Memorandum submitted by the Association
for the Conservation of Energy
1. INTRODUCTION
The Association for the Conservation of Energy
is a lobbying, campaigning and policy research organisation, and
has worked in the field of energy efficiency since 1981. Our lobbying
and campaigning work represents the interests of our membership:
major manufacturers and distributors of energy saving equipment
in the United Kingdom. Our policy research is funded independently,
and is focused on four key themes: policies and programmes to
encourage increased energy efficiency; the environmental benefits
of increased energy efficiency; the social impacts of energy use
and of investment in energy efficiency measures; and organisational
roles in the process of implementing energy efficiency policy.
2. BACKGROUND
In 2003, the Environmental Audit Committee conducted
its inquiry into the 2003 Budget Report. We presented evidence
to that inquiry detailing our disappointment that despite two
Treasury consultations, little progress had been made on the introduction
of economic measures to improve energy efficiency.
HM Treasury and DEFRA launched a consultation
in 2002 on economic instruments to improve household energy efficiency.
In response to that consultation, the Association for the Conservation
of Energy compiled a list of 12 measures—the "Clean
Dozen"—that we considered would be most effective in
improving household energy efficiency. The "Clean Dozen"
was supported by over 200 organisations and individuals—including
Members of Parliament, local authorities, NGOs, energy efficiency
practitioners and relevant trade associations.
We hoped that the Treasury would act swiftly
to implement at least some of the measures listed in the "Clean
Dozen", and we were most disappointed when this did not happen.
Instead, it was announced in the Budget 2003 report that the Government
would "shortly undertake further detailed consultation on
specific measures to encourage household energy efficiency".
This consultation was finally launched in August 2003—over
a year after the first consultation exercise.
Nevertheless, we were pleased that the three
measures shortlisted in the second consultation as being "the
most viable" were derived from the "Clean Dozen".
These were:
— a reduced rate of VAT to 5% for the
supply and installation of certain energy efficient products or
materials in non-grant schemes when householders employ contractors;
— capital allowances and 100% first
year enhanced capital allowances for companies, eg Energy Service
Providers, who invest in energy-saving equipment to lease to social
landlords and households;
— a "Landlord's Energy Saving
Allowance", allowing private landlords to claim investment
in energy-saving materials against profits.
The Association compiled a highly detailed response
to this consultation, citing a wealth of expert opinion and evidence
as to the potential effectiveness of each of the above three measures.
In addition, we produced similar expert evidence in favour of
two further measures from the "Clean Dozen", which we
believed had been prematurely rejected in the second consultation.
These were:
— a stamp duty rebate for house purchasers
who make energy efficiency improvements to their home within,
say, six months to a year;
— a tax allowance for companies training
installers of energy-saving equipment.
The second consultation concluded in October
2003. As with the first consultation, we had hoped that the Government
would move swiftly to put in place the three shortlisted measures
and to give an early indication of their intention to undertake
further detailed work on the two supplementary measures contained
in our response. We therefore looked to the Pre-Budget Report
to signal the Government's intention to implement the necessary
fiscal reforms.
3. PRE-BUDGET
REPORT 2003
In November 2003, John Healey, Economic Secretary
to the Treasury, addressed a meeting in Parliament of the Parliamentary
Group for Energy Studies. ACE explained to him our frustration
at the lack of progress and sought assurances that the Government
would now be taking action to implement, at the very least, the
three measures shortlisted in the second consultation. Mr Healey
responded: "I can understand your frustrations. I can certainly
say that we are grateful for the consensus that you have built
around the shortlisted measures—and I can assure you that
there will be no third consultation. Now is the time for action."
We were heartened by the Minister's answer and, in light of it,
anticipated a substantive announcement in the Pre-Budget Report.
But the 2003 Pre-Budget Report announced no
new economic instruments to improve household energy efficiency,
stating merely that, "the Government will give further detailed
consideration to measures to promote energy efficiency, including
the case for a domestic business tax allowance." [Para 7.25,
p 152].
4. BUDGET 2004
In due course, Budget 2004 introduced two new
measures to improve household energy efficiency:
— A Landlord's Energy Saving Allowance
(discussed above).
