Combined Heat and Power

Part of the debate – 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 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.