predictable - Solar Trade Association
HMRC consultation on changes to the reduced rate of VAT for Energy Saving Materials – the case for retaining the 5% rate for solar energy A response from the Solar Trade Association
About us Since 1978, the Solar Trade Association (STA) has worked to promote the benefits of solar energy and to make its adoption easy and profitable for domestic and commercial users. A not-for-profit association, we are funded entirely by our membership, which includes installers, manufacturers, distributors, large scale developers, investors and law firms. Our mission is to empower the UK solar transformation. We are paving the way for solar to deliver the maximum possible share of UK energy by 2030 by enabling a bigger and better solar industry. We represent both solar heat and power, and have a proven track record of winning breakthroughs for solar PV and solar thermal.
Respondent details Respondent Name: Email Address: Contact Address: Contact Telephone: Organisation Name: Would you like this response to remain confidential?
Mike Landy, Head of Policy [email protected] 53 Chandos Place, London WC2N 4HS 0203 637 2945 Solar Trade Association No
STA response We are pleased to respond to HMRC’s consultation on changes to the reduced rate of VAT for energy saving materials, published on 9th December 2015. It follows a meeting on 14th December at which the STA was invited by HMRC to submit early evidence in support of a different outcome for solar from that proposed by the consultation, which currently would result in solar’s VAT rate reverting from the 5% reduced rate to the full 20% standard rate from 1 August 2016. We submitted a preliminary response to HMRC in early January and this is now our final response. We have chosen not to answer the specific questions in the consultation (as these do not refer to solar’s exclusion) but to put the case for retaining solar’s reduced rate across the board, which we believe to be very compelling based on the wording of the VAT Directive. Our response starts with some general background to the issue and makes the case for retaining solar’s reduced VAT rate across the board. It then provides additional, more detailed evidence for particular subsectors, including typical cost breakdowns between materials and non-materials.
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Background HMRC’s consultation follows a European Court of Justice (ECJ) ruling in June 2015 which supported the European Commission’s case that the UK’s reduced rate for energy saving materials (ESMs) is illegal under the terms of the EU’s VAT Directive. However it is only three of the 11 energy saving measures (solar, wind and hydro) that have been singled out by HMRC for complete removal. The other eight measures remain eligible where complying with a social policy as well as for wider private residential applications. In the latter case, if materials account for more than 50% of the cost, the reduced VAT rate will apply only to the non-materials element. We believe that the reduced rate can be justified for solar in the same way as for the other eight ESMs, as it meets the same qualifying criteria. Annex III of the VAT Directive states that reduced VAT can only be applied to goods and services which are utilised in the ‘provision, construction, renovation and alteration as part of a social policy’ (Category 10) and also to the ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied’ (Category 10a). HMRC’s consultation justifies removing the reduced VAT rate for solar, wind and hydro as follows: “The installation of ESMs can be seen as the “renovation” of a property but, in order to ensure that UK law is fully EU law compliant following the decision of the CJEU, we need to exclude certain items from the reduced rate in future on the basis that their installation cannot properly be said to ‘renovate’ a property (rather, they simply serve to generate electricity).” The STA believes that solar technology can fulfil the requirements of both of the above Directive clauses (10 and 10a), so there is a very strong case for treating solar in the same way as the other eight ESMs proposed by HMRC to retain their 5% reduced rate. This paper presents that case and aims to provide additional evidence for specific sectors of the domestic solar market. It is important to point out that solar actually involves two distinct technologies:
Solar PV (photovoltaic) panels generate electricity for consumption on-site, with any surplus exported to the grid. The cost of PV in the UK has fallen substantially in recent years (70% since 2010) and will continue to fall if there is a stable market, however it still requires financial support to compete with grid electricity (we believe that, with stable government support, grid parity could be achieved within five years).
Solar thermal panels produce hot water which predominantly contributes to domestic hot water demand, but can also contribute to space heating requirements. In this regard the technology is no different to heat pumps or biomass boilers that are proposed by HMRC to retain the 5% reduced rate. Until 2010 solar thermal was the dominant solar technology, but more recently solar PV has become the more economic option and the solar thermal market has consequently been in relative decline (see later).
Details of the UK’s current entitlement to reduced rates for residential energy saving measures are given in HMRC Notice “VAT Notice 708/6: Energy Saving Materials”. It should be noted that Paragraph 2.9 of this notice specifies that ‘solar panels’ includes both solar PV and solar thermal whilst the current consultation does not differentiate between the two technologies.
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The UK has a legally binding target under the Renewable Energy Directive to achieve 15% of its energy consumption from renewable sources by 2020, the most recent official figure being 7.0% in 2014. Both forms of solar energy can make an important contribution to meeting the doubling of renewable energy still required by 2020 and both are therefore currently supported by financial incentives, respectively the Feed-in Tariff (FiT) for solar PV and the Renewable Heat Incentive (RHI) for solar thermal. However the FiT tariff for domestic PV has just been reduced from 12.0p/kWh to 4.39p/kWh which will severely reduce take-up of the technology. DECC is also currently reviewing the RHI and support for domestic solar thermal appears to be at risk. Both solar technologies therefore enter 2016 in very precarious positions, which the HMRC consultation threatens to exacerbate if the domestic VAT rate increases in August to 20%. For example the change would add around £900 to a 4kW domestic PV system, taking it from ~£6,300 to ~£7,200. Unless DECC were to compensate by rapidly increasing the domestic FiT and RHI tariff levels, it is not too strong to say that the VAT increase could well be a killer blow for both technologies for the foreseeable future.
