By Steven Heath: External Affairs Director – Knauf Insulation Northern Europe
Government decision making is based on outdated textbook economics; a reliance on economic modelling that can never truly represent us in all our complexity. Rather we are reduced to rational calculating machines ‘always motivated by self interest and desire for gain‘. These are the claims made in ‘Compassionate Economics’ by Conservative MP Jesse Norman MP.
Should those Whitehall economists have given the insulation industry a call, we could have let them know the population might not be the calculating machines they believe them to be.
Indeed UK Governments over the last two decades have recognised the fact by subsidising products like loft and cavity wall insulation, despite the payback for installing cavity wall insulation actually giving a better return on your investment than apple stock over the last few years. It is the reliance on ‘outdated textbook economics‘ that delivered us the Green Deal in its current state; a mechanism that would appear sensible to the rational self-interested mind. Government has stuck to the line‚ ‘why would we force take up of Green Deal in large numbers when it makes perfect sense once you have explained the golden rule‘?
What the uptake figures tell us is that Green Deal alone, or even combined with the energy company subsidy, will not deliver the improvement to Britain’s old and leaky building stock that it so desperately needs. But more than the limited interest in Green Deal giving the lie to a simplistic interpretation of human behaviour, it also gives a truth to Government’s willingness to believe an outdated economic model over the evidence.
The Department of Energy & Climate Change‘s (DECC) own impact assessment for Green Deal broke the economic textbook mould, with DECC priding itself on actually polling real people on whether the Green Deal was attractive. The resulting low predicted uptake was then dismissed as the result of overly pessimistic DECC economists – and faith in the old textbook thinking was renewed. You might feel some sympathy for the economists in question.
So rather than accept the need for a real demand driver for Green Deal uptake, we have witnessed six months of positive spin about an ever growing number of assessments. Given the amount of insulation left on our forecourt, and the number of reported job losses in the installation industry, over 5000 and counting, we knew these assessments were not converting to real home renovation – more a version of the emperor’s new clothes for our homes.
Infographic to represent the low uptake figures of Green Deal
© Image provided by Knauf Insulation
With the release of these low numbers, the Government must now accept the naked truth; Green Deal needs a demand driver. People need a reason to take it out.
I’ve been working with the UK Green Building Council on what that incentive might look like and picked my own winner;
Linking the level of Stamp Duty paid to a property’s energy efficiency is to me by far the best approach. The amounts needn’t be huge; a small nudge for people to consider the energy efficiency of the property and build it in as a factor into their purchase decision. In fact it would both encourage the purchaser to consider it when buying and push the vendor to consider before selling as it may affect the purchase price – two bites at the cherry. Actually, it would incentivise the estate agents to offer retrofit…three bites at the cherry, and surveyors… four …or even mortgage advisors … five. Unlike the other incentives often mooted such as a council tax link to property energy efficiency, it hits all the right buttons. It can;
- easily be built into existing processes
- be cost-neutral to treasury
- designed in such a way that it doesn’t penalise any demographic unfairly
- comes at a time when people are most likely to be considering refurbishment
It might also just pass the Daily Mail test as the cost to those purchasing energy inefficient homes will come at a time when finance is being arranged or existing equity released – i.e. it won’t hit the weekly or monthly budgeting in any significant way. What is even more attractive, is the charge is levied, or bonus paid, at a time when people are actually making the biggest financial decison of their lives; in other words people are most like the calculating machines the economic text books believe us to be.
But then the Government played the emperor’s new clothes trick again! They released a study that suggested people already valued energy efficient homes. DECC research revealed ‘making energy saving improvements to your property could increase its value by 14% on average – and up to 38% in some parts of England. Closer examination of the study reveals a wonderfully, even beautifully, complex and baffling economic model. The model‘s aim is to ‘isolate the effect of the Energy Performance Certificate (EPC) rating‘ (ref p15).
Alarm bells were already ringing as I followed enthusiastic tweets from Government and industry alike welcoming the report. Does this mean people do understand more than I give them credit for. That for years prospective buyers have not only been whispering into each other’s ears ‘I love the garden‘ but also ‘that boiler is 15 years old! It had an efficiency level of only 60% when it rolled out the factory and is probably down at 30% now! We should knock a few thousand off the asking price‘.
The authors of the paper concede that ‘property condition‘ is a potentially significant variable missing from the study. The outcome may therefore be that older dwellings which have been refurbished or are well maintained will have higher EPC ratings than poorly maintained buildings (ref p14).
