Examination of Witnesses (Questions 160-177)
MICROPOWER COUNCIL
23 OCTOBER 2006
Q160 Chairman: Before I came to see
you a few weeks ago I thought a ground source heat pump was something
to do with geothermal energy. I had no idea that it was actually
a big solar panel in your garden.
Mr Schofield: That is right. It
is getting energy out of the ground that has been heated by the
sun. It is not digging that deep that you are hitting the earth's
core and getting heat that way, so it is not a good term and we
try and put brands on. We call our solar panel Greenskies. We
call our heat pump Greenstore, because you are getting stored
energy out of the ground. I have managed to get a plug in there,
if you will excuse me.
Q161 Chairman: I gave you the line
for the commercial.
Mr Schofield: Yes, sorry about
that. Ground source heat pumps are a fascinating technology. For
every one kilowatt of energy you put into the unit to run it—and
it is basically like a fridge in reverse; you are just moving
heat from one place to another—you get four kilowatts of
heat out, so you get this four-to-one ratio of energy savings,
and they are not cheap. An average system is going to cost you
between £7,000 and £10,000, but if you put that in an
off-the-mains fuel poverty property, an old person's bungalow,
something like that, the running costs then can be less than the
winter fuel allowance. Okay, it has cost the council probably
£10,000 to install it but for the householder and the issue
with energy costs, which is very apparent to everybody, as I say,
it can be less than the winter fuel allowance. There are massive
benefits to these technologies.
Q162 Mark Hunter: May I apologise
to our witnesses for being late and missing the start of their
answers but I have been listening very patiently to the questions
that have gone before. I would like to come on to the role of
Government with a few specific questions that I would like to
put to you, starting with the DTI. I think it is understood that
the DTI has only one dedicated person at present looking at microgeneration
and, given that, it seems reasonable for me to ask you how confident
you are of the Government's ability to "aggressively"
implement its Microgeneration Strategy.
Mr Sowden: I have to say this
is a major concern for us.
Q163 Mark Hunter: I thought it might
be.
Mr Sowden: We welcomed the Microgeneration
Strategy when it was published in March. Broadly, it is the right
set of policies, we believe, to take the industry from the niche
market that it is in into a mass market context. There are two
areas where we think it is deficient but I think somebody may
ask a question on fiscal issues later so I will hang fire on that;
the other area is renewable heat which we have discussed. Other
than that we think it is a pretty good suite of policies that
we very much welcome. With the best will in the world, it represents
an ambitious work programme and having one middle-ranking civil
servant responsible for its entire delivery we do not consider
to be sufficient. I did learn last week, and we have been lobbying
Government quite hard on this, that they have now strengthened
that team by two people. There are two more junior people, taking
the sum total on policy implementation to three. They also had
another two people already working just on administering the existing
grants programme. I am sure the Government will put to you that
they have now got five people working full time on microgeneration.
However, that is not five people working on implementing the strategy
and we certainly do not have a senior civil servant whose day
job is to do not much else than microgeneration.
Q164 Mark Hunter: So you would be
more minded to believe they were taking it more seriously if there
were a little more resource allocated to that area of policy?
Mr Sowden: Yes, and I think you
have already heard from other people giving evidence that we do
not believe there is a dedicated budget. It is not just about
the human resource; it is also about the pieces of consultancy
work that need to research a detailed bit of policy in some more
detail.
Q165 Mark Hunter: Can I move you
on to the business of targets? We know that we have a Government
which has a great fondness for targets in all kinds of areas.
Your submission argues in favour of Government targets for microgeneration.
Could you explain to me what purpose you think having such targets
would serve and at what level and on whom you would wish to see
them imposed?
