Although PAYS has been conceived to address retrofit, developers and RSLs are hoping it might also reduce the financial burden of meeting more stringent upcoming regs for new build.
In theory it works like this: by capitalising future energy savings, developers could afford to put in the low carbon measures they need to in order to hit strict limits on emissions. The occupants then use a portion of the savings to pay off this capital lump.
Developers hit their targets and occupants get savings. Everyone’s a winner. But in the case of new build, what are the savings measured against? The UKGBC final PAYS report suggests that:
A proportion of the difference between the projected energy bills [of the new build] and the ‘stock’ average energy bills, for the particular dwelling type, is allowed to be used as the PAYS Charge.
So what is stock? Surely the baseline should be the standard that builders are legally required to meet? If this is the case, then there are no savings to capitalise – developers are looking to PAYS to help them meet the regs, not exceed them.
Or if stock means something else, say it refers to an average UK housing standard, then isn’t this a mortgage by another name? Going through the steps:
- Developer builds a house to meet regs
- A notional savings vs the average UK house is calculated, and a portion of the savings capitalised (using a low interest loan) and paid to the developer
- The developer keeps part of the capital lump and shares some with the purchaser by reducing the sale price.
- The purchaser pays off the whole capital lump over 20 years, using a portion of the “energy savings”
Even ignoring the nasty fact that there isn’t actually any energy savings here, a few things look wrong with this. First, the purchaser only sees part of the capital lump (in the form of a reduced asking price) and yet they’re committed to paying the whole thing off.
Second, depending on how value is shared, the purchaser would probably have been better off getting a mortgage for a higher asking price and omitting PAYS altogether. Ok, if they’re getting the bulk of the PAYS value then the cost of borrowing via PAYS may be lower than a mortgage. But the more the purchaser gets, the less goes to the developer. What problem are we trying to solve here?
So it’s a false hope for developers to think that PAYS will help them fill their upcoming funding gap.
Or am I missing something?
carbon limited 
Thanks Casey – I had niggling reservations about PAYS on new build and you’ve explained it a lot better than I could. Totally agree that the cost should go into the capital cost of the property and therefore the mortgage.