The case for retaining solar’s reduced VAT rate across the board As stated earlier, the retrofitting of solar panels to homes fits both of the clauses that justify a reduced rate in the VAT Directive, so we do not see a justification for solar energy being treated differently from the eight other technologies proposed to retain the 5% reduced rate. We therefore request that solar’s reduced VAT rate of 5% be retained for all applications in the domestic sector, covering both solar thermal and solar PV. By providing a blanket derogation for solar, HMRC would also avoid any future risk of market distortion. With regard to complying with a social policy (Category 10), solar PV has been a major contributor to reducing fuel poverty in recent years as local authorities and social landlords have installed solar on over 100,000 social housing roofs UK-wide, providing the tenants with free energy for a significant share of their requirements. This seems to exactly meet the terms of Category 10 of Annex III of the VAT Directive: ‘provision, construction, renovation and alteration as part of a social policy’. Whilst the reduced FiT rate may no longer allow free energy to be supplied, it should still allow the social landlord to provide tenants with discounted energy. With regard to the more general installation of solar in residential buildings, Category 10a of Annex III requires qualifying ESMs to be seen as ‘renovating or repairing private dwellings’. As stated earlier we believe that solar thermal cannot be differentiated from the other qualifying technologies that supply domestic hot water and space heating; indeed solar thermal is often installed in conjunction with the renovation of a hot water system, or as a complement to heat pumps and biomass boilers. Even PV retrofit to a conventional roof should be seen as renovation (Category 10a), increasing the value of the property whilst reducing occupants’ energy bills and carbon emissions. Our understanding is that HMRC treat solar panels as ‘fixtures’, incorporated into the fabric of the building. Since the solar equipment is physically attached to the structure of the dwelling, there is little to differentiate solar from the other technologies like ground and air source heat pumps that are proposed to retain the 5% VAT rate. In HMRC’s VAT Notice 708: buildings and construction, under Section 13: The VAT meaning of ‘building materials’, solar panels are included under “13.8 - Examples of articles ‘ordinarily’ incorporated in a building”. Consequently, a person ‘renovating’ their home would expect to incorporate modern ‘building materials’ to make it new, thereby demonstrating that all solar panels are capable of being a renovation. This would appear to set a clear precedent for solar being included under energy saving materials. We do
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not see that the supply of electricity should be treated differently from the supply of heat; in both cases there are alternatives available. In addition to conventional housing, there are limited numbers of remote dwellings that do not have an electricity grid connection and for them solar PV is the obvious way to provide power. Together with battery storage, solar PV will form the basis of their energy supply. The solar PV industry is currently reeling from the decision announced on 17th December 2015 that the domestic FiT tariff has been reduced by 64% from 15th January – DECC’s own Impact Assessment suggested the FiT cuts will result in job losses of up to 19,000. An increase of VAT to 20% can only increase this figure, so we were very surprised to see HMRC state in the VAT consultation that “this measure is not expected to have any significant economic impact”. For our members the impact, on top of the FiT cut, is only too real and could well be terminal. We hope that HMRC will take this cumulative employment impact into account in making its decision on solar.
Additional evidence on specific solar sub-sectors As stated in the introduction, the remainder of this note provides more detailed additional evidence on some of the solar sub-sectors, to provide additional justification for retaining solar’s reduced domestic VAT rate. We also provide some information on the share of costs represented by materials, as this is one of the factors referred to under Category 10a of Annex III. Installations complying with a social policy (Annex III, Category 10): Fuel poverty is recognised as a significant social issue in the UK and, as described above, solar is now seen as a highly reliable contributor to the solution, providing free or reduced cost energy for housing association tenants as well as to the list of ‘qualifying persons’ cited in the consultation. Solar panels are easy to install and maintain, they are warrantied for 25 years and they are low-risk as irradiance levels fluctuate little year by year, providing consistent and predictable energy generation. We believe that in these cases solar should be charged the reduced rate of VAT (5%), justified under Category 10. Currently social landlords use two main models to install solar: self-financing and ‘third party funded’, where a third party owns the assets and enters into a lease or licence agreement for roof space with the social landlord. Social landlord projects have much longer lead times than other domestic projects due to the typical scale and procurement processes required. There is a large body of evidence1 to demonstrate the impact of reducing fuel poverty with solar technologies. However the viability of the approach depends on the economics of the technology: with a lower Feed-in Tariff any additional costs from an increase in VAT rate will inevitably further undermine the economic case. There have been many examples of solar providing social households with a cheap affordable energy source. In all cases, their solar PV projects are conducted as part of their social policy, in particular as a means of addressing rising levels of fuel poverty:
Flintshire Council fitted hundreds of council homes with solar PV; the panels are used to reduce the running costs of each property and help to tackle fuel poverty, as well as reduce carbon emissions.
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https://www.jrf.org.uk/report/renewable-energy-getting-benefits-right-social-housing, http://ac.els-cdn.com/S1364032106000554/1-s2.0S1364032106000554-main.pdf?_tid=1b81edfa-b2cc-11e5-b1d2-00000aacb361&acdnat=1451902721_25e3c506a56c2175c9a12f6dfcccf8d9
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It is anticipated that over the ‘20 year lifetime of the panels, tenants will save over £3.3 million,’ which is around £412 per year for each council home.2
One thousand Darlington council homes are set to benefit from solar under the council’s social policy, significantly reducing tenants’ energy bills3.
There are similar schemes in other areas such as Swansea and Cambridge where councils have raised the funds for solar to be installed on council houses in order to help reduce energy bills and create jobs as part of their social policy.
