Energy and Climate Change CommitteeWritten evidence submitted by Knauf Insulation
(Similar submission also sent by the Mineral Wool Insulation Manufacturer’s Association)
1. Executive Summary
1.1 Knauf Insulation (KI) is the UK’s largest manufacturer of Insulation making products for both domestic and commercial uses. KI is entirely supportive of the Government’s goals for the Green Deal and the Energy Company Obligation (ECO), which it wants to see succeed.
1.2 However, KI and much of the industry has major concerns about the Government’s plans for transition for insulation measures from the CERT/CESP regime to Green Deal and ECO, the general readiness of the Green Deal and ECO and the appetite of consumers to take up Green Deal.
1.3 We welcome the opportunity to respond to the Energy and Climate Change Committee and would suggest that there are a number of criteria which would be pertinent for the committee to assess the success of the Green Deal.
1.4 These include:
The availability of Green Deal Finance.
The distribution of ECO funds.
The number of homes taking up the Green Deal.
The savings made through taking out a Green Deal.
Insulation supply chain capacity and level of supply chain engagement in other Green Deal “trigger point” industries.
2. Policy Context
2.1 The Government has set out a policy ambition to improve the UK’s ageing building stock; the aspiration is to retrofit 14 million homes by 2020. KI believes there are five inter-linked elements which all need to be in in place if the aspiration is to be considered realistic.
2.2 These are:
Finance—through Green Deal, low cost private finance to be made available to those wishing to retrofit their property at no, or reduced, up-front cost.
Subsidy—the Energy Company Obligation (ECO) to assist with installation costs where measures are not cost-effective for individual householders but offer a societal benefit (socially cost-effective) such as “solid wall insulation” or “hard to treat cavity wall insulation”.
Real renovation performance—while energy bill savings resulting from a property refurbishment can’t be guaranteed, there must be a reasonable degree of confidence that predicted bill savings at the assessment stage are realised after measures have been installed. This is true for both homeowners who must pay Green Deal charges to cover the cost of installed measures and institutional investors considering purchasing Green Deal bonds (householder Green Deal repayment default rates will likely be higher if they don’t realise the expected savings).
Supply chain capacity—an adequate number of assessors, installers and products with suitable accreditation, certification and warranties to deliver real performance.
Demand drivers—The points above enable someone who has already made the decision to improve their home or building to do so with a degree of confidence and financial support. Mechanisms must also be put in place to persuade people to take that decision to improve their property in the first place—we are not aware of a large body of people waiting for the right opportunity to improve the energy efficiency of their whole home.
3. Measuring the Success of the Green Deal
3.1 At present these five elements are all at varying degrees of readiness. This means that there are significant risks to the success of the Government’s policy ambitions.
3.2 We set out below our concerns for each of these elements and why we believe the Green Deal will be delayed in its implementation as a result.
3.3 We then go on to suggest a number of ways in which the Committee on Energy and Climate Change could look to monitor the success of the Green Deal and elements it is intrinsically linked to.
4. Finance
4.1 The Issue
4.2 There is a need for low cost private finance for those wanting to retrofit their property at no, or reduced, up-front cost; essentially the Green Deal element of the Government’s policy.
4.3 KI understands that Green Deal Finance (which was due to be available from 28 January 2013) will now not be widely available until April 2013, and there will be lead-in-times in generating consumer demand and installations thereafter. The Green Deal Finance Company is the only private finance provider looking at a universal Green Deal lending model and faces serious hurdles to meet the 28 January Green Deal go-live date.
4.4 This includes raising £76million from members in order to be able to begin lending. There are serious questions around whether this will be possible (it failed in its first fund raising efforts before Christmas), and even if it raises these funds, there are questions about the level of demand it can meet in the early months of the Green Deal.
4.5 We are therefore concerned that consumers will be unable to access the finance that they need in order to access a Green Deal. By measuring the following, it would be possible to assess whether finance is readily available across the board and whether the Green Deal Finance Company are able to have successful bond issues.
