REDUCING COSTS FOR CONSUMERS
84. Because the costs of most low-carbon sources
of heat and electricity are so high, there is, rightly, a consensus
around the need for these to fall, or the cost of other energy
sources to rise markedly, if the technologies are to become cost-effective
and have mass market appeal in the long run. There are potentially
two main drivers to reducing costs. First, costs may fall as a
result of improvements in the technology itself. For example,
PV panels currently capture only 15% of the energy in sunlight—this
might improve with scientific advances.[132]
The second source of lower costs, and the one on which greater
emphasis is placed by commentators, is through the economies of
scale that will arise from producing and installing these technologies
for a mass market, through, for example, improved manufacturing
processes. Here, there is a potential feedback effect between
rising demand for local energy systems and falling costs as the
market expands.
85. The Government recognises the role it can play
in providing 'seed-corn' or 'pump-priming' funding for the industry
so as to stimulate early growth in the market. It has provided
support for local energy technologies since 2000, with annual
funding under its Solar Photovoltaic and Clear Skies capital grant
programmes, peaking at £13.5 million in 2005-06. In 2006,
the DTI replaced these schemes with the Low Carbon Buildings Programme
(LCBP). This is set to run over three years, with capital grants
allocated in two phases. Phase one provides £28.5 million
for household, community and commercial projects, while phase
two has £50 million of funding for local energy projects
in the public and charity sectors. Within the household stream
of phase one, applicants can receive a grant of up to 30% of the
capital cost of new installations, depending on the technology
used.
86. In the first few months of the LCBP, take-up
from households has been much higher than anticipated. So far,
£6.4 million has been allocated to 4,370 projects. Yet only
£6.5 million out the £28.5 million of phase one funding
was originally set aside for the household sector. The DTI responded
to the high level of demand by re-allocating to the household
stream an additional £6.2 million from elsewhere in the phase
one budget. This gives total capital grant funding for households
of £12.7 million from 2006 until the summer of 2008. With
almost half of this allocation already committed, the programme's
manager, the Energy Saving Trust told us that "there is a
serious risk of shortfall".[133]
As another witness noted, this means "there is a danger of
serious disappointment amongst consumers" if funds run dry
before the scheme is scheduled to close.[134]
Not only that, but this kind of 'feast or famine' approach to
supporting the sector also potentially undermines the industry's
ability gradually to build up capacity.[135]
87. A number of organisations argued that, in the
long run, there were approaches other than capital grants that
the Government could use to encourage growth in the sector. One
of the key themes was that of fiscal policy and, in particular,
the tax treatment of local energy vis-à-vis larger energy
producers.[136] For
example, investment in large scale power stations can be written
off against companies' tax bills over time. In addition, businesses
that invest in energy efficiency and local energy measures can
now receive enhanced capital allowances that allow them to write-off
the whole cost of their investments in their first year.[137]
Yet households are not able to do this, having to purchase installations
out of post-tax income.[138]
88. Elsewhere in the fiscal system, we were told
council tax and stamp duty are areas where reform could provide
strong incentives for investment in local energy.[139]
Because local energy installations can increase property values,
such investments could push homes into higher council tax or stamp
duty bands—thus largely, or entirely, offsetting any income
benefit from the installation. Council tax is an area in which
there is scope for innovative local authorities to provide incentives
for local energy. British Gas is currently working with around
40 councils, offering households a £100 rebate on their council
tax bills if they invest in home insulation from the company.
Schemes such as these could be extended to local energy. We are
encouraged, also, by the Chancellor's announcement in the 2006
Pre-Budget Report, of the introduction of a time-limited stamp
duty exemption for the vast majority of new zero-carbon homes.
We welcome too the commitment to enact legislation exempting households
from income tax on the earnings from any exported electricity
they produce.[140]
However, the Government still needs to address the wider treatment
of local energy within the fiscal system if it is to provide a
fair reward for all forms of low-carbon energy.
89. The expansion
of the local energy industry is the key to reducing costs. The
Government has in place a popular capital grants scheme, which
is in danger of running out of funds before it is due to close
in summer 2008. The Government should continue to monitor take-up
of the scheme with a view to either rationing of funds, or increasing
the available monies for the household stream. A stop-start approach
to funding could be damaging to the sector's growth. The Government
should also conduct a comprehensive review of the way in which
local energy is treated within the fiscal system, both at a national
and local authority level, with a view to rewarding investment
by households, businesses and large-scale generators in low-carbon
energy. However, the Government's efforts to encourage households
to invest in reducing their carbon dioxide emissions could be
undermined by the law of unintended consequences: if improving
energy efficiency raises property values, then households may
be subject to higher council tax. As a result, we recommend that
any increases in property value due to energy efficiency measures,
or local energy installations, should not be considered for purposes
of re-assessing homes for council tax.
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