Clause 20 — Income tax exemption for domestic microgeneration

Orders of the Day – in the House of Commons at 6:15 pm on 26th June 2007.

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Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury 6:15 pm, 26th June 2007

I beg to move amendment No. 3, page 15, line 10, leave out sub-paragraph (b).

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

With this it will be convenient to discuss the following amendments:

No. 34, page 15, line 17, at end insert—

'(3) The Treasury shall prepare and lay before the House of Commons annually a report on the effectiveness of the tax relief mentioned in subsection (1) in achieving its objectives, with particular reference to the change in the amount of electricity generated by microgeneration systems.'.

No. 4, page 15, line 29, clause 21, leave out sub-paragraph (c).

No. 35, page 15, line 20, leave out clause 21.

No. 5, page 16, line 5, clause 21, leave out sub-paragraph (c).

No. 36, page 16, line 19, clause 21, at end insert—

'(5) The Treasury shall prepare and lay before the House of Commons annually a report on the effectiveness of the tax relief mentioned in subsections (1) and (2) in achieving its objectives, with particular reference to the change in the number of domestic microgeneration schemes.'.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

In the course of saying farewell to the Economic Secretary before he is elevated onwards and upwards to higher things, I forgot to mention that this is the Chancellor's last full day. I intend principally to discuss amendments Nos. 34 and 36, and I shall begin by marking that point.

This afternoon gives the Chancellor a final chance to act on the emerging consensus in this House that the Treasury should take a clear departmental lead on the environment in relation to microgeneration and energy efficiency. Hon. Members will recall that at this stage of last year's Finance Bill, Alan Simpson, who is in his place, tabled an amendment to make the Treasury issue an annual report on fiscal measures to assist with microgeneration, energy efficiency and small-scale energy generation. Hon. Members will also recall that we supported that amendment in the Lobby along with the Liberal Democrats when it was pressed to a vote. We tabled the same amendment in this year's Committee of the whole House, when we were supported by the Liberal Democrats. Julia Goldsworthy agreed with me in the closing moments of that debate that it was worth returning to the matter, and amendments Nos. 34 and 36 are that return to the matter.

Following a slight adjustment, the amendments propose that the Treasury report annually to the Commons on the effectiveness of the tax reliefs in clauses 20 and 21. In the debate in the Committee of the whole House, which was somewhat compressed, I tried to sum up the emerging consensus on microgeneration in a sentence:

"The Red Book only takes us so far."—[ Hansard, 1 May 2007; Vol. 459, c. 1477.]

I said that the information on page 177 of the Red Book does not tell us how effective the Treasury expects clauses 20 and 21 to be or how many microgeneration systems the Treasury expects to be installed by how many people over what period of time. In that respect, this debate has an eerie resemblance to the debate that has just taken place.

In Committee of the whole House, the hon. Member for Nottingham, South pointed out that responsibilities for reporting on microgeneration and energy efficiency are spread across several Departments—the Department of Trade and Industry, the Department for Communities and Local Government and the Department for Environment, Food and Rural Affairs—and that the Treasury is not currently one of them. He stated that Finance Ministries in other European countries have a more enhanced role and that the lack of that role here leaves

"a glaring gap in the coherence of our approach to climate change policies".—[ Hansard, 1 May 2007; Vol. 459, c. 1477.]

In response to that debate, which was necessarily truncated, I thought that the Chief Secretary went through the motions. He said that the new clause was

"not necessary, because there is already a requirement to produce information on those subjects."—[ Hansard, 1 May 2007; Vol. 459, c. 1480.]

There is such a requirement, but it does not apply to the Treasury outside the Red Book and the Green Book, to which the Chief Secretary referred the House. However, it is hard to see how those documents give the House what it needs, because they provide less detail than other Departments.

Sections 7.42 and 7.43 on page 177 of this year's Red Book cover microgeneration. They contain a slightly more detailed explanation of the two clauses than that provided by the Chancellor in his Budget speech. They do not answer the questions that I asked a few moments ago, such as how many extra microgeneration systems the Government expect to see installed as a result of those measures and what the overall effectiveness of the Government's strategy has been to date. In short, the emerging consensus in the House wants a continuing assessment from the Treasury of how effective the Chancellor's microgeneration measures are, and not merely a description of what those measures entail.

It is not, after all, as though the background to clauses 20 and 21 is completely encouraging. We welcome the direction of travel outlined in last year's microgeneration strategy, but if one compares our record with that of some of our international competitors, we are not setting the pace. By the end of 2004, 200,000 Japanese homes had fitted photovoltaic cells; 300,000 micro-renewable systems have been installed in Germany; more than 10 per cent. of homes in Sweden already use micro-renewable technology to heat their homes; German companies are already generating half the entire turnover of the global wind industry; Japanese firms are at the forefront of fuel cell and hybrid engine technologies; and American companies are leading the way in bringing affordable renewable technologies to the market. We clearly have some way to go to catch up.

The amendments, which, as I have said, are supported by an emerging consensus across the House, will not automatically improve our position, but the case for them—that the Treasury should publish an estimate of how successful it expects those measures to be—is surely unanswerable. I hope that the Minister will accept the principal amendments, Nos. 34 and 36, but in the event that he does not, may I ask him directly, as I did not get a chance to do so in Committee of the whole House, how many schemes the Treasury expects to be brought into effect by these provisions and over what period of time?

