PAYS (“Pay As You Save”) is getting a lot of airtime these days. Born in the US, it figured largely in yesterday’s low carbon transition strategy and the Government clearly hope it will take the pain out of the £10bn per year (or so) that needs to be spent on improving existing stock.
Pay as You Save is a funding approach where efficiency measures are paid for out of the savings. For example, if I have an inefficient Victorian terrace, I might ask a PAYS provider to come in and insulate it, replace the boiler, lag the pipes, maybe even replace the windows.
The theory goes that, as the occupant, I wouldn’t pay anything towards this refurb but instead would commit to an annual payment to the PAYS provider for the next 20 years or so (a commitment that stays with the house, not with me). Critically, these payments would be less than the savings that result from the works.
Sounds fantastic. But it doesn’t exist in the UK yet and there are still some hard questions to answer: who collects the payments, who carries debt risk, how do you prove that savings are larger than payments on a case by case basis, etc.
But there’s an even more important question to ask first: how much economic value is there in this approach? In other words, based on the likely savings, how much can a PAYS provider afford to spend on the refurb?
To get an idea of the ballpark we’re in, let’s assume an average savings of £300 per year through refurbishment (with savings increasing at the same rate as the price of energy). And let’s assume that it will cost the PAYS provider between 5% and 7% to borrow the money over 20 years (assuming the mechanisms have been put in place to keep the debt risk low). The up front lump sums look like this:
So in our middle scenario, that’s around £4.4k, which isn’t going to buy a huge amount of low energy refurb, particularly in a hard to treat house.
It’ll probably cover the low hanging fruit: low energy light bulbs, loft and cavity insulation, draught stripping, and a new boiler. But it won’t get close to addressing houses with solid wall constructions for example. And if you’re including a boiler in the PAYS package, maybe the financing should be 15 years rather than 20 (after all you don’t want to still be paying for a bit of kit after it’s gone to the scrap heap). If we change from 20 years to 15, the lump sum in our middle scenario drops to £3.5k!
Even at this broad brush level, it’s clear that there will be a significant shortfall here. PAYS will not, single handedly, solve the existing stock problem. Someone else – either government or homeowners – are going to have to stump up and the costs are likely to be high.
I just found out today that we’ve won a project to look in detail at this and other financing mechanisms for refurbishing affordable housing. So we’ll look at the potential refurb measures, the resulting savings, financing options, etc. It should give us a chance to take an educated stab at the size of that shortfall. I’ll post something here once I’ve got results.
carbon limited 
I believe PAYS is also known as ‘get a loan’ or ‘re-mortgage to obtain a chunk of money, and pay for refurbishments out of that’.
The important thing here is that, in order to get mass uptake, the payments have to be less than the savings. Also the scheme would include a group of “low energy refurb companies” set up to do the work as well as a QA and finance body. The idea is to make it as cheap and easy as possible for people rather than for them to organise it off their own backs (which they’re less likely to do).
I know Kirklees Council have been doing a version of this already. The scheme covered solar panels and the loan only has to be repaid when the property is sold. They also committed a chunk of money to free insulation upgrades. So, you’re right. Private money alone is unlikely to make it work financially, but with a combo of public drivers (carbon reporting), scalability and some entrepreneurial spirits, I’m feeling quite upbeat about this. Waiting to hear more when you finish your research…
Four things I can think of which might make PAYS work:
1. Low cost implementation. If there is a mass market for this then it makes sense for companies to put together reasonably standardised offerings for different types/sizes of building, and this should reduce the cost of implentation (e.g. compare this to the hirecar business where it only costs these businesses £8/day to hire a car due to good deals with suppliers)
2. Clearly the market will be segmented. The savings from a large, leaky, high ceiling, single glazes solid wall house are likely to be higher so the this should give you more money to play with.
3. Low energy refurb can have additional benefits -e.g. reduced moisture ingress into building fabric, more healthy to live in homes, possible upgrades to facades…. If these could be internalised into the cost-benefit analysis then suddenly the numbers will probably start to look a whole lot better.
4. Integration with renewables options will be important. Small scale renewables can be economically favourable when compared to for instance external cladding on a £/tCO2 basis, and more so now that the “clean energy cashback” system looks like it’s going to be with us at last.
It remains to be seen of course to what extent HIPs and Code for sustainable homes levels will also start to dictate market price on sale, but this will also probably start to become a driver as times goes by.
So all-in-all some reasons to be optimistic!
[…] how good is PAYS? « carbon limited – Great explanation from Casey on how PAYS might work (or not). The long and the short of it: "Even at this broad brush level, it’s clear that there will be a significant shortfall here. PAYS will not, single handedly, solve the existing stock problem. Someone else – either government or homeowners – are going to have to stump up and the costs are likely to be high." […]
[…] how good is PAYS? « carbon limited – Great explanation from Casey on how PAYS might work (or not). The long and the short of it: "Even at this broad brush level, it’s clear that there will be a significant shortfall here. PAYS will not, single handedly, solve the existing stock problem. Someone else – either government or homeowners – are going to have to stump up and the costs are likely to be high." SHARETHIS.addEntry({ title: "Links for July 18th through July 19th", url: "http://www.melstarrs.com/elemental/2009/07/24/links-for-july-18th-from-1752-to-1752/" }); […]
I’d back up the point that it’s probably as important to get the right people and skills in place to get these types of scheme in place than the financing. Without it you are liable to get duff advice or duff implementation. Not surprisingly this point comes from recent personal experience (on my own refurb of a leaky Victorian terrace).
I saw your post about your roof, Phil. Sounds like you guys are having trouble figuring out who to listen to!