Ben Caldecott asks if a Green Deal Mutual could lower the cost of energy efficiency improvements and revive the Big Society
Last week's announcement that a Green Deal Finance Company (GDFC) might be established could be a significant and positive development. The new company, created by an industry consortium led by PwC, is meant to help overcome the financing challenges associated with the Green Deal energy efficiency scheme. Given the financing requirements of the Green Deal and the need to keep interest rates low for consumers, anything that can help in this regard should be welcomed.
For those that need a quick reminder, the Green Deal is a transformative "pay-as-you-save" scheme being introduced by government. Households that participate can pay for a range of energy efficiency improvements over 20 years or more via a charge collected and attached to their energy bill. Front-loading these Green Deal charges to pay upfront for a vast number of disparate energy efficiency improvements is where the financing challenge lies.
If the Green Deal is as successful as the Government hopes, DECC estimates that £7bn per year will need to be raised by the private sector to finance it. But, existing players, as well as new entrants, simply don't have the capital or balance sheet capacity to do this. And if any of them did, it would create a significant competitive advantage for one or a few large players, which would undermine the Government's objectives for plurality and competition in Green Deal provision.
The Green Deal Finance Company is meant to help overcome these problems, by creating a new vehicle able to aggregate and then securitise Green Deal cash-flows. By packaging future cash-flows together into financial products, the company can raise money from a range of investors in the capital markets.
But for this to be successful, the vehicle will need to be properly capitalised so it can secure the best credit rating possible. PwC say that the new company should be able to achieve a AA-rating. The higher the credit rating, the lower Green Deal interest rates should be for consumers and the more energy efficiency measures they can afford to have installed. This is clearly in the interests of government and consumers the like.
To make sure that the company is adequately capitalised so it can achieve its AA-rating, sufficient injections of capital will be needed from the companies that have just signed up to be part of the new consortium. How much the companies involved are willing to stump up, and whether this will be enough to properly capitalise the vehicle, looks to be an outstanding issue that will need to be resolved quickly.
Moreover, while the new company is meant to be a "not-for-profit", this status doesn't actually mean that the company won't make significant sums of money or inflate costs, nor does it mean that its interests or the interests of its owners are necessarily aligned with those of the Green Deal households themselves. For example, the company could become quite a profitable monopoly provider of finance for the Green Deal. This could reduce costs and if these cost reductions were passed onto Green Deal householders, would be a good thing. But there is also plenty of scope for these savings to actually go back to the owners of the company instead and not go back to reducing costs for Green Deal households.
To prevent any such outcome and to make sure that the company's interests are properly aligned with Green Deal households receiving finance, a mutual society model would be much better. All Green Deal households would automatically become a member of the Green Deal Mutual and thus have rights to profits and control. A mutual structure would protect the interests of society members and return value to them, in a way that a company completely owned and operated by other companies might find challenging.
In addition, a new Green Deal Mutual could create innovative ways for Green Deal households to save - helping savings to equal investment in the economy. For example, the Mutual could create green retail bonds or ISAs for its members, with the underlying assets being the securities created by packaging Green Deal cash flows. This would be an efficient and effective symmetry.
One final element would make a Green Deal Mutual a much more effective option than a private company, though this isn't a necessary prerequisite. This is the provision of UK Green Investment Bank (GIB) capital to seed it.
The GIB, as a public financial institution, represents the interests of government and taxpayers. More importantly, its lower cost government-backed capital could allow the Green Deal Mutual to have a AAA-rating from day one, thereby giving Green Deal householders an even lower cost of capital than the proposed company.
The Green Deal Finance Company is an important development, one grounded in elements of advice previously provided to government via the Green Investment Bank Commission and others. But, such a vehicle could give Green Deal households an even better deal if it was mutualised and if the Green Investment Bank provided seed capital.
This approach would also support new savings mechanisms and help the government's flagging Big Society agenda - every Green Deal household would have a stake. All these are excellent reasons for a Green Deal Mutual to emerge out of the commendable efforts to create a Green Deal Finance Company.
Ben Caldecott is head of European policy at Climate Change Capital