Companies such as iPower UK work with social landlords who fund their own PV and others who arrange third party finance. Their ‘Solar Circle’ ten year goal is to deploy solar on every suitable social landlord home.
However due to the drastic reduction in the domestic FiT tariff some social landlord projects have already been abandoned. Carmarthenshire and Doncaster have scrapped ambitious plans to install solar on council homes due to the level of cuts4. Sheffield Council has just announced that it will now not be installing PV panels to 6,000 council homes after the 64% cut in subsidies by the government and we fear that there will many more such announcements. A further increase in VAT would add up to £900 to a typical installation, rendering solar on social housing uneconomic in most cases and bringing the internal rate of return (IRR) below 4%. We fear that a change of the VAT rate to 20% will result in the cancellation of many projects that are specifically renovating homes “as part of a social policy”. We are sure that the Commission would not want its case against the UK to be seen as increasing the incidence of fuel poverty in our country. Justification for retaining Solar Thermal As mentioned previously, solar thermal panels produce hot water which predominantly contributes to domestic hot water demand, but can also contribute to space heating requirements. Solar thermal is often installed in conjunction with the other technologies classified as ESM, such as heat pumps and biomass boilers, offering a more cost-effective package than the latter on their own. See Appendix 2 for the STA’s Solar Thermal Statistics and Market Size report. Since 2010 there has been a steady decline in solar thermal sales due to solar PV becoming the more attractive option under the new Feed-in Tariff (solar thermal sales in 2014 were 65% lower than their 2010 peak). A report on the UK low carbon economy published by BIS in April 2015 cited 5,200 solar thermal jobs in 80 firms in 20135. The costs of a typical domestic solar thermal installation are shown in the table overleaf, broken down between equipment and labour. Solar thermal can provide a contribution to space heating though this application is currently treated as ineligible under the RHI.
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http://www.flintshire.gov.uk/en/Resident/Council-Apps/NewsPortlet.aspx?a=liveNews&u=0C6B0ED8D6F2A1B480257F070038AAEE http://www.solarpowerportal.co.uk/news/council_promotes_solar_as_fit_deadline_approaches_2372
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http://www.solarpowerportal.co.uk/news/carmarthenshire_council_scraps_solar_rooftop_plans_following_fit_1289 http://www.solarpowerportal.co.uk/news/fit_changes_could_impact_doncaster_solar_scheme_but_investors_still_7891 http://www.theguardian.com/environment/2015/nov/18/thousands-social-tenants-lose-out-solar-subsidies-cuts-go-ahead?CMP=twt_gu 5 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/416240/bis-15-206-size-and-performance-of-uk-low-carboneconomy.pdf
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Excluding VAT, materials typically account for 44% of the total cost. An increase of the VAT rate from 5% to 20% would add £675 to the cost to the customer. Given the declining sales in the sector and the fact that DECC will soon be consulting on the possibility of removing solar thermal from the domestic RHI, any increase in the VAT rate from 5% to 20% can only accelerate the current decline in market uptake. Solar Thermal Cost of Equipment Labour (scaffolding, sales etc) Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
£1,979 £2,521 44% £225 £900 £675 £4,500 £4,725 £5,400
Indicative cost breakdown of a typical domestic Solar PV installation A domestic ‘on-roof’ PV system is typically made up of an array of panels (each generating up to 270W), an inverter, wiring and meters. The table below presents the cost breakdown of a typical domestic ‘on-roof’ PV installation, rated at 3.0kW. Materials account for 37% of the cost (ex-VAT). An increase of the VAT rate from 5% to 20% would add £818 to the cost of this install. Even for a large 4kW domestic system, the percentage share of material costs would usually be below 50%. Standard PV Install Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour (scaffolding, sales etc) Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
11 2.97 270 £2,035 £3,415 37% £273 £1,090 £818 £5,450 £5,723 £6,540
As stated earlier the costs of solar PV installations have fallen around 70% since 2010. We expect costs to continue to fall, though at a slower pace. Whilst those cost savings will occur for both materials and labour costs, the share of material costs is likely to remain well below 50% for domestic installs. A comparison of ‘on-roof’ conventional PV with roof integrated PV is presented in the next section.