Were the above to be true, and I believe it’s likely, what the complex economic model appears to be telling us is; ‘People are willing to pay more for nicer homes!‘. That headline might struggle to force its way on to the front page.
I would have an even simpler test to get to the truth behind the study. How many estate agents are advising their clients to make energy efficient improvements to their properties before placing them on the market? This would help the seller realise the high prices listed in the study and increase the agent’s commission. If the answer is few to none, then the study is misleading.
My concern is that, as the writer of Compassionate Economics points out‚ the Government is all too willing to believe economic modelling can represent the real world adequately and we, the public, can sometimes believe the modelling despite evidence to the contrary. Pushing the line that people already account for energy efficiency in purchasing decisions may well undermine the one demand driver that could yet mean the Green Deal delivers against its potential.
If I were George Osborne, I would read the DECC study into housing prices and decide the invisible hand of the market will eventually deliver up the improvements in the housing stock we need; so no need for a stamp duty incentive linked to energy efficiency. I would quietly ignore the messy reality of such low Green Deal take up numbers and simply put it down to teething problems; sure in my mind that people will come to their ‘rational‘ senses soon enough.
As far as the Green Deal is concerned, the nuts and bolts need examining through the lens of what people actually might agree to; not what Government and economic models assume they should. The first step to achieving this is to put access to all cash backs and incentives behind generic multiple measure energy efficiency retrofit. Then see if people pick Green Deal as their route of choice to market. If they don’t, tweak it until they do?
At an estimated cost of between £7bn-£11bn a year to deliver the retrofit to the housing stock we need (ref E3G Financing the Green Deal), and an estimated ECO subsidy spend of only £1.3bn a year, something needs to fill the funding gap. I believe that to be an attractive functioning Green Deal.
Built On Performance 
I am a rational well informed and educated professional within the energy saving industry.
When I buy a house, my wife decides based on location, look, kitchen, bathroom, garden, local amenities. We once mistakingly purchased an ‘A’ rated house and it was the coldest and least energy efficient house we have lived in.
Likewise, when we buy a car we have no interest in emissions, level of road fund licence, fuel consumption, etc. we buy the car we want with the biggest engine we can afford in red.
Fiddling with stamp duty is not enough to encourage those that can afford to purchase a home to change their outlook.
Whilst Government and climate change experts try to encourage the general public to take these issues on board, they do little other than to frustrate and annoy them.
Try linking it to a carrot, e.g 20% off a new sports car, kitchen or bathroom; the things that matter to real people.
The masses are yet to be convinced that climate change is real or will affect them in any way. Those that are already convinced would have done all the improvements by now! If not, there is no chance for convincing anyone.
Most professionals I know in the industry have yet to install all energy saving measures in their own homes. This tells us a great deal about rational and education. Neither work in this instance.
We consider tinkering at the edges while Rome burns. Lets get real and give free energy saving measures to anyone and everyone willing to take it.
This approach makes sense for UK plc. Especially as we fast appear to be running out of energy capacity.
I love the analogy to the motor trade and buying cars. While I believe that everybody has freedom of choice to decide what they want to buy, and colour of course, the biggest twist to car buying is based on exhaust emissions and subsequently the Road Fund Licence on the car.
People are now buying cars in the bands A-C specifically to get the lower yearly cost. If the Stamp Duty is the equivalent to the a vehicle’s emission/RFL, then this will have a much greater effect to people’s choice that you give credit.
If the energy bills in the house are equivalent to the MPG of a car, then people will buy a house based on the running costs too. The EPC will help people with that part of the decision process too.
There are always exceptions to every rule, but the general consensus in the motor trade is that when people are spending their hard earned cash on the 3rd most expensive purchase in their lives (House & Getting Married being the first two) the buyers are looking for the best value for money, coupled with lowest tax bracket and running costs.
So if this is true for a car, how does this affect their decisions when spending a far greater amount of money on bricks & mortar?
Estate Agents should inform investors / buyers on the Green Deal potenital of a property as well. My recent purchase for ‘buy to let’ was ideal for Green Deal but it prooved really difficult to find a company to be interested, the service is not widely available yet.
Phil Beynon is right in concluding that the only way for Britain PLC to reduce their energy needs is to provide energy saving measures free to the end user since the pay back times in self financing for the individual are simply unrealistic.
Some improvement in take up might be achieved if the cost of installing such measures were more realistic. Quotes in excess of £3000 to install a replacement boiler costing £800 (inc VAT) are simply not on. The British public are not daft and most are aware of a “guy down the road” who had his boiler replaced for £1500! Why commit to any more.