Photo of John Bercow John Bercow Conservative, Buckingham 6:30 pm, 26th June 2007

I well recall last year's amendment tabled by Alan Simpson to which, if memory serves me correctly, I put my name. It seemed to me that its rejection was unjustified. Is it not safe to work on the assumption that if the Government did not think that their proposal will be environmentally effective they would not have introduced it, and that they therefore reckon that it will be effective? Given that, they should surely want to trumpet the fact on an annual basis for some years to come.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

Yes, my hon. Friend is entirely right. If the Government expect the scheme to be effective, as they surely do, it does not seem unreasonable to ask them for some figures. I apologise to my hon. Friend for omitting to mention his support for last year's amendment, which I must confess had slipped my mind.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Photovoltaic solar panels cost £11,000 to install in a house, with payback in some 25 or even 30 years. Is it not important that we monitor their success, particularly in the absence of economies of scale, because there is likely to be first, little take-up, and secondly, little benefit to society?

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

My hon. Friend is making the central case for the amendments. It is all very well for other Departments to produce reports, but if all we get is a brief summary of the proposals in the Green and Red Books, it is impossible to monitor how successful they may or may not be.

Amendments Nos. 3, 4 and 5 are drawn from the remarks of the hon. Member for Falmouth and Camborne, who rightly pointed out in Committee of the whole House that there is no good reason to restrict the tax incentives to homes that are producing energy only for domestic purposes. Householders may want to sell any excess electricity that they produce back to the national grid.

Today is the Chancellor's last opportunity as Chancellor to respond to this emerging consensus, and his last chance to ensure that the Treasury takes the departmental lead on microgeneration and becomes a powerhouse for energy efficiency. I commend the amendments to the House.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Mr. Goodman talked about the need for an annual report on top of whatever is in the Green and Red Books. What we see on microgeneration in this year's Red Book makes that case more strongly than anything. It makes statements that seem on the face of it to be incredibly positive, such as:

"The Government today announces that it will allocate a further £6 million—making a total investment of over £18 million—to Phase One of the Low Carbon Buildings Programme for households."

If one considers that statement in the wider context, one realises that at that point the low-carbon buildings programme was suspended altogether, and that when it was restarted at the end of last month, the maximum grant of £15,000 that was available to households had been reduced to £2,500. As Mr. Newmark said, the cost of photovoltaic cells is considerable. Many campaigning climate change organisations have been vitriolic about the impact that the change has had. They would far rather extend to more households the opportunity of taking up this option as opposed to probably making it prohibitively expensive for them to do so. The devil is always in the detail, and often the Red Book is not the place to see all the information presented in the most appropriate way.

I very much welcome the amendments, which reiterate the spirit of those tabled in Committee of the whole House. It is important to make clear the impact of such measures and to be certain that they are not a green fig leaf for a Bill that otherwise contains very few environmental measures and shows the Government's timidity in pushing forward this issue.

The hon. Member for Wycombe referred to an aspect that I highlighted in Committee of the whole House. Clauses 20 and 21 limit the amount of tax relief available on the basis of an individual's intention not to generate more electricity than would "significantly exceed" that needed for personal use. I do not see why it is necessary to limit it in that way. Surely we should be encouraging people to use the maximum capacity that they have available at a personal level.

Moreover, there is already a definition of microgeneration in section 26 of the Climate Change and Sustainable Energy Act 2006:

"the use for the generation of electricity or the production of heat of any plant".

It then lists the sources of energy and technologies that must be used to qualify for that definition: biomass, biofuels, fuel cells, photovoltaics, water, wind, solar power, geothermals and combined heat and power systems. It also defines the capacity of a microgeneration system: 50 kW for the generation of electricity and 45 kW thermal for the production of heat.

Given that we have that incredibly specific definition of microgeneration, why is it necessary for the Bill to limit the scheme on the basis of the individual's personal use and intentions? That makes absolutely no sense and prompts the question of what impact and benefit it will have. How will it affect people's behaviour, and how is the Government able to assess that? Surely, as the scheme is based only on what people intend to use, the threshold will be so low that there will not be any real incentive for them to take microgeneration on board. What happens in circumstances where they mistakenly produce more electricity than they intend for their personal use? What happens if they have a wind turbine and it blows a gale throughout the middle of the autumn? What would be their intention in that situation?

In a whole series of areas, the measure is, on the surface, very welcome, but what is not welcome is the way in which it is limited. On that basis, I commend amendments Nos. 3, 4 and 5, which are virtually identical to amendments tabled in my name and those of my hon. Friends in Committee of the whole House and the amendment tabled last year by Alan Simpson. I would hope that the Minister welcomes them as a way of beefing up what is essentially a very weak green thread running through the Bill.

Photo of Alan Simpson Alan Simpson Labour, Nottingham South

I am grateful to the two preceding speakers for referring to the amendment's point of origin in an amendment to a previous Finance Bill tabled in my name and that of John Bercow. I mention that because it reflects the genuine cross-party consensus that exists in the interests of promoting the shift into microgeneration and the move towards sustainable and renewable energies.

I have never understood why the Treasury has taken a line whereby it is willing to go along with the notion that reporting should be included in legislation as long as that reporting does not extend to the Treasury itself. The Energy Act 2004 placed reporting duties on the Department of Trade and Industry, and the Climate Change and Sustainable Energy Act 2006 placed reporting duties on the Department for Environment, Food and Rural Affairs. That is welcome, but the programmes end up being piecemeal. That starts to hit the credibility, not of the intention of policies or reporting duties, but of programmes' ability to deliver the targets to which the Government claim to be committed.

