In this article, we ask the question: do pay-as-you-save schemes have a future now there has been a demise in Green Deal Finance Company lending capabilities?
Latest update on the Green Deal Finance Company
Update: December 2016 – the services company behind the Green Deal Finance Company has been sold to a number of institutional investors (Greenstone Finance and Aurium Capital Markets), according to the latest company house records. The Government distanced themselves from the Green Deal scheme following the last election and are no longer supporting it financially. This means it has moved into the private sector.
It is our understanding that the assets will be sold on to the investors and they will repackage the scheme under a new name. More announcements will follow in the next few days.
What was the function of the Green Deal Finance Company before it stopped lending?
The Green Deal Finance Company was set-up under the original Green Deal framework in 2012, ready to provide low-cost loans to UK private homeowners or landlords to finance energy saving measures like energy efficient boilers, insulation and solar panels.
With the demise of the Green Deal in July 2015, and an independent audit report into the performance of the scheme in 2016, the Green Deal Finance Company seized any new underwriting. Up until September 2016, it has been actively on the lookout for a buyer for its loan book portfolio, and one has now been found.
According to the latest records the Green Deal Finance Company website, it has a loan book value of just under £50m with 13,700 plans written.
Green Deal Finance: an example of pay-as-you-save lending
The Green Deal Finance Company was good in the sense that it had managed to fill a gaping hole in the market, helping to fund energy saving schemes long-term, with fixed rates of interest and relatively low rates of default. The rate of interest was still fairly high versus secured products, but was better in cost comparison to most comparable unsecured high street products when closely analysed.
The funding of the schemes was paid for through an initial injection of government finance and some private funding, aligned to help the uptake of the national approved energy saving scheme, which was the Green Deal at the time.
Consumers were allowed to contact Green Deal providers who acted as the providers of the loans and other sources of funding such as ECO and the Green Deal Home Improvement Fund vouchers. Once the Green Deal Finance plan was written, the home owner paid back this commitment through their monthly energy bills. The whole concept was designed around the ‘golden rule’ and expected energy savings from the installed improvements – this final element being the ‘pay-as-you-save’ element.
The demise of Green Deal Finance
With the Green Deal scrapped and the generous grants that once came with it, the uptake purely for Green Deal Finance waned. The Green Deal Finance Company was not helped by being unable to source additional pools of private finance to help with underwriting of new green plans. The fact that the Green Deal was scrapped in July 2015 probably sent all the wrong messages to investors, so it didn’t really stand a chance of living on following this news.
Also, the fact that the whole mechanism of Green Deal Finance was based on expected energy bill savings unfortunately missed a massive trick! Home energy saving improvements don’t just lead to energy savings, but also increase home comfort and lead to overall value enhancements to the property and its occupiers. These additional consumer motivational factors responsible for the uptake of energy saving installations in homes have finally been recognised with the recent publication of the Each Home Counts Review (or Bonfield Review in Dec 2016).
Each Home Counts and finance schemes
The Each Home Counts review (as mentioned above) into energy saving and consumer protection advocates the formation of a new energy efficiency framework for providers, manufacturers, installers and end consumers. Within this framework may or may not include the guidance of how ‘pay-as-you-save’ schemes should be run in the future (awaiting more information of delivery plan). What you can be assured of through is that it will certainly move away from the centralised, top-down, Green Deal Finance approach, to a more diverse and private sector led framework.
Therefore, the future is less about government delivery to more about enforcement of pre-set rules and regulations.
What now for pay-as-you-save energy finance schemes?
The landscape for financing energy saving measures has changed a lot since the beginning of the Green Deal Finance Company in 2012, with more private and social providers of funding entering the market. On top of alternative finance providers, traditional lenders such as banks and building societies are also providing their own home improvement loans, which can in theory be used on a number energy saving measures.
Therefore the market is already moving towards what the Bonfield Review wants it to do; therefore what is the point of it?
Well, if actually there are also rules around the quality of delivery of these measures and a better understanding overall of consumer and industry risk, then we may be able to get to a place where energy saving measure financing is as easy as taking out a new credit card, and the cost of financing these loans will drop for the end consumer.