HC 1605 Energy and Climate Change and Environmental Audit CommitteesWritten evidence submitted by the National Housing Federation

Summary

Feed-in Tariff: Impact on bills and benefits

The Department of Energy and Climate Change’s (DECC) own figures show, by 2020, lowest income households will be spending up to 15% of income on energy, five times more than the highest income households. Carbon reduction levies, including FIT, forecast to lead to increase in bills over 2% of household income for the poorest, if they receive no benefit in reduced bills, compared with just 0.2% for the wealthiest.

So if FIT and other levies are not to be highly regressive, reductions in energy costs they finance need to be biased very significantly towards low income households.

Solar PV in social housing

Less than 50 respondents to a Federation survey in summer 2011 (about 4% of housing associations) had installed any PV and fewer than 40 others had plans or were in the process of installing, largely because of challenge and complexity created by procurement regulations to which social landlords are subject, and lender negotiations over charging issues.

In social housing, benefit of free electricity goes to tenant, not the landlord or private partner carrying out the installation.

Yet great potential for cost-effective installation in social housing, for that installation to produce significant carbon and fuel poverty benefits, and to support other climate change policies.

Impact of Phase 1 consultation announcement

Announcement has created great concern in the sector, at the extent of the reductions and the short notice.

Activity halted to nearly 18,000 housing association homes, and impact on confidence and commitment to climate change policies beyond FITs.

Key recommendations

Government should:

1.Defer effective date of tariff reduction for social housing installations substantially in development when Phase I consultation published on 31 October 2011 to at least 31 March 2012, as schemes targeted for March are now on hold.

2.Set tariff for social landlord- or community-organised schemes to enable sufficient numbers of them to be financed, recognising that only such schemes can secure solar PV benefits for low income households at any scale. Initial view based on member modelling is that rate needed around 30p, certainly proposed 16.8p multi-installation rate uneconomic in social housing.

3.Set tariff and eligibility to ensure low income households receive bill reduction benefits at least equivalent to increase in their bills caused by the policy. Similar policy objectives should be adopted for other obligation mechanisms, notably ECO.

4.Improve approach to understanding and evaluating the impact of its policies as a whole on social tenants and landlords, recognising that social housing can contribute significantly to carbon and fuel poverty objectives but this requires co-ordinated policy design.

Full Submission

Introduction

1. The National Housing Federation is the voice of affordable housing in England. We believe that everyone should have the home they need at a price they can afford. That’s why we represent the work of housing associations and campaign for better housing.

2. Our members provide two and a half million homes for more than five million people. Each year they invest in a diverse range of neighbourhood projects that help create strong, vibrant communities.

3. The social housing sector should be a major focus for Government policy on carbon reduction and home energy efficiency. This is for reasons of:

Opportunity: there are over 4 million homes in the sector, 20% of England’s housing stock. In contrast to the owner-occupied and private rented sector, ownership is highly concentrated, with 272 housing associations owning 90% of housing association stock. and almost all council landlords owning 3,000 or more homes. Housing associations are substantial, professionally managed organisations, with a track record, above all through the Decent Homes programme, of managing large scale programmes of work to existing properties. They have a strong commitment to improving residents’ economic and social wellbeing. Their effective asset management and investment means that on average social homes are more energy efficient than other tenures, but there are still 1.2 million homes with substantial further potential for carbon saving. The scale and concentration of stock means there is opportunity for large scale. installations, producing substantial carbon and fuel poverty benefits with economies of scale.

Need: on the most recent (published 2011 but measuring 2009) figures, 762,000 social households were in fuel poverty, a higher proportion than in any other tenure. With October 2011 inflation figures including 12 month rises in gas prices of 24.1% and in electricity prices of 14.9%, this must be widening and deepening. At the same time, social tenants will be affected by other economic and policy developments, including falling real terms pay for those in employment, changes to the benefit system, and increasing worklessness.

