House of Commons - Communities and Local Government Committee

Select Committee on Communities and Local Government Committee Written Evidence

Memorandum submitted by Friends of the Earth

Friends of the Earth inspires solutions to environmental problems, which make life better for people

Friends of the Earth is:

— the UK's most influential national environmental campaigning organisation;

— the most extensive environmental network in the world, with around one million supporters across five continents, and more than 70 national organisations worldwide;

— a unique network of campaigning local groups, working in more than 200 communities throughout England, Wales and Northern Ireland; and

— dependent on individuals for over 90% of its income.

INTRODUCTION

Friends of the Earth welcomes this opportunity to submit evidence to this inquiry.

The domestic sector contributes 27% of the UK's carbon dioxide emissions. 70% of this is from space and water heating.

There is massive potential to reduce emissions in two ways: energy efficiency and new micro-renewable energy generation technologies. These will both be necessary if the sector is to make its contribution to the necessary 80% cut in UK carbon emissions by 2050.

Friends of the Earth has long supported the introduction of mandatory energy rating of homes and welcomes the introduction of Energy Performance Certificates (EPCs) as a key tool for cutting carbon emissions from the domestic sector.

Our submission primarily addresses the role of EPCs, the most environmentally effective model of implementation of the Energy Performance of Buildings Directive and other policy instruments to maximise the impact of EPCs, incentivise and finance energy efficiency improvements. We also address the importance of microgeneration to cutting the carbon emissions of existing homes and proposes the introduction of a UK feed-in tariff as the best mechanism to support the expansion of on-site, decentralised, community and domestic renewable electricity generating capacity.

PART 1: MAXIMISING THE EFFECTIVENESS OF ENERGY PERFORMANCE CERTIFICATES

Since the beginning of 2007 Friends of the Earth has been heavily involved in public debates about the introduction of Home Information Packs (HIPs) because of our interest in Energy Performance Certificates (EPCs). Friends of the Earth supports the model of strong implementation of EPCs pursued by the Government which we believe will help to maximise the environmental effectiveness of the certificates, specifically we support the decision to go beyond the minimum requirements of Section 7 of the Energy Performance of Buildings Directive.

Friends of the Earth strongly rejects the charge made by the Better Regulation Commission and others that the Government has "gold-plated" the EPBD. They claim that:

1. The Directive allows for a EPCs have a ten year lifespan rather than a new one being required each time a home is sold.

2. EPCs could be produced at any point during the home buying process rather than being required upfront.

3. The Directive does not require them to come in until 2009.

We think this is a misreading of Article 7 of the EPBD, which requires that "The energy performance certificate for buildings shall include reference values such as current legal standards and benchmarks in order to make it possible for consumers to compare and assess the energy performance of the building. The certificate shall be accompanied by recommendations for cost-effective improvement of the energy performance." A ten year certificate would not be able to meet these objectives. The charge of gold-plating is also inconsistent with the findings of Lord Davidson's report on the implementation of EU directives which stated that: "it is sometimes beneficial for the UK economy to set or maintain regulatory standards which exceed the minimum requirements of European legislation. The EU may not always set the most appropriate level of regulation. The decision to introduce or maintain higher standards or stricter regulatory regimes than is required by EU directives could bring benefits as well as costs".[115]

Friends of the Earth strongly support Yvette Cooper's statement to the House of Commons that: "we are going beyond the minimum requirements for energy performance certificates set out in the EU directive. However, that is not gold-plating; it is green-plating, and we make no apology for that."[116]

Friends of the Earth believes that having an EPC that is up to date (the maximum lifespan should be no greater than one year) and provided whenever the property is first marketed for sale is crucial if the document is to have credibility with homeowners and if prospective homeowners are to have time to assess their needs, arrange for finance (such as a green mortgage) and organise for work to be carried out on the property before they move in.

