Under the Green Deal, building owners (both residential and non-dwellings) and tenants will be able to order an energy efficient refurbishment of their property from a Green Deal Provider and fund it through a new type of loan. The innovative feature of a Green Deal loan is that it is attached to the property and not the occupier. To say that this is revolutionary is rather an understatement and is one of the key reasons why new primary legislation was needed.

The loan repayments are not made directly to the lender but will instead be added to the property’s electricity bill as a separate item. The loan is therefore repaid by the person responsible for the energy bills - who will also benefit from the improved energy efficiency of the property. The electricity company then passes on the money to the Green Deal Provider. Because the loan runs with the property, not the person, the loan will continue to be paid even if the original owner or tenant who organised the refurbishment leaves the property.

Of course, it is this mechanism that makes the scheme applicable to the rented sector (private or commercial) as it is the occupiers of the property - who could be tenants - who pay off the loan.

Green Deal removes the need for upfront payment, so neither owners nor tenants have to provide the capital for the improvement works.

It also recognises that the building occupants may change. Currently, homeowners say they are reluctant to do any work that has a payback time longer than they expect to own the property. Since there is currently little evidence that energy efficiency improvements add any value to a property (unlike say, gas central heating or double-glazing), the departing homeowner may not get a return on their investment. This will now be addressed since the person benefiting from the lower energy use is the person responsible for paying for the improvements.

It addresses the split-incentive problem in rented buildings, whereby landlords are reluctant to install upgrades which would only benefit their tenants. Under Green Deal the tenants will repay the loan but since it runs with the property it does not matter if new tenants move in every 6 months.

As with any loan there will be some limitations. The main one for Green Deal is the ‘Golden Rule’. Under the Golden Rule, the annual cost of any loan repayments must not exceed the anticipated annual saving in energy costs.

Another limitation is that only certain measures will be eligible for financing with Green Deal. The current likely measures include boiler upgrades, flue gas recovery mechanisms, heating controls, double glazing and insulation, including solid wall insulation and flat roof insulation.

The main constraint is that any income from Feed-in Tariffs (FIT) and the Renewable Heat Incentive (RHI) schemes can not be used in the Golden Rule calculation, which will limit the scope for using Green Deal to finance the installation of microgeneration measures.

To take advantage of Green Deal, building owners and occupiers will have to have their properties assessed by a Green Deal Adviser (GDA) who will produce a Green Deal Advice Report. The Green Deal Advice Report will include an EPC, an occupancy assessment (comparing the current occupants energy use with the standard SAP assumptions) and details of one or more tailored Green Deal improvement package.

The building owner will be able to ask Green Deal Providers to quote for the work specified in their Green Deal Advice Report. If their quote is accepted, they enter into a contract with the occupant. The Green Deal Provider then manages the installation works and sorts out the loan repayments through the electricity company on behalf of the applicant.

Returning to the Golden Rule; despite the fact that the cost of any loan repayments must not exceed the deemed savings on energy bills and will be calculated using government approved software, the savings will not be guaranteed. While the theory is that the bill payer will always be saving more than they will be paying, this will still be based on a set of conventions that may not match the actual energy use. Add to that the issue of the ‘Rebound Effect’ and the actual energy and therefore financial saving possible will not be guaranteed. This will clearly involve considerable user education. It is also worth mentioning that it will be possible to ‘bundle’ some improvement works together to maximise the funds available.

Alongside the Green Deal and also included in the Energy Act, the Government is planning to introduce the new Energy Company Obligation (ECO), replacing existing programmes such as CERT and CESP. This aim is to focus energy companies on improving the ability of the vulnerable and those on lower incomes to heat their homes affordably. A key question is the extent to which ECO will subsidise the cost of improvement measures, with the balance of the cost financed through Green Deal. This is particularly relevant to high cost measures such as solid wall insulation.

Once the contract is signed with the Green Deal Provider, the Green Deal charge will be centrally registered. The reason for this is that for Green Deal to work, the loan must be transferred to new occupiers. The current stated intention is that the primary vehicle for the disclosure of the Green Deal loan will be the EPC. The mechanism for doing this will be set out in the secondary legislation. Clearly this will mean that the EPC will become a central document for the property conveyancing process and could become much more central to the sales and letting process.

So that is where we are currently. A lot remains unclear - there is still a huge amount of detail to be sorted out before Green Deal goes live, but the timetable has been published and the clock has started ticking down to October 2012.