Memorandum from the Council for Energy
ENERGY EFFICIENCY SHOULD RECEIVE STATE AIDAND
NOT BE A SOURCE OF INCOME TO THE TREASURY
Reducing Pollution Speedily is a National
Treasury Should Also Not Benefit From Fuel
Poverty and Low Income Sectors
Power Price Decreases Benefit "Fuel
Rich" But Not the Low Income Sector
Conversely Power Price Increases Would Not
Penalise Low Income Sector
Treasury Gain Benefit from reduced power supply
pricesat the expense of households in receipt of State
benefits. For instance the target reductions in electricity prices
announced for 2000 of 10 per cent in April and 10 per cent in
the Autumn are worth around £1 billion per annum (our estimate),
with households whose occupants receive nil or comparatively little
in State benefits, benefiting fully by these reductionswhich
are a boost to net disposable income in terms of lower cost and
saving the 5 per cent VAT thereon.
Households whose occupants are in receipt of
substantial State benefits make similar percentage savings offset
by a reduction in benefit payments, where the Retail Price Index
is "taken into account". We estimate the effect will
be a loss in Benefit income of up to £250 million per annum
£252 (average electricity cost per household)
divided by £680 (average total fuel & light per household)
equals 36 per cent of the fuel & light portion of the RPI,
namely 34 parts divided by 1000 parts.
36 per cent of 34 divided by 1000 equals 12.24 parts
RPI (imputed for electricity cost).
12.24 parts reduced by forthcoming electricity price
cuts of 20 per cent equals 12.24 divided by 5 equals circa 2.5
divided by 1000 reduction in cost affecting the RPI.
This 2.5 divided by 1000 equals a minus 0.25 per
cent effect on the RPI.
State pensions are directly linked to RPI movements
and most other benefits take RPI "into account". Benefit
payments are circa £100 billion annually. 0.25 per cent of
£100 billion equals an annual saving in benefit payments
of circa £250 million. The Treasury loses the 5 per cent
VAT on the circa £1 billion total of decreased domestic power
prices, namely circa £50 million.
Conversely if power prices were to rise because
of increased costs, Standards of Performance levies, or other
taxation, then this would predominantly effect the fuel rich sector
and not "those on State benefits" sectorbecause
of the effect on the Retail Price Index.
The Treasury (we estimate) gain the £250
million per annum in reduced benefit payments, less losing the
£50 million VAT per annum on the entire £1 billion reduction.
May we assume some eight million households
rely on State benefit payments as the major portion of their total
income, and are therefore responsible for consuming 25 per cent
to 35 per cent of domestic electricity usage; and therefore savings
they will make collectively will be circa £250 million to
£350 million yearly, plus 5 per cent VAT thereon, offset
by receiving say £200 million (of the say £250 million
projected reduction in benefit payments) less per annum in benefits.
Benefit income will vary per householder, so
those households in receipt of the greatest benefit income may
well be net losers by electricity price decreases. For instance,
if electricity bills show reductions of £40/50 (from £250
to £200/£210 per annum and annual benefit income in
some households is £10,000/£20,000, losses in benefits
could equal £50.
If all the power price decreases of recent years
are taken into account "high benefit" households arewe
assume from the abovegreatly disadvantaged in comparison
to non-benefit households. What does this say for policies to
alleviate fuel poverty?
Power price reductions are counter-productive
to the cause of reducing pollution. Energy is really an ideal
way of raising revenue for the State: it is certainly accepted
practice in the UK with regard to most road transportation. This
is why the £1.20 levy per domestic electricity and per gas
customer is niggardly and the confrontation between British business
and the Treasury over the Climate Change levy a diversion from
countering the potential world environmental problems being created.
Ideally the Treasury should not be a major beneficiary
from investment in measures to reduce climatic pollution; it should
at the very least take a neutral stance or even become a contributor.
Currently the cost of funding the Home Energy Efficiency Scheme,
the Energy Saving Trust, Winter Heating allowances etc are overshadowed
by the huge income from the (VAT) tax on sales of energy efficiency
measures and of the billion pounds a year decrease in benefit
payments resulting from decreases in power prices over the last
Power price decreases lower the Retail Price
Index (RPI)whereas lowering of domestic energy consumption
merely alters the weighting of the RPI. If the RPI were not a
"shopping basket of spending" but a more accurate way
of measuring and costing household needs, it would be possible
to put a case to the Treasury that investment in energy efficiency,
which showed a 10 per cent or better annual return on capital,
was very near "self funding" at current interest rates.
Reducing energy prices seems to benefit the
Treasury coffers, but does not reduce energy consumption: the
Treasury appears to lose from the latter (mainly VAT).
So the challenge is to prove to "able to
pay" households that energy efficiency can be self funding.
Grants and discounts may have lost some of their appealand
Standards of Performance schemes have a Regulator who feels £1.20
is the current limitation, coupled with the hampering 28 day rule,
and a demanding carbon calculation. We need to side step some
of this, which could be done if:
(a) "able to pay" households funded
the measures, so that power supply companies could claim carbon
"credits" for having inspired their respective customers;
(b) loans were available from £500 to
£10,000 per household for approved energy efficient measures
"which collectively returned 10 per cent or better on energy
and building maintenance annual cost saving"; such loans
being facilitated via members of the Council of Mortgage Lenders
and repayable out of the 10 per cent or better savings over a
maximum period of 10 years via quarterly payments, linked with
power supply bills where possibleor separated where customers
had changed power supplier during the repayment period;
(c) the interest on the loans was "nil"
to the customer, and funded by perhaps a combination of monies
drawn from the Standards of Performance levy and contributions
from the Treasury by foregoing VAT on the approved measures.
If "interest free up to 10 year" loans
are paid back over the period in equal instalments out of reduced
energy usage (either actual or imputed), this is self funded for
all those households not taking advantage of additional comfort.
After payback they are well in profit with "life of the building"
improved energy efficiency homes worth more, and permanently lower
energy bills. And the only cost has been use of funds levied from
power customers and, perhaps, the Treasury foregoing its "profits
from energy efficiency measures."
We project figures for a £10 billion (a
£1 billion a year for each of 10 years) 10 year loan campaign
as £10 billion lent for 10 years at 7.5 per cent interest
per annum, paid back equally over 10 years, equals £5 billion
average outstanding over 10 years at 7.5 per cent = £3,750
17.5 per cent VAT within £10 billion is
worth £1,500 million of this (or more if £1,500 million
of interest is discounted on a cashflow basis) and a levy of under
£5 per customer over 10 years worth the balance of the interest
(£2,250 million or less).
Ideally the Treasury should allocate funds equivalent
to projected savings on reduced benefit payments (resulting from
power price decreases)to fund ring fenced, Standard of
Performance schemes for those on State benefits. Pensioners "able
to pay" should be required to make some form of contribution
out of energy savings, or alternatively be referred to the "able
to pay" sector loan scheme.
Energy efficiency measures costed on an up to
10 per cent annual return on investment will make it easier for
a package of measures to be applied to both cavity walled and
solid walled housing, where currently there are some major omissions
(due to cost; failing set carbon criteria, because pollution has
not been allocated an imputed cost; or social factors are not
taken into account; or other advantages are ignored). So schemes
formulated for the "able to pay" and the "unable
to pay" sectors should aim for similar investment criteria.
Note: Since this was first submitted decreases
in the price of domestic gas supplies have been announced, strengthening
some of the above contentions: and VAT on domestic insulation
by installers lowered to 5 per cent: the latter does not weaken
the contention for a major "homes loans" scheme, but
increases the case for a much higher Standards of Performance
levy for the "able to pay" sector.