Friends of the Earth agrees with the reasons for strong implementation set out in The Regulatory Impact Assessment for the EPBD[117]:

— the latest information on energy saving technologies can be provided, including micro-generation options as these become more available and cost-effective;

— the estimates of energy cost savings will be based on current prices;

— the information on availability of grants will be up to date;

— any changes to the building since the last EPC was issued will be taken into account;

— lenders could use new EPCs as a basis for green mortgages; and

— overall the new EPC will have a greater level of credibility in the market.

Friends of the Earth believe a major additional advantage is that websites, email addresses and helpline numbers would also be up to date—a critical factor if homeowners are to act on the information in the EPC.

Incentivising and financing action on EPCs

The introduction of Home Information Packs has been highly controversial and the potential popularity of EPCs has been reduced by their association with HIPS. However this has meant that EPCs have much higher awareness levels among the public than they probably would have had otherwise[118].

Friends of the Earth believes that the fact that EPCs are associated with the change of ownership of a property and hence that property being empty for a period means they should be used to encourage a whole house approach.

According to the EST: "Research has shown that people are most likely to undertake work on their new property within six months of moving in."[119] This points to the need to focus on policies to encourage the installation of the most disruptive and expensive energy efficiency measures (and even microgeneration) while the property is empty or quickly after purchase.

The Government's recent consultation on the Carbon Emissions Reduction Target (CERT) states (section 2.42): "We expect that CERT, in combination with new tools such as Energy Performance Certificates to be launched in 2007, will encourage and support householders in taking a holistic view of the carbon impact of their home and to take as much potential action as possible to reduce that impact."

We agree with the objective but do not believe that the policies currently in place are sufficient to achieve it.

The Energy Efficiency Partnership for Homes has identified that significant awareness, informational and practical barriers still exist to homeowners taking action on their EPC.[120]

The Regulatory Impact Assessment for the EBPD predicts that the information in EPCs will drive additional people to EEC/CERT providers for energy efficiency measures, reducing the energy suppliers EEC/CERT promotional and marketing costs by £40 million per annum. Overall depending on how they are implemented EPCs are predicted to be saving between 0.7 and 0.8 million tonnes of carbon annually by 2020 (or between 22 and 26 mtc cumulatively).[121]

Friends of the Earth has consistently argued that while EPCs will drive some additional carbon savings by themselves this is not nearly sufficient compared with the level of cuts in emissions required from the existing housing stock. EPCs can become a powerful policy if they are seen as a basic building block for other policies to incentivise action based on the information an EPC provides.

For Friends of the Earth just installing three or four cost effective measures (eg loft and cavity wall insulation and `thermostatic values) falls far short of what could be considered a "whole house" approach that Government has said it wants to see (but has done little to facilitate) and would also fall short of the potential of EPCs to act as a tool to encourage the installation of less cost effective measures such as solid wall insulation which will be necessary if carbon emissions from the domestic housing sector are to be sufficiently reduced.

Stamp Duty rebate

A 2005 study by Simon Dresner and Paul Ekins recommends a Stamp Duty rebate as potentially an effective mechanism to encourage consumers to improve the energy efficiency of their homes.[122]

A Stamp Duty rebate has some limitations as Dresner and Ekins point out in their study which means it will not work for all situations and other policies are required: it only works for owner occupiers (though this is 70% of the housing stock) and works through the housing stock relatively slowly. As it's take-up is limited to those who purchase a property, the maximum number of people who could take-up this incentive would be about 1.3 million. The EST has calculated that a Stamp Duty rebate would take 10 years to impact on half of all households.[123]

Given this it is crucial that a Stamp Duty rebate is engineered to incentivise large scale energy efficiency over-hauls of properties to a significant value. A minimum (as well as presumably maximum) threshold value for qualification for the rebate might be a way of encouraging purchasers to undertake more work.

There are many questions that would need to be resolved. The rebate could be for the total cost of the installed measures or a percentage of the total. It could be made available only if a property was brought to its maximum performance by installing all of the measures on the EPC or any EPC recommended measures could qualify.

