Jenny Love and Peter Warren, UCL Energy Institute
With help from Martin Evans, the Simplification Centre http://www.simplificationcentre.org.uk/
This October the government is planning to launch a scheme called the Green Deal whose aim is to incentivise householders to make their homes more energy efficient. The Green Deal has come under much criticism for a number of reasons– we feel that the main problem is that it is difficult to simply and/or convincingly explain to people who are not environmentally driven or do not have a technical background. However, we do not feel that it is helpful to lament about the problems, so after explaining what might go wrong, with the help of Martin Evans from the Simplification Centre we will start off a discussion of possible solutions. Please do contribute your thoughts at the end!
1. What is the Green Deal?
Reduced to arguably its simplest terms, it is a scheme whereby householders take out a loan to buy energy efficiency measures. That is, they pay nothing up-front, get measures installed, and repay the loan as they save money on their energy bills. “Under a ‘golden rule’ the repayments must be less than the savings on the energy bill” (taken from Which)
A member of the public presented with the above paragraph would quite likely think, “I don’t really understand whether this is a good deal or not”, or “I don’t know whether this would make me richer, poorer or do nothing?” This article aims to explore how to make the Green Deal clearer.
2. What needs to be sorted out if the Green Deal is going to work?
Broadly speaking, there are three things to work out:
a) The measures need to work. That is, if a consumer wants some external wall insulation there needs be some available, and the quality of the installation needs to be good.
b) The finance needs to work. The loan should be available at the rate and or payback period promised to the consumer. If the consumer defaults, there need to be mechanisms in place to deal with that.
c) The consumer engagement needs to work. ‘Consumer engagement’ means that householders need to understand what it going on, agree that it is a good thing, and thus go through with it.
Now, having heard a variety of speakers and done some research on the above, we feel that issues a) and b) are smaller than issue c). That is, the supply chain should sort itself out and there should be skilled people to install the measures. Equally, the financial model should hopefully sort itself out even if at first it is a bit shaky. We are therefore going to focus from now on issue c), that of the householder…
3. What is the evidence that consumer engagement needs improving before the Green Deal is launched?
The motivation for writing this article came from attending a talk describing Green Deal trials carried out by npower, where, on the whole, consumers did not understand what was being proposed to them. This was not the first trial of this kind – the official pilot project of the Department of Energy and Climate Change (DECC), named ‘Pay as you save’ (PAYS), was carried out a couple of years ago by the Energy Saving Trust (the full report can be found here: http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/microgeneration/2670-home-energy-pay-as-you-save-pilot-review.pdf)
Below are a few key lessons from PAYS, but also areas in which it did not reflect the forthcoming Green Deal, thus implying that some aspects of the latter are untested:
Firstly, the sample was self-selecting in that recruitment was through online or telephone responses to various advertisements. Afterwards it was inferred through questionnaires that the level of environmental awareness of PAYS participants was much above that of the UK population. Therefore, we do not have a lot of evidence of ‘normal people’ taking it up of their own accord.
Secondly, the PAYS scheme was simpler in mathematical terms and more attractive from a customer point of view than the Green Deal will be – since the PAYS loan was zero-interest as opposed to the Green Deal (GD) figure of around 5.8%. We are sure that this will make quite a big difference to uptake. An interest rate of 0% is a good deal as long as the measures save more money on energy bills than the cost of the loan repayment, per instalment. An interest rate above zero is only a good deal if the measures save more money than the loan repayment + interest, per period, per instalment. The zero interest rate was shown to be a key motivation of customer uptake.
Drop-out was closely monitored throughout the trial, yielding some interesting findings. Although households dropped out at many stages of the pilot, most opted to cease their participation after an energy assessor had been to their house, performed an energy assessment, and given them “detailed information concerning actual savings and repayments specific to their property”. That is, they had opted in to the Deal, but when some specific numbers were given to them it didn’t seem like such a good deal. And this was with a 0% interest loan.
Given the above, how should the Green Deal be explained? Here are a few suggestions…
4. Suggestions for explaining the Green Deal to Normal People
a) General principles
– Find what the customer actually cares about. We think that it is, ‘How much will I save?’, and when we had a think about what unit the customer thinks in, we refined that to ‘How much will I save per bill?’. In consultation with the Simplification Centre, it has been suggested that a model bill is shown to the customer. In this way, the customer can see that this is what their bill will look like, and be taken through it by a human being before making a decision as to whether it is a good deal or not.
