By John Peters, Managing Director, Engage Consulting Limited
There is no doubt that green is the most fashionable color about. To be anything other than green in the energy industry would see you lose friends both in government and amongst customers. However, how are we going to get things like the Green Deal in the U.K. to work operationally?
The government wants the Green Deal to go live in 2012, which may well be rather optimistic as we sit here in February 2011. Quite rightly it has big ambitions to improve the energy performance of the U.K. housing stock, something which many people have been talking about for years if not decades. The Department of Energy and Climate Change (DECC) will have established the framework and put the legal apparatus in place; but how does the industry deal with the Green Deal from a day to day operational perspective?
The process is likely to involve someone surveying homes to decide if a range of energy conservation measures (ECMs) are appropriate using the laid down Green Deal criteria. The key principle (golden rule) will be that the ECMs must save sufficient energy to repay the capital cost of the ECM and presumably its financing costs or interest. Clearly there is much to be decided as to how this survey will be initiated and scheduled but our focus is going to be on what happens next.
Once the surveyor approves a Green Deal ECM, a number of processes will need to be kicked off. Firstly, the financing organization will need to approve the spending of their money, whether on a deal by deal basis or in blocks with the survey effectively making the deal approval. In addition someone will also need to keep a record of the loan approvals, the ECM type, cost, premise, etc. – a not inconsequential, but extremely important, administrative task to avoid problems in the future.
The next step along the journey entails the selection of the ECM installer and instructions being given to them such that the work is carried out at the customer’s premises. Perhaps rather strangely it is not yet clear who actually carries out this selection but one thing is certain that there will need to be a very clearly laid down process (most probably something akin to a works order type) to make sure the right contractor does the right job at the right premises. Failure to do something that perhaps seems so simple will lead to chaos on all fronts and a very hostile reaction both from the customer, the media and perhaps even local MPs. It hardly bears thinking about should attempts be made to install the insulation at the wrong premises, and given the serious problems the U.K. energy industry got itself into after the opening of competition in the late 1990s we certainly cannot cope with more bad publicity. Of course, the surveyor and installer could be the same organisation, like M&S or B&Q or an energy supplier, which should in theory make the process rather easier.
Trust you are keeping up to date as now it gets rather more complicated on the “Big Green Machine.” So ...
The customer will repay the ECM cost from energy saving on his bill. This means that if the supplier has not been involved in the process to date then it will need to be notified about the deal, what the ECM cost, and the annual savings the ECM will deliver. In addition, the supplier will need to be notified about who financed the ECM as clearly this party is going to need to get their money back. Almost certainly this is going to mean the supplier will have to modify its billing system to deal with this loan repayment. No doubt suppliers have already started the process of planning for these eventualities as we speak.
However, there is still more to come. I think it is reasonable to think that the customer will want some information about the repayment process, how much do they have left to pay, etc., as well as how much have they paid thus far. Even more challenging customer questions are likely to be asked, such as how much energy, money or carbon have I saved so far? This will require some assessment of what the customer would have used without the ECMs in place, possibly broken down by a number of ECMs.
These sorts of questions are not straightforward for anyone to answer and it seems vital that the Green Deal surveyor provides the basic statement data in the original survey output to support this. Now the important thing will be for the supplier to receive this data in a consistent format regardless of the Green Deal surveyor or installer. Providing it is one thing, but making sure the supplier or whoever is receiving these questions can access and understand them is just as important.
There is one very important feature not to be forgotten that makes this complex and changes the fundamental relationship from one of a customer to a premise. Indeed, this is something which is similar to turning back the clock to the days before energy competition. The Green Deal very much creates the loan to the premise. Therefore, the supplier will need to move the “Deal” to the new customer when people move home. Now normally this may not be too difficult but there are occasions when it is difficult for the supplier to identify the new customer. That new customer will be expected to continue to pay the Green Deal loan repayments and just adds one more administrative and potentially bad debt problem for suppliers and financiers alike.
It appears that the intention is to class Green Deal debt as energy debt. This makes it considerably less risky for any financier and thus relatively cheap to provide with low interest rates. Do not underestimate the need for the supplier and financier to agree up front a debt management process. How about deciding whose debt is collected first, say from a prepayment meter, or would it be ok to disconnect because of outstanding Green Deal debt? This could lead to some very interesting practical problems for the people charged with operating the schemes on a day to day basis.
One last point, imagine that the property owner qualified for a second green deal ECM, for example a heat pump installed as an insulation ECM. Imagine that this is from a different Green Deal installer with a different Green Deal financier. The supplier is now repaying two Green Deal loans from the one account. Imagine all the extra complexity this might create.
This is giving every sign of being difficult to understand, hard to manage and tricky to operate. Everyone will need to understand the rules of the game and will need to solve the complexity very fast.
It said “there is light at the end of the tunnel.” Yes, it’s a man with a torch sat on the Great Big Green Machine bringing extra work!