Mr Sowden: First of all let me
give you the negative response to that, which is that targets
will serve no purpose whatsoever unless they are accompanied by
a commitment to underpin them with detailed policy measures designed
to deliver them. It is not just targets for targets' sake. It
needs substance underneath it. Indeed, the Microgeneration Strategy
starts to give us some of that substance. Where we think targets
still have an important role to play is in inspiring confidence
amongst investors. The micropower industry is unique. Investors
are very familiar with consumer goods and investing in that sort
of thing: the MP3 player, the whiz-bang gadget. They understand
that market. They also understand the energy sector because they
invest in utility stocks. This is a little bit mould-breaking
because it brings those two worlds together and nobody has ever
done it before on a mass market scale. On what basis therefore
do investors believe the business plans that prospective companies
are putting forward? On what basis do they believe their market
projections match their product offering? It is very difficult
to get investors engaged in this and secure the capital that is
so important (a) for scaling-up production, and we all know how
mass production can bring down manufacturing costs, and (b) to
invest in the infrastructure—the point that Neil was making—on
the installation side because there are good opportunities to
strip costs out of the installation part of the industry as well.
We consider targets at the highest level to be very important
for instilling confidence in the investment community.
Q166 Mark Hunter: Targets on whom?
Mr Sowden: In the Climate Change
and Sustainable Energy Act the way in which the targets section
is worded would apply a national target which really just sets
out where the Government sees the microgeneration industry sitting
in general terms in the portfolio measures that it has available
for energy policy, so we have targets on renewables, we have targets
on CHP, we have targets on energy efficiency. Something that explains
(and I am just using one example that could be expressed in other
ways) how many households the Government expects to see with microgeneration
technologies installed by 2015, by 2020, by 2025, gives a fairly
solid commitment to where the Government sees this sitting within
the overall energy mix. The target would be on the Government
and the Act, I believe, if I am correct in my interpretation of
it, requires the Secretary of State, once having set a target,
to use reasonable endeavours to ensure that target is achieved.
Q167 Mark Hunter: So the target is
one of Government's own?
Mr Sowden: Yes.
Q168 Mark Hunter: Moving on to a
question which you rightly anticipated a few moments ago, can
you tell us a little bit more about the fiscal incentives that
you would like to see imposed for microgeneration?
Mr Sowden: One of the clauses
that was in the first draft of the Climate Change and Sustainable
Energy Bill was a requirement for a fiscal strategy to be drawn
up covering both energy efficiency and microgeneration, and I
do think it is important to take those two together. This is not
so much about individual financial incentives; it is more about
addressing whether there are fiscal imbalances in the system.
I know you took evidence last week from Sussex University which
expanded on this theme, but, for example, we have an energy system
where corporations make large capital investments, or the public
sector makes capital investments, in power generating facility.
If we are going to start to recapitalise the energy industry in
part on the other side of the meter then the fact that corporations
can write those investments down against tax and individuals have
to fund that capital from post-tax income creates an imbalance
and that is the sort of imbalance that, if we are serious about
microgeneration playing a major role in energy policy into the
future, the Treasury needs to take a look at. There are a number
of other specific examples. We have had some recent changes. All
microgeneration technologies now qualify for a 5% VAT rating.
We do not regard that as a financial incentive per se.
We regard that as levelling the playing field between energy efficiency/microgeneration
on the one hand, which previously had a VAT rate of 17.5%, and
the sales of energy on the other, which previously attracted and
still does attract a rate of 5%, so that is more about removing
a strong disincentive than providing a strong financial incentive.
Just to give you a comprehensive answer, in a couple of other
areas it is not only fiscal policy in the Treasury sense of the
word but there are some perversities in the way that business
rates are operating. We have had examples where a business has
installed some small-scale renewable technology energy solution
and then found that it has had a rating reassessment and all of
the benefit of installing that technology has been wiped out by
the increase in business rates. There are, I believe, examples
in the household sector where, because the value of the property
has increased as a result of the customer installing microgeneration
measures, it has gone into the next council tax band and the increase
in council tax has wiped out all of the benefit. Those are the
kinds of areas which we think need looking at in the round, in
a proper strategic review of how the fiscal system operates for
the micropower sector.
Q169 Mark Hunter: What about stamp
duty rebates?