One 2005 study estimated that a Stamp Duty rebate capped at a maximum of £800 could be taken up by 450,000 householders and would cost the Treasury £350 million.[124]

Opinion polling by IPOS-MORI (released on 1 October 2007) suggests that a Stamp Duty rebate would be a highly popular policy (59% support for a Stamp Duty or Council Tax rebate) which would provide a strong response relative to the value of the rebate[125].

The granting of a Stamp Duty rebate for Zero Carbon Homes has already introduced the public to the "greening" of this tax and shown that the Treasury is prepared to use it in innovative ways.

Council Tax rebate

The idea of a Council Tax rebate as an incentive for the most cost effective energy efficiency measures has received considerable attention since it was adopted in Braintree (in that case it was a £100 rebate for cavity wall insulation installation jointly funded by the local authority and British Gas). Friends of the Earth considers it to be a excellent policy and has called on the Treasury to provide local authorities with the funding to role it out nationwide.[126]

Because it can be accessed at any time (not just when a property is being sold) a Council Tax rebate can work through the existing housing stock much more rapidly that a Stamp Duty rebate and is ideally suited to incentivising the take-up of the cheapest, most cost effective and least disruptive measures.

While there are currently over eight million homes lacking Cavity Wall Insulation and six million without adequate loft insulation. An exclusive focus on these two measures would leave out the huge number of homes without a cavity wall or loft. However, alongside other instruments tackling whole house overhauls, because of the huge numbers of properties involved, the rapid payback times and large potential carbon savings it is worth dedicating a policy to these measures.

Friends of the Earth would like to see the Treasury centrally fund a national role out of a policy of £100 rebates for homes either installing cavity wall or loft insulation.

Green mortgages

Even with a strong fiscal incentive from Government or an energy supplier many house holders will struggle to find the capital for the upfront costs of whole-house improvements or to act on all or most of their EPC recommendations. The first call on any savings will inevitably be the numerous other costs associated with buying a property and moving home.

Mechanisms allowing householders to borrow money at low rates of interest to finance whole house energy efficiency improvements need to be established.

Green mortgages—those that actually provide an incentive or finance to improve the environmental performance of the home—are few and far between. The Energy Efficiency Partnership for Homes (EEPH) has produced a definition of a green mortgage[127] :

— It encourages consumers to buy, or to work towards, a high energy performing home.

— It offers one or more defined financial incentive(s) linked to the home's energy use.

— It encourages the consumer to access advice and support on domestic energy use prior to making improvements.

— It has defined qualifying criteria, based either on a minimum energy standard, or a commitment to make certain improvements to the home.

EEPH suggests that these qualifying criteria could be based on information in an EPC. Only three mortgage providers have products which meet these criteria: Norwich & Peterborough Building Society, the Ecology Building Society and the Cooperative Bank.

The fact that so far the market has failed to bring forward many products which reward homeowners for installing energy efficiency measures or help finance these improvements is disappointing. With the arrival of EPCs there will be a much greater focus on the energy efficiency of properties. This may encourage many more mortgage providers to offer genuinely "green mortgages" however it could lead to an explosion of products which use the green label but do not provide any additional incentive to improve a properties energy efficiency or help to finance such improvements. This could cause considerable confusion among consumers. If the situation continues Government should consider regulatory approaches to create such products and to ensure clarity in the market.

VAT on refurbishment

It is time to end the anomaly where new build housing is zero rated for VAT but refurbishment attracts the full rate of 17.5%. Friends of the Earth agrees with the Sustainable Development Commission that a reduction of the VAT rate on refurbishment to high environmental standards, of which energy efficiency is one part, is needed to eliminate a perverse incentive to demolish homes in existing communities. The SDC calculates that equalising the VAT on new build and refurbishment at 11-12% would be revenue neutral[128].