Feed-in Tariffs and the Social Housing Sector

Impact on energy bills

4. All social tenants are affected by Feed-in Tariffs (FIT) because they contribute to them through a surcharge on their energy bills. Social tenants, as a group, are much more predominantly in the lowest income groups than residents in other tenures, with fewer than a quarter in employment, a third retired, and nearly two thirds receiving income-related benefits. On the Government’s own figures, energy is set to account for over 15% of the spending of the poorest households by 2020, over five times as much as the richest. So FIT and any other levies on energy bills affect low income households disproportionately. The Government’s figures suggest that by 2020, climate change levies will be adding to the energy bills of the poorest households, if they receive no benefit from them in reduced bills, by an amount equivalent to 2.1% of their income, compared with just 0.2% for the best off. If spending financed by FIT and other mechanisms is not biased heavily towards cutting the energy bills of the poorest households, the policy impact will therefore be highly regressive, and worsen fuel poverty, as Professor John Hills has recently pointed out in the interim report of the Fuel Poverty Review commissioned by the Secretary of State.

Installations

5. The Federation has encouraged members to think positively about installing solar PV and other renewable energy technologies because large numbers of social housing tenants are on low incomes and at risk of fuel poverty, and could benefit from having access to free or low cost electricity. The characteristics of much of the social housing stock, for example built as large blocks of flats, or large numbers of houses or smaller blocks of similar design, creates opportunities for larger scale installations with substantial potential carbon and fuel poverty benefits. In addition to the benefits to tenants in properties where PV is installed, some landlords’ plans include using the surplus generated for them to cross-subsidise energy efficiency work to reduce carbon and fuel bills in other property.

FITs opened up for Staffordshire Housing Association a strategy to make an investment of over £1.5 million in PV for some 360 homes. The income generated from the FIT payment was intended to undertake retrofit work to the homes that could not benefit from PVs or to build new homes. This reinvestment would help to tackle fuel poverty and reduce CO₂ emissions within their stock as a whole, or to provide new energy efficient homes. They had procured this work from a local contractor with the aim of making their investment create jobs for people in the area. This was an important part of their strategy as Stoke-on-Trent is one of the most deprived cities in the country and has been encouraged to look for growth in jobs via the green technologies. The Government’s proposals are likely to bring their programme to an end in December, depriving many more homes of much needed support to tackle fuel poverty. In addition the contactor has ceased his recruitment and training arrangements and is no longer considering taking on apprentices.

6. In summer 2011, the Federation surveyed all its members to get a clearer picture of what housing associations in England have been able to achieve so far and the challenges they are facing in installing PV and benefitting from FIT. Less than 50 respondents to the survey had installed PV on either new or existing homes and fewer than 40 more were either installing or about to install PV. Less than 3000 small-scale installations (below 4KW) had been carried out by respondents on existing homes as of mid-September 2011. Fewer than 30 respondents had installed PV when new homes were being developed but only 11 have been able to claim FIT following guidance issued by the Homes and Communities Agency about state aid rules (see paragraphs 19 – 21).

Golden Gates Housing Trust and Warrington Council have been progressing their solar PV pilot project, with approval to install 600 properties in wards among the 10% most deprived in England. This has potential to make a huge difference to the financial circumstances of the tenants involved, taking them out of fuel poverty. The project was integral to an investment programme for properties to have double glazing, efficient heating systems and loft insulation up to 300mm (they already have cavity wall insulation). It also linked to funding an educational programme to deliver behavioural change so that tenants were much more energy efficient. They were trying to implement a tender for 300 properties but with much uncertainty as to how many will be completed before the deadline of the 12 December. With the proposed changes they will not be able to proceed with phase 2 which consists of 300 properties because the business case no longer works. After the pilot the Council had been seeking to install solar PV to circa 3,000 properties over a number of years. Extensive work has been carried out on surveying the properties to identify those most suitable.