In a previous debate, there was considerable discussion about regulations that affect new, low-carbon or zero-carbon homes, and we considered the prospect of building 200,000 homes a year that might fall into that category. However, the introduction of microgeneration systems applies more appropriately to the existing 25 million properties in which people live. It is right for the Opposition to draw our attention to the scale of change that has meant the introduction of microgeneration systems into existing properties in other parts of Europe. Although the United Kingdom has a policy commitment, we are so far adrift in practice from our partners or competitors that it is embarrassing.

Perhaps I should have begun by declaring an interest. I have a roof that is full of photovoltaic panels. The house uses them in conjunction with micro combined heat and power generating systems to produce a surplus of energy, which I supply back to the grid. I hope I do not do that on a scale that would put me in breach of the law, but it would be an absurd law that punished someone for supplying too much green energy back to the system and not polluting enough. Indeed, I would relish being prosecuted for such an offence.

Photo of Jeremy Corbyn Jeremy Corbyn Labour, Islington North

I know that my hon. Friend has studied those matters carefully, and I applaud him for it and for his house. Has he made any calculation of the amount of electricity that could be generated if the roofs of this wonderful building were covered with photovoltaic cells? Would we breach the law if we did that?

Photo of Alan Simpson Alan Simpson Labour, Nottingham South

I am sure that we would not breach the law because we make the law. I suspect that a Parliament and parliamentary estate the size of ours could generate more than enough energy to fulfil its needs. We face such transformational challenges not only in Parliament but in society.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

The hon. Gentleman makes an excellent point and I support his personal initiative in using photovoltaic solar panelling in his house. When he decided to install PV on his roof, was the decision based on economics or a desire to be green and show his neighbours that he was being green? If we stuck PV panels on the whole of Parliament, it would be hugely expensive, with the payback taking some 25 years or more.

Photo of Alan Simpson Alan Simpson Labour, Nottingham South

My decision was based on both factors that the hon. Gentleman mentioned. I felt that there was no point in Members of Parliament trying to preach to the public about the scale of the changes that need to happen in our society if we were not prepared to act ourselves. There was therefore an element of walking the walk as well as talking the talk to the decision. At the time, it was also an economic decision because I was one of the last beneficiaries of the Government's programme whereby one received a 50 per cent. rebate on the costs of installing solar panels. I was therefore somewhat disappointed when we changed the programme and moved to the low-carbon buildings programme, thus effectively removing such support for PV. The change has effectively doubled the cost of installing PV panels.

The panels are so expensive in the UK because, by and large, we have to import them and we do that on a minute scale. Fiscal measures that were introduced in Germany show that, if the domestic market can provide for a programme of 300,000 houses with solar roofs, the unit costs of production and installation drop like a stone. Our problem in the UK is our piecemeal set of measures, which continue to treat microgeneration as an infant industry. The fiscal measures that other parts of Europe have adopted mean that microgeneration has become a dynamic and cost-cutting part of their economy.

Hermann Scheer, the architect of the German feed-in tariff law, came over a couple of weeks ago and met the Minister for Science and Innovation. He pointed out that it was calculated that each adult German citizen spends approximately €2,500 a year on energy bills—that is a combination of bills at home and energy costs in the work place. In a Land or region of approximately 1 million people, that meant annual energy expenditure of €2.5 billion. In conventional terms, that region would buy gas, oil and uranium from an external source and coal from internal and external sources. Expenditure would go outside the region for energy sources that are beginning to run out. By actively promoting microgeneration, regions have instead put the bulk of that €2.5 billion a year into their economies. The multiplier effect of that spending creates jobs and skills and generates taxes in the regions. Mr. Scheer argued to our Minister that microgeneration is not a cost but becomes a dynamic cost-saving measure that results in huge economic security.

As was said earlier, such measures have given Germany 50 per cent. of the world market in onshore wind turbines and 15 per cent. of the world market in PV. We need to measure against that the effectiveness of our fiscal strategies for promoting a similar sort of dynamic in the UK economy, and our place in the global economy in promoting microgeneration.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow 6:45 pm, 26th June 2007

The hon. Gentleman commendably puts his money where his mouth is in his domestic power generation. Would the latest measure in the low-carbon buildings programme, to which he referred, to limit the amount of grant per household to £2,500 have deterred him from proceeding with his installation? If not, does he anticipate that it will have a significant impact on reducing take-up throughout the population?

Photo of Alan Simpson Alan Simpson Labour, Nottingham South

It would not have deterred me because I had a different starting point. However, if asked to determine whether that made economic sense in the short term, I have to say that the answer would be no. All those with whom I work in the microgeneration industry and all those households that are desperately keen to be part of the process wring their hands in despair at the muddle into which we appear to have got ourselves in the low-carbon buildings programme. I understand that the programme was underfunded to begin with, and that there was a danger we would run out of funding for it within the first couple of months of the financial year. Trying to ration it out on a monthly basis has meant that, unless someone is on the phone in the first hour of the first day of each month, their prospects of getting into the programme are next to none.

There is clearly a level of public interest in the programme, but that does not make the programme adequate. It ought, however, to give the House an indication of how hungry society is to be part of such a change, and it ought to give the Treasury an indication of why it is so important that it should give a lead on the reporting of the fiscal effectiveness of the measures that it puts in place in the Budget to support that kind of shift. If what we are doing is right in principle, but the scale of intervention is simply inadequate, Parliament needs to be big enough to acknowledge and understand that, and to do something about it.