However EU law currently allows a lower 5% reduced rate of VAT to be applied to refurbishment. The Government should apply this rate and actively engage in negotiations at an EU level to allow a further reduction.

This move would compliment and reinforce a Stamp Duty rebate to provide a very strong incentive for homeowners to engage in whole house energy overhauls (going well beyond just the lowest cost measures) of a property before they move in.

VAT on DIY energy saving equipment, materials and their supply and installation

The 2002 Budget introduced a reduced rate of VAT for the installation of a number of energy saving measures (including energy efficiency and microgeneration measures). The cost to the Treasury is small at around £50 million[129]. However this currently excludes such basics as energy efficient light-bulbs because DIY energy saving products are not covered.

Again the Government's room to manoeuvre on VAT is limited by the EU VAT Directive.

We are pleased that at the Pre-Budget Report the Government committed itself to actively engaging in negotiations at an EU level so that VAT levels can be lowered further in the future on products and materials bought for DIY as well as professional installation. This will particularly benefit poorer families who may be unable to afford to have energy efficiency measures professionally installed.

Non-transactional EPCs

Friends of the Earth believes that the Government should introduce mechanisms to extend the use of EPCs beyond the moments demanded by the EPBD (selling and renting), to enable many more households to receive information on the environmental performance of their home.

One way to do this would be to require an EPC to be produced when a homeowner is applying for planning permission (the EPC would have to be submitted alongside the application for planning permission).

Another moment that could trigger the requirement of an EPC could be those who are not moving house but remortgageing within the same property

Mandatory action on EPC measures

Friends of the Earth believes that after an initial period of incentives (three to five years), and as information and practical barriers to action are being substantially reduced or eliminated it should be compulsory for the cheapest and most cost effective energy efficiency measures identified by an EPC to be taken up by homeowners and landlords. Clearly further analysis and consultation needs to happen to establish which measures should be mandatory and where the duty of obligation should fall (should it be the seller or buyer). However given the scale of the cuts in carbon emissions that are necessary from the domestic sector, the large numbers of homes that currently lack key cost effective measures (nine million homes without filled Cavity Walls) and the considerable carbon savings that would result, and the low cost and rapid payback from these measures (usually less than three years) this is both necessary and will not be burdensome. If non-transactional EPCs are included this would mean that within a few years it should be illegal to buy/sell, rent, refurbish/extend or remortgage a property without undertaking certain cost effective measures.

The Sustainable Development Commission's report on improving the domestic housing stock proposed a system of "consequential works" when a property is extended accompanied by a reduction in the rate of VAT for refurbishment[130].

A local authority could require certain measures flagged up in the EPC to be carried out as a condition of granting planning permission (the EPC having been submitted with the application). This would be relatively easy to administer and would not have to be limited to only the basic measures.

Such a compulsory system requiring action on home energy inspections has been in place in San Francisco for many years.[131]

The private-rented sector accounts for 10% of the housing stock and contains a very high proportion of energy inefficient properties.[132] The 2004 Budget introduced a Landlord's Energy Saving Allowance covering capital expenditure of some forms on insulation (and extended in Budget 2006 to cover solid wall and hot water insulation). Budget 2007 extended the LESA to 2015 and allowed it to be applicable per property rather than by building. The take up the LESA is reported to be extremely low as many landlords are unaware of its existence[133].

These are welcome moves but still does not deal with the essential problem of split incentives between landlord and tenant. EPCs could help enormously by allowing prospective tenets to compare between properties. However further enforcement is needed. Friends of the Earth believes that landlords should have to a minimum standard for the energy performance of a property and that no property, regardless of its SAP should be able to be let if it lacks the most basic cost effective measures such as a hot water jacket, cavity wall insulation etc. The combination of this regulation, information (via the EPC) and the LESA tax incentive could make a powerful policy package.

Practical Barriers

Even with significant financial incentives there are significant practical barriers to householders taking action on the information in their EPC which could slow the pace of change in the housing stock. Even once the desire to take action has been established a homeowner still has to find a suitable contractor and commission the work.

