Select Committee on Environmental Audit Minutes of Evidence


Memorandum from the Council for Energy Efficiency Development


Reducing Pollution Speedily is a National Concern

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 prices—at 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 reductions—which 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 calculated:

    £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" sector—because 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 are—we assume from the above—greatly 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 few years.


  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 appeal—and 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 possible—or 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 million.

  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.

November 1999

  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.

June 2000

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