4.6 Measurements
4.7 We would suggest that the following data is collected on a monthly basis by the Committee:
The finance being offered by the Green Deal Finance Company (TGDFC) to Green Deal providers.
If they can offer finance—at what volume, at what interest rate and under what limitations (ie will all householders through any accredited Green Deal Providers have access to that funding or will there be constraints around householder credit worthiness for example)?
How many other lenders are offering Green Deal Finance?
If the high street banks aren’t yet ready to offer Green Deal finance, do they plan on offering it? If so when? If not, why not?
If Green Deal finance is available, how swiftly are Green Deal finance providers aggregating Green Deal debt and able to get it off their balance sheets through securitization?
5. Subsidy
5.1 The Issue
5.2 Government has decided that where energy efficiency measures are not cost effective for individual householders, but offer a societal benefit (socially cost effective) eg Solid Wall Insulation or Hard to Treat Cavity Wall Insulation, energy suppliers will be obliged to “enable” householders to take up these measures under the Energy Company Obligation (ECO). In reality, this means energy suppliers covering part or all of the installation cost—potentially even offering cash incentives above the installation cost—to incentivise take up.
5.3 High levels of ECO subsidy per house will mean the scheme is operating sub optimally as all energy bill payers will have to cover the cost of energy suppliers delivering their ECO obligation. A large part of the ECO is therefore designed to run in tandem with private Green Deal finance with installers of solid wall insulation or other eligible measures incentivised to persuade householders to take out Green Deal finance along with the ECO subsidy. If Green Deal finance is not available, or limited in availability, there will be higher ECO delivery costs for energy suppliers which will ultimately be passed on to us all through our energy bills.
5.4 The remaining part of ECO will fully fund energy efficiency measures in fuel poor homes although this element runs outside of the Green Deal focus of the committee’s investigation.
5.5 Measurements
5.6 We would suggest that the following data is collected on a monthly basis by the Committee:
Is Green Deal finance available to Green Deal Providers installing ECO eligible measures?
What proportion of the average cost per install is covered by Green Deal finance and what is covered by ECO funding? (This information would need to be supplied directly by suppliers, and due to commercial sensitivity, an agreement may need to be reached regarding aggregating the information for public dissemination. An alternative would be tracking the price per tonne of carbon (the metric which energy suppliers are required to report to Ofgem in delivering the ECO) which should give an indication of how successful Green Deal finance is in displacing ECO subsidy.)
6. Demand Drivers
6.1 The Issue
6.2 Whilst finance and subsidies will help someone to improve their home, there needs to be a mechanism in place to persuade them to take the action in the first place. The stronger the demand drivers, the easier it will be to persuade householders to take up the measures and be willing to take out Green Deal finance. It will also reduce the cost to energy suppliers of delivering the ECO—a cost that will ultimately be passed to all energy bill payers.
6.3 We welcome the Government’s commitment to marketing the Green Deal through their £2.9million investment for digital and traditional engagement to encourage those considering home improvements to take up the Green Deal.
6.4 We also welcome the announcement of £125 million in Green Deal cashback incentives to encourage uptake of whole house energy efficiency improvements. This scheme offers householders cash back when they install measures such as new efficient boilers and insulation. It also requires householders to ensure they install minimum levels of installation if they wish to claim cash back on a new boiler for example.
6.5 However, we believe that this alone will not provide enough of a driver to encourage Green Deal take-up. Government appeared to agree when, in April this year, DCLG proposed in a consultation to require all householders installing a new boiler, extension or glazing to improve the energy efficiency of their home. However, following a tabloid press back lash, the policy has been dropped but no demand driver of equivalent impact has replaced it.
6.6 At the moment a boiler installer sells boilers and doesn’t recommend insulation that could save householders on bills and extend the lifetime of the boiler. The same lack of cross selling occurs with the glazing and insulation industry. If Green Deal is to succeed these supply chains must be joined up to offer whole house improvement.
6.7 Measurement
6.8 We would suggest that the following data is collected on a quarterly basis by the Committee:
How many Green Deal assessments have taken place assessed through Energy Performance Certificate lodgement?