Promotional materials from energy suppliers looking to carry out specific measures to meet their EEC obligations can help to target specific measures such as Cavity Wall Insulation but don't help homeowners wishes to carry out the sort of bespoke whole house overhaul that the government wants to encourage and is necessary.

The Mayor of London has suggested that a Green Concierge service would target the able to pay[134]. The Green Party have suggested a network of "one stop shops"[135] The EST currently is able to support 49 local Energy Efficiency Advice Centres. If the UK is serious about tackling the carbon emissions from existing homes then there will need to be a massive increase in activity in the sector. If EPCs and financial incentives are work to maximum effect then government needs to ensure homeowners should find not find there are other barriers in their way.

Friends of the Earth does not currently have a view about the best way of overcoming the "hassle factor" but our focus on financial incentives does not mean that we do not consider this to be a considerable problem which will require considerable additional financial resources from government. We have characterised this as the need for government to make it both cheaper and easier for people to cut their carbon emissions.

A mechanism often proposed for overcoming both the practical and financial barriers would be the creation of Energy Service Companies (ESCOs). These companies would make money from delivering energy services rather than from selling electricity. The ESCO would make energy efficiency modifications to the property and perhaps install microgeneration on behalf of the householder who would then pay back the cost through their (now substantially reduced) energy bill over an extended period.

PART 2: BOOSTING MICROGENERATION

The Government, in its recent consultation on the Renewables Obligation (section 3.15) states that "in the long-term microgeneration can make a significant contribution in terms of carbon savings."

According to the DCLG Review of the Sustainability of Existing Buildings: "current existing [housing] stock conditions and with currently known technologies . . . a 60% reduction [in carbon emissions] would require the application of microgeneration technologies."

It is now clear that an 80% cut in UK carbon emissions is necessary if we are to have any chance of keeping global temperatures at less than 2C above pre-industrial levels. This implies a far greater role for microgeneration technologies that goes beyond filling in the gaps that energy efficiency measures can't fill. A study commissioned from the then DTI from the EST study commissioned by the suggested that by 2050, microgeneration could provide 30-40% of the UK's electricity needs and help to reduce household carbon emissions by 15% per annum.[136]

While energy efficiency measures usually offer a more cost effective means of reducing carbon emissions initially this is no reason to neglect the contribution microgeneration can make now. Many newer homes and certain other types of hard to treat properties have limited scope for reductions in carbon emissions from energy efficiency measures alone.

It would be a mistake to delay the extensive role-out of microgen to the existing housing stock until after the possible energy efficiency measures have been exhausted.

We believe the current policy framework for supporting the development of renewable energy in the UK is insufficient to meet the new EU wide goal of 20% renewable energy by 2020. Policies to expand microgeneration capacity are especially lacking.

The main policy mechanism the Low Carbon Buildings Programme has been so poorly handled and under-funded as to actually weaken the industry it is supposed to be developing. The existing fiscal incentives for homeowners—reduced VAT on microgen technologies and exempting earnings from microgen exports from income tax—might be useful add on's to a strong programme of grants and a feed in tariff but alone they are almost entirely insignificant. They are not predicted by the Treasury to have any significant impact on carbon emissions. The LCBP is predicted by the Treasury to save just 0.01 MtC per year by 2010.[137]

Two recent developments could have an impact on the market for domestic microgeneration. The first is that energy suppliers will able to gain credit for installing microgen measures as part of their CERT obligations.[138] The Regulatory Impact Assessment for CERT concludes that 121,000 microgen installations could result from CERT, accounting for 8.2% of the annual carbon savings.[139]

This will boost the market for microgen but obviously comes at the cost of more energy efficiency measures being installed (the assumption in the RIA that housing associations or local government will contribute to the cost for the 51,000 predicted Priority Group household installations seems optimistic given the lower level of cost effectiveness of most renewable technologies).

