Green Deal Related Risk And The Construction Sector

Some businesses use computer software to work out the risk they are exposed to – however for most it is a back of the envelope calculation. The magic figure is 33% - as in try to avoid having one particular customer responsible for more than a third of your business. If you are a builder having more than three jobs on the go at once is safer than living hand to mouth and moving from one job to the next. The theory is that if one customer fails you can absorb the loss if the other two will remain sound. This assumes, of course, the three customers are independent of each other and in complex markets it becomes difficult to determine whether this is the case. A good example is the sub prime mortgage crisis during which investors thought bonds they were buying were independent of each other when in fact they were all linked, via a complex financial web, to a run down housing estate in Detroit. The lesson here is, try to avoid inadvertently putting all your eggs in one basket.

The Green deal is one basket and, potentially, a very flimsy one at that. It provides a link between all of a construction company’s customers. They may be working on twenty different sites but all the contracts will have been signed with the Green Deal in mind. Does that matter, after all the government is backing the Green Deal? Perhaps it is worth asking a solar PV installer that question – or then again looking a bit closer at the Green Deal itself.

Although the government’s program to make homes more energy efficient is aimed at the construction industry in general, and the home improvement sector in particular, in reality it is a weapon to fight energy providers. The government is under pressure to reduce domestic energy prices and cut carbon emissions. Energy providers have no interest in doing either – hence the conflict. The government has recruited the construction industry to help it fight this battle. Energy providers work on long business cycles - based on the thirty-year life of a power station. Governments work on four-year electoral cycles. While governments are strong on tactics energy providers win on strategy - and anyone who ends up on the wrong side becomes mere collateral damage. If, as seems likely, the Green Deal crashes shortly after take off the construction industry, which has been asked to fly it, will go down in flames as well. Once again the fate of the solar PV installer provides an example of how this will play out.

The Green Deal represents such a large risk for the construction industry because it distorts a market that is already shrinking and also provides a common link between every home improvement deal. The potential loss to companies will go far beyond investment in training and certification. The program exposes companies to a sudden change in tactics by a government that will be out manoeuvred by the power supply industry on issues of pricing and carbon emissions. Forced, in the run up to a general election, to choose between sky-high energy prices and the Green Deal, which will the government choose to cut loose?

If it is to survive the construction sector must find two thirds of its business from non Green Deal sources. While it may sound a radical move the industry could develop a ‘Green Deal’ style program of its own - taking responsibility of developing energy efficient building technology away from DECC. This would of course bring it into conflict with the energy sector – but at least it could choose both tactics and strategy. However, more important than this, the industry itself could choose what proportion of its business exposed to risks that originate outside the construction sector.

Peter Kruger

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