Like everything once a government grant payable to an installer is in the offing the price goes up. Why not make the grant available directly to the end user and let them choose the installer – the government might even save some money?
Steven:
Thank you for an excellent post and Knauf for the courage to blow the whistle on the ‘greenest government ever’.
Approximately two years ago, before the green deal went into ‘action’, there was a period when insulation companies were offering free insulation (with some conditions) to everyone. Over the course of three weeks we signed up over 200 homes for this programme – ALL of which were installed quickly and efficiently at no cost to the homeowners. Those 200 homes represented about 6% of our total housing stock in the two villages we canvassed. If you subtract those homes that already had both cavity and 300mm of loft insulation, then our efforts reached nearly 25% of underinsulated homes in our area. Again, that was accomplished in only 3 weeks!
If we really are serious about tackling climate change then insulation is the best place to start. We simply need to proceed in an organised and orderly fashion. It’s done by going from house to house, street by street, to deliver free insulation until all 14 million targeted homes are installed. From your chart that would appear to amount to about £4 billion spread over the next 6 years. In terms of the overall annual budget that amounts to under £700M per annum which is not a lot. It could easily have zero impact on the treasury by either 1) charging households £30/yr for the next 10 years; or 2) cutting MP salaries and expenses (including cosy junkets to warm tropical places next winter).
There are plenty of volunteer ‘activists’ out here to encourage neighbours to sign up for such a programme and welcome with flags waving the armies of installers as they fill our lofts and cavities with insulation. But be forewarned! Those who are doing the encouraging MUST be part of the same community. Otherwise, the cynicism created by the current Green Deal will close off any possibility of acceptance. Neighbour to neighbour is the key to getting this job done quickly.
We know it works because we’ve already done it.
The majority of properties in my local area (North Highlands) that have benefited from insulation improvements have been of relatively modern timber frame construction. The older stone traditional built properties 1 1/2 storey with lath and plaster / plasterboard and studwork internal linings are deemed as “we can’t insulate that”.
So the houses that need it most are being pushed aside due to the “difficulties of installation” or lack of profit perhaps for the installers.
Heaven forbid if your boiler conks out or you want to apply for the “Deal” as you will have to jump through more hoops than a circus tiger.
What is needed is an injection of cash to improve the properties that need it most, not just for the open the loft hatch and roll out a dozen rolls of insulation situations.
Thanks
A
Thanks everyone for your comments and views. The Green Deal has a number of barriers that individually would make home owners think twice, but collectively carry too many unknowns and risks. I think this is why the response has been so poor. Each barrier needs to be addressed.
Phil, I think you are right about consumers and climate change, but people are starting to feel the effect of constant energy price rises. Getting them to take action on it is the conundrum. I think Chris and Steven are right about Stamp Duty. It is existing infrastructure, so falls into the not too complex box, and it can be eased in gently at first but driving a significant incentive over time at little or no net cost.
Ken, the Treasury just wouldn’t countenance your £4bn loan and payback suggestion. ( the fact it would work doesn’t count!). Having said that I do think there is real value in a street by street community approach, but I see your ‘local activists’ more as local installer SMEs demonstrating the real savings achieved from one neighbour to the next. Product suppliers need to arm the SMEs with the tools to do the job.
The Government seemed quite impressed with themselves that 22% of homeowners had heard of the Green Deal after 5 months, albeit at a cost of £2.9m. They need to introduce a new activity driver, make the assessment free of charge, and then start a proper long term advertising campaign demonstrating the benefits of home energy efficiency improvements and the return on investment. They should let homeowners decide how best to fund them; the Green Deal being one option.
Good Morning! It’s been a fine hot weekend, Andy won, and the weather outlook looks good for another fine week. Time to shed the gloom that is the Green Deal and revive ourselves with a fresh look at the problem. So with that in mind let’s begin with a question …
Could it be that our inability to drive demand for energy saving and renewable energy technology is based on human biology? Are the messages and programmes we are delivering simply missing the target?
Those of us who thought that people make decisions based solely on ‘rational self interest’ were wrong. We came to believe in rationalism through the use of the neocortex portion of our brains – something we have been trained to do from childhood: rationality rules! We collect data, hold conferences, conduct consultations, and analyse. It’s what makes us human and our rationality is a very powerful tool. Yet, we often build elaborate programmes, and then we are bitterly disillusioned when our fellow citizens fail to embrace them. We go back, re-examine, nit pick and tweak our creation looking for that one detail which will open the flood gates of participation in our projects. We forget that rationality is not the most important part of the human decision making process.
