Energy Bill

Memorandum submitted by the Builders Merchants’ Federation (EN 06)

1) The Builders Merchants’ Federation (BMF) is the trade association representing businesses in building materials’ distribution. Members sell everyday construction materials and home improvement products to the trade and DIY enthusiasts. Together with major manufacturers & suppliers, we represent 400 companies with combined annual sales of approx £7 billion.

OVERVIEW

2) We welcome the Green Deal: it is ambitious, forward-looking and tackles a need to improve the thermal performance of homes & workplaces. Jobs & growth depend on it becoming a success.

3) Investing in buildings to improve the condition and fitting energy-saving measures are central to our members’ businesses. Merchants earn a living from selling loft & solid wall insulation, heating & hot water systems, glazing, lighting and renewable energy products. Most of what ministers in the Department of Energy & Climate Change (DECC) and the Department for Communities & Local Government have sought advice on in the last 3 years, we make or sell.

4) We are grateful for the chance to submit views. We confine our remarks to where the BMF has direct experience and practical knowledge - and address only some of the clauses. If the Committee seeks further assistance, we shall be pleased to help.

SUMMARY

5) The Bill must create a wider, deeper & longer market to allow merchants and their trade customers (esp. SMEs) to participate in improving the thermal performance of buildings.

6) The BMF concentrates on these issues if the policy is to work:

a) assessments: how ministers plan to protect voters by ensuring the independence of assessments from the interests of vertically-integrated businesses or installers

b) finance: how ministers persuade money markets to invest in asset-backed improvements

c) demand: how ministers will publicise and market their policy to inform the electorate and stimulate interest - so voters act to take up the offer and create jobs & growth.

7) The biggest risk is that (coming out of recession) voters see the Green Deal as another debt. The Government’s ambition for the ‘demand-side’ to pull the market will falter: a politically unattractive outcome. We predict it will be necessary for Government to reconsider spending taxpayers’ money on publicity campaigns to raise awareness and stimulate demand.

8) We urge the Government to take time in Committee to outline what nudges, triggers & incentives it plans to entice voters (esp. ‘early adopters’). Council Tax and Stamp Duty are often quoted - but we believe 5% VAT is the single most important (see paras 45-51).

DETAILED OBSERVATIONS ON CLAUSES

PART 1: ENERGY EFFICIENCY

CHAPTER 1: GREEN DEAL

Clause 3: Framework Regulations

Green Deal Providers

9) The latest thinking expressed by DECC officials causes alarm in the building materials’ supply chain because the proposals rely far too heavily on big corporate names. The models being discussed favour large vertically-integrated businesses - i.e. energy suppliers and major retailers - that will dominate the market from the outset with a "one stop shop".

10) Energy suppliers cannot be allowed to exclusively provide goods & services - especially via control of independent assessors (see paras 27-29). They already have a competitive advantage over everyone else because they hold information on gas & electricity billpayers. They can mine the data to directly target voters with Green Deal offers.

11) Using this unfair advantage, energy suppliers will want to steer existing customers towards their subsidiaries, preferred partners or sub-contractors with whom they have agreements. This will restrict consumer choice or confidence.

12) Prior to the Bill, ministers made much of names such as Tesco and Marks & Spencer expressing firm interest. It is logical to assume big retailers will also direct customers towards subsidiaries or preferred partners. Tesco and Marks & Spencer already offer home insulation - and both these companies’ interests are managed by the same agent.

13) If the above is allowed, it will limit the plurality of providers that ministers want - meaning little or no scope for SME firms to participate. The success of the Green Deal is predicated on routine work, done by trained & competent people, delivered in large volumes, every day of the week, in towns and suburbs around the country. At a time when the Government wants private enterprise to lead the economic recovery, we urge the Committee to question this.

14) A wide range of providers must be encouraged - otherwise choice is restricted, and vertically-integrated corporates secure a dominant hold over the market - neither of which is acceptable.

Eligible Measures

15) It is not entirely clear whether (or not) ministers intend to designate a list of measures. If they are tempted to do so in Secondary Legislation, we urge them to think again.

16) The BMF firmly believes it is not necessary to designate any measures. The market for products aimed at improving the thermal performance of buildings is well-established. All that is required is clear, easy-to-follow information to guide voters in deciding what work to have done - in line with the recommendations given by a properly-qualified assessor.

17) We recommend voters adopt a sequenced approach to any work done. Measures should be done in a logical, sequenced way to optimise savings & benefits and protect investments.

