The proposals are based on a European ruling that current 5% VAT is “not consistent” with EU law and thus should be raised.

EU law dictates that materials and projects can be made exempt from higher tax bands if they match certain social criteria and provide benefits. However, the UK’s energy-generating turbines and solar panels will not be eligible under ‘social criteria’ and thus will be subject to the higher VAT figure.

The Renewable Energy Association (REA) is adamant that this decision would have a negative impact across the energy efficiency and renewable markets. The Association for Public Service Excellