Incentivising green: Green home finance
Government schemes and discounted home loans can make a sustainable build or green upgrade more affordable, so why aren’t householders taking them up? Cameron Jewell deputy editor with The Fifth Estate investigates.
The rapid acceleration of the global divestment movement has shown how willing people are to support ethical financial products and institutions, including by moving their savings or switching superannuation funds.
But when it comes to housing finance, householders appear less keen to pursue the options on offer – from government incentives to enterprising banks providing discounted finance for green upgrades. We look at what’s on offer, and why take up has been low.
Depending on where you live, state government incentives may be an attractive option to make your house more energy-efficient. Government schemes cover activities such as: draught-proofing external doors and windows; upgrades to space heating and cooling; installing energy-efficient lighting; replacing inefficient fittings; and installing insulation and solar.
With or without government help, there will still be a portion of costs needing to be covered.
If you can’t or do not want to finance these energy upgrades upfront, there are a range of options available – the pros and cons of which you should weigh up to make a decision right for your circumstances.
There are myriad attractive personal loan options available, and while green personal loans exist, they are atypical and generally must be used to finance sustainable home upgrades or energy-efficient cars. Green loans are an option with institutions such as First Option Credit Union, Community First Credit Union, Bendigo Bank and Victoria Teachers Mutual Bank, which provide discounts on standard loan rates to fund home improvements.
The repayments can be offset by potentially cheaper energy bills, and can be spread over a long period, typically from one to 10 years.
If you’re considering an expensive investment like solar panels or battery storage, or an extensive retrofit, and don’t have the upfront capital available, refinancing or redrawing from your mortgage (if you have one) may be an attractive option.
In Australia, there are only a few such examples of green home loans, including from Bendigo Bank and Hunter United.
Bendigo Bank’s Generation Green home loan was Australia’s first and has been around since 2002, according to Joshua Pell, who is in charge of the bank’s environment and sustainability agenda. The loan provides a discount on the standard terms, and also removes many of the upfront and ongoing fees. “The Generation Green loan was established for people looking to reduce their impact,” he said. “Reducing our impact on the environment and helping others do the same is part of the bank’s commitment to building sustainable and prosperous communities.”
To qualify for the loan involves complying with minimum required environmental standards, as well as installing a selection of upgrades.
While Joshua sees the market for sustainable homes getting larger, uptake of green-focused finance has not been high, and for some banks it has been much lower than expected. In fact, for Bank Australia (formerly bankmecu), it was partly why they decided to discontinue their goGreen home loan option in August 2015, which was available for those wanting to buy or build a home rated 7 NatHERS stars or more.
For the 2011-12 period, Bank Australia saw just seven of these home loans approved. According to Martyn Norman, head of lending at the bank, there was not a strong take-up of the product, though the organisation also wanted to simplify its offerings, following its brand change.
“We have sustainability features built into all our loans,” Martyn says. “All home loan customers can apply for Bank Australia’s eco-repayment pause (a three-month break in repayments) for environmental upgrades to their homes.”
Developing the market
In a 2013 report, Joan Ko, senior sustainability consultant at Arup, investigated why there was a lack of consumer appetite for existing green financial incentives. “We thought it might be because the money wasn’t available,” she said. “But even if money is made available, uptake is still very low.”
Case studies from the US could be instructive for effective ways to incentivise consumers, Joan says.
A program in Portland allowed other renovations to occur at the same time energy efficiency and sustainability upgrades were being made. So, you could get your LED lights and insulation, but also, say, get a marble benchtop for the kitchen or timber floorboards. Due to this flexibility, take-up was much higher than for a similar program available in San Francisco. “In the end what we concluded was that the funding of energy efficiency with other renovations and upgrades can be a hook into the Australian market,” Joan says. However, the research found other consumer barriers including paperwork, a distrust of promised financial savings, and the lack of market awareness.
Bundling loans and de-risking private investment could be the key to achieving scale, particularly if government provided security or credit worthiness for retrofit loans. Joan believes this could be achieved through existing options, including loan loss reserve funds – which are available in case of defaults and which help reduce interest rates – and repayment charges through councils, which occurs for commercial buildings (and residential in some councils) under Environmental Upgrade Agreements.
Internationally, there are some success stories, most prominent of which is the German state-owned development bank KfW, whose Energy-Efficient Refurbishment program offers grants of up to €30,000 (AU48,000) or discounted loans of up to €100,000 (AU$160,000) for people investing to make an older residential building more energy-efficient or those purchasing a newly refurbished home.
The program, according to the 2013 Arup report, has proved popular in the German housing market, and at that time had seen more than €40 billion (AU$64 billion) committed. Along with tight regulations, the program has helped Germany to have some of the most efficient residential housing stock in the world.
The Arup report found that public sector involvement was key to a successful home financing project. However, proper design is also critical. A case in point is the UK’s troubled and now discontinued Green Deals program. Officially launched in 2013, the program provided loans for energy saving measures that would lead to reduced energy costs for homeowners. The loan was paid back through energy bills and was attached to the property, rather than an individual. However, an upfront assessment cost of up to £150 and relatively high interest rates meant that only four green deals had gone ahead by June that year, though 38,259 Green Deal assessments had been completed.
