25 January 2013 – The major challenge in financing either energy efficiency or distributed generation is the relatively long payback period. Financial support via capital grants and feed-in-tariff (FiT) schemes, increasing energy prices and falling capital costs shorten the payback period, but do not make large capital items such as double glazing and solar PV attractive investments for many who feel  they have more important things to spend their money on.

According to Jonathan Lane, GlobalData’s head of consulting for power and utilities, “payback periods of 10, eight or even five years are not attractive for most consumers, especially given the pressure on household budgets across the world brought by austerity and inflation, but there is an exception that proves this rule: home ownership and mortgage financing.”

Green mortgages are currently available in some markets, but as they are typically overly expensive, poorly communicated and lack integration with support schemes for renewable energy and energy efficiency, they have so far failed to impress. However, Lane believes that the way forward for green mortgages is to integrate FiTs and energy savings with mortgages:

“Integrating the capital costs of solar PV, heatpumps, micro-CHP or other energy generation or efficient heating devices into the mortgage capital of a green mortgage is relatively straightforward and risk-free for the mortgage provider as the capital is backed by a FiT. The revenue from the FiT could also be used to offset the mortgage repayments whilst the FiT lasts and attracts customers to the mortgage.”

Energy savings are more difficult to assess financially as the cost of the energy consumption avoided cannot be calculated over the period of the contract. However, for an energy inefficient home, the chances of such an investment not paying back over a 20 to 25 year period is negligible. “The risk would be a case of how much it pays back, rather than if.The mortgage provider could take the risk/return of future energy prices and charge a risk premium, or even pass it through to customers.

“The integration of both capital and revenue/savings/repayments into a single mortgage product would provide financial benefits to customers, thereby making the product attractive. Whilst lenders would need to keep the product competitive with alternatives, there would be scope to increase margins a little compared to standard products.”

Green mortgages would be best delivered in partnership between traditional mortgage lenders and utilities. In Lane’s proposal, each party would bring their own strengths into green mortgage scheme, with the mortgage provider delivering the finance while the utility firm would assess the potential energy savings, take the risk on future energy prices, arrange for the installation of equipment, and set up the FiTs, where appropriate. The utility would also provide the customer with a supply contract and share some of the margin with the mortgage provider.

“Strong brands and national coverage would help position the product effectively and provide reassurance for the consumer,” Lane says.“Both brokers and comparison sites allow users to compare different mortgage offers relatively easily, and therefore getting such a product to market would be simple once the product had been developed and roles and responsibilities of the different partners agreed.”