We also need to acknowledge that, in every Budget that has been presented since 2002, there have been measures to address energy efficiency in the home and to address microgeneration and the shift to sustainable and renewable energies. Having said that, it would be hard to say that those measures had been anything other than piecemeal, so far as the Treasury is concerned. So far, they have been restricted to changes in the rate of VAT and exemptions from VAT. They have also been supplemented by fiscal measures relating to capital exemptions. Those provisions are to be welcomed, but they do not, in themselves, make for a coherent programme.

There needs to be a new range of fiscal measures if we are to make our programmes coherent. I am happy for the House to have an argument about what those measures should be. At other stages, we have debated the case for attaching a reduction in the rate of stamp duty to the introduction of microgeneration systems in the home. The coherence of that argument is that it would be at the point of transfer of a property that people would look most closely at the financial savings that could be made if they had introduced microgeneration systems, or if they did so within six months, in which case they could get a rebate. That is a perfectly coherent case for fiscal intervention at a point where families and households make those decisions about change.

An alternative would be to consider fiscal intervention measures that could be applied in an ongoing way to address annual savings in household expenditure. That could take us into the arena of entitlements to council tax rebates or of the introduction of feed-in tariff systems. Such systems have now been introduced in 19 other countries across the expanded European Union; Britain is one of the few exceptions. It would be perfectly possible for the Treasury to put in place fiscal measures that would promote such a shift to feed-in tariffs. That would afford households the long-term security to work out what savings could be made by taking on a substantial capital investment in the short term that could be set against substantial cash savings that could be planned over a number of years. I am somewhat agnostic as to which of the measures makes the most sense. I would be happy for us to adopt any of them, or any combination of them. They will not happen, however, unless the Treasury puts itself at the centre of the reporting process.

There is a further option in which the Treasury might be interested. Only a few months ago, the Government announced that they wanted a lead from a number of core cities to promote energy services companies. They asked for ideas on how cities could lead that initiative—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The hon. Gentleman is straying a little wide of the amendments before us. Perhaps he could address his remarks to them.

Photo of Alan Simpson Alan Simpson Labour, Nottingham South

The point that I was making, Madam Deputy Speaker, was that microgeneration is at the core of energy services companies, because they relate to how we use microgeneration at a collective level to support community energy needs.

In the Netherlands, fiscal measures have been used to support the introduction of microgeneration systems involving "hot road" technologies in school car parks and playgrounds, and in the car parks at health centres. Those measures are driven by fiscal incentives that get built into the costs and allowances that apply at the design stage in the framework of the approach to the built environment in the 21st century. That is a result of a Treasury lead that changed the rules of the game.

As I said earlier, it frustrates me that, during this Parliament, in every Bill that has been enacted in which targets have been set on climate change, fuel poverty eradication and carbon reduction, the Treasury has exempted itself from the duty to report. All the evidence from elsewhere in Europe and across the globe shows that real change comes when it is driven from the financial heart of the Government. Such change cannot happen if it does not start with a duty to report. What follows from a duty to report is that, when we know what will work and what will not, we can move on to a proper debate about the scale and direction of the programmes that will work. Until we get the Treasury to take ownership of that central co-ordinating role, however, we shall be left planning in fragments.

If this is the biggest challenge of our time, it will be sad to record that, at the heart of the Government, when Members on both sides of the House and members of the public in every part of the land were knocking on the door, there was no one in at the Treasury. I hope that the Minister will accept the amendments and give the lead that Parliament and the public have a right to expect.

Photo of John Redwood John Redwood Conservative, Wokingham

I rise to support the amendments, because I share the impatience of the Conservatives and the Liberal Democrats, and of Alan Simpson, at how small the incentives are in the Bill as drafted. The amendments would make some contribution towards making them a little more generous.

There is a growing view in the House and outside that much more power could be generated in environmentally friendly ways by individuals and families through their own domestic property. Of course we are not talking about people having a large power station in their back garden and abusing the thing; the Government have made it quite clear that the measures are limited to microgeneration schemes, and they have a rather low threshold for their definition of such schemes. It is therefore even more strange that they should double up the restrictions by putting in clauses that prevent people from producing a little more power than they need for their own requirements on average over the days, the weeks and the months as they look at the balance in and out of their system. I hope that the Minister will succumb to the pressures from inside and outside the House and at least accept the amendments that get rid of that unnecessary restriction.

The tax reliefs on offer in the Bill as drafted are not very generous. The allowance on chargeable gains is unlikely to produce any money for most of the people who might take up the scheme. We are concentrating only on the income tax relief, which relates only to surplus generated power, so if we are told that there can be no installation that might produce surplus power on average, it means that no tax relief is on offer. The way the definitions will be phrased under the legislation means that they will give with one hand and take away with the other.

The House, apart from Members on the Treasury Bench, is trying to persuade the Government to be more generous, ambitious and bold in future by including the requirement for annual review. We hope that will bring the Government two realisations: first, that the tax relief they are offering at present is almost zero and that from zero will come little; and, secondly, that as the schemes will not catch on quickly because the tax relief on offer is far from generous, perhaps in a future year, in a future Bill, it will be seen that something bolder and bigger is needed.

Photo of John Bercow John Bercow Conservative, Buckingham 7:00 pm, 26th June 2007

My right hon. Friend is forging a progressive consensus with Alan Simpson to which I am a happy subscriber, but I am puzzled and my brow is furrowed. Can my right hon. Friend explain to the House why there is an instinctive disinclination on the part of the Treasury annually to report? Is it because the Treasury thinks that others report to it and that it is not in the business of lowering itself to report, or is there a better reason that has hitherto escaped me?