Timescales

7. The Federation’s survey found that schemes involving housing association stock have tended to take longer to develop and procure than retail schemes involving owner-occupied stock for a number of reasons:

Their scale is likely to lead to a high level of benefits, but by the same token, assessing potential, planning the works, negotiating with financing and delivery partners, is likely to take significantly longer than a retail installation on a single property;

Negotiations with lenders with an existing charge on the property affected;

The need to go through European procurement, because of the scale of the projects;

Negotiations with District Network Operators about connection.

8. Responses to the survey indicated that, for some larger schemes, these factors were adding as much as a year to the process, and some schemes now face abortive costs in the region of £100,000, in addition to substantial staff time, for schemes that are no longer viable.

Housing Solutions, a landlord of more than 6,000 homes in the South East, were planning to start PV installations to 200 homes in December 2011 for completion by March 2012. Surveys had been completed and promises made to residents which may now be broken. A further 750 homes were proposed from April 2012 and these are very unlikely to proceed. Housing Solutions have invested about £80,000 in getting their programme to this stage and these setup costs will now be wasted if they cannot proceed to the installation phase. The income generated was to have been reinvested as part of their core purpose of meeting affordable housing need and improving services to residents, which had included plans to improve the energy efficiency of the stock and to tackle fuel poverty.

Economic viability

9. There is an important difference in the economics of solar PV installations between social landlord schemes and large- and small-scale private sector schemes. In the latter case, the free electricity generated is part of the benefit to the individual or company carrying out the installation. In social housing, the benefit of the free electricity goes to the tenant, reducing the return to the landlord or their commercial partner from FIT. It does not appear that DECC recognised this crucial difference in economic viability in the analysis underpinning its proposed lower rates.

Affordability, Delivery and Factors to consider in setting FIT rates

10. Distributional fairness needs to play a very strong part in shaping FIT and other policies funded ultimately by levies on household fuel bills. We therefore suggest that the Government should adopt as a key objective for policy, that the net effect of FIT and other levies on the lowest income households, should, at worst, be neutral, with low income households receiving benefits from such policies at least in line with the contribution they make to their cost through higher bills.

11. If this principle is accepted, it follows that FIT rates and other conditions should be shaped to support a high volume of installations by social landlords and others (like community groups) which benefit predominantly low income residents and neighbourhoods. It is improbable that there could ever be a high level of installations for low income households in other tenures. So social landlord and community schemes are the only significant option if FIT is not to end up being distributionally unfair.

12. The Federation’s members do not believe that the rates proposed in the Stage 1 consultation, the 21p rate, still more the 16.8p multi-installation rate, are enough to make installations in the sector viable. Figures from a number of social landlords’ analyses suggest a rate in the region of 30p is the minimum required. We urge Government to engage with the sector on its analysis of viability before reaching final conclusions about rates.

13. One way the Government could modify its approach to increase installations in social housing and for low income households is to develop the idea floated in the Phase 1 Consultation of a Community Tariff. We would suggest this could allocate a higher than standard tariff to schemes which plough most or all of the economic surplus created by the installation into social benefits, for example reduced bills for low income residents, or cross subsidy for energy efficiency programmes which further reduce bills for residents in the properties involved, or more widely.

14. The Government’s proposal to make eligibility for FIT conditional on the property on which solar PV is installed meeting minimum energy efficiency standards needs careful consideration, particularly in relation to any prescriptive standard, and the Federation will offer our view on the detailed options raised in our response to the Phase 1 consultation. If such a policy is not to treat low income social tenants unfairly, a number of important issues must be thought through properly, with DECC considering the interaction between policy on renewables, energy efficiency and fuel poverty in a connected way. There is a clear logic for linking energy efficiency and the installation of renewable heating but no direct link with energy efficiency and the potential for PV to reduce carbon emissions and electricity bills for low income households.

