This would come into effect on 1st August. For solar power this VAT increase would add £900 to a 4kW domestic system, lengthening pay-back periods.
The domestic solar power industry has already had support cut by 65% and the market is now at a fifth of levels seen this time last year. In the context of climate change the proposals are nonsensical and, if implemented, the STA is looking for immediate mitigating action from DECC to maintain modest returns for families investing in solar energy systems – and to reassure the currently fragile market. DECC has previously said that mitigating action would be taken; "If the rate of VAT does change, we will consider the options for how to maintain a suitable rate of return for investors under the feed-in tariff".
The STA’s strong preference is to maintain 5% VAT. If the VAT proposals go ahead UK families trying to ‘do the right thing’ will be paying 20% VAT for solar systems, while paying 5% VAT for grid electricity, or fossil energy such as oil heating – an absurd situation given OECD promises to end subsidy distortions in favour of fossil fuels. DECC says that HMT has been forced to do this as a result of an EU court ruling. In our view HMT has discretion not to implement this measure, the illogicality of which attracted the attention of EC Energy & Climate Commissioner Canete. The STA’s view, that the Chancellor should stand up to the Commission, has been strengthened by FT reports last Friday that the Commission has just mooted overhauling VAT rules entirely to either allow free Member State choice, or to broaden eligible products and services for VAT relief.
Bizarrely DECC has proposed removing support for solar thermal entirely from the Renewable Heat Incentive in 2017, though it has provided very weak justification for doing so. . However, we are fairly hopeful that solar thermal will not have 20% VAT applied.
Business Energy Efficiency Tax Review – reward green business
Government is overhauling the complex array of policies that govern carbon reporting and taxation in the commercial sector. As a result, the Climate Change Levy is likely to be extended to a much wider range of participants. The STA has been frustrated that in the past carbon reporting and taxation policies have actually penalised commercial companies that sought to do the ‘right thing’ investing in renewable energy. For example, HMT’s sudden removal of Climate Change Levy exemption from renewable power contracts means companies are now paying tax on the carbon that their purchased renewable power is not emitting.
At the same time, Government’s greatly reduced solar policies allow just 15MW of capacity for medium-sized commercial roofs per quarter, before Tariffs are significantly reduced. Solar over 1MW will not have any viable support from April in the UK, despite being highly cost-effective. Ministers had previously said they wanted a ‘solar revolution’ and DECC’s Solar Strategy put a strong emphasis on commercial rooftop solar. Current policies do not support this objective.
The Energy Efficiency Tax Review is therefore a unique opportunity to reward business investment in onsite and contracted solar power, as well as solar thermal – and at no cost to energy bill-payers. As a minimum the STA wants to see perverse penalties removed. The Review has consulted once in broad terms and it is hoped that more details will be provided in the budget. This is of major interest to the Solar Trade Association.
Lack of market forces & level playing field in energy policy landscape
There is widespread concern about the marginalisation of cost-effective solar power in the energy policy landscape, which is now widely believed to be steered by Treasury. Government will be spending just 1% of new expenditure under the Levy Control Framework supporting solar power under its only remaining support scheme in each of the next three years – yet mainstream analysts expect solar power to dominate future energy supply. Solar power has been prevented from competing with other low-carbon generation – allowing this would provide both better value for money, and competitive pressure for other technologies, for the benefit of consumers. HMT has given very significant tax breaks to the oil and shale gas sectors (for example 100% first year Capital Allowances). DECC is consulting on subsidies for new gas generation under the Capacity Mechanism and has offered much larger CfD subsides for new nuclear than the CfDs solar previously received.
The Sunday Times reports that Osborne will announce plans for up to six ‘giant tidal lagoon projects’. While support for diverse and innovative renewables is always welcome, the STA is concerned by a strong, general trend away from market & technological forces in energy policy, by the marginalisation of solar power, and by an increasingly unlevel playing field in relation to fossil fuels.
Take steps on smart grids
The STA was pleased to see the new National Infrastructure Commission report on ‘Smart Power’, showing how a modern, flexible power system, incorporating storage, could save consumers £8 billion per annum. The report said that flexibility ‘can significantly reduce the integration cost of intermittent renewables, to the point where their whole-system cost makes them a more attractive expansion option than CCS and/or nuclear.’ The STA is interested to see whether the Chancellor will take up the recommendations by the National Infrastructure Commission on Smart Power, which include much stronger emphasis on active, local networks – strongly supported by the solar industry – as well as increasing storage and flexibility in the power system. Solar sits at the heart of a modern, smart, decentralised grid and there is strengthening consensus across the energy sector that this is the way forward, and that Government needs to work with, and not against, a major technological shift.