Photo of John Redwood John Redwood Conservative, Wokingham

Tomorrow the progressive consensus takes over at No. 10 Downing street. We hope that the obstacle has been the current Prime Minister and that when we have a new Prime Minister who wishes to forge a progressive consensus he will want to join the hon. Member for Nottingham, South, my hon. Friends the Members for Buckingham (John Bercow) and for Wycombe (Mr. Goodman), me, and even the Liberal Democrats on this occasion, to show that he is truly persuaded that the progressive consensus is now in favour of much more microgeneration and that he understands furthermore that fiscal incentives are an extremely good way of changing behaviour.

The House knows that I do not normally favour tax increases and regulations to change behaviour. However, if a tax reduction is on offer it is more my kind of behaviour-changing inducement, so I recommend it strongly to the Government if and when they want to join the emerging progressive consensus. I have often found that the ideas I propose in the House are a little ahead of their time, but this may be one that is not so far ahead of its time that we shall have to forgo all value from it for the foreseeable future.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

In achieving the consensus, does my right hon. Friend see a day when the new Prime Minister might install a wind turbine on the top of No. 10 Downing street?

Photo of John Redwood John Redwood Conservative, Wokingham

We shall probably not see that any time soon, even with the change of tenant at No. 10 Downing street, but as the hon. Member for Nottingham, South said, perhaps the House can do rather more under the provisions of the clause to provide examples of how we could generate more of our own energy. Members have already said that we generate a lot of hot air that could be used. I suspect we should need a spin turbine rather than a wind turbine, and the new tenant at No. 10 may be particularly good at offering a model that would offer facilities from which he and we might benefit.

I urge Members on the Treasury Bench to understand the strong feeling that much more could be done. My hon. Friends and others clearly understand that at present the technology is not cheap enough to take off across the board, which is why so few people are adopting it, apart from those such as the hon. Member for Nottingham, South and my right hon. Friend the Leader of the Opposition, who are showing the way. However, to get our constituents enthusiastic about microgeneration we need to introduce real tax relief. The provisions do not do that; the amendments would help a little, but the amendment that requires an annual report might in due course persuade even the Government that they should join this exciting progressive consensus.

Photo of Jeremy Corbyn Jeremy Corbyn Labour, Islington North

The Leader of the Opposition and his individualistic wind turbine sum up Tory policies—they are completely individualistic. If, as my hon. Friend Alan Simpson has just pointed out to me, the Leader of the Opposition had gone for a community wind turbine, he might have had greater success and his chimneys would probably be safer.

Photo of Jeremy Corbyn Jeremy Corbyn Labour, Islington North

Absolutely. Some collectivism is still alive and well on the Labour Benches, too.

I support the proposals for annual reporting on microgeneration. If we are agreed on a policy of support for the idea of microgeneration, especially photovoltaic cells on the roofs of houses, it is obvious that we should consider it every year to see how successful or otherwise it has been and if need be change policy to encourage it further. A large number of people want to put photovoltaic cells on the roofs of their houses so that they can generate some or all of their electricity, with any surplus going into the grid. However, the costs are impossible, partly because, as my hon. Friend the Member for Nottingham, South pointed out, the grant system has ended and been subsumed into the carbon-neutral homes scheme.

Secondly, because there are so few places in the country where such schemes operate, the cost of the cells is enormous. That need not be so. We simply need to provide a reasonable grant system to encourage people to produce such energy, and reasonable tax incentives. In addition, where grants are awarded for improvements to any public or private buildings a condition should be imposed, such as the standards that apply to insulation and windows, that there should be a degree of microgeneration through photovoltaic and water-heating cells. That seems eminently sensible.

As my hon. Friend pointed out, if we imposed such rules on new properties it would be helpful. We hope that there will be a big increase in the development of council and social housing, which would be a good opportunity to experiment and to encourage the use of more photovoltaic cells. However, the real issue relates to improvements to existing properties; for example, when people replace roofs or undertake major regeneration there would be a good opportunity to install microgeneration systems.

The Treasury probably agrees with almost everything that has been said on both sides of the debate, so why cannot the Government accept the amendments? They have been proposed previously and the arguments have been well rehearsed. The argument for considering the success of the provisions is blindingly obvious. If we do not want to go down the road of developing more power stations, the answer lies in our existing buildings, where we can do something towards conserving energy—we have already gone a long way in that direction—as well as generating electricity. Towns in Germany, Austria and elsewhere have taken huge steps in that direction and have thus become centres of excellence for the development of microgeneration technology. Why cannot we do the same? Why are we holding ourselves back when we so readily understand and welcome the arguments?

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I turn first to amendments Nos. 3, 4 and 5. I have no need to rehearse the careful arguments advanced earlier in the debate today and in Committee on the issue. However, in the Committee of the whole House, the Chief Secretary implied that the question was one of intention, not of the volume of production—of which we have heard much today. The right hon. Gentleman said that the Government's proposals on microgeneration were

"targeted at people whose primary intention is to consume in their home the electricity that they generate".—[ Hansard, 1 May 2007; Vol. 459, c. 1479.]

That may be so, but clauses 20 and 21 are drafted in terms of the amount generated, not the intention behind the generation. Will the right hon. Gentleman attempt to put a figure on what he believes constitutes significant excess?

Secondly, does the Chief Secretary anticipate any adverse impact on domestic energy efficiency if people realise that there is little incentive or indeed some risk in generating a significant excess? We have heard much about that point this afternoon. Lastly, would not it be simpler to forget the idea of intention altogether and stick with the generation limits already contained in the Climate Change and Sustainable Energy Act 2006?