— A reduced rate of VAT for the domestic
installation of ground source heat pumps and, from 2005, for micro-CHP
(dependent on the results of field trials).
At the same time, the Government announced that
it would consider the introduction of a "Green Landlord Scheme",
with the aim of incentivising landlords to invest in energy efficiency.
We considered this to be a disappointing response
and your Committee agreed, noting in your Tenth Report of Session
2003-04, "Budget 2004 and Energy":
"It is disappointing that the Treasury,
after consulting in both 2002 and 2003 on fiscal measures for
domestic energy efficiency, was unable to include in Budget 2004
a more significant package of measures."(para 63)
5. PROGRESS SINCE
BUDGET 2004
Since Budget 2004, progress has been painfully
slow and the 2005 Pre Budget Report should be seen in this context.
Budget 2005 contained two modest policy announcements:
— The extension of the Landlord's Energy
Saving Allowance (LESA) scheme to cover solid wall insulation.
— The promised VAT reduction for the
installation of micro-CHP, together with an extension of the reduced
rate to air source heat pumps.
In relation to the Green Landlord Scheme, the
2004 Pre-Budget Report trailed an announcement to be made in Budget
2005. In the event, Budget 2005 merely stated that work was continuing.
6. PRE BUDGET
REPORT 2005
There were two key parts to the Pre Budget Report
announcements on energy efficiency. The first was that, as part
of the Green Landlord Scheme, the Government said it intended
to reform the existing Wear and Tear Allowance by making it conditional
on the energy efficiency level of the property.
There was also a commitment that the Government
would "look to extend the scheme to unfurnished properties
and link qualification of a property for this allowance to the
forthcoming Energy Performance Certificates."
The Committee will note that this represents
further promises of future activity, so, whilst we are pleased
that this matter has not been dropped, we remain frustrated at
the slow rate of progress.
The announcement that the Warm Front programme
will get an extra £300 million of funding to assist pensioners
with the cost of installing central heating in their homes is
welcome.
Nevertheless, it is the view of the Association
for the Conservation of Energy that, like previous Budgets and
Pre-Budget Reports, the 2005 Pre-Budget Report wholly failed to
satisfy, and represented yet another missed opportunity for the
Government to show that it is serious about using fiscal instruments
to encourage and promote energy efficiency.
7. POLICY SUGGESTIONS
YET TO
BE PROGRESSED
There is still considerable scope for the introduction
of further fiscal and economic measures.
Of the original measures proposed in the Clean
Dozen, the following are still outstanding:
Reduced rate of VAT to 5% for the supply and installation
of energy efficient products or materials in non-grant schemes
when householders employ contractors
There is already a limited VAT reduction on
some energy-saving materials (insulation materials, draught stripping,
hot water and central heating controls) used in non-grant schemes
installed by contractors. The case for reducing VAT on energy
saving materials is therefore well made. There is thus no good
or logical reason for not extending the limited existing reduction
to include all energy efficient central heating and hot water
systems, along with A-rated windows and low energy lighting.
In the past the Treasury has justified limiting
the reduction on the basis that its policy is to provide VAT relief
on the installation of materials whose "primary purpose is
to save energy". However, the fact that solar water
heating already attracts a VAT reduction illustrates that in practice
this "justification" is without substance.
Capital allowances and 100% first year enhanced
capital allowances for companies, eg energy service providers,
who invest in energy-saving equipment to lease to social landlords
and households
It is quite clear that one of the barriers preventing
the take-up of new, innovative, high efficiency equipment is the
high initial capital costs involved. Leasing equipment could act
to shift the initial financing costs away from the individual
and on to the equipment lessor. Capital allowances are already
available for the Affordable Warmth Programme and for non-domestic
energy service providers, so the precedent exists for extending
the capital allowances system.