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Roof integrated PV Although we believe the justification to be very strong, we recognise that HMRC may not accept our arguments that all solar PV should retain the 5% reduced rate but is willing to consider retaining it for renovations where the PV is built into the fabric of the roof rather than attached to an existing roof. This sector of the PV market is generically known as Building Integrated Photovoltaics or BIPV and is used for systems that replace roof coverings to form a functioning part of the roof (roof integrated PV) as well as glazing products that mount in cladding and glazing systems. Use of PV in glazing and facades is more common in commercial buildings; in the short term BIPV applications in the domestic sector will predominantly be ‘in-roof’ systems. Roof integrated PV is generally accepted to be more aesthetic6 than on-roof systems and is likely to attract an increasing share of the PV market going forward, though it normally carries a price premium. There is a huge potential market for roof integrated PV in both new build and refurbishment of existing buildings. Some roof integrated PV products also incorporate insulation, which improves the energy efficiency of existing buildings. Roof integrated PV certainly does much more than just generate electricity – it is a bonne-fide roofing product that also reduces heat losses. Increasing the VAT rate to 20% would have a significant economic impact for domestic installers of roof integrated PV, adding up to £2,000 to a domestic installation. The cost breakdown of four roof integrated products can be found in Appendix 1, using the same 3.0kW system size previously presented for ‘on-roof’ PV. The market ranges from £6,000 for standard ‘in roof’ systems that are suitable for residential and commercial buildings such as ‘easy roof’ to the higher end of the market, for example solar tiles such as Solarmass’s Ergosun from £10,000. This product is the most aesthetic solution, mainly used for residential pitched roofs. The product has high-efficiency and is very easy to install. Therefore the roof integrated PV sector ranges from systems that are approaching cost competitiveness with ‘on-roof’ solar PV to much more costly systems that replace individual conventional roof tiles with a PV tile that is almost indistinguishable in appearance (see the picture for Scenario 4 in Appendix 1). We believe that roof integrated PV falls under Category 10a of Annex III ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied’. DECC’s UK Solar PV Strategy Part 2: Delivering a Brighter Future7 defines BIPV ‘where the building fabric is made from solar PV materials. Technology is starting to provide us with the opportunity to install PV directly into the fabric of building glass and cladding material.’ If HMRC want to differentiate roof-integrated PV for the domestic market we propose using the following definition:
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See our draft solar booklet https://drive.google.com/file/d/0B8Wg5eH9kHBtcDVvc3AtU0YwQTA/view?usp=sharing https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302049/uk_solar_pv_strategy_part_2.pdf
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“Where a solar panel installation is solely for the purpose of generating electricity, it can qualify for the reduced rate of VAT where: (i)
(ii)
an area of the existing outer roof covering beneath the solar panels is removed and the panels and/or their installation and fixing kit form the new primary weather-tight roof covering of the refurbished roof, and the area of roof covering replaced is at least equal to the active area of the solar panels.”
In addition we believe that roof integrated PV can make a significant contribution for the purpose of complying with a social policy (Category 10 of Annex III). As roof integrated PV becomes more cost competitive we are seeing an increase in social housing projects using this approach. Solarcentury’s C21e tile has been used in Luton as part of a complete refurbishment of 242 social houses (see the photographs below and overleaf). Sixty of those properties had the C21e solar tile installed as part of the renovation, a total capacity of 52.8 kWp. The renovation to the properties has also improved their energy efficiency as the panels have improved the insulation of the houses. The residents now have a secure and more affordable energy supply, increasing their energy security.
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Appendix 1: cost breakdown of four roof integrated PV systems For example Viridian’s Fusion Tile
Scenario 1 Retro BIPV install Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
12 3 250 £2,882 £3,014 49% £294.80 £1,179.20 £884 £5,896 £6,191 £7,075
Scenario 2 In Tray + Standard Panels Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
For example IRFTS Easy Roof
12 3 250 £2,600 £3,400 43% £300 £1,200 £900 £6,000 £6,300 £7,200
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Scenario 3 Premium BIPV
For example Solarcentury’s C21e
Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
60 3 50 £5,550 £3,400 62% £448 £1,790 £1,343 £8,950 £9,398 £10,740
Scenario 4 Ultimate BIPV Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
For example Solarmass Ergosun
231 3 13 £7,300 £3,400 68% £535 £2,140 £1,605 £10,700 £11,235 £12,840
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Appendix 2: STA’s UK Solar Thermal Statistics and Market Size report
UK Solar Thermal Statistics
October 2015
Annual Solar Thermal Sales
Flat Plate (m2)
Aperture Area (m2)
100,000
Evac. Tube (m2)
Total
Change prior yr
(m2)
%
2008
32,196
5,223
37,419
2009
48,717
16,788
65,505
2010
70,061
18,317
88,379
35%
70,000
2011
60,794
15,688
76,481
-13%
60,000
2012
41,053
10,891
51,944
-32%
50,000
2013
27,721
8,223
35,944
-31%
40,000
2014
24,590
5,870
30,460
-15%
90,000
Evacuated Tube
80,000
Flat Plate
75%
30,000 20,000 10,000 2008
2009
2010
2011
2012
2013
2014
Source: STA / HHIC / ICOM
Quarterly Solar Thermal Sales
Year
Quarter
2013
25,000 Evacuated Tube
20,000
Flat Plate
2014
15,000 10,000
2015
5,000 -
Evac.
Total
Tube (m2)
30,000
Aperture Area (m2)
Flat Plate
(m2)
(m2)
Change prior yr %
1
7,763
1,857
9,619
-32%
2
7,746
2,181
9,927
-28%
3
6,688
2,490
9,178
-31%
4
5,524
1,696
7,220
-32%
1
7,689
1,603
9,292
-3%
2
6,962
1,844
8,806
-11%
3
5,740
1,568
7,308
-20%
4
4,199
855
5,054
-30%
1
4,206
892
5,098
-45%
2
4,094
812
4,906
-44%
3
5,807
905
6,712
-8%
4
3,959
771
4,730
-6%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010
2011
2012
2013
2014
2015
Source: STA / HHIC / ICOM
Monthly Solar Thermal Sales 2015
Year
Month
4000
Total
Tube (m2)
(m2)
(m2)
Change prior yr %
1,511
235
1,746
-36%
Flat Plate
February
1,181
364
1,545
-56%
Prior Yr Total
March
1,514
293
1,807
-41%
April
1,509
188
1,697
-43%
May
1,234
291
1,525
-51%
2000
June
1,351
333
1,684
-37%
1500
July
1,310
366
1,676
-44%
August
3,106
257
3,363
65%
September
1,391
282
1,673
-27%
October
1,192
203
1,395
-39%
3000 2500
1000
500
2015
Evac.