There is a compelling need for the Government's policy on incentivising microgeneration to receive some scrutiny, which amendments Nos. 35 and 36 will provide. As we have heard, the most significant challenges faced by those wishing to install microgeneration are the high start-up costs and, consequently, the length of time needed to justify the initial capital costs. In principle, at least, exempting from income tax the sale of electricity from domestic microgeneration is a step forward, as it would seem to speed up the return on that initial investment. I suspect, however, that the measure will make not a jot of difference; it is a classic case of gesture politics.

First, there is no evidence whatever that HMRC has attempted to collect any tax in that context. If it had done so, the policy could have been curtailed in a memorandum of understanding rather than in legislation. Secondly, the sums involved, I suspect, will be truly minute. In any event, the Government are committed to clamping down on a significant excess of generating capacity, which suggests a policy that is pulling in two directions at once. We have no idea how successful the provisions are expected to be, or how it is thought that they will influence behaviour. While the Government are arguing over pennies, the pounds seem to be going astray. The low-carbon buildings programme seems to have restarted, but the general impression has been one of a policy in disarray and a lack of co-ordination across Government. Waiving income tax on electricity generation will not address the central issue of capital costs, and how else it can contribute remains to be seen.

A report on the benefits of the policy would be most welcome so that the issue does not continue to obscure the significant challenges faced in the quest to take microgeneration into the mass market. Clearly, we are not there yet. Recently, I met representatives of British Gas to discuss the latest phase of its innovative scheme to incentivise microgeneration: Members with an interest in climate change and energy efficiency will have heard me wax lyrical previously about its successful partnership with Conservative Braintree district council to offer council tax relief in return for cavity wall insulation. That scheme has now been extended to a subsidy of microgeneration technology. However, the numbers are still, at least to my mind, marginal. It costs £11,000 to install a photovoltaic solar panel or, slightly better, £4,300 for solar thermal installation. In return, participants qualify for a one-off council tax rebate of £500 and £300 respectively, in addition to eligibility for a subsidy of about 10 per cent. from the low-carbon buildings programme. Those technologies require some 25 or perhaps 30 years to repay the investment, and are unlikely to have mass market appeal.

I would like a report to be made to Parliament, as the amendments propose, to see whether the Government's policy has any impact on the numbers. If it does, I shall applaud them. The British Gas representatives whom I met wryly observed that one of the reasons for the scheme's success was that people preferred a tax rebate to a subsidy, even if the amount is the same. In the same spirit, perhaps a tax-free income from microgeneration will prove to be a similarly successful incentive. We shall have to wait for the report called for by the amendments, which I hope the Government will support.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow 7:15 pm, 26th June 2007

I wish to speak briefly in support of the amendments, which are to clauses that I recall describing in Committee as a "puny measure"—because of their impact on the revenue, and because they illustrated the Chancellor's attempts to position the Budget as a green Budget without having any significant impact on take-up of microgeneration. The amendments will therefore highlight and expose for the Government and the public at large the fact that the measure will be meaningless.

There are two inconsistencies in the Government's approach to microgeneration and renewable energy. First, as the Chief Secretary will know if he has read the National Audit Office's report, the Government have an opportunity to encourage renewable energy in their own building programme. They spend some £3 billion a year, across different agencies, on new buildings and refurbishing existing premises, and they have committed themselves to introducing energy efficiency into those buildings. But when it comes to actual measures—surprise, surprise—they find, as my hon. Friend Mr. Newmark was saying, that the lack of cost-effectiveness is unfortunately prohibitive. In the case of Nottingham prison, it would have cost more than £2 million to install the energy efficiency measures that the prison authorities wanted; they did not have the budget, so none of them was installed. In the public sector, the payback on solar panels is approximately 18 years. Action taken on such measures would be far more effective than the clause under consideration.

Secondly, in relation to the low-carbon buildings programme, which, as other Members have highlighted, has been introduced in a shambolic fashion, the companies proliferating around the country trying to help domestic consumers to make such installations have been subject to regulatory overload in the form of the Building Research Establishment. It has now started a system of registration of those installers—a registration process that is adding considerably to the costs and risks of being in business. Most of them have relied on the low-carbon buildings programme grant to encourage customers to take up installations. Not only do they find that those grants are cut from month to month and are unreliable as to availability, but they are now being charged to be registered as installers—£1,800 to get registration, plus an additional £600—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The hon. Gentleman is going rather wide of the amendments.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

The point of my illustration, Madam Deputy Speaker, was to show that far from easing microgeneration, the Government are making it more difficult through such measures. The Chief Secretary ought to address those issues, rather than introduce gesture clauses.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

We have had an interesting debate, marked by passion and commitment across the House. We have had debates of a similar tenor on such matters previously.

Let me remind the House of the purpose of clauses 20 and 21. They aim to remove a barrier, or hurdle, which has discouraged householders from investing in microgeneration. As we have heard, microgeneration is defined in section 4 of the Climate Change and Sustainable Energy Act 2006. That Act requires the Secretary of Sate to consider by next year whether the introduction of targets for microgeneration is appropriate, and to report annually on measures taken to meet that target. We will return to that in relation to the amendment about reporting. The list of eligible technologies is set out in that Act.