In 2014, the government launched the Green Deal Home Improvement Fund, which offered cashback of up to £4000 for home energy efficiency upgrades, which saw a dramatic increase in popularity. This was scrapped following the 2015 re-election of the Conservative government in 2015, with UK energy secretary Amber Rudd citing poor take-up and workmanship. Just £114 million (AU$233m) of the £540m dedicated (AU$1104m) had been utilised.
Other financing methods are available to fund solar panel installation, including payment plans through installers and power purchase agreements or solar leasing. But what’s suitable depends on your circumstances.
Nigel Morris, chief executive of RoofJuice Australia, previously Sungevity, whose background goes right back to Australia’s early days in the rooftop solar industry, says finding definitive answers on finance options for solar is like asking how long is a piece of string. You can offer to pay cash (which is the cheapest because it does not have an interest component), you can pay over a term typically five to seven years, or you can lease. Leasing can appeal because it takes out the headache of maintaining or repairing the panels or inverters if something goes wrong. Responsibility for maintenance is with the company installing the system.
Some companies offer an interest-free period, but Nigel warns it would be a mistake to take this at face value. “Everyone gets hung up on the interest rate but there is so much more to it than the interest rate,” he says. “There is the term of the agreement – you can have a high interest rate but a short term and be better off.”
The alternative is a low interest rate and a long term, which could mean significantly higher overall costs. “For instance the lowest interest you can have is a housing loan. It’s the cheapest money you can get, at four to five per cent. But if you’re paying it back over 20 years, when you add up the cumulative interest it means it’s the highest cost.”
The personal loan comes in handy if you have some ‘head room’ or equity in your home loan, because you’ve paid off a significant part of it – in which case, the bank can’t object to what you spend your equity on.
What doesn’t exist, he stresses, is the idea of ‘no interest’. If a product is offered with no interest, you can be assured the interest is built into the cost somewhere, he says. Cheap finance could be attached to an inflated system cost, or the deal could come with exorbitant monthly fees or establishment costs. It’s also possible to get personal tax deductions through depreciation, he says, depending on how the deal is structured. “There are so many different finance products out there. Macquarie Bank has four or five different products,” he says.
A power purchase agreement or PPA is effectively a solar deal stretched over the longer term, around 10 to 20 years. You’re charged for the energy generated by the system, which is likely set at a rate much lower than grid energy.
The payments you make should be lower than the savings you make on your energy bills, meaning you come out on top. It also means the customer doesn’t have to worry about maintaining the product if things go wrong.
“If the system doesn’t work they don’t get charged. Customers love that and some are happy to pay a premium for it.” And there may be an option to get ownership of the product at the end of the deal. However, as you’re charged for the energy generated by the panels, you could be charged whether you’re using that energy or not. Beware, jetsetters!
So what’s best?
It can be hard to a clear picture of the offerings between products. “I’ve tried on many occasions to get the financial products guys to spell out the pros and cons. But I never got an answer,” Nigel says. “They don’t necessarily want to be stacked up against each other; they want to keep their cards close to their chest so competitors don’t see what they do.”
So do your research, and choose the option that suits your personal circumstances.
Need for change
One thing is clear. Governments in Australia need to step in to raise the bar on residential housing sustainability and promote the benefits of efficient homes. In January 2016, the Australian Sustainable Built Environment Council put out a call for a nationally consistent framework for residential ratings, which it says would help to improve the sustainability of new and existing homes. It recommends a three-pronged approach involving minimum regulatory performance standards in new buildings; benchmarks for market comparison of best practice sustainability performance; and communication messages explaining the value of sustainability features to renovators and homebuyers.
“The industry is clear,” ASBEC president Ken Maher said. “We need governments to work with us to implement a nationally harmonised sustainability ratings framework for houses.”
For consumers, a nationally consistent framework promises to be a big help, which along with clearly communicated information on sustainability measures could help drive real and accessible incentives to go green in the home.
South Australia’s Retailer Energy Efficiency Scheme stands out as a generous program that allows householders to benefit from energy efficiency upgrades at no cost or at a discount from participating energy retailers. Lucky Adelaide city residents can also take advantage of the Adelaide City Council’s Sustainable City Incentives Scheme.
Victorian Energy Efficiency Target (VEET) scheme involves accredited businesses creating certificates, each representing one tonne of carbon abatement, when they help a householder make selected energy efficiency improvements to their premises. The money the business makes from selling its certificates can go towards a discount on the product installed. This discount is known as an Energy Saver Incentive.
Under the similar NSW Energy Savings Scheme, householders can get access to subsidised home efficiency upgrades including appliance sales and removals, and retrofitting activities.
The ACT government’s Energy Efficiency Improvement Scheme compels electricity retailers to work with homes to reduce energy use. Households can directly participate in the EEIS by booking a free Energy Saving House Call.
Many local councils also offer generous schemes to encourage energy- efficient upgrades, some which benefit low-income households.
Businesses – as well as households in some councils – may also be able to access loans for green building upgrades through an Environmental Upgrade Agreement, making repayments through council rates.
This article was written in collaboration with the Fifth Estate. An extended version of the story is available at www.fifthestate.com.au