Combined Heat and Power

– in Westminster Hall at 4:00 pm on 6th January 2004.

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Photo of Ms Jane Griffiths Ms Jane Griffiths Labour, Reading East 4:00 pm, 6th January 2004

I have been seeking to introduce this debate since visiting the technology centre, located in Peterborough, of a Reading company, MicroGen Energy. I am therefore pleased to have secured today's discussion on this important topic.

Photo of Ms Helen Clark Ms Helen Clark Labour, Peterborough

Peterborough, as is well known, is one of only four environment cities in the country, so it is very appropriate that the facility for this technology is based in the city and in its environs, in the constituency represented by Sir Brian Mawhinney. Does my hon. Friend think that Government assistance for this technology could help the United Kingdom to become a world leader and develop a UK lead in the manufacture of this boiler? I am very grateful to MicroGen for allowing my hon. Friend and me to visit the centre.

Photo of Ms Jane Griffiths Ms Jane Griffiths Labour, Reading East

I thank my hon. Friend for her intervention and for helping to arrange the visit to the site close to Peterborough. I believe that the UK could become a world leader in the manufacture of this technology, and I shall return to that.

The Government have accepted that human beings and their activities have an impact on our environment. An increasing number of Government policies have been introduced with the aim of reducing our impact on our climate and achieving our Kyoto targets for reductions in CO2 emissions. I must say, with some disappointment, that what the Government have done has not always been in harmony with those targets. I refer to the subject of previous debates and the purchase of air conditioning systems. Numerous Departments, including the Treasury, have installed air conditioning units during recent building projects that are contrary to the Government's own climate change policy. I make no apology for taking the opportunity to raise that matter when a Treasury Minister was able to respond to me in person.

To give credit to the Treasury, however, a number of measures have been introduced to help to influence people's behaviour towards activities that do not encourage climate change, and away from those that cause it. Those include the climate change levy, the emissions trading scheme and the use of taxes on road transport, which is where the emission of climate change gasses is growing most quickly. However, I must say, by the by, that I am disappointed that the fuel duty escalator was abandoned some considerable time ago, and I would like to ask the Minister whether that, or something similar, could be reintroduced in the next Budget or in the near future. Perhaps I digress.

The urgency with which we must deal with this problem is shown by just two pieces of evidence of the impact that we are having on the environment: four of the five warmest years recorded in England since records began in 1772 were after 1990, and a UK record temperature of 38.1o Celsius was recorded in Kent on 10 August last year. In 2002, numerous local and regional records were set for windstorms, rain intensities, floods, droughts and temperatures.

My debate today is on tax and other financial incentives for home combined heat and power. I have shown that there is an accepted problem of climate change, that the Government have agreed to international treaties to take action against it, that they have policies and programmes to tackle the problem, and that the Treasury has accepted the use of fiscal measures to encourage the development and use of measures and technologies that do not effect climate change. Figures from the House of Commons Library show that 27 per cent. of carbon dioxide emissions are from domestic sources. To achieve the energy White Paper targets of a 20 per cent. reduction in CO2 emissions by 2020 and a 60 per cent. reduction by 2050, the domestic sector must play its part.

I have pointed out that this debate arose following a visit to see the technology of a Reading-based firm last September, but I want to make it clear that, although I secured the debate following contact with a firm in my constituency, I am talking about not only that company, but support for the technology.

In preparing for the debate, I contacted other firms involved in developing home CHP. Of course, support for home CHP technology will assist the firm in my constituency but, as I said, I am lobbying in favour of the technology. The energy White Paper states that the cheapest, cleanest and safest way of addressing our energy policy objectives is to use less energy. Some 27 per cent. of carbon dioxide emissions come from households, so households have an important part to play. Half of all domestic CO2 comes from boilers, despite the growth in the more efficient condensing boilers.

Micro-CHP is a home heating and power system—one boiler that can generate heat and light. It can 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.

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.

Micro-CHP has all that going for it, so why do I seek tax and other fiscal incentives for home—or micro—CHP? Micro-CHP boilers offer average savings of £150 a year and are cheaper than other boilers over the full lifetime, but they are more expensive to buy, as most new technology tends to be. They also suffer from anomalies in the tax system. There is 5 per cent. VAT on the use of energy, but 17.5 per cent. VAT on the purchase of micro-CHP. Market research carried out for MicroGen, the micro-CHP manufacturer in my constituency, shows that customers are excited by the technology and are attracted to the energy savings as well as the idea of independence and control over power and fuel supply, but they do not value the environmental benefit highly.

In addition, installers like to install known technology and are risk averse. Most importantly, perhaps, customers are disproportionately influenced by upfront costs. We should remember that most people do not plan to buy a new boiler. More often than not, buying a new boiler is a distress purchase and people are unhappy about it.

The cost has a great impact on the purchase of a boiler, and the tax system encourages the use of energy rather than investment in technology that reduces energy use. Would it make a difference if the VAT on a new boiler was reduced to 5 per cent? Evidence from two different sources suggests that it would. Condensing boilers were introduced to the Dutch market in 1980. There were environmental benefits to installing the boilers and they were cheaper to run. They were also more expensive to buy. Throughout the 1980s, sales of condensing boilers in Holland accounted for about 10 per cent. of annual gas boiler sales. In 1989, however, a major subsidy scheme was launched and, within six years, condensing boilers accounted for nearly 50 per cent. of all gas boiler sales. Then, building regulations were introduced requiring the introduction of condensing boilers. That saw sales in Holland reach more than 90 per cent. last year.

Contrast that with the UK. In 1990, sales in the UK were also running at about 10 per cent. Following awareness campaigns, voluntary agreements and low-level subsidies throughout the 1990s, they still accounted for 10 per cent. of Centrica's gas boiler sales. New boilers are bought only every 15 years or more. Imagine all those less-efficient boilers installed through the 1980s and 1990s that are still with us. Think of the people trying to heat homes who are spending more money than they should. Think of the carbon dioxide we have emitted that need not have been emitted.

The second set of evidence relates to the UK experience. As I said, in 2001 condensing boilers accounted for 10 per cent. of Centrica's central heating sales. This year, after two years of the price-matching scheme, which offered condensing boilers for the same price as conventional, sales of condensing boilers have more than tripled and account for an average of 35 per cent. of all sales. This is clear: fiscal incentives to encourage people to invest in boilers that save families money, help the environment and help to secure safe generating capacity work.

There is another fiscal incentive that could play a large part in developing a market. Registered social landlords purchase and install boilers in large numbers. The change that would most help to develop a market in this area relates to enhanced capital allowances, because registered social landlords typically do not purchase new boilers, but lease them. Enhanced capital allowances would help to make the boilers more competitive for registered social landlords and would help residents of social housing to benefit from reduced heating costs, as well as to play their part in reducing our carbon dioxide emissions.

What would be the cost to the Treasury of such measures? Estimates—again for MicroGen—show that if nothing is done, around 150,000 CHP boilers will be sold by 2010. With a 5 per cent. VAT rate, however, the volume would be almost 400,000 by 2010. That would make a massive difference to the environment, to low-income families, to the security of generational supply and to UK manufacturing. The annual cost of that reduction in VAT for 400,000 CHP boilers by 2010 is estimated at £25 million. Using the Government's own recommended figures for the social cost of carbon, independent empirical research-based analysis predicts that reducing the VAT on micro-CHP would result in a benefit, not a cost.

Why push for action now? Why does it matter that something is done soon to introduce fiscal incentives for home CHP? As we saw with the development of condensing boilers, and from the market research, the bigger upfront cost for the new boilers means that the market is not likely to develop as quickly as it would if incentives were introduced. If we were talking about petrol that might not be a problem; a wait for a year or two while the Treasury carried out a consultation or negotiations would not matter so much. However, this area is different. People buy a new boiler only every 15 years. The greater the delay, the more people will buy boilers that do not benefit the environment and do not save them money, the longer it will be before we gain security of supply, and the fewer the opportunities we will offer to British manufacturing to get a head start in a new and developing technology.