January
Evacuated Tube
3500 Aperture Area (m2)
Flat Plate
November
0 1
2
3
4
5
6
7
8
9
10
11
12
December
Source: STA / HHIC / ICOM
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About us Since 1978, the Solar Trade Association (STA) has worked to promote the benefits of solar energy and to make its adoption easy and profitable for domestic and commercial users. A not-for-profit association, we are funded entirely by our membership, which includes installers, manufacturers, distributors, large scale developers, investors and law firms. Our mission is to empower the UK solar transformation. We are paving the way for solar to deliver the maximum possible share of UK energy by 2030 by enabling a bigger and better solar industry. We represent both solar heat and power, and have a proven track record of winning breakthroughs for solar PV and solar thermal.
Respondent details Respondent Name: Email Address: Contact Address: Contact Telephone: Organisation Name: Would you like this response to remain confidential?
Mike Landy, Head of Policy [email protected] 53 Chandos Place, London WC2N 4HS 0203 637 2945 Solar Trade Association No
STA response We are pleased to respond to HMRC’s consultation on changes to the reduced rate of VAT for energy saving materials, published on 9th December 2015. It follows a meeting on 14th December at which the STA was invited by HMRC to submit early evidence in support of a different outcome for solar from that proposed by the consultation, which currently would result in solar’s VAT rate reverting from the 5% reduced rate to the full 20% standard rate from 1 August 2016. We submitted a preliminary response to HMRC in early January and this is now our final response. We have chosen not to answer the specific questions in the consultation (as these do not refer to solar’s exclusion) but to put the case for retaining solar’s reduced rate across the board, which we believe to be very compelling based on the wording of the VAT Directive. Our response starts with some general background to the issue and makes the case for retaining solar’s reduced VAT rate across the board. It then provides additional, more detailed evidence for particular subsectors, including typical cost breakdowns between materials and non-materials.
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Background HMRC’s consultation follows a European Court of Justice (ECJ) ruling in June 2015 which supported the European Commission’s case that the UK’s reduced rate for energy saving materials (ESMs) is illegal under the terms of the EU’s VAT Directive. However it is only three of the 11 energy saving measures (solar, wind and hydro) that have been singled out by HMRC for complete removal. The other eight measures remain eligible where complying with a social policy as well as for wider private residential applications. In the latter case, if materials account for more than 50% of the cost, the reduced VAT rate will apply only to the non-materials element. We believe that the reduced rate can be justified for solar in the same way as for the other eight ESMs, as it meets the same qualifying criteria. Annex III of the VAT Directive states that reduced VAT can only be applied to goods and services which are utilised in the ‘provision, construction, renovation and alteration as part of a social policy’ (Category 10) and also to the ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied’ (Category 10a). HMRC’s consultation justifies removing the reduced VAT rate for solar, wind and hydro as follows: “The installation of ESMs can be seen as the “renovation” of a property but, in order to ensure that UK law is fully EU law compliant following the decision of the CJEU, we need to exclude certain items from the reduced rate in future on the basis that their installation cannot properly be said to ‘renovate’ a property (rather, they simply serve to generate electricity).” The STA believes that solar technology can fulfil the requirements of both of the above Directive clauses (10 and 10a), so there is a very strong case for treating solar in the same way as the other eight ESMs proposed by HMRC to retain their 5% reduced rate. This paper presents that case and aims to provide additional evidence for specific sectors of the domestic solar market. It is important to point out that solar actually involves two distinct technologies:
Solar PV (photovoltaic) panels generate electricity for consumption on-site, with any surplus exported to the grid. The cost of PV in the UK has fallen substantially in recent years (70% since 2010) and will continue to fall if there is a stable market, however it still requires financial support to compete with grid electricity (we believe that, with stable government support, grid parity could be achieved within five years).
Solar thermal panels produce hot water which predominantly contributes to domestic hot water demand, but can also contribute to space heating requirements. In this regard the technology is no different to heat pumps or biomass boilers that are proposed by HMRC to retain the 5% reduced rate. Until 2010 solar thermal was the dominant solar technology, but more recently solar PV has become the more economic option and the solar thermal market has consequently been in relative decline (see later).
Details of the UK’s current entitlement to reduced rates for residential energy saving measures are given in HMRC Notice “VAT Notice 708/6: Energy Saving Materials”. It should be noted that Paragraph 2.9 of this notice specifies that ‘solar panels’ includes both solar PV and solar thermal whilst the current consultation does not differentiate between the two technologies.
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The UK has a legally binding target under the Renewable Energy Directive to achieve 15% of its energy consumption from renewable sources by 2020, the most recent official figure being 7.0% in 2014. Both forms of solar energy can make an important contribution to meeting the doubling of renewable energy still required by 2020 and both are therefore currently supported by financial incentives, respectively the Feed-in Tariff (FiT) for solar PV and the Renewable Heat Incentive (RHI) for solar thermal. However the FiT tariff for domestic PV has just been reduced from 12.0p/kWh to 4.39p/kWh which will severely reduce take-up of the technology. DECC is also currently reviewing the RHI and support for domestic solar thermal appears to be at risk. Both solar technologies therefore enter 2016 in very precarious positions, which the HMRC consultation threatens to exacerbate if the domestic VAT rate increases in August to 20%. For example the change would add around £900 to a 4kW domestic PV system, taking it from ~£6,300 to ~£7,200. Unless DECC were to compensate by rapidly increasing the domestic FiT and RHI tariff levels, it is not too strong to say that the VAT increase could well be a killer blow for both technologies for the foreseeable future.