Mr Sowden: Stamp duty rebates
is another one I forgot to mention but it is in our evidence.
Stamp duty catches people at a time in their lives when they tend
to do things to their property anyway. The first thing many people
do is fit a new kitchen or refurbish the bathroom. They make improvements
when they move house, so stamp duty catches that natural discontinuity
and provides a valuable incentive at that moment in a customer's
life.
Q170 Mark Hunter: I guess you would
accept that without these kinds of incentives it is going to be
something of an uphill struggle for the microgeneration schemes
that you would like to see taking hold because most people are
motivated by what is in it for them. Would you accept that this
is absolutely key to the whole issue of providing proper incentives?
Mr Sowden: Indeed I do, and I
think the messages that it sends to consumers are just as important
as the actual quantities of money. There was a recent pilot which
British Gas ran in Braintree where it was offering customers the
same amount of money to subsidise cavity wall insulation through
its own direct branding and then it tried a combination of its
branding and a £50 council tax rebate. There was no new money
overall. There was exactly the same discount and of course take-up
shot up because the perception from customers, even though British
Gas was funding that discount on council tax, was that it was
a reduction in tax. Therefore, because it came through the local
authority, because it was branded by the local authority and because
nobody likes paying council tax, it was much more effective as
a policy instrument.
Q171 Mark Hunter: Given that you
seem to have pretty comprehensively accepted the case for the
importance of incentives, how do you square this with what I understand
to be your view to see a level playing field amongst all energy
generators?
Mr Sowden: I hope I have answered
that as I have gone through. When it comes to access to Renewables
Obligation Certificates (ROCs), we are talking about levelling
the playing field in terms of transaction costs. When we are talking
about fiscal equity, particularly writing down allowances, we
are talking about levelling the playing field between corporations
on the one hand and individuals on the other. When we are looking
at stamp duty rebates, we might be looking at direct financial
incentives or subsidy, if you like to call it that, but there
is a good case for some boost to get the industry moving. As long
as that is transitional and something that is there on a temporary
basis to help us kick start the mass market, I think it is well
justified.
Q172 Mark Hunter: Do you think the
structure of government, given that DEFRA and the DTI both have
a policy interest in sustainable energy, undermines progress on
microgeneration?
Mr Sowden: That is always a difficult
question to answer. It has been the case with the development
of the microgeneration strategy that the one middle ranking civil
servant is proving to be an extremely effective civil servant
and did a very good job of pulling all those different strands
of government together but the ability to join up government is
one that should be institutionalised and not reliant on the motivation
of one civil servant, quite frankly. We need to look at more effective
ways of drawing all these policy strands together. The Microgeneration
Strategy does a good job of that but if we did not have a very
enthusiastic civil servant at the centre of that, I question whether
it would be quite the document that it is.
Q173 Mark Hunter: The point is not
so much the lack of resource but the fact that it is the two departments
and that is the crux of my question. Given that DEFRA and the
DTI have a policy interest, do you see that as being a drag factor
in that regard? Would it be simpler if it were just one of them
that was responsible for progressing this agenda?
Mr Sowden: I am sure it would
be simpler and I am deliberately sitting on the fence here.
Q174 Mark Hunter: I noticed.
Mr Sowden: That is because we
do not have a strong view about those institutional arrangements.
Q175 Chairman: Presumably, if there
is one civil servant in the DTI, she is there doing her work.
There is no civil servant in DEFRA who will take an interest.
Mr Sowden: They have a responsibility
for individual pockets of policy but as a very small proportion
of their overall job portfolio.
Q176 Mark Hunter: Is there any specific
policy tool that you would use or like to see used to encourage
renewable heat?
Mr Sowden: Neil chairs our policy
development group on renewable heat. We have quite a well formulated
policy proposal on this. The important thing to stress at the
start is that the microgeneration of the household sector in particular
works rather differently to other sectors in that customers respond
much better to, "I will have £300 off the upfront price
of the installation now" rather than some vague promise that
it might be £10 or £40 per year into the future. There
are proponents of that latter revenue based scheme who support
renewable heat. We think the two sit quite comfortably together.
