A Green Deal but not a great deal

http://www.guardian.co.uk/money/2013/jan/26/green-deal-not-great-deal

Version 0 of 1.

The Green Deal, the government's flagship programme to make millions of homes more energy efficient, goes fully live on Monday. But will it be a case of "Deal or No Deal" once homeowners have looked at what's on offer and done the maths?

This major scheme is a new way for people to improve their homes without having to shell out large sums upfront. It's basically a type of personal loan where you pay for the work over time through your electricity bill. The aim is that your monthly repayments will be covered by the savings you'll make as a result of having the measures installed.

Ministers were this week giving the Green Deal the hard-sell treatment, and there is even cashback on offer from the government to encourage people to sign up. The suggestion is that the government will effectively pay you to have the work done because, under this scheme, someone who previously would have had to fork out upfront for a new boiler would now be able to gradually pay for it via the savings they will see in lower energy bills – and would pocket a £270 cash bonus too.

But there are growing doubts about whether the maths is going to add up. For the Green Deal to work, the estimated savings on your bills must always equal or exceed the cost of the work done. However, when Money crunched the numbers on some examples, we couldn't find a way to make it work. This is partly because your repayments will also include interest, which bumps up the cost of the deal.

To be a winner from this scheme, you will probably have to be living in a draughty old house with an ancient boiler and paying very high bills.

The sentiment behind the Green Deal makes a lot of sense, however. As the government says, millions of our buildings are inefficient, and waste a lot of the energy that we are paying high prices for. The average household energy bill has jumped from £522 in 2004 to £1,352 now, according to Ann Robinson, director of consumer policy at uSwitch.com, and she believes a further 15% increase over the next 18 months is highly likely.

Here's how the scheme works. First, you arrange for a Green Deal assessor to visit your home. He or she will spend about two hours carrying out a detailed review, and will recommend improvements and say whether these are expected to pay for themselves through reduced energy costs. Solid wall insulation or a new boiler will probably be the most recommended work, but a host of other measures are also possible – double glazing, a new front door, new storage heaters etc.

The assessment will typically cost £75-£120, though this may be waived if you hire that firm to do the work. You are free to take your assessment to any Green Deal provider (there were 24 ready to roll this week, including British Gas and npower – go to greendealorg.co.uk/providers/provider-search). The provider will give you a quote for the work, which will include interest on the loan. The government body behind the Green Deal has set the interest rate at 6.9%, but what you pay will depend on the rate charged by the provider, which is likely to be in the region of 6-9%, so shop around. Anybody operating the scheme has to display the Green Deal Approved quality mark.

A Green Deal plan is a type of unsecured loan that is attached to the electricity bill. Once signed up, the repayments are fixed and will be collected by your utility company via your electricity bills and passed on to your Green Deal provider. If you move house, the next bill payer will take on the repayments.

All householders are eligible for the scheme – owner-occupiers, landlords, those renting privately and those in social housing. As an added enticement, there is the government cashback, which is "first-come, first-served" and can be spent on anything you like: from £10 for hot water tank insulation to £650 for solid wall insulation, which can cost anything from £5,000 to £13,000 to get done.

This scheme certainly needs a kick-start: it has been possible to have an assessment since October, but press reports this month have suggested that only five had been completed so far.

One obstacle the Green Deal will have to overcome is the fact that many owners of Victorian/Edwardian properties have a major aesthetic problem with things such as double/triple glazing, replacement doors and disruptive internal wall insulation (which involves the temporary removal of skirting boards and door frames). The middle classes are very attached to their draughty sash windows.

However, it's the maths that looks like being the biggest challenge. The government says the total cost of the parts, labour and finance should always be less than the total savings you'll make. But the fact that interest is charged on the loan at about 7% suggests this is going to be hard to achieve.

Money crunched the numbers to see how the Green Deal would work in practice (see below). The figures for costs and estimated savings are taken from the Energy Saving Trust's website. In both examples, the cost of the loan repayments would outweigh the savings.

Those seeking quotes for work from Green Deal providers should also compare what they are told with the cost of borrowing on the high street. There are several companies offering personal loans with headline interest rates lower than 7%. If, for example, your creaky old boiler went and you decided to take out a personal loan to pay for an A-rated one, you would have to cover the monthly repayments out of your income, but would also enjoy the financial benefits of having lower bills.

The maths

Example 1: Solid wall insulation (external)

Cost: £10,000 (this is generous – the Energy Saving Trust says £9,400-£13,000)

Possible savings: about £475 a year, but the Green Deal would cost £840 a year, assuming a £10,000 loan at 6.9% over 25 years that's paid off monthly. Over 20 years the cost is £923 a year. The government suggests some people in older properties and those on low incomes may benefit from subsidies which would bring down the cost.

Example 2: New A-rated condensing boiler

Cost: £2,300 for a straightforward replacement

Possible savings: perhaps £200 a year (the Energy Saving Trust says £105-£300), but the Green Deal would cost £246 a year, assuming a £2,300 loan at 6.9% over 15 years that's paid off monthly. Over 10 years the cost is £319 a year. So the maths might work if your existing boiler is very old and inefficient.

Economics correspondent Phillip Inman tested the Green Deal on his Victorian terraced home – but found it was No Deal

To say I'm in a quandary about the government's energy-saving initiative is an understatement. Keen to install solar panels, double glazing and a new heat-saving roof, last month I called a Green Deal adviser. But I was told it was most unlikely I would qualify for anything other than a partial loan on a couple of double-glazed windows. Even this was in doubt as the savings on my heating bill could be too small to fit the government's criteria. To cap my disappointment, he said it was probably not worth spending the £150 he would charge for a visit.

If the roof could take solar panels it's possible a loan could cover some of the cost, but the estimated £10,000 outlay would almost certainly not qualify for a Green Deal loan.

Our loft is already insulated. We have a wood-burning stove on the ground floor, which seems like an indulgence, except I can keep the gas central heating turned down and during the cold snap, it's a lifesaver.

I would like double glazing and have already installed some PVC units, but would prefer wooden sash-style units for the front of the house. These are wildly expensive, so won't work on the Green Deal. In any case, I can't expect the government to subsidise the fact that I think plastic units are too ugly. Instead, I'll need to start saving up.

I need a new roof and the roofing company has recommended blanketing the rafters in a German-made permeable membrane to save heat. It's the latest thing, apparently, and can pay for itself in 10 years – but it's not available through the Green Deal. The worry is that unless I can get rid of the condensation that plagues my house after the loft and windows were insulated, the moisture will sit under the membrane and turn mouldy.

My Victorian terraced house was built to be well ventilated. Could it be that the more I save from insulating the property, the more I need to spend on electric extractors to get rid of the moisture?