18) Consequential improvements done in the optimum order are:

a) reduce energy loss by improving the structural fabric of the building

i) loft, cavity wall, flat roof and solid wall insulation (external & internal)

ii) energy-efficient glazing

iii) draught proofing and replace doors (esp. external ones)

b) replace or upgrade the heating & hot water system

i) boilers, heating controls, radiators & thermostatic valves

ii) associated insulation - i.e. water cylinder jackets & pipe lagging

iii) heat recovery systems and ventilation & cooling systems

iv) underfloor heating

c) install modern energy- and water-saving solutions

i) efficient bathroom, shower, toilet and kitchen products

ii) lighting fittings & controls

d) install renewable sources of energy

i) renewable heat - i.e. solar thermal, heat pumps, biomass & geothermal

ii) electricity micro-generation - i.e. solar pv & wind turbines

19) Work done out of sequence wastes time, effort & money - and causes aggravation & disruption - because dull (but vital) labour-intensive tasks that yield cumulative savings are not done first.

20) A prime candidate for the Green Deal is solid wall insulation - on grounds of cost and because there is plenty to be done. Solid wall insulation and glazing replacement go together, and carrying them out at the same time makes good sense.

21) With longer, hotter and drier weather, the policy ought to cover ventilation & cooling. If not, energy will be spent taking heat out of buildings. On 17 January, the Government promised the Lords it would look at ventilation & cooling and come back to Parliament.

Consumer Protection

22) Much has been said about safeguards against bad advice or mis-selling. Consumer protection and quality assurance are paramount. We alert Members to the debate in the House of Lords.

23) On 17January 2011, Liberal Democrat peers tabled an amendment on collusion between partners. The aim was to add a new clause (after Clause 3) to protect voters from collusion, anti-competitive activity, or being offered restricted options to favour particular products or organisations. Peers talked about the relationship between assessors and installers whereby the former will always want to give business to the latter. The example of double-glazing was quoted. If this collusion occurs, consumer protection and consumer confidence is at risk.

24) The point being debated was not that the installer or product is un-authorised. The fear expressed (and we whole-heartedly agree) was voters have desirable work done - but more worthwhile action to the structure of the building is not completed first. If measures are carried out in line with the sequence in para 18, they provide better savings or comfort (of both) because several measures done together (in the right order) are better for the inhabitants.

Industry Capacity and Capability

25) In recent consultations, supply chain constraints were mentioned. We are puzzled by this. Builders’ merchants are the supply chain and are the single most efficient route-to-market for primary materials and value-added products. We are not aware of any such constraints.

26) We imagine they mean installation capacity & capability. If so, we recommend DECC talks to different voices than it does at present. With hundreds of thousands of jobs lost in construction since 2008, a way can be found to redeploy workers (laid off by volume housebuilders & SME firms) with suitable, all-round skills with relative ease to muster the extra installers.

Clause 4: Assessment of the property etc

Independence of Assessors

27) The Green Deal succeeds or fails on the initial assessment being conducted correctly for the property. Not only the "Golden Rule" calculation but also the estimates of (a) likely energy bill savings and (b) likely period over which the improvements will generate those savings.

28) This requires the assessment criteria to be based on a common standard, approved and widely available to all participants. We imagine it will be a software package based on the Building Research Establishment’s SAP or RdSAP software.

29) Energy suppliers cannot be allowed to control or influence independent assessors. As mentioned earlier, they have the advantage to target gas & electricity billpayers. Independent assessors must give independent advice, and not be tied to energy suppliers or installers.

Inducements

30) The BMF suspects there will be assessors who (for whatever reason) give biased or incomplete advice to favour a particular business or solution. Voters must be assured the advice received is independent and the best possible for their property. Suspicion of collusion cannot be allowed.

31) An extra risk is commission. Those who earn a living from assessments will be eager to complete as many possible (especially if self-employed). It is fair to assume their income is modelled on a basic rate plus commission - causing advisors to make up salaries by chasing sales. On 17 January 2011, the Government promised the Lords that it would look at the role of commission and how assessors are remunerated, and come back to Parliament.

The Assessment

32) The BMF believes these unresolved questions remain:

a) will assessors be allowed to charge for an assessment and allow voters to take it elsewhere (as opticians do with prescriptions for spectacles) ?

b) will the assessment simply recommend what work ought to be done - or guide voters towards trustworthy, skilled & proficient contractors to carry out the work ?

c) how wide will the difference be between savings & costs for the Golden Rule to be met ?

33) We would like the Committee to consider our idea of establishing some sort of government-supported price comparison website - similar to those for insurance on television. Such a website would help overcome suspicion in the minds of voters as to solutions and prices recommended in completed assessments. Before signing anything, voters could surf the internet to compare prices to be reassured about the project they are about to start.

Clause 5: Terms of Plans

Access to Finance

34) Merchants are unlikely to participate unless their Green Deal accounts are settled in the normal way. It is unlikely Green Deal providers will want to carry debts on their books unless they can be factored out elsewhere. Guaranteed funding for completed work is the issue. The home improvement trade can deliver the ambition if it knows it will be paid promptly, in full.