The case for retaining solar’s reduced VAT rate across the board As stated earlier, the retrofitting of solar panels to homes fits both of the clauses that justify a reduced rate in the VAT Directive, so we do not see a justification for solar energy being treated differently from the eight other technologies proposed to retain the 5% reduced rate. We therefore request that solar’s reduced VAT rate of 5% be retained for all applications in the domestic sector, covering both solar thermal and solar PV. By providing a blanket derogation for solar, HMRC would also avoid any future risk of market distortion. With regard to complying with a social policy (Category 10), solar PV has been a major contributor to reducing fuel poverty in recent years as local authorities and social landlords have installed solar on over 100,000 social housing roofs UK-wide, providing the tenants with free energy for a significant share of their requirements. This seems to exactly meet the terms of Category 10 of Annex III of the VAT Directive: ‘provision, construction, renovation and alteration as part of a social policy’. Whilst the reduced FiT rate may no longer allow free energy to be supplied, it should still allow the social landlord to provide tenants with discounted energy. With regard to the more general installation of solar in residential buildings, Category 10a of Annex III requires qualifying ESMs to be seen as ‘renovating or repairing private dwellings’. As stated earlier we believe that solar thermal cannot be differentiated from the other qualifying technologies that supply domestic hot water and space heating; indeed solar thermal is often installed in conjunction with the renovation of a hot water system, or as a complement to heat pumps and biomass boilers. Even PV retrofit to a conventional roof should be seen as renovation (Category 10a), increasing the value of the property whilst reducing occupants’ energy bills and carbon emissions. Our understanding is that HMRC treat solar panels as ‘fixtures’, incorporated into the fabric of the building. Since the solar equipment is physically attached to the structure of the dwelling, there is little to differentiate solar from the other technologies like ground and air source heat pumps that are proposed to retain the 5% VAT rate. In HMRC’s VAT Notice 708: buildings and construction, under Section 13: The VAT meaning of ‘building materials’, solar panels are included under “13.8 - Examples of articles ‘ordinarily’ incorporated in a building”. Consequently, a person ‘renovating’ their home would expect to incorporate modern ‘building materials’ to make it new, thereby demonstrating that all solar panels are capable of being a renovation. This would appear to set a clear precedent for solar being included under energy saving materials. We do
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not see that the supply of electricity should be treated differently from the supply of heat; in both cases there are alternatives available. In addition to conventional housing, there are limited numbers of remote dwellings that do not have an electricity grid connection and for them solar PV is the obvious way to provide power. Together with battery storage, solar PV will form the basis of their energy supply. The solar PV industry is currently reeling from the decision announced on 17th December 2015 that the domestic FiT tariff has been reduced by 64% from 15th January – DECC’s own Impact Assessment suggested the FiT cuts will result in job losses of up to 19,000. An increase of VAT to 20% can only increase this figure, so we were very surprised to see HMRC state in the VAT consultation that “this measure is not expected to have any significant economic impact”. For our members the impact, on top of the FiT cut, is only too real and could well be terminal. We hope that HMRC will take this cumulative employment impact into account in making its decision on solar.
Additional evidence on specific solar sub-sectors As stated in the introduction, the remainder of this note provides more detailed additional evidence on some of the solar sub-sectors, to provide additional justification for retaining solar’s reduced domestic VAT rate. We also provide some information on the share of costs represented by materials, as this is one of the factors referred to under Category 10a of Annex III. Installations complying with a social policy (Annex III, Category 10): Fuel poverty is recognised as a significant social issue in the UK and, as described above, solar is now seen as a highly reliable contributor to the solution, providing free or reduced cost energy for housing association tenants as well as to the list of ‘qualifying persons’ cited in the consultation. Solar panels are easy to install and maintain, they are warrantied for 25 years and they are low-risk as irradiance levels fluctuate little year by year, providing consistent and predictable energy generation. We believe that in these cases solar should be charged the reduced rate of VAT (5%), justified under Category 10. Currently social landlords use two main models to install solar: self-financing and ‘third party funded’, where a third party owns the assets and enters into a lease or licence agreement for roof space with the social landlord. Social landlord projects have much longer lead times than other domestic projects due to the typical scale and procurement processes required. There is a large body of evidence1 to demonstrate the impact of reducing fuel poverty with solar technologies. However the viability of the approach depends on the economics of the technology: with a lower Feed-in Tariff any additional costs from an increase in VAT rate will inevitably further undermine the economic case. There have been many examples of solar providing social households with a cheap affordable energy source. In all cases, their solar PV projects are conducted as part of their social policy, in particular as a means of addressing rising levels of fuel poverty:
Flintshire Council fitted hundreds of council homes with solar PV; the panels are used to reduce the running costs of each property and help to tackle fuel poverty, as well as reduce carbon emissions.
1
https://www.jrf.org.uk/report/renewable-energy-getting-benefits-right-social-housing, http://ac.els-cdn.com/S1364032106000554/1-s2.0S1364032106000554-main.pdf?_tid=1b81edfa-b2cc-11e5-b1d2-00000aacb361&acdnat=1451902721_25e3c506a56c2175c9a12f6dfcccf8d9
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It is anticipated that over the ‘20 year lifetime of the panels, tenants will save over £3.3 million,’ which is around £412 per year for each council home.2
One thousand Darlington council homes are set to benefit from solar under the council’s social policy, significantly reducing tenants’ energy bills3.
There are similar schemes in other areas such as Swansea and Cambridge where councils have raised the funds for solar to be installed on council houses in order to help reduce energy bills and create jobs as part of their social policy.
Companies such as iPower UK work with social landlords who fund their own PV and others who arrange third party finance. Their ‘Solar Circle’ ten year goal is to deploy solar on every suitable social landlord home.