We have been working very closely with the Renewable Energy Association
who you took evidence from last week in order to make sure that
the proposals they are developing for larger scale applications
and the proposals that we are developing for the household sector
sit together comfortably. What we believe is that there is already
a well designed, effective policy mechanism with a good track
record on the Energy Efficiency Commitment. It has been proven
to work. We have seen the mass market transition of A-rated white
goods through that scheme: fridges, freezers, washing machines
and so on. We have seen those come into the mass market and we
have established delivery chains that understand how that instrument
works. We have a proposal which we are about to submit to government
both in our response to the Energy Efficiency Commitment consultation
which goes in today and as a response to a wider invitation that
we had from the DTI to respond on this issue, which is flagged
up in the Energy Review. We do have some concrete proposals which
we are in discussion with Government about right now.
Mr Schofield: I welcome the fact
that renewable heat got a name check in this Committee because
it has been a frustration that it does seem to be overlooked.
It is so much more the norm in the domestic property. Heat and
hot water are what people need. Three quarters of energy is dedicated
to those disciplines. There is not currently a government strategy
on renewable heat so it is very much lacking at the moment.
Q177 Chairman: What can we do to
help ensure that those who are least able to afford renewable
technologies can benefit from them? You, Mr Schofield, said in
your answers that you can effectively run a ground source heat
pump for the cost of the fuel allowance meaning there will be
no energy bill for the individual concerned, but the up front
capital costs are huge. Also, what can we do to make sure that
those who are not necessarily environmentally conscious but want
to derive some of the financial benefits are helped as well? What,
in summary, can we do?
Mr Schofield: The starting point
is the technology that we are personally involved in. The route
to that market is key. It is engaging the industry. Someone has
to fit all these technologies. They are not DIY technologies.
You need to call on a professional to install whatever it may
be. It is that point of engagement with the householder that can
be the turning point. Energy efficiency, as we all know, is not
very sexy. People are not particularly interested in it, but what
we have seen in recent months is a phenomenal awareness of energy
costs. I remember, when I used to come down here a couple of years
ago, getting a cab and being asked, "Where are you going?"
"Westminster". "What is happening on energy efficiency?
I spend more on my daughter's telephone bill for her mobile phone
than I do on gas or electricity." There just was no interest.
That has changed. We undoubtedly have come to a tipping point
where people are very interested in the cost of energy. It is
now a turning point where we can engage people, all people, not
just the middle classes who want to put a wind turbine up to make
a statement. People want to look at the technologies that can
save them money. There is this issue of payback and I accept that.
I think the industry has more to do to prove the case. We are
trying to do that ourselves. The route to market is key for us
and we have proved that through our installing network, encouraging
its promotion at that point when we engage with the customer.
We very much welcome that the B&Qs and the Currys of this
world promote it. The uptake has been very impressive in those
organisations in recent weeks. We are starting but there is obviously
more to do. It needs us all to engage. My boss, if he was here,
would ask people to put their hand up if they had a solar panel
or a wind turbine in their own house. We all have to start somewhere.
Mr Sowden: There are three things
we need. One, we need to reduce prices in this industry and engender
mass market appeal. As part of that we can only do that if we
have reliable products that are easy to use. In that sense, one
thing we have not had the opportunity to talk about is the need
for industry standards. As we are moving into the mass market
it is very important that we do not let cowboys in, especially
when we are talking about putting moving part objects such as
wind turbines on people's roofs. It is very important that we
have high standards of product installation from a health and
safety point of view but also from a performance point of view
as well. We also need to remove the remaining regulatory barriers
and that means implementing the Microgeneration Strategy properly.
Where it is appropriate, there is a good case still for pump-priming
but we need to design that in a way that gets the industry as
quickly as possible to become self-sustaining.
Chairman: Thank you very much. We wish
you every success in your endeavours. We are very grateful to
you for your time and trouble.
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