Combined Heat and Power

Part of the debate – in Westminster Hall at 4:16 pm on 6th January 2004.

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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.