However due to the drastic reduction in the domestic FiT tariff some social landlord projects have already been abandoned. Carmarthenshire and Doncaster have scrapped ambitious plans to install solar on council homes due to the level of cuts4. Sheffield Council has just announced that it will now not be installing PV panels to 6,000 council homes after the 64% cut in subsidies by the government and we fear that there will many more such announcements. A further increase in VAT would add up to £900 to a typical installation, rendering solar on social housing uneconomic in most cases and bringing the internal rate of return (IRR) below 4%. We fear that a change of the VAT rate to 20% will result in the cancellation of many projects that are specifically renovating homes “as part of a social policy”. We are sure that the Commission would not want its case against the UK to be seen as increasing the incidence of fuel poverty in our country. Justification for retaining Solar Thermal As mentioned previously, solar thermal panels produce hot water which predominantly contributes to domestic hot water demand, but can also contribute to space heating requirements. Solar thermal is often installed in conjunction with the other technologies classified as ESM, such as heat pumps and biomass boilers, offering a more cost-effective package than the latter on their own. See Appendix 2 for the STA’s Solar Thermal Statistics and Market Size report. Since 2010 there has been a steady decline in solar thermal sales due to solar PV becoming the more attractive option under the new Feed-in Tariff (solar thermal sales in 2014 were 65% lower than their 2010 peak). A report on the UK low carbon economy published by BIS in April 2015 cited 5,200 solar thermal jobs in 80 firms in 20135. The costs of a typical domestic solar thermal installation are shown in the table overleaf, broken down between equipment and labour. Solar thermal can provide a contribution to space heating though this application is currently treated as ineligible under the RHI.
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3
http://www.flintshire.gov.uk/en/Resident/Council-Apps/NewsPortlet.aspx?a=liveNews&u=0C6B0ED8D6F2A1B480257F070038AAEE http://www.solarpowerportal.co.uk/news/council_promotes_solar_as_fit_deadline_approaches_2372
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http://www.solarpowerportal.co.uk/news/carmarthenshire_council_scraps_solar_rooftop_plans_following_fit_1289 http://www.solarpowerportal.co.uk/news/fit_changes_could_impact_doncaster_solar_scheme_but_investors_still_7891 http://www.theguardian.com/environment/2015/nov/18/thousands-social-tenants-lose-out-solar-subsidies-cuts-go-ahead?CMP=twt_gu 5 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/416240/bis-15-206-size-and-performance-of-uk-low-carboneconomy.pdf
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Excluding VAT, materials typically account for 44% of the total cost. An increase of the VAT rate from 5% to 20% would add £675 to the cost to the customer. Given the declining sales in the sector and the fact that DECC will soon be consulting on the possibility of removing solar thermal from the domestic RHI, any increase in the VAT rate from 5% to 20% can only accelerate the current decline in market uptake. Solar Thermal Cost of Equipment Labour (scaffolding, sales etc) Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
£1,979 £2,521 44% £225 £900 £675 £4,500 £4,725 £5,400
Indicative cost breakdown of a typical domestic Solar PV installation A domestic ‘on-roof’ PV system is typically made up of an array of panels (each generating up to 270W), an inverter, wiring and meters. The table below presents the cost breakdown of a typical domestic ‘on-roof’ PV installation, rated at 3.0kW. Materials account for 37% of the cost (ex-VAT). An increase of the VAT rate from 5% to 20% would add £818 to the cost of this install. Even for a large 4kW domestic system, the percentage share of material costs would usually be below 50%. Standard PV Install Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour (scaffolding, sales etc) Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
11 2.97 270 £2,035 £3,415 37% £273 £1,090 £818 £5,450 £5,723 £6,540
As stated earlier the costs of solar PV installations have fallen around 70% since 2010. We expect costs to continue to fall, though at a slower pace. Whilst those cost savings will occur for both materials and labour costs, the share of material costs is likely to remain well below 50% for domestic installs. A comparison of ‘on-roof’ conventional PV with roof integrated PV is presented in the next section.
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Roof integrated PV Although we believe the justification to be very strong, we recognise that HMRC may not accept our arguments that all solar PV should retain the 5% reduced rate but is willing to consider retaining it for renovations where the PV is built into the fabric of the roof rather than attached to an existing roof. This sector of the PV market is generically known as Building Integrated Photovoltaics or BIPV and is used for systems that replace roof coverings to form a functioning part of the roof (roof integrated PV) as well as glazing products that mount in cladding and glazing systems. Use of PV in glazing and facades is more common in commercial buildings; in the short term BIPV applications in the domestic sector will predominantly be ‘in-roof’ systems. Roof integrated PV is generally accepted to be more aesthetic6 than on-roof systems and is likely to attract an increasing share of the PV market going forward, though it normally carries a price premium. There is a huge potential market for roof integrated PV in both new build and refurbishment of existing buildings. Some roof integrated PV products also incorporate insulation, which improves the energy efficiency of existing buildings. Roof integrated PV certainly does much more than just generate electricity – it is a bonne-fide roofing product that also reduces heat losses. Increasing the VAT rate to 20% would have a significant economic impact for domestic installers of roof integrated PV, adding up to £2,000 to a domestic installation. The cost breakdown of four roof integrated products can be found in Appendix 1, using the same 3.0kW system size previously presented for ‘on-roof’ PV. The market ranges from £6,000 for standard ‘in roof’ systems that are suitable for residential and commercial buildings such as ‘easy roof’ to the higher end of the market, for example solar tiles such as Solarmass’s Ergosun from £10,000. This product is the most aesthetic solution, mainly used for residential pitched roofs. The product has high-efficiency and is very easy to install. Therefore the roof integrated PV sector ranges from systems that are approaching cost competitiveness with ‘on-roof’ solar PV to much more costly systems that replace individual conventional roof tiles with a PV tile that is almost indistinguishable in appearance (see the picture for Scenario 4 in Appendix 1). We believe that roof integrated PV falls under Category 10a of Annex III ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied’. DECC’s UK Solar PV Strategy Part 2: Delivering a Brighter Future7 defines BIPV ‘where the building fabric is made from solar PV materials. Technology is starting to provide us with the opportunity to install PV directly into the fabric of building glass and cladding material.’ If HMRC want to differentiate roof-integrated PV for the domestic market we propose using the following definition:
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See our draft solar booklet https://drive.google.com/file/d/0B8Wg5eH9kHBtcDVvc3AtU0YwQTA/view?usp=sharing https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302049/uk_solar_pv_strategy_part_2.pdf
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“Where a solar panel installation is solely for the purpose of generating electricity, it can qualify for the reduced rate of VAT where: (i)
(ii)
an area of the existing outer roof covering beneath the solar panels is removed and the panels and/or their installation and fixing kit form the new primary weather-tight roof covering of the refurbished roof, and the area of roof covering replaced is at least equal to the active area of the solar panels.”
