Using renewable energy can be expensive, but households can start managing their energy requirements by considering both the demand and supply side of the equation. They can diversify through using renewable sources and the most energy-efficient options. The house becomes the power plant and the shortfall is sourced from the grid.
This model is based on the premise that the savings achieved from reduced electricity is sufficient to pay off the capital cost. This makes the repayments sustainable and, by definition, viable from a bank’s perspective.
“The Green Bond” recognises renewable energy equipment as an asset that adds economic value to the house. It reduces the household’s reliance on Eskom and increases the size of the bank’s book, so it makes good business sense.
The model considers the energy efficiency of a house and its use of non-renewable energy sources, such as solar water heating (SWH). The energy saved can be quantified over the life expectancy of the renewable energy assets and this figure is added on to the value of the house. Consider having to choose between two identical apartments next to each other.
However, the one unit’s levies are twice as much and have an annual escalation of what Eskom is proposing going forward (up to 18% to start).
The other unit has exposure only to the shortfall of its electricity that it must source from the grid.
Here is an illustrative example of a 300 litre SWH which would cost about R20 000 to install. It should deliver a 25% to 30% savings on overall electricity consumption (based on national average consumption). The model considered two scenarios of monthly consumption. The following assumptions have been made:
- Electricity prices will increase at 12% for the next five years and then at 8%;
- An average prime interest rate of 11% for the next 20 years;
- The Eskom incentive for SWH installations is 20% (this scheme was approved in June 2007 but has not been rolled out yet); and
- If the savings were paid into the bond, the savings in real terms over 20 years is R290 000 and R170 000 respectively.
Arguably the most topical global issue at the moment is climate change and the need to reduce CO2 emissions. The bank acts as the intermediary by securitising all the SWHs it has financed. It can sell the carbon credits on the client’s behalf via the clean development mechanism (CDM). This allows households to participate in carbon trading. The benefits are passed back to the household via reduced interest rates. About 2 000 homes are required for the CDM initiative to be viable.
Households would opt to reduce their reliance on the utilities for one of three reasons — home security, environmental or economic. Regardless of a household’s motivation, “The Green Bond”, by default, allows it to participate in all three categories. The concept has been presented to the innovations team at First National Bank and it is being modelled — if all goes well it will be launched in the near future. Environmental economics is not only financially viable, it is increasingly becoming a business imperative.
Theo Covary is employed at a South African financial institution