How many of us have made strong and reasoned business proposals to our boss only to be told: “it just doesn’t feel right.”
Let me quote from a TED talk by Simon Sinek (http://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action.html)
“If you look at a cross-section of the human brain, looking from the top down, what you see is the human brain is actually broken into three major components … The neocortex is responsible for all of our rational and analytical thought and language.”
Decision making is a function of the older part of our brain known as the limbic brain. Sinek says: “The middle two sections make up our limbic brains, and our limbic brains are responsible for all of our feelings, like trust and loyalty. It’s also responsible for all human behavior, all decision-making, and it has no capacity for language.”
Most of what we do to sell ‘energy saving technology’ is rational. It is aimed at our neocortex brains. As Sinek says: ” …people can understand vast amounts of complicated information like features and benefits and facts and figures. It just doesn’t drive behavior.” We need to communicate from the inside, our limbic brain, outward to our neocortex rational brain. “When we can communicate from the inside out, we’re talking directly to the part of the brain that controls behavior, and then we allow people to rationalize it with the tangible things we say and do.”
Steven’s post points to the government’s reluctance to change tactics: “Government has stuck to the line‚ ‘why would we force take up of Green Deal in large numbers when it makes perfect sense once you have explained the golden rule‘?” The ‘facts, figures, benefits and features’ approach, i.e., the appeal to our rational neocortex brains alone, has been a demonstrated failure. With fewer than 39,000 assessments and 4 sign ups after explaining the ‘golden rule’ to 22% of the population, the Green Deal message has not changed behaviour.
Again, if we want to drive behaviour, drive demand, then we must reach the limbic brain where the real decisions are made. This is the place where trust and loyalty reside.
In my view, it is counter-productive to adopt ‘rational’ policies that FORCE behavioural change. It signals desperation and surrender – quite understandable after the hopes everyone had for the Green Deal. It allows those dark forces within government to implement a new policy that’s been lurking beneath the surface for the past 18 months: ‘Forget sustainability, energy savings, and renewable energy. We will reduce CO2 emissions by burning gas from fracking.’
We follow leaders because we want to, not because we are forced to. Inspire people if you want them to act. So, I would approach the ‘stamp duty’ issue with extreme caution. Forcing more expense on people in an era of extreme financial strain is not the kind of thing that instills trust and loyalty. It reinforces peoples’ negative belief that corporations, institutions and government are out to squeeze every last penny from us. There are better ways to clear the forecourt.
In that regard, a comment on your response: “I see your ‘local activists’ more as local installer SMEs demonstrating the real savings achieved from one neighbour to the next.” I understand how that would appear like the correct way forward from a supplier viewpoint. However, it misses the target. Installers are businesses and they elicit the usual ‘well they would say that wouldn’t they’ response from skeptical homeowners. The activists I’m talking about are neighbours and they, not installers, are the sustainability opinion leaders in a community, the go-to people who give the homeowner a thumbs up. If you don’t win over the activists, then your forecourt remains full.
The key is to lead through inspiration. ‘Inspire me and I will follow you to the ends of the earth’. It applies to customers, activists, SMEs, and especially to your own staff. It is a transformative strategy for your market and also for your company. The opportunity is great. And, you begin by asking: “WHY do we do what we do?” Is it to make a living? Or do we possess the passion needed to tackle one of the greatest problems ever to face humanity? Shall we, all of us, sit back and wait for a leader to emerge, or are we going to step up and do the hard work – door by door, street by street, village by village?
A good, thoughtful article. However, as I saw the phrase “Linking the level of Stamp Duty paid to a property’s energy efficiency is to me by far the best approach” I read it as ” Linking the level of Stamp Duty paid to a property’s stated EPC result, which the Assessor will inevitably be encouraged to alter to reduce the stamp duty liability”. I don’t dismiss the idea, but I don’t know how to avoid corrupting the role of the DEA or GDA in this scenario either.
I agree that ‘rationality’ is overvalued in the matter of energy efficiency. Three other significant, non-rational factors are :
1) Does an individual accept that humanity’s Co2 release is causing a big problem?
(I do, but I consider this an irrational leap of faith, as I can’t prove it, and we all have to wait and see if Climate Change Theory is broadly correct)
2) Does an individual, whether well-informed, educated or not; whether convinced by Climate Change Theory or not, actually give a stuff about the expected consequences of climate change?