What is even worse is that once an inefficient boiler is installed, it cannot be changed without enormous inconvenience and extra cost. Every time someone chooses to install a traditional boiler rather than a micro-CHP boiler, the opportunity to save more than 20 million tonnes of carbon dioxide over the next 15 years is lost, and another will not arise for another 15 years.

Perhaps most importantly of all, there is the Government's commitment in the energy White Paper to produce a domestic energy efficiency implementation plan by 24 February. It has already been stated that that plan will include fiscal measures. If the Government wait for the Budget before announcing measures to correct the market failures and barriers, the implementation plan will not be able to include those measures or it will have to be delayed until after the Budget. Either way, we all lose out.

On Thursday 18 December last year, those matters were raised in Treasury questions. In response, the Economic Secretary said that changes to capital allowances would have to wait for the completion of a review of corporation tax and that the matter of 5 per cent. VAT relied on negotiations in the European Union. The Economic Secretary accepted that there was frustration in the industry about the time it is taking to resolve the matter, although no indication was given of when it might be resolved. Will the review of corporation tax be completed before the publication of the energy efficiency implementation plan or the Budget? Accepting that the outcome of negotiation with others is difficult to predict, does the Minister expect that negotiations within the EU will be completed before the publication of the energy efficiency plan or the Budget?

I hope that I have shown that the development of a market for micro-CHP has benefits for families, because it reduces fuel bills; for climate change, because it reduces CO2 emissions; for security of energy supply, because extra generating capacity will be developed; and for the economy, because British manufacturing capacity in a world-leading technology will be expanded.

At the same time, I hope that I have shown that the longer we delay in introducing measures to correct problems in the market that act against the introduction of micro-CHP, the more opportunities we will miss to obtain those benefits. I beseech the Minister on behalf of hard-working families, the environment, our generating capacity and British manufacturing to put his shoulder to the wheel and do what he can to get those changes introduced as quickly as possible.

Photo of John Healey John Healey The Economic Secretary to the Treasury 4:16 pm, 6th January 2004

I congratulate my hon. Friend Jane Griffiths on securing the debate and giving us a valuable opportunity to update the exchanges at last month's Treasury questions.

My hon. Friend has a long-standing interest in environmental and sustainable energy issues and has long shown an active involvement in that subject in Parliament. As the Treasury Minister responsible for environmental policy—the green Minister in the Treasury—I get invited to many all-party parliamentary group meetings on topics such as sustainable waste management, energy studies, wildlife and conservation, the environment and renewable and sustainable energy. When I turn up to those meetings, I often find that she is present as an office holder in the group.

My hon. Friends the Members for Reading, East and for Peterborough (Mrs. Clark) clearly take a close interest in the companies that are at the forefront of some of the technological developments in the field. My hon. Friend the Member for Reading, East mentioned MicroGen Energy, which is based in her constituency and has operations in the constituency of my hon. Friend the Member for Peterborough. I can confirm that MicroGen Energy has had discussions with Treasury officials and that it has submitted a useful briefing on technical aspects of European VAT law. Customs officials plan to visit one of the technology plants next week to find out more.

BG Group is the parent company of MicroGen Energy, and it has contacted me directly about those issues. As you might imagine from my short description, Sir Nicholas, that company is an active advocate in this policy area. Just before Christmas, a senior Customs official found herself at a charity drinks reception where she ran into a senior executive from MicroGen Energy. When the senior executive found out who she was, he spent half an hour expounding the benefits and virtues of reduced VAT rates to support micro-CHP. I assure my hon. Friends that the case is being made strongly across the board.

My hon. Friend the Member for Reading, East has made the case forcefully—and briefly—this afternoon. She was supported by my hon. Friend the Member for Peterborough, who also takes an active interest in such issues in Parliament—as I know, partly to my cost, from my regular appearances before the Environmental Audit Committee, of which she is a member.