- Address risks perceived by the customer. ‘Perceived’ is emphasised here as it is incredibly important. The Green Deal could either be seen as taking on a risk (by taking out a loan), or as lowering a risk (protecting oneself against future rises in energy prices). Frame the Deal so that the customer feels that he/she is minimising risk.
- One problem not mentioned above is that the loan repayment will be added to the customer’s electricity bill, whereas energy savings are likely to show up more on the gas bill. As much as we like to think that a customer meticulously calculates and optimises everything in their life, he/she doesn’t, and this setup will mean it is an effort to see the overall effect of the Deal on his/her wealth. We therefore propose that energy billing should be done using one single bill. For those whose gas and electricity are provided by different suppliers, we propose a 3rd party to manage the billing. However, this will add administrative complexity. Nevertheless, we feel that the issue of disconnection between gas and electricity bill must be solved.
- Behavioural economics has reminded us again and again that when making comparisons, the point of reference is very influential to the outcome. Consider the issue of ‘payback’ – the amount of time it takes for a measure to pay for itself by the energy saving it makes. Consumers are often presented with a report including measures ranked by payback period – and they can be above 60 years for some measures. Given this, the customer will say, ‘no thank you’. But compare to something like getting a new kitchen which gives the customer zero financial payback – he/she still purchases it, for reasons other than getting the money back. Our point here is that customers should not be presented with a comparison of measures in terms of payback periods, they should be presented with a comparison of having the Green Deal or not having the Green Deal, and payback should not be presented as the point of reference.
- In terms of marketing the Green Deal, DECC is currently anticipating industry to take care of it, whereas we believe that the role of central and/or local government is crucial. This is because it could fail if no one knows about it, and might have more impact coming from a central body than sporadically from different private sector sources. At the minimum ministers should promote the central message to get base level interest.
- Thinking long-term, sustained feedback is important (as recognised by the latest DECC document replying to the consulation responses, available here: http://www.decc.gov.uk/assets/decc/11/consultation/green-deal/5521-the-green-deal-and-energy-company-obligation-cons.pdf) . Comparisons to previous years, in the form of a simple graphical document, may help point out unconscious increases in energy use through comfort-taking or other reasons.
b) Different methods of communication to the consumer
The following is a non-exhaustive list and contains, we feel, some bad ones and some better ones – please give your own suggestions.
1. The ‘standard graph’: something like
Variations of this are seen all around. But is it appropriate to show the customer? We think that this particular example is clear, but Martin Evans points out that it could look to the customer like a big loan repayment has been shoved on top of their bill, which is perhaps not a great way to market it!
2. A diagram showing where the money ends up:
In this diagram, the financial flows between the householder and the green deal provider are shown. Although only indicative figures are given, it shows how both parties benefit in monetary terms:
3. Explanation in terms of a mortgage or a normal loan. Looking at the documentation that goes with a loan, maybe not….e.g. http://www.lloydstsb.com/media/lloydstsb2004/pdfs/PlatinumonlinTsCs.pdf
The Green Deal is a bit more complicated than a normal loan. Perhaps a picture is a better way of showing the similarity and differences…
4. Picture from the point of view of the customer
5. A short film/youtube video: DECC made one and you can watch it here: http://www.youtube.com/watch?v=R1oBCPj81Bw&list=UUULvYGk41IsFKZ21TZgiOpg&index=8&feature=plcp Do you think it gets the message across?
6. The no-brainer argument: the consumer would have the same wealth with or without the GD but have a warmer house with. (Modification pointed out by a helpful commenter: the government have not guaranteed that savings will exceed repayments in each invididual case – only for an average energy user for certain archtypes of dwelling and efficiency measures – and so this argument will not always be true.)
We hope you found this article thought-provoking. Do have a think about, as a customer, the format and framing in which you would best understand the Green Deal, and tell us. We very much wish the Green Deal to succeed and want to encourage discussion to maximise its successful uptake.
Appendix: how is the loan paid back?
We are not sure if the current proposal is for a flexible or a fixed-term loan.
- Flexible: the loan repayment is a percentalge of the energy savings; that is, the more energy used by the consumer, the longer it takes to repay the loan. However, there is still an end date the consumer cannot exceed – so if more energy is used at the start and thus not much of the loan is paid back, the rest will have to be paid back in a short space of time.
- Fixed: a set amount of money per month (i.e. not thinking about energy [and consequent carbon] savings, just thinking about paying back the loan).
There is a trade-off here: customers would like to know how much will be coming out of their bank account each month for the repayment contract, but on the other hand the carbon objectives of the Green Deal are best satisfied by a flexible timeframe as it encourages people to make more savings.