"Landlord's Energy Saving Allowance",
allowing private landlords to claim investment in energy-saving
materials against profits
As already noted, some progress has been made
in this area. Budget 2004 introduced a "Landlord's Energy
Saving Allowance" to provide up-front relief on capital expenditure
for installations in rented accommodation of loft and cavity wall
insulation (including first-time installations). The maximum amount
payable to landlords is £1,500 per property. In Budget 2005,
the Landlord's Energy Saving Allowance was extended to cover solid
wall insulation.
There is considerable scope for extending "Landlord's
Energy Saving Allowance" to cover products other than insulation
and for increasing the amount payable per property. The private
rented sector is relatively small, but it contains a very high
proportion of energy inefficient properties.
A stamp duty rebate for house purchasers who make
energy efficiency improvements to their home within, say, six
months to a year
This is a measure that has attracted widespread
support—from, among others, the Royal Commission on Environmental
Pollution, the Energy Saving Trust and from your Committee (as
recommendation 43 in your 1st report of the 2004-05 session, "Housing:
Building a Sustainable Future").
Owner-occupiers account for 70% of the UK's
householders. Very few of these households are taking steps to
improve the energy efficiency performance of their properties.
Research shows that the time of purchase is
the time when home owners are most likely to respond to an incentive
to make energy efficiency improvements to their property. This
is particularly the case with more disruptive measures, such as
solid wall insulation or loft insulation. The experience hitherto
of incentives offered under the Energy Efficiency Commitment likewise
implies that consumers are encouraged by mechanisms that cut the
cost of taking action. As stamp duty can be a significant additional
cost to moving home, it is therefore reasonable to assume that
householders would be encouraged to install energy efficiency
measures with the inducement of money back from their stamp duty
bill.
A rebate could be readily linked to the Energy
Report that will form part of the mandatory Home Information Pack
from January 2007.
In the current Parliamentary session, 254 MPs
from across the political spectrum have signed Early Day Motion
214 in support of a stamp duty rebate for energy efficiency measures.
A Council Tax rebate for householders installing
energy saving measures
A Council Tax rebate is a way of reaching households
that are not moving or taking out a new mortgage. It therefore
has the potential to reach more households more quickly than a
stamp duty rebate—although, as previously discussed, the
take-up rate for a stamp duty rebate would be likely to be higher.
Since November 2004, Braintree District Council,
in conjunction with British Gas, have been operating a scheme
providing rebates on Council Tax to residents installing cavity
wall insulation. The Braintree model indicates that linking an
energy efficiency incentive to Council Tax need not be administratively
onerous.
A tax allowance for companies training installers
of energy saving equipment
To achieve the objective of improving energy
efficiency substantially will require increasing capacity in the
insulation and heating installation industries. Both already suffer
from skills and labour shortages. There is a very substantial
number of sole traders who are often not prepared to take on apprentices
as it reduces their own productivity while training an apprentice.
The ability to offset training time and costs against their tax
bill would be a useful incentive to overcome this problem. This
could be achieved through a rebate on tax for heating and insulation
installers if they take on apprentices. For larger companies,
a rebate against corporation tax could be a sufficient incentive
to develop training schemes.
In addition there are a number of other measures,
which have received less attention hitherto but could potentially
have a useful role to play:
A reduced rate of VAT to 5% on DIY energy saving
materials, bought by a householder to install him/herself
As noted above, the list of goods and services
to which EU member states are allowed to apply reduced VAT rates
(of no less than 5%) is contained in Annex H to the Sixth VAT
Directive. The generally accepted view is that Annex H does not
allow member states to introduce reduced VAT rates for DIY products,
as opposed to those that are installed by contractors. This is
because Annex H requires there to be a "service element".
In other words, it is not sufficient that products be supplied—they
must also be installed. That being said, the UK Government has
for many years declared its commitment to pursue an amendment
to the Sixth VAT Directive to permit a reduced rate of VAT for
the purchase of energy saving materials for DIY installation.
Organisations such as the Energy Saving Trust and the Association
for the Conservation of Energy continue to press hard for this
change, stressing the inequity of the current regime, whereby
low income households—who would be more likely to lay their
own insulation than pay someone else—are discriminated against.
B&Q ran a marketing campaign some years
ago, whereby they offered insulation at an apparent 5% VAT rate.