Management of Government Policy, and impact of Phase 1 Review Proposals on Social Housing

15. The impact of the announcement has been dire. Information we have received since publication of the consultation indicates that installations to nearly 18,000 homes have been stopped in their tracks. This means 18,000 households, almost all of them on very low incomes and at risk of fuel poverty, will not now see reductions in energy bills of up to £150 a year. Even if the Government, on reflection, accepts our arguments that a higher rate of tariff is needed to support social housing installations, there is no prospect of the currently planned installations going ahead, since prudent Boards must make decisions on the basis that the 12 December date will stand. As previously stated, social landlords now face considerable abortive costs in project development and procurement, costs which are, of course, met out of the rental revenue landlords receive from their predominantly low income tenants.

16. We are therefore urging the Government to permit social landlord schemes which were substantially in train at the date of the Phase 1 consultation announcement (31 October) to proceed with the current rates of tariff, against which they were developed, in good faith.

17. It has been well understood, following the announcement in February 2011, that the Government was reviewing FIT, and there would have been widespread agreement that it was extremely likely that there would be a reduction in rates. But, ahead of the announcement of the Phase 1 consultation on 31 October, the Government had given no indication that:

the consultation would be substantially less than the normal 12 week period;

the effective date for some of the measures would be just 6 weeks from the start of the consultation.

18. The character of the consultation and the timescales has led not just to concern in the sector, but to disillusionment. It does not appear to the Federation and its members that, in making its proposals, the department has:

recognised the impact on all the types of businesses involved in the solar PV market (of which social landlords, as social businesses, are just one) of very significant short notice changes to policy;

sufficiently engaged with the social landlord sector during the preparation of the consultation, to inform the development of its proposals and, if such significant change was on the cards, to open minds to the range of options under consideration and enable landlords to take earlier action to mitigate the risk of a reduction in FIT;

taken any account of distributional fairness as a factor to consider in decisions on FIT policy and rates. Despite the issue being clearly set out in other DECC analysis, there is nothing in the Phase 1 Review consultation or supporting impact assessment to suggest this has been considered or that it has had any impact on the policy proposals;

considered the impact of its FIT proposals on the perception and confidence in the social housing sector about the range of DECC policies, above all Green Deal, on which important policy development is proceeding in parallel (and, we would say, with a much higher quality of engagement with the social landlord sector). The proposals on FITs will in some cases affect the ability of landlords to fund Green Deal work, since the surplus generated by some solar PV schemes was earmarked for investment to meet a likely shortfall in what can be financed under the Golden Rule.

Solar PV and Social Housing in other Countries

19. DECC chose to notify the FIT scheme to the European Commission in 2010, as a renewable energy initiative. The Commission ruled that the scheme was state aid but compatible with the Treaty. It stated, however, that grants and feed in tariff revenues were unlawful, i.e. if an organisation received a grant to pay for the PV installation, they would not be able to claim FIT revenues.

20. This has caused problems for housing associations developing new homes with Social Housing Grant (SHG). One of the conditions of SHG is that the new home corresponds to a level of the Code for Sustainable Homes, usually 3, but 4 in London. Unfortunately, for Code level 4 and above, it is sometimes difficult for housing associations to reach these levels without incorporating PV panels on the schemes. Since the PV panel would have received some form of SHG grant, this means that they cannot claim FIT revenues.

21. The approach in this country contrasts with other member states. France, for example, chose not to notify their feed in tariff scheme, using instead the existing state aid legislation, including the Commission decision of 28 November 2005 on the application of article 86(2), and the European Regional Development Funds (ERDF) / European Social Fund (ESF) regulations for the period 2007-2013 to inform the way they were managing their feed in tariff initiative. The 2005 Decision and the ERDF /ESF legislation allow for a level of grants and revenues to coexist, when it comes to Services of General and Economic Interest providers, such as social housing associations, and when it is aimed at promoting renewable energy. This has meant for instance, that social housing providers in France have been able to use ERDF to invest in PV panels and claim FIT benefits.

22 November 2011