The second is that agents will be able to apply for ROCs on behalf of homeowners.[140]

However the Government's recent Renewables Obligation consultation (section3.15) states that "the Obligation was designed to support large scale deployment of renewables and we do not feel that it is the best way to deliver the incentives that the microgeneration industry require."

Friends of the Earth thinks that the RO is fundamentally flawed as a mechanism for delivering an increase in domestic microgeneration and that a premium feed-in tariff system such as that currently used in Germany would be a far more effective policy.

Feed-in tariff

In many European countries legislation to introduce a renewable energy feed-in tariff has proven a highly effective policy instrument for delivering a rapid increase in the uptake of a wide range of renewable technologies including microgeneration.

Feed-in tariffs are the primary support instrument for renewable energy throughout Europe, paying a guaranteed, premium, fixed price for renewable energy, with different price levels set for different technologies. As the future price of ROCs is unknown, plans to make ROCs more easily available to domestic generators will not give them the certainty necessary to invest in microgeneration technologies. Provided they are set sufficiently high a UK feed-in tariff would offer rapid paybacks times for domestic generators.[141]

Moving to a feed-in tariff system for domestic microgeneration would revolutionise the market. Friends of the Earth believes that UK feed-in tariff would provide long term security to homeowners wishing to invest in microgeneration technologies with guaranteed rates of return.

The Government's recent Energy White Paper rejects a feed-in tariff. This is a mistake. In it's response to the recent Renewables Obligation consulation, Ofgem states: "There is also increasing evidence that there are more efficient and effective policy tools which can be used to encourage renewables deployment. The European Commission compared the costs and associated effectiveness of "feed-in tariffs" to support renewables implemented in Europe with corresponding quote schemes, such as the RO. The analysis showed that the RO was the most expensive and least efficient method of support."

Ofgem goes on to recommend to government examine the case for a UK feed-in tariff.

Friends of the Earth believes a feed-in tariff designed to boost on-site, domestic, community and micro renewables could operate alongside a reformed, banded Renewables Obligation. Installations with a generating capacity above a certain threshold would be covered by the RO and below by a feed-in tariff. The threshold between support mechanisms would not have to be the same for all technologies. The feasibility of such as system has been established by Dr David Toke (Senior Lecturer in Environmental Policy at the University of Birmingham) in his submission to the recent Renewables Obligation[142].

115 A more detailed explanation of our reasons can be found in our evidence to the House of Lords Committee on the Merits of Statutory Instruments www.publications.parliament.uk/pa/ld200607/ldselect/ldmerit/129/129.pdf Back

116 16 May 2007. Back

117 Regulatory Impact Assessment Energy Performance of Buildings Directive Articles 7-10, Department for Communities and Local Government, March 2007. Back

118 The EST report that 4 out 10 people are aware of EPCs. EST National Attitude and Behaviour Tracker, 2 August 2007. Back

119 Changing Climate, changing behaviour: Delivering household energy saving through fiscal incentives, EST, July 2005. Back

120 For more on these barriers see Home Energy Report Seminar, The Energy Efficiency Partnership for Homes, 15th September 2005 and Energy Performance Certificate Supply Chain Research, The Energy Efficiency Partnership for Homes, May 2006. Back

121 Regulatory Impact Assessment Energy Performance of Buildings Directive Articles 7-10, Department for Communities and Local Government, March 2007. Back

122 Whole House Fiscal Measures to Encourage Consumers to Improve the Energy Efficiency of their Homes, Simon Dresner and Paul Ekins, Policy Studies Institute. Back

123 Changing Climate, changing behaviour: Delivering household energy saving through fiscal incentives, EST, July 2005. Back

124 Using Stamp Duty to bring about a Step Change in Household Energy Efficiency. Eoin Lees Energy, 2005. Back

125 www.ipsos-mori.com/polls/2007/greenagenda.shtml Back

126 After Stern: Towards a Climate Change Budget, Friends of the Earth, November 2006. Back