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Understanding the Green Deal
Either a landlord or a tenant will approach a Green Deal Provider and ask for a Green Deal on their property. Simplicity and ease of access is key to the Green Deal.
The Green Deal Assessment
The Green Deal Provider will send a Green Deal Assessor to the property and undertake two assessments. This will take about 2 – 3 hours and it is advisable that both the landlord and the tenant are available (but not essential).
The Green Deal Assessor will start with a ‘Technical Assessment’ of the property; very similar to an EPC assessment but much improved and in greater detail. It will look at the fabric of the building; what type and quality of insulation measures are already installed, the property’s heating system, whether there is the ability to have micro generation such as solar panels installed and what type of windows are in the house.
The second assessment is an ‘Occupancy Assessment’ which is why it is important to either have the tenant at the house or at least have copies of the utility bills. This will involve finding out how the tenant uses energy. For example, are they high users who leave the heat on all day and open the windows when it gets too hot or are they can only afford to heat one or two rooms in the house.
Green Deal Recommendations
Once the Green Deal Assessment has been undertaken, the Assessor will input the information from both the Technical and Occupancy Assessments into a computer system. The software will then provide a list of recommended energy efficiency improvements (similar to the Recommendations Report on an EPC) and whether they can be financed through the Green Deal, Energy Company Obligation (ECO) or both.
Based on the Recommendation List, the landlord and tenant will jointly decide what measures to take out and notify the Green Deal Provider.
Installation of the Improvements
Once the energy efficiency improvements to be installed are agreed, the Assessor will go back to the Green Deal Provider who will organise the finance package (known as the Green Deal Plan), arrange for the measures to be installed and make the initial capital payment for the work.
Landlords will also get an updated EPC to reflect the new energy rating for the property.
Green Deal Finance and overcoming the ‘Split Incentive’
The capital outlay for the improvements, initially paid by the Green Deal Provider, is then attached as a loan to the electricity bill of the property (known as the Green Deal Charge). Therefore, whoever pays the utility bills; pays back the Green Deal loan.
This is because, even if it is a landlord’s property, the tenant, is the one reaping the benefit of the Green Deal improvements. The Government use the phrase “whoever benefits, pays”. The Green Deal therefore completely removes the split incentive of the landlord pays and the tenant benefits as generally, the tenant is the one paying the utility bills. Therefore, the tenant is the one paying back the Green Deal Charge.
An entirely portable Charge
As the Green Deal Charge is attached to the electricity meter of a property, it is effectively an entirely portable, unsecured loan. If a tenant changes tariff or moves utility companies, the loan moves to the new utility company. As tenants change, the Green Deal Charge passes automatically to the new tenant. If the landlord sells the property, the Green Deal Charge passes to the new property owner.
Landlords will be required to notify prospective tenants/buyers of and get them to agree to pay the Green Deal Charge (known as Green Deal Acknowledgement) before they sign the tenancy agreement (AST).
NOTE: As the Green Deal Charge is attached To the electricity meter, it does not go as a charge against the property on the Land Registry and will not affect the affordability criteria for mortgage applications.
The Golden Rule
It has been argued that with a tenant paying back the Green Deal Charge, tenants are paying to improve their landlord’s property. The Green Deal finance mechanism is a ‘Pay As You Save’ scheme and therefore the Golden Rule is vital.
The Golden Rule dictates that when combining the cost of the Green Deal Charge and the new, reduced cost of the utility bills, the total payable must be lower than if the Green Deal had not been taken out. Therefore, even with a Green Deal Charge, the tenant will make a saving in their utility bills.
It is important to note that utility bills are inevitably going to go up over the next decade or so. Therefore, whilst the savings in the utility bills might not be great at the start of a Green Deal Charge, by the end of the term, tenants could be seeing significant savings.
Green Deal Measures
There are 45 different measures covered by Green Deal Finance. Taking into account the Pay As You Save nature of Green Deal finance and the Golden Rule, the improvements always covered by the Green Deal will be loft, floor and cavity wall insulation as well as draught-proofing measures and lagging for water-pipes. These are generally low cost measures that will fit within the Golden Rule.
Solid Wall insulation, double glazing, new boilers and micro-generation such as solar panels will be part of the scheme but will almost always break the Golden Rule. Therefore the Government had to come up with a way of dealing with these ‘Hard-to-Treat’ properties: the Energy Company Obligation (ECO).