The low-carbon buildings programme has been discussed this afternoon. Between 2002 and 2006, we provided £11.6 million of funding for householder microgeneration installations. The low-carbon buildings programme will provide householders with £18.7 million over two years, including the additional moneys announced in the Budget—a significantly improved level of funding. We are aiming, however, for a sustainable UK industry that is not dependent on subsidy. Grant funding for householders has certainly played its part, but we need to look to longer-term measures that will support the industry in future, such as the energy efficiency commitment, the removal of planning barriers and the zero-carbon homes commitments, including the removal of stamp duty, which we debated earlier.

Photo of David Drew David Drew Labour, Stroud

I hear what the Chief Secretary says, but surely the policy would be more credible if we were trying to achieve economies of scale. One problem with the low-carbon building programme is that it is aimed at individual households. To make a real difference, as we see in parts of Europe such as Germany, we need to generate by using renewables on a street-by-street or estate-by-estate basis. What are the ways in which the Government are seeking to achieve that?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

We are considering a variety of ways, in particular through the renewables obligation. It is a powerful market-based mechanism that is a lever for bringing about the changes that we need. It introduces advantages for householders, but even more advantages for generators. Offshore wind generation has started and other new technologies are being introduced. That is how we can achieve a sustainable and long-term way forward, avoiding the huge costs of some of the feed-in tariff systems on the continent.

Photo of Alan Simpson Alan Simpson Labour, Nottingham South

Will the Chief Secretary reconsider his point about huge costs? As I understand it, according to the figures, the scheme in Germany cost its Exchequer nothing last year, and it cost the energy industry a total of €15 per household bill per year to finance. So far as the Germans are concerned, the claims of huge costs do not stack up.

Will the Chief Secretary also reconsider what he said about renewables obligation certificates? It would help if the Treasury could examine whether they work in terms of accessibility. I am a generator of surplus energy who has been defeated by the process of claiming ROCs. If those of us who are anoraks cannot get through the maze, then those who are keen but are not anoraks will give up, too, and the system of ROCs will defeat all the Government's intentions.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

The renewables obligation is proving to be an effective lever for raising the proportion of electricity generated from renewable sources. We have seen that rise pretty sharply over the past few years in response to the renewables obligation. There has been an animated debate in Germany about the costs of the feed-in tariff and other processes. I did not follow the election debate there closely, but I am told that that was a significant element of it. It is certainly not the consensus in Germany that the feed-in tariff measures are inexpensive. I am sure that one can present the figures in a variety of ways, but there is serious political concern about the costs of the arrangements.

I am disappointed to hear that my hon. Friend has been unable to claim any ROCs for his own electricity generation. I shall take that point away and consider it. I agree that the mechanisms need to be accessible to change behaviour. There is no doubt, however, that the renewables obligation is starting to bring about the large-scale changes that we need for an up-scaling of electricity generation from renewable sources.

The primary purpose of microgeneration is for people to generate their own domestic electricity, but they can, and are most welcome to, sell surplus electricity back to the national grid, as my hon. Friend has done. ROCs are available. I am confident that people are receiving those from domestic generation, although I shall check that point further. The certificates can then be sold to energy companies.

However, receipt of income in that way raises the question of liability for tax. Uncertainty about the tax position has been a disincentive to the take-up of microgeneration. Clauses 20 and 21 aim to remove that disincentive. Together they ensure that householders do not face a tax bill by investing in microgeneration equipment for their own domestic use. They exempt from income tax and capital gains tax the proceeds from the sale of surplus electricity and from the receipt and disposal of ROCs. They remove the uncertainty and therefore the disincentive. I think that the House will agree that that is a welcome change.

The precise value of the income tax exemption will depend on how much surplus electricity a householder will generate. A householder can expect to make between £120 and £240 a year from a wind turbine and perhaps £40 a year from a solar photovoltaic system, although that will depend on the weather conditions and the contracts that are in place. We announced in the Budget that the Government will ask Ofgem to examine how householders can benefit more from the prices paid to them when they export electricity to the grid. Perhaps that will give us an opportunity to address the problem of microgenerators accessing ROCs.

The tax exemptions are available only for householders who have installed microgeneration primarily for their own domestic use. They do not apply to individuals who invest in microgeneration with the intention of selling surplus electricity or of dealing in ROCs as a commercial activity. That is right. The test of significantly exceeding the amount that they use themselves is simple and straightforward, and it ensures that the tax exemptions are properly targeted.

It has been argued that the "significantly exceeding" test should be removed from both the exemptions, so widening the scope of the tax exemption to include those individuals who are seeking to make a commercial profit from domestic microgeneration. I argued in Committee, and argue again now, that that would be ill advised. The clauses provide clarity for householders who are involved in microgeneration. They ensure that unless an individual is trying to make a significant profit, he will not face a tax charge as a result of microgenerating electricity.

Photo of John Redwood John Redwood Conservative, Wokingham

What would happen if a family of five put in generation equipment that was suitable for their requirements and shortly afterwards the children went to university, one of the two adults left home, the family broke up and only one person was left living in the house? Would that person be deemed to be generating far more power than he should and therefore have a tax liability?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

The test is based on intention. Most householders are not installing microgeneration systems that substantially exceed their total consumption in a year. As long as that is the case at the point of installation, depending on the circumstances, I do not think that they would be caught. However, it is right that a business based on commercial microgeneration should pay tax on its profit just like any other commercial activity. To do as the amendments propose would be unfair. They address a problem—uncertainty about the tax position—that does not exist if the primary purpose is commercial. It would be odd to give tax incentives to electricity companies to set up power stations in people's homes, to use the right hon. Gentleman's phrase. Why should there be a tax unfairness against renewable generators? That would be the wrong way to go. The "significantly exceeding" test is the right approach. I hope that the amendment will be withdrawn.