35) From the start, we have consistently asked how the Government intends attracting sufficient capital if the policy is to flourish in the way ministers predict. They talk of different finance models from banks and the capital markets. Ministers have told Parliament they are confident in attracting the necessary working finance from fund managers & corporate investors.

36) The most widely quoted example is securitisation - perhaps through the bond market. The BMF notices the legislation as drafted does not appear to rule out voters modifying or extending a mortgage to incorporate the cost of Green Deal works.

Project Merlin

37) We believe the banks that signed this agreement with the Government ought to see the Green Deal as a way to repair their tarnished reputation. Ministers must persuade banks in which the taxpayer is a major shareholder to lend to businesses (like merchants) who seek project & operating finance. Responsible lending, to creditworthy borrowers, at decent rates, so firms and voters can take advantage of opportunities under the Green Deal, is what everyone wants.

Interest Rates

38) During the passage of the Bill, fixed or variable interest rates were raised in both Houses. Much of this was about the cost of borrowing being approx 8% to 10% over a 25-year period.

39) Higher interest rates will lead to lesser types of measures being installed - and lower numbers of them. Using the Golden Rule, it has been cited, for example, that a 9% rate equates to only loft & cavity wall insulation and draft-proofing being viable - whereas a 5% interest rate could support loft & cavity wall insulation and boiler & glazing replacement.

40) The worry is that voters will not entertain the Green Deal because if they decide to act to improve their property, they can do so at a lower cost than is offered in the Green Deal.

41) The Government ought to take another look at this because the Golden Rule is easily broken as interest rates go up. We wonder if it may be necessary to link the Green Deal to either the Retail Prices Index, or the Consumer Prices Index.

Clause 7: Installation of improvements

42)        The Government is considering whether (or not) to      produce a list of products that comply with the relevant technical standards. We believe this is unnecessary. The market for these products is well-established. Ministers ought not to be fixated on the actual product - but appreciate the thermal performance any product installed (or improvement made) provides.

CHAPTER 5: INFORMATION ABOUT ENERGY CONSUMPTION, EFFICIENCY AND TARIFFS

Clause 69: Smart Meters

43) The Government wants to place an obligation on energy suppliers to install smart meters in every home by 2020. This means the companies have an unrivalled opportunity to use visits to cross-sell or up-sell products or services direct to voters that no other commercial party has.

44) We urge the Committee to ask what protection (if any) ministers are planning to prevent energy suppliers using visits to bounce voters into signing up for other products or services. Installing meters cannot be used as cover to carry out unwelcome or pressurised sales’ activities.

OTHER AMENDMENTS DISCUSSED BY THE HOUSE OF LORDS

Value Added Tax

Simplifying & Clarifying Existing Arrangements

45) The BMF believes there is a compelling case to review the VAT rules & rates because existing arrangements are complex, confusing, and do not serve their original purpose.

46) There is a fundamental lack of awareness of existing reliefs among SME builders. This comes as little surprise as the logic on what attracts a reduced rate is questionable. For instance:

a) installing insulation = 5% reduced rate, but double-glazing or low-emissivity glass = 20%

b) central heating & hot water system controls = 5% yet fitting energy-efficient boilers = 20%.

47) Current rules also state if the standard VAT rate applies to the main job, the standard rate must be charged for the whole of the work - regardless of any energy-saving measures completed.

48) On 31 January 2011, the Lords debated a new clause to extend the range of products that enjoy a reduced VAT rate. Liberal Democrat peers sought to add passive flue gas heat recovery systems, and energy-efficient windows, to a list of qualifying energy-saving measures. The Government said the proposal did not fall within the scope of this Bill - but ministers said they understood the thrust of the amendment & arguments made about lower rates of VAT.

Extending 5% VAT to Repair, Maintenance & Improvement Work

49) New construction plays its part in carbon reduction, via the Code for Sustainable Homes. This will continue when new homes are built to Zero-Carbon Standards from 2016.

50) The prize must be to make it easier for voters to improve their property. The BMF argues the most straightforward way to accomplish this would be to selectively reduce VAT on home improvements where specific actions to take carbon out of buildings are completed.

51) Extending the 5% VAT rate to projects to improvement homes & workplaces will encourage individuals & businesses to invest when they modify, extend, renovate, buy or sell property (so-called trigger points). We urge ministers to introduce 5% VAT on improvement projects if it is serious in wanting the Green Deal to succeed.

CONCLUSION

52) The Committee will doubtless receive briefing from others (for example) who represent manufacturers of insulation or micro-generation equipment. Merchants take a wider view because they sell more than one solution. Their staff are trained to high levels of product knowledge (often NVQ) to give impartial advice. Because the BMF is not a single product-specific association, our merchants offer unbiased advice on the interplay and suitability between products & solutions available.

June 2011