy efficiency investment, the scheme contains two unique features. Known as the Golden Rule, the first specifies that expected financial savings from energy efficient equipment must be equal to or greater than the costs attached to the energy bill. 

The second means repayments are worked out through the energy bill so there is no upfront cost and money repaid is what the user would have paid on fuel bills had the efficiency measures not been installed. Repayments stay with the property and are passed on to the next occupier.

Companies and households can invest in 45 different measures, from insulation to boilers, heating, ventilation and air-conditioning systems, roof lights, radiant heating, energy-efficient taps and showers and PV solar panels. Loan interest rates have been set at 6-8%.

As far as commercial properties are concerned, the scheme is more relevant to smaller businesses. Commenting on its suitability for large commercial properties, a spokesman from the Department of Energy and Climate Change (DECC) explains: “Any company can apply ... but the upfront cost is much higher for whoever is doing the work and it’s harder to get a package, more expensive and time consuming.”

A study by property consultancy the Sweett Group confirmed this, indicating the Green Deal might not be worthwhile for the larger buildings it investigated, including an office building, a retail warehouse and an industrial unit. This is because it found energy savings from improving the retail and office building fabrics only pay back 25-60% of the capital costs over 25 years, while finance costs can intensify this difference.  

This suggests only the most inefficient buildings might be eligible if the Golden Rule is strictly applied. However, decisions to act could be affected by government plans to make the most inefficient properties unlettable (unless all Green Deal measures have been undertaken) by 2018. These points would need to be considered by larger companies interested in applying for Green Deal finance.

However, Siobonne Brewster, strategic director of energy services at Carillion, a property services company that will be responsible for packaging and administering loans, points out the scheme’s particular relevance to smaller companies: “SMEs might not have the same access to finance [as larger companies] so it could work well for them. The cost of finance could also work well for what they are doing. It could be a good growth area, especially as a lot of SMEs are in converted properties.” 

Added security
Like domestic tenants, some small businesses are not usually interested in these kinds of investments, because they require a long-term commitment under conventional financial agreements. However, Brewster believes the added security of the Golden Rule and the fact that the tenant relinquishes responsibility for payments after moving could be attractive new features. 

The scheme is certainly remarkable and ambitious. However, it has attracted criticism, not least because the fixed interest rates of 6-8% seem high in comparison to loans in the market, indicating that many businesses could get better finance elsewhere. Companies interested in applying for a loan should contact one of the Green Deal providers – the businesses responsible for Green Deal packages – and book a Green Deal assessment for their property.

Patrick Clift, public affairs manager at the British Property Federation (BPF), advises SMEs to take care. “For a Green Deal to take place in rented commercial property, new agreements between the landlord and tenant(s), framed in a licence, are likely to be needed,” he says. “Most existing commercial leases will not fit with the Green Deal financing arrangement whereby the tenant pays for improvements and will not usually deal with works that encompass both landlord and tenant controlled areas.”

The BPF also recommends the better use and awareness of existing fiscal incentives. These, it suggests, would promote uptake of the scheme, though further incentivisation may be needed. “There are already fiscal incentives attached to investment in energy-efficient kit, but their availability is not widely known and understood,” says Clift. Potential non-domestic customers, he indicates, should be told about available incentives and how they link with the Green Deal, while further tax levers should be used to incentivise large-scale works such as façade replacement and enhancement and mixed mode or natural ventilation because these are unlikely to be economic through the Green Deal.

Potential customers should move quickly, however, as the government has agreed to set up an introductory offer of £200m to boost early take-up.

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