By deleting clause 21, amendment No. 35 would remove entirely the exemptions for both income tax and capital gains tax which apply to the receipt and sale of ROCs. That would simply perpetuate the uncertainty—indeed, it would make the uncertainty worse for householders who have invested in microgeneration equipment for their home—and undermine the aim of removing uncertainty, which from the tenor of the debate is something that I think the whole House would support. That uncertainty has discouraged take-up of domestic microgeneration. Removing the clause would make the position worse again.

Finally, I come to amendments Nos. 34 and 36, which would impose a statutory obligation on the Treasury to publish an annual report on the effectiveness of the new income tax exemptions. I noted in particular the heartfelt nature of the calls by my hon. Friend Alan Simpson that the Treasury should take that on. I know that we have had this debate before, but I make the point to the whole House again. Last year, the Government published their microgeneration strategy, which included the commitment to assess progress on a continual basis and publish a report each year as part of the annual report on the energy White Paper. There is no case for duplicating that with another report along those lines.

Nor do I agree with my hon. Friend that nothing ever happens unless the Treasury takes charge of it. That is a counsel of despair. The Secretary of State with responsibility in that area rightly has the lead responsibility and has to report in collaboration, of course, with the Treasury. I can tell the House that Treasury officials have met representatives of the microgeneration industry a couple of times just in the last six weeks. The Treasury is firmly engaged with this issue, but does not have the policy lead, which rightly rests with the Secretary of State, and that is also where the reporting duty should rest.

Photo of Jeremy Corbyn Jeremy Corbyn Labour, Islington North 7:30 pm, 26th June 2007

I am delighted to hear that the Treasury is firmly engaged in this process, and that is good news, but my right hon. Friend understates the power of the Treasury. Clearly there are tax issues and costs involved, as well as huge benefits for the community. What is the problem with reporting on microgeneration issues once a year? Decisions made by the Treasury will have a huge impact on whether or not we promote microgeneration.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Of course the decisions of the Treasury have a wide impact on a broad range of issues, but it would be wrong to say that therefore the Treasury should lead on all of them. The appropriate Secretary of State is the right person to lead and, in this case, there is a clear statutory obligation to annual reporting. The annual reports should address the kind of issues that we have discussed in this debate and, no doubt, information from the Treasury will enable those reports to be completed. However, it would be a mistake to say that the Treasury should lead on this or all the other issues to which one might apply the same argument. The right person to make the report is the appropriate Secretary of State.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

As an indication of the Treasury's willingness to report, will the Chief Secretary now answer the question that I put to him initially? How many microgeneration schemes does he expect these tax reductions to produce?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

As I said earlier, the Climate Change and Sustainable Energy Act 2006 requires that the Government consider, by November next year, whether it is appropriate to introduce targets for microgeneration and, if they are introduced, to report annually on things done to meet those targets. That decision will be made by November next year —[ Interruption. ]

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The level of conversation in the Chamber is rising. Members who have been present throughout the debate are entitled to hear the closing remarks.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I am grateful to you, Madam Deputy Speaker. I am about to draw my remarks to a conclusion—[Hon. Members: "Hear, hear."] I note the enthusiasm of the House for my concluding observations. The amendments are unnecessary and I ask the House to reject them.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

This has been an interesting debate and it has formed itself around an observation by Alan Simpson. He argued that what one does not report on, one is less likely to be held accountable for. What one is not held accountable for, one is not likely to have much of an incentive to improve. If the Treasury were to report once a year on the effectiveness of its microgeneration strategy, it would set out clearly how successful it expects the strategy to be; it would raise expectations and standards; the Treasury Committee would take great interest in it; and it would enable the Government to be held to account for what they are doing under these two clauses.

The main amendments that we propose, amendments Nos. 34 and 36, are simple. They ask the Government to give an assessment not of their wider strategy, but simply of how successful they expect the clauses to be.

Photo of John Bercow John Bercow Conservative, Buckingham

My hon. Friend will agree that the Chief Secretary is a prodigiously intelligent fellow, but although we listened intently we have not heard of any ill effect that could possibly flow from the adoption of the amendments. As an earnest of good intent, therefore, why does not the Chief Secretary accept them?

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

The Chief Secretary has simply argued that it would be duplication for the Treasury to produce a report about tax, which is its responsibility and not the responsibility of other Departments. The Chief Secretary, who is indeed prodigiously intelligent, was radiating institutional resistance to the idea that once a year the Treasury should be required to report on how effective the measures are likely to be.

I cannot ask the House to vote on all the amendments, but I will pluck out the main one, so it is our intention to press amendment No. 34 to a vote. We regret that, in his last full day as Chancellor, the Chancellor and his Ministers have not taken the chance to join the consensus that has been demonstrated across the House this evening. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 34, in page 15, line 17, at end insert—

'(3) The Treasury shall prepare and lay before the House of Commons annually a report on the effectiveness of the tax relief mentioned in subsection (1) in achieving its objectives, with particular reference to the change in the amount of electricity generated by microgeneration systems.'.— [Mr. Paul Goodman.]

Question put, That the amendment be made:—

The House divided: Ayes 205, Noes 269.

Division number 153 Orders of the Day — Clause 20 — Income tax exemption for domestic microgeneration

Aye: 205 MPs

No: 269 MPs

Ayes: A-Z by last name


Nos: A-Z by last name


Question accordingly negatived.