Late last month, the U.K. folded the Green Deal, an ambitious energy efficiency program that never took off the way the government had hoped.
The Green Deal was a flop. On paper, it sounded like a great idea. The U.K.’s Department of Energy and Climate Change (DECC) wanted to build a public-private partnership that would give homeowners £10,000 ($16,500) to support energy efficiency improvements, with no upfront costs. The focus was residential weatherization.
But nearly three years later, fewer than 10,000 loans had gone through. The program's shortcomings can serve as lessons for U.S. states looking at private financing vehicles to animate residential energy-efficiency markets in place of utility weatherization programs.
“It’s different to finance projects people are already doing versus using financing to motivate someone to do something they wouldn’t do on their own,” said Chris Kramer, senior consultant with Energy Futures Group, an energy-efficiency program consulting firm. “Getting someone to put in insulation is really, really hard.”
Troubled from the start
Many things went wrong for the Green Deal.
There were scams that eroded trust in the program, the participation rate was low, and there was also a problem with long paybacks due to the program's focus on weatherization.
Because the U.K.'s climate is not particularly extreme, weatherization retrofits did not bring rapid savings. Very often, the financial savings were lower than the actual cost of the loan to insulate an entire home. To create a fix, the utilities were meant to provide subsidies to cover parts of the loans as a way to meet their carbon reduction obligations.
The utilities, however, preferred to meet their carbon obligations in other, more cost-effective ways and didn’t promote the program. Ultimately, the government set up a cash-back scheme to subsidize the Green Deal.
The cash-back program, unsurprisingly, was more popular than the loans. The government had issued $178 million through the cash-back program versus $92 million for the loans, according to The Telegraph. The decision to end the Green Deal came because it wasn’t seen as a good use of taxpayer money.
Axing the Green Deal comes at a time when Amber Rudd, the energy and climate change secretary, has been making cuts in other areas as well, includingsolarfarm and woodchip power subsidies.
The U.K. had a modestly successful weatherization program that predated the Green Deal. The energy retailers provided heavily subsidized wall insulation. It wasn’t entirely free, however, as the money came from utility ratepayers, the same way many energy-efficiency programs are funded in the U.S.
But when the Green Deal started, the number of weatherization projects fell 97 percent from the year before. The government expected an initial drop-off, but not such a drastic decrease.
Lessons for U.S. regulators
While the Green Deal was unique to the U.K., the use of novel financing tools to unlock more residential energy efficiency is growing in the U.S. as well. These include on-bill financing, property-assessed clean energy financing, and cash loans. Although efficiency is not an official building block under the Clean Power Plan, many states could be looking toward novel financing products to meet CPP goals.
One of the most recent successes is the adoption of property-assessed clean energy (PACE) programs, which have supported more than $600 million in residential energy projects, primarily in California. But most of the PACE money goes to solar and equipment upgrades, not weatherization. These are separate from utility efficiency programs. By comparison, total U.S. energy efficiency spending by utilities, including both commercial and residential projects, amounted to $4.8 billion in 2010.
The first lesson from the Green Deal is that if you're looking for savings from weatherization, a market-based financing program, such as PACE, might not unlock the market. Unless people have a comfort problem, weatherization is not an easy sell, said Andy Frank, the CEO of Sealed, a startup that performs air sealing for homeowners and then offers a lower monthly bill than they would pay to the utility.
The Green Deal also suffered from poor program execution. It would take at least 30 days to close a loan, partly because of red tape due to consumer protection regulations. Many U.S. energy-efficiency programs also suffer from burdensome program design. A recent study by economists at the University of Chicago, for example, found that the U.S. government's Weatherization Assistance Project does save participating homes 10 percent to 20 percent on their utility bills. However, the cost of administrating the program is greater than the savings achieved, they conclude.
In some regions of the U.S., regulators and legislators might want to consider if there are easier projects beyond weatherization on which to focus. It has long been accepted that weatherization is one of the most cost-effective ways to achieve residential energy savings. But the Green Deal showed that in the U.K., the projects were largely not cost-effective. That recent study from the University of Chicago also questioned whether weatherization actually saved the energy that models suggested it would.
Regulators in the U.K. thought that the Green Deal would improve utility energy-efficiency programs. But utilities didn't find a lot of value in the Green Deal. In America, some states are looking to phase out traditional rate-based utility energy-efficiency programs altogether in favor of more market-based programs.
In New York, for example, the state’s Green Bank is working with Citi to provide $100 million in loans to homeowners and promote the creation of a marketplace for the securitization of residential energy-efficiency loans. But simply creating a new loan mechanism may not be enough for weatherization. The loan program in New York, dubbed WHEEL, is being run by San Francisco-based startup Renewable Funding. WHEEL is a reactive program -- providing loans when people need to buy a new furnace or AC unit. Homeowners rarely use the program for weatherization projects on their own.
Many professionals are trying to figure out new ways to promote weatherization in a cost-effective way. Two home performance experts, Nate Adams and Ted Kidd, have crafted an idea called "One Knob" that would abandon rebate checklists and pay contractors based on savings delivered at the meter.
The Green Deal is a cautionary example for U.S. states, particularly as many of them consider new plans under EPA carbon regulations.
“There’s this assumption that because it makes so much sense, people will do it. But it just doesn’t bear out that way,” said Chris Kramer. “You do have to think about what the real barriers are.”