In addition we believe that roof integrated PV can make a significant contribution for the purpose of complying with a social policy (Category 10 of Annex III). As roof integrated PV becomes more cost competitive we are seeing an increase in social housing projects using this approach. Solarcentury’s C21e tile has been used in Luton as part of a complete refurbishment of 242 social houses (see the photographs below and overleaf). Sixty of those properties had the C21e solar tile installed as part of the renovation, a total capacity of 52.8 kWp. The renovation to the properties has also improved their energy efficiency as the panels have improved the insulation of the houses. The residents now have a secure and more affordable energy supply, increasing their energy security.
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Appendix 1: cost breakdown of four roof integrated PV systems For example Viridian’s Fusion Tile
Scenario 1 Retro BIPV install Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
12 3 250 £2,882 £3,014 49% £294.80 £1,179.20 £884 £5,896 £6,191 £7,075
Scenario 2 In Tray + Standard Panels Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
For example IRFTS Easy Roof
12 3 250 £2,600 £3,400 43% £300 £1,200 £900 £6,000 £6,300 £7,200
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Scenario 3 Premium BIPV
For example Solarcentury’s C21e
Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
60 3 50 £5,550 £3,400 62% £448 £1,790 £1,343 £8,950 £9,398 £10,740
Scenario 4 Ultimate BIPV Number of panels Capacity (kWp) Panel Size (Wp) Cost of Equipment Labour Material cost percentage vat 5% vat 20% Difference Total Install (excluding VAT) Total Install 5% Total Install 20%
For example Solarmass Ergosun
231 3 13 £7,300 £3,400 68% £535 £2,140 £1,605 £10,700 £11,235 £12,840
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Appendix 2: STA’s UK Solar Thermal Statistics and Market Size report
UK Solar Thermal Statistics
October 2015
Annual Solar Thermal Sales
Flat Plate (m2)
Aperture Area (m2)
100,000
Evac. Tube (m2)
Total
Change prior yr
(m2)
%
2008
32,196
5,223
37,419
2009
48,717
16,788
65,505
2010
70,061
18,317
88,379
35%
70,000
2011
60,794
15,688
76,481
-13%
60,000
2012
41,053
10,891
51,944
-32%
50,000
2013
27,721
8,223
35,944
-31%
40,000
2014
24,590
5,870
30,460
-15%
90,000
Evacuated Tube
80,000
Flat Plate
75%
30,000 20,000 10,000 2008
2009
2010
2011
2012
2013
2014
Source: STA / HHIC / ICOM
Quarterly Solar Thermal Sales
Year
Quarter
2013
25,000 Evacuated Tube
20,000
Flat Plate
2014
15,000 10,000
2015
5,000 -
Evac.
Total
Tube (m2)
30,000
Aperture Area (m2)
Flat Plate
(m2)
(m2)
Change prior yr %
1
7,763
1,857
9,619
-32%
2
7,746
2,181
9,927
-28%
3
6,688
2,490
9,178
-31%
4
5,524
1,696
7,220
-32%
1
7,689
1,603
9,292
-3%
2
6,962
1,844
8,806
-11%
3
5,740
1,568
7,308
-20%
4
4,199
855
5,054
-30%
1
4,206
892
5,098
-45%
2
4,094
812
4,906
-44%
3
5,807
905
6,712
-8%
4
3,959
771
4,730
-6%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010
2011
2012
2013
2014
2015
Source: STA / HHIC / ICOM
Monthly Solar Thermal Sales 2015
Year
Month
4000
Total
Tube (m2)
(m2)
(m2)
Change prior yr %
1,511
235
1,746
-36%
Flat Plate
February
1,181
364
1,545
-56%
Prior Yr Total
March
1,514
293
1,807
-41%
April
1,509
188
1,697
-43%
May
1,234
291
1,525
-51%
2000
June
1,351
333
1,684
-37%
1500
July
1,310
366
1,676
-44%
August
3,106
257
3,363
65%
September
1,391
282
1,673
-27%
October
1,192
203
1,395
-39%
3000 2500
1000
500
2015
Evac.
January
Evacuated Tube
3500 Aperture Area (m2)
Flat Plate
November
0 1
2
3
4
5
6
7
8
9
10
11
12
December
Source: STA / HHIC / ICOM
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