Uptake was 120% more than during the same month the previous year.
There is no doubt that consumers like to think they are getting
something for nothing, especially if it is some kind of valid
tax avoidance. If 5% VAT were awarded to DIY energy efficiency
measures, a marketing campaign to inform consumers that this has
occurred would be a very effective way of further stimulating
the market.
It is therefore imperative that the Government
take a firm lead in the ongoing negotiations on the Sixth VAT
Directive. There was no evidence of the 2005 UK Presidency being
used to facilitate this.
Mortgage Interest Relief for sustainable homes
This would effectively be a restoration of mortgage
interest relief at source (MIRAS) for homes that met some sort
of sustainability criteria. The measure could be linked to the
Home Information Pack when it is introduced. It could also be
linked to green mortgages. The relief could be given to homeowners
when they move house and/or to those who are remortgaging their
house, but not moving. It would probably work best as a supplement
to a stamp duty rebate—ie targeted on the remortgaging market,
which is huge (about 1.2 million new mortgages being granted to
non-movers each year).
Green Mortgages
Three lenders already offer "green mortgages"
to encourage their clients to become more energy efficient. However,
there needs to be a much more concerted effort by the major mortgage
lenders to stimulate a serious focus on energy efficiency and
environmental issues in general. As noted above, green mortgages
can be a route into mortgage interest relief for sustainable homes.
HM Treasury has a considerable degree of influence
with the financial institutions—and it should therefore
take a leadership role in encouraging mortgage lenders to offer
incentives to borrowers to make their homes more energy efficient.
Reform of Winter Fuel Payment to create incentives
to invest in energy efficiency measures
This is an idea that merits further attention.
HM Treasury and the Department of Work & Pensions should work
together to review the relationship between the Winter Fuel Payment
and energy efficiency, and develop practical ways of ensuring
that a growing proportion of the WFP expenditure is invested in
energy efficiency.
Reduced Planning Gain Supplement for housing developments
meeting a high energy performance standard
Kate Barker's 2004 report on housing supply
recommended that the Government should actively pursue measures
to share in the windfall development gains accruing to landowners
when they sell land for housing. She suggested the introduction
of a "planning gain supplement" as a way of doing this.
It is proposed that this would take the form of a charge that
would be levied on the developer (probably at the time of granting
planning permission), with the aim of capturing part of the windfall
gain. The charge would be a proportion of the increase in the
value of land when it is sold for housing (as opposed to agricultural
or other purposes). The granting of planning permission would
be conditional on the payment of the planning gain supplement.
The Association supports proposals for a reduced
rate of planning gain supplement for developers who build houses
to a high energy performance standard. It is likely that, in order
to incentivise developers, the reduction in PGS would have to
be a relatively large proportion (at least half) of the additional
cost of building to a higher standard.
It is possible that such an incentive could
go some way towards helping building regulations to improve more
rapidly in the future: if significant numbers of homes are already
being built to a higher standard, it is easier for the industry
to adjust when building regulations are revised.
Such a measure would probably be even more effective
if it were combined with an incentive linked to stamp duty—whereby
the first buyers of homes built to a high energy performance standard
would receive a stamp duty rebate. This would have the potential
greatly to increase consumer demand for sustainable homes.
8. JOINT LETTER
TO JOHN
HEALEY MP
The Association for the Conservation of Energy
has recently joined the Energy Saving Trust, the Energy Retail
Association, the Environment Agency, National Insulation Association
and WWF-UK in writing formally to the Economic Secretary, John
Healey MP, endorsing three of the measures discussed above, namely,
council tax rebates, a Stamp Duty Rebate and Reduced Planning
Gain Supplement for housing developments meeting a high energy
performance standard. This is attached for the Committee's information.
9. CONCLUSION
The Association—and the energy efficiency
industry as a whole—is extremely disappointed by the painfully
slow progress towards introducing new economic instruments to
improve household energy efficiency. Frankly, we are beginning
to wonder whether it will ever happen or whether the Treasury
lingers under the illusion that running consultation exercises
on a regular basis is the full extent of the commitment required
from them.
January 2006
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