My hon. Friend the Member for Reading, East set out the wider context to the consideration of such policy issues. She recognised that the energy White Paper, which was published early last year, acknowledges the challenges that we all face in tackling climate change and the importance of energy policy in helping to meet those objectives. In recognition of that interrelationship, the Government announced that one of the goals of energy policy would be to put the UK on a path to cut carbon dioxide emissions, which are the main contributor to global warming, by some 60 per cent. by 2050, as recommended by the Royal Commission on Environmental Pollution.

The White Paper also recognised the role that increased energy efficiency in the home would be required to play in achieving progress on the targets for 2020 and 2050. 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.

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, something that was stressed by my hon. Friend.

First, we introduced a reduced rate of 5 per cent. VAT for the supply and installation of certain energy-saving materials, such as insulation products, in the homes of elderly or less well-off people, provided that the work was grant-funded under a relevant scheme. The reduced rate was introduced to make sure that the grant funding could go further, allowing more vulnerable households to benefit.

Two years later, we were able to extend the relief to the supply and installation of certain energy-saving materials in all residential accommodation, even if the work was not grant funded. At the same time, the list of energy-saving materials was extended to include installations of solar panels and wind and water turbines to ensure that the relief covered all products whose primary purpose was to save energy. In addition, we extended the reduced rate to include relief for contractor installations of central heating systems and heating appliances in the homes of less well-off elderly people, reflecting our expansion of the home energy efficiency scheme to include those products.

More recently, in the 2002 Budget, to ensure that extra help goes to the most vulnerable households and to reflect the extension of the home energy efficiency scheme as part of our fuel poverty strategy, 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.

I would argue, and I hope that my hon. Friend would accept, that the Government have demonstrated that we are ready to use—to the full—the freedoms that we have to introduce reduced rates to help with energy efficiency in the home, and that we have pressed hard for the extension of the scope to introduce further derogations in discussions with our partners in the European Union.

My hon. Friend rightly set her comments in a wide context. On the wider front, the Government have continued to seek opportunities—beyond the question of reduced VAT rates—to encourage energy efficiency in the home. Last month, in the pre-Budget report, we reported on the completion of the latest consultation for using economic instruments, including tax, to help improve energy efficiency in households. The responses to the consultation, which were published alongside the pre-Budget report, were strongly supportive of the use of fiscal instruments to encourage such household energy efficiency. My hon. Friend might be interested to know that 120 out of the 126 respondents supported the greater use of reduced VAT rates and that 67 of the 126 supported the use of capital allowances and enhanced capital allowances to help companies to write off investments in energy savings equipment for households and social landlords.

In response to that consultation, the Government confirmed in the pre-Budget report that they see a case for using economic instruments as part of a wider package to promote greater domestic energy efficiency, but, until the outcomes of the European VAT review and of the Government's review of corporation tax are clearer, it is too early to make detailed announcements. However, I assure my hon. Friend that I aim to ensure that a further announcement can be made at around the time of the Budget this year.

It is disappointing that the future of those European-level negotiations on reduced rates for VAT remains 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.

On corporation tax, the consultation period on the review ended on 3 November. There was substantial interest and a substantial number of responses. We are closely analysing and considering the implications of the responses that we received.

Micro-CHP, as my hon. Friend said, offers simultaneous generation of heat and power in a unit that is about the same size as a domestic heating boiler. Although these are early days for the technology, we hope that it will offer significant reductions in both household energy bills and carbon emissions. I confirm that we shall consider a role for capital allowances to play a part in encouraging installation of micro-CHP in the context of both the energy saving strategy and of the corporation tax review. I also assure my hon. Friend that we shall fully consider the case for micro-CHP and reduced VAT rates as part of the process of considering responses to the energy consultation document.

My hon. Friend has used this debate effectively to advance the proposition that micro-CHP is a technology that could make a valuable contribution to greater domestic energy efficiency. We recognise that, and that the gains may be even greater in future as the industry develops the technology further. We have made provision for reduced rates of VAT on grant-funded installations of micro-CHP. We shall consider both the case and the scope for doing so for domestic installation and we are also considering the case and the scope for going further.

Question put and agreed to.

Adjourned accordingly at twenty-eight minutes past Four o'clock.