Memorandum submitted by the Renewable
Energy Association
The Renewable Energy Association (REA) was formerly
known as the Renewable Power Association. The name change came
at the end of 2005, to reflect the Association's growing advocacy
of increasing the share of renewable energy in the heat and transport
sectors. The REA has over 400 members, active across the entire
range of renewable energy resources and technologies.
The REA's evidence comprises four sections,
a comparison of fiscal measures across renewable technologies
and the discrepancies between them, a discussion on equitable
tax treatment for micro generation, some new suggestions and a
description of how fiscal policy can be used to reward renewable
electricity generation.
INTRODUCTION
Broadly speaking the VAT issues relating to
renewables have been solved to some extent. From 1 January 2006,
the reduced rate of VAT was extended to boilers fuelled by biomass,
thereby bringing all renewables onto a level playing field. Enhanced
Capital Allowances, however, are still only available for a limited
number of renewable energy technologies. However if the fiscal
treatment of householders installing renewable energy equipment
is compared to businesses installing such equipment, it is clearly
not a level playing field. If it were, then householders would
be able to write-off their costs against tax; they would pay no
VAT and would have access to other kinds of tax breaks.
Unlike the USA, the UK does not use tax breaks
for actually encouraging larger scale renewable project development.
Instead we have the Renewables Obligation (RO). This has come
under increasing political pressure recently. The REA is producing
a paper addressing these criticisms, which we intend to feed into
the Energy Review. A brief explanation of the US Tax Production
Credit is given, and a paper outlining other tax measures is appended,
for information.
1. Differing treatment of renewables across
the tax system
VAT
Before the beginning of this year there was
a discrepancy in VAT rating for renewable technologies. A 5% reduced
rate of VAT applied to the installation of certain specified energy
saving equipment, but not biomass boilers. As of 1 January 2006,
this was extended to include the installation of boilers fuelled
solely by wood, straw or similar vegetal matter in homes and certain
residential and charity buildings.
This measure was introduced "to encourage
the use of micro generation using sustainable energy sources,
promote household energy efficiency and contribute to the Government's
commitment to reduce carbon dioxide emissions." [1]
Enhanced Capital Allowances
Enhanced Capital Allowances (ECAs) enable a
business to claim 100% first-year capital allowances on their
spending on qualifying plant and machinery. There are three schemes
for ECAs:
— Energy-saving plant and machinery.
— Low carbon dioxide emission cars
and natural gas and hydrogen refuelling infrastructure.
— Water conservation plant and machinery.
Businesses can write off the whole of the capital
cost of their investment in these technologies against their taxable
profits of the period during which they make the investment. This
can deliver a helpful cash flow boost and a shortened payback
period, and is an important commercial incentive for the greater
uptake of low and zero carbon energy saving technologies.
A discrepancy remains with enhanced capital
allowances. The table below shows which technologies are on the
list, along with the number of approved products.
| Approved renewable technology |
Number of listed products |
| Biomass Boilers >300kW |
168 products |
| Biomass boilers >300c and <15,000kW |
53 products |
| Solar thermal |
30 products
|
| Heat pumps | There are several categories of heat pumps. The number of listed products varies.
One category has over 1,000 products listed.
|
| |
Other renewable energy equipment does not qualify for ECAs,
notably solar photovoltaics (pv) and wind. In 2003, with the encouragement
of the Building Research Establishment and Carbon Trust, the (then)
RPA and the British Photovoltaic Association (PV-UK) made a joint
application proposing that PV be included on the technology list.
It was rejected, solely on the grounds that PV already benefited
from a dedicated capital grant programme and that there was insufficient
evidence that ECAs would encourage greater uptake in the private
sector. The capital grant programme issue is no longer relevant
as the Government's solar PV Major Demonstration Programme will
cease allocating funds in March 2006.
There also appears to be a view within the Treasury that
electricity generating solar PV and wind are not energy saving
technologies. But there is no difference in principle between
a PV system reducing a company's dependence on grid-supplied electricity
and for example a solar hot water system that reduces a company's
reliance on mains gas.
The 2003-04 joint industry PV ECA application satisfied all
the specific ECA criteria set by DEFRA/Carbon Trust as managers
of the scheme and we propose to submit a further application for
both solar PV and small wind later this year.
Not only should all renewable technologies be eligible for
enhanced capital allowances, but also the rules should accommodate
the leasing of renewable energy equipment. Furthermore the flexibility
that is afforded through ECAs, in particular with leasing provides
the opportunity to mobilise capital at significantly lower cost
than might otherwise be the case. The mechanism provides the opportunity
to bring forward greater levels of investment.
With specific regard to transport biofuels, the pre-budget
report proposes to introduce, subject to state aids approval,
a 100% first year allowance "for biofuels plant that meet
certain qualifying criteria which make a good carbon balance inherent
in the design" (Section 7.55). This is a welcome development.
However, the Association has some concern that the timescale
to implementation lacks the necessary urgency. Although the Pre-Budget
Report argues that the measure is intended to work alongside the
RTFO, it is the case that the investment needed to meet the targets
under this new mechanism means that capital must be committed
before the RTFO comes into operation. Businesses are already seeking
to invest in a series of projects in the biofuels sector, and
it is conceivable that any unnecessary delay in the introduction
of ECAs may act to postpone, rather than incentivise these investments,
as parties wait for the preferential tax treatment. Expeditious
introduction of ECAs would mitigate this risk.