3) The amount of disposable money an individual has can over-ride the rationality of saving money. It would appear that some people will happily own a house or a car which they know to be unnecessarily expensive to run, because that extra cost is simply insignificant to them.
Wow … great article and comments … although not so keen on the suggestion of assessors altering information … I can’t see many going to the trouble of getting qualified in the first place to risk something so stupid.
Loved the article though and the idea of introducing a subtle incentive via stamp duty … how simple.
Re assessors possibly altering data – I really think it does and will happen unless or until the auditing and sanctions are very effective. This industry has already brought us the ‘drive-by DEA’ – unaccompanied visit, quick external look, D. Glazing, no room-in-roof, solid walls – drive home and make it up. I’ve seen an open suggestion on LinkedIn that an experienced GDA will know how to get the ‘right’ result for his employer or client.
In my last job, I found, read and acted upon the Re:New Good Practice Manual which said it can be difficult to do a scheme visit in 90 mins, whereas my operations manager had merely ‘heard of’ this manual. Under his direction staff were given up to 12 appts a day (90 mins, 60 mins?, probably 25 ) and we had ‘The Delivery Man’ whose visits were done on the doorstep in about 5 minutes.
They go to the (limited) trouble of qualifying because some think it’s a quick route to grossing £75K a year. When they find it’s not, the temptation to cut big corners is there, especially if their management makes corner-cutting appear normal, for their own reasons. I don’t think many DEA’s or GDA’s are committed environmentalists, but personally I think they should be.
I too like the idea of a link to stamp duty or council tax but corruption aside, the powers that be will probably want it to be revenue-neutral, which means that discounts for high-scoring EPC’s must be balanced by increased duty or tax for low-scoring ones. Politically difficult. Unless someone commits to funding the discounts…politically and practically difficult at the moment I fear.
Some very important details are touched in your blog. It’s a pity the government didn’t pause before hastily launching an incomplete scheme that ignored the problems of cost-benefit, affordability, disruption and confidence. I hope the GD conditions will be modified after a period of observing homeowner responses, and comments from all parties. Some of your bloggers’ suggestions should be considered in detail, including free, high-quality insulation for all homes, to minimise energy loss; CO2 emissions and energy poverty.
Meanwhile, I recall in autumn 2012, the Knauff Chairman calling for immediate GD launch to avoid the potential loss of 16,000 jobs. Have they been preserved? I recommended that Ed Davey ensured his department’s readiness before premature launch and potential failure of a scheme that appeared then to focus less on domestic energy saving and more on industry and profit. Energy prices have since risen, shifting the burden imposed by suppliers to those who can least afford it, whilst many who can will simply pay more, to avoid dust on the carpets.
Ken’s description of community-led / activist-led promotion of home insulation is inspiring, although I think it gets more difficult if you try (as Green Deal does) to go beyond loft and cavity wall insulation. Likewise if you aren’t in a village setting. Trust is going to be very important, but if you don’t know your neighbours it’s an uphill struggle. In my experience of giving recycling and energy efficiency in London, you generally need an alternative messenger such as the local council or a good and well-known local environmental charity.
The Local Government Information Unit has set up an outfit called Local Energy, and they are actively talking to many local authorities about different models they could adopt to ‘deliver’ Green Deal. Local Energy has gone as far as becoming a G.D. Provider so that it can speak from first-hand knowledge. Part 6 of their Diary of a Green Deal Provider describes the different models
http://www.localenergy.org.uk/diary-of-a-green-deal-provider/
Ken, not all installers need to be businesses in the conventional sense, and alternatives for these and for G.D. Providers are appearing – generally I think because the people involved saw the shortcomings of G.D. early on. These could be Workers’ Co-ops, Community Interest Companies, Bencoms (Community Benefit Societies) etc. Of course, they too may struggle to gain trust if residents don’t understand how they are different. I think some are planning to work with local councils.
The idea of ‘street champions’ has been successfully demonstrated both for local urban recycling and energy-saving projects in the past. I think in relatively impersonal communities these champions or promoters, combined with a provider / installers who are not out-and-out commercial in nature, or in presentation at least, could be a way forward.
Here’s a link to an Energy Saving Trust blog article about ‘competitive energy-saving’ between friends, neighbours or those living in comparable properties. Apparently this could become an easy thing to do when Smart Meters are commonplace, because householders can choose to make their smart meter data publically acessible.
http://www.energysavingtrust.org.uk/blog/2013/02/01/keeping-up-with-the-greens/#comment-5000