Renew On Line (UK) 49

8. Stalling on Micro-CHP and VAT

Back in January, Jane Griffiths MP for Reading East (Lab) managed to get the House of Commons to debate micro-CHP.

 She argued forcefully that domestic Micro-CHP could  ‘contribute to four policy goals of the  energy White Paper. First, it reduces CO2  by at least 1.5 tonnes per household per annum. Secondly, when aimed at the mass market, it provides a highly diversified generating source, reducing winter peak demand on the grid and enhancing security of supply, which is obviously welcome when there is concern about the future electricity supply.  Thirdly, it provides adequate and affordable home heating, even in homes that are hard to heat, and reduces energy bills by some £150 a year, which makes it the heating system with the lowest lifetime cost. Fourthly, it helps to improve our competitiveness, as the UK is at the forefront of the technology.’ 

She added that ‘If only a quarter of heating systems installed between now and 2020 were micro-CHP, they would provide half the energy White Paper’s carbon-saving targets for domestic energy efficiency. At the same time, that would provide the equivalent of 40 per cent. of today’s nuclear capacity, and would provide significant, secure and diverse generating capacity.’

However, although such devices could yield savings of £150 a year and are cheaper than other boilers over their full lifetime, they were at present more expensive to buy, and this dissincentive to take-up was compounded by anomalies in the tax system- for example  purchasers were faced with the full 17.5% VAT charge. She argued that this should be removed. She noted that on the basis of MicroGens’ estimates, that ‘if nothing is done, around 150,000 CHP boilers will be sold by 2010. With a 5%VAT rate, however, the volume would be almost 400,000 by 2010’.

The Economic Secretary to the Treasury, John Healey, basically agreed that it was an important issue but pointed out that ‘Since 1997, Labour in government has consistently sought to provide economic and fiscal incentives to improve domestic energy efficiency. One way in which we have done that has been to make the best use of the reduced VAT rate, although our ability to introduce new VAT reliefs is constrained by European VAT law. Without  changes at European level, we cannot introduce a reduced rate for energy-saving materials that are installed by DIY, nor can we tax competing goods at different rates of VAT.’

 He noted that ‘Even with those limitations, over the last five years, we have built up  an extensive range of reduced rates for installations of energy-saving materials and products. We introduced the first ever VAT reduced rate for installations of energy-saving materials in 1998 and we have extended it twice, in 2000 and 2002, so that it now covers the installation of a wide range of energy-saving products with particular emphasis on helping the most vulnerable households.’

Most  recently, he noted that in the 2002 Budget, as part of the drive to deal with fuel poverty ‘we extended the reduced rate of VAT again to include grant-funded installations of  factory-insulated hot water tanks, domestic combined heat and power units, and heating systems that use renewable energy. That means that grant-funded installations of micro-CHP boilers are already covered by  the reduced rate.’ 

In addition, he noted, the government were looking at other ways to provide fiscal support for options like this, including capital allowances. However, he added, their hands were tied until the outcomes of the European VAT review and the Government’s review of corporation tax were clearer, and warned that the outcome of EU-level negotiations  on reduced rates for VAT remained uncertain. ‘In the short term, those negotiations are unlikely to deliver an opportunity for VAT rates to be used to encourage domestic energy efficiency beyond the existing provisions, but we remain committed to securing new reduced rates for DIY materials that help to save energy. Whatever the outcome of the VAT negotiations, the Government will examine what further options under existing VAT legislation are open to us.’

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