2. Equitable fiscal treatment of householders' investment
in micro-renewables
There is a great inequity between the fiscal treatment of
renewable energy investments made by householders and those made
by business. Householders do not have access to tax or depreciation
allowances whereas companies do. Householders will pay VAT (albeit
at 5% rather than 17.5%) on the installation of the equipment,
whereas business can claim it back.
Householders should be given the same tax treatment, which
means that householders would be able to write-off their costs
against their tax bill, pay no VAT (or be able to claim it back)
and have access to other kinds of tax breaks that larger power
companies benefit from.
Generally the capital costs of renewable energy equipment
are inversely proportional to the size of the project, and the
inequitable tax treatment only exacerbates the differential.
3. New suggestions
Tax breaks for investment in emerging technologies
There are a number of tax benefits for R&D expenditure
generally, and for SMEs in particular. There are ways in which
these benefits could be extended to bring greater benefit to investments
in renewable energy R&D and renewable energy technology development
companies.
The UK has a particular strength in device development in
the wave and tidal sector, as has been recognised in many Government
reports. The UK Government would like to see the UK's relative
lead maintained. At the current stage of the development of wave
and tidal industry, device development is a non-profit making
exercise financed in large part by venture capital. The UK accounts
for almost 50% of the world capital expenditure on wave energy,
and almost 90% of tidal capex.
Tax relief on the costs of decommissioning offshore wind farms
In offshore oil and gas operations, the costs of decommissioning
and removing the installations are allowable for tax purposes
as they can be carried back for the three preceding years and
set against profits for those years, thereby reducing the tax
liability. The Inland Revenue explained that current legislation
does not allow such carry-backs for operations other than oil
or gas "ring fenced activities". As a result, no tax
relief will be available on the costs of decommissioning and removing
offshore wind farms, since they will be incurred after the trade
has ceased and there will be no trading profits against which
the costs can be deducted. [2]
Tax breaks for charitable donations of renewable energy equipment
If donors were able to offset charitable donations of renewable
energy equipment to schools etc, this would reduce the cost of
purchasing that equipment.
Incentivising renewable procurement through the PFI system
"Greening" the PFI is one way in which the Government
could make good its commitments to using Government procurement
to deliver more sustainable buildings including integrated renewable
energy solutions. There is no technical reason for example why
the current school and hospital building programme could not be
built to meet tougher energy efficiency standards and to include
renewable energy equipment.
Government should therefore strive to increase the role of
renewables in procurement, not least to demonstrate to the private
sector that such solutions are practicable. One simple proposal
is that projects that qualify for PFI credits could receive an
additional contribution if there was a renewable component. This
approach would present a fiscal carrot to accompany any regulatory
stick that should be employed to encourage more widespread adoption
of renewable energy in PFI contracts.
4. Output-based tax incentives
As a means of encouraging renewables deployment in the medium-long
term the REA generally prefers output-based support measures rather
than capital grants, [3]as
performance rather than investment is incentivised. The tax system
is more commonly used to reduce capital costs than to reward production.
However a very effective example of the latter is the US production
tax credit described in detail below. This approach could be a
good alternative model were we not to have a renewables obligation
in the UK. Similarly it might be considered as a preferential
means to support technologies such as renewable heat, that presently
fall outside of the remit of the Renewables Obligation.
The US production tax credit
The US Renewable Electricity Production Credit (REPC) is
a per kilowatt-hour tax credit for electricity generated by qualifying
energy resources. These are listed below.
The level of the credit, the duration of entitlement and
the qualifying resources have been changed since its original
introduction in 1992. At the moment the REPC applies to the following
resources, and projects built before the end of 2007 will get
the credit levels listed below for 10 years. [4]
|
| Technology |
cents/kWh
|
|
| Wind | 1.9 |
Closed-loop biomass
equivalent to energy crops.
| 1.9 |
Open-loop biomass
equivalent to biomass other than energy crops
| 0.9 |
| Geothermal energy | 1.9 |
| Solar energy | 1.9 |
Small irrigation power (150 kW—5 MW)
Equivalent to run-of-river hydro
| 0.9 |
| Municipal solid waste | 0.9
|
| Landfill gas | 0.9 |
| Hydropower | 0.9 |
|
| |
All that is required of businesses to participate in this
scheme is to fill out a two-page form, which is accompanied by
two pages of instructions and can be found on the Internal Revenue
Service of the US Treasury. [5]A
business can take the credit by completing Form 8835, "Renewable
Electricity Production Credit," and Form 3800, "General
Business Credit."
January 2006
1
See note 3 of Business Brief 23/05. Back
2
OFFSHORE WIND FARMS-THE TAX QUESTION. Summary of report, New
Review, ISSUE 41 August 1999. See http://www.dti.gov.uk/NewReview/nr41/html/offshore-wind.html Back
3
Micro-renewables can be the exception however, where assistance
with up-front costs is likely to be more effective. REA believes
that providing this assistance through the tax system rather than
a capital grant programme is preferable in the long term. Back
4
However, open-loop biomass, solar, geothermal, small irrigation
hydro, landfill gas, and municipal solid waste combustion facilities
placed into service after 10/22/04 but before 8/8/05 are only
eligible for the credit for a five-year period. Back
5
Form 8835, "Renewable Electricity Production Credit"
can be found on www.irs.gov/pub/irs-pdf/f8835.pdf Back
| 