Of these, how many Green Deal plans are taken forward by householders?
How many Green Deal plans are taken forward using Green Deal finance assessed through green deal repayment charges lodged on energy meters?
What proportion of Green Deal assessments are realised every quarter based on assessments for other home improvements eg new boiler, double glazing etc?
What proportion of Green Deal assessments are realised through other trigger points eg estate agent pension adviser initiation?
Proportionally, which tenures are taking out Green Deals ie owner occupier, private rented, housing association or local authority owned properties. (This data could be collected through a combination of energy supplier and Green Deal provider records and local authority reporting through the Home Energy Conservation Act.
7. Real Renovation Performance
7.1 The Issue
7.2 In order to convince those investing in whole house energy efficiency retrofit—both home owners and institutional investors—whole house renovation must offer confidence the energy bill savings proposed at the Green Deal assessment stage will be realised.
7.3 DECC has set in place a comprehensive accreditation process and built conservative penalty factors into the predicted savings in the Green Deal assessment software for each energy efficiency measure.
7.4 DECC is also considering a mechanism to reward those products and installation processes that are able to demonstrate better performance in realising energy bill savings against their competitors and against Green Deal software predictions.
7.5 This should ensure that no gross errors are made in savings predictions and the supply chain is incentivised to innovate. However the whole supply chain must accept that the reputation of Green Deal will be damaged by only a few bad headlines
7.6 Measurements
What progress has been made toward putting the system in place to reward better product performance against alternative products and against predicted household energy bill savings?
What protocols have Green Deal providers put in place to ensure predicted savings outlined at Green Deal assessment stage are realised?
What safeguards have Green Deal providers put in place to ensure these protocols exist across the market?
8. Supply Chain Capacity
8.1 The Issue
8.2 In order for the Green Deal and Energy Company Obligation to be successful in delivering the aspiration set out above, there needs to be an adequate number of assessors, installers and products available with suitable accreditation, certification and warranties to deliver real performance.
8.3 The key metrics of success are; to what degree has the Green Deal engaged those supply chains not involved in the recently closed carbon reduction schemes (the Carbon Emission Reduction Target or CERT and the Community Energy Saving Programme or CESP)—the boiler, glazing and extension install businesses.
8.4 The other key part of the supply chain is insulation installers themselves. With declining demand, loft and cavity wall insulation installers will struggle to stay in business and manufacturing plants will struggle to remain at capacity, and subsequently not be able to continue with their current investment levels.
8.5 The Association for the Conservation of Energy carried out research on the impact on jobs in the insulation industry. The research shows that full-time employees currently employed in the loft, solid wall and cavity wall insulation industry will fall from 36,000 in 2012 to a worst case scenario of 20,000 in 2013—a drop of 45%.
8.6 Research carried out in the insulation industry by the Insulation Industry Forum (a body representing 70% of the industry) shows that to date, over 800 people have lost their jobs, with a further 1,200 having been placed on notice for redundancy.
8.7 This is only the beginning of the problem and with expected delays to financing and concerns over take-up, many more jobs are expected to go in the coming weeks and months.
8.8 Measurements
Number of insulation installer jobs lost. (This information could be provided through Insulation Industry Forum members or a trade body)
Number of installer companies liquidated. (This information could be provided through Insulation Industry Forum members or a trade body)
Lost insulation manufacturing capacity/factories closed. (This information could be provided through Insulation Industry Forum members or a trade body)
Supply chain links made with the heating and glazing industries as set out in the “demand” section above.
9. Conclusion
9.1 In order to effectively monitor the success of the policy, we believe there are five key criteria which should be tracked by the committee. Together these five elements, if fit for purpose, would allow the policy ambitions of the Green Deal to be realised.
9.2 KI is fully supportive of the aims of the Green Deal and we would like to see it succeed. We believe that through effective monitoring, it would be possible to identify the areas which there may be potential problems, and address them as soon as possible.
9.3 We would be very happy to provide the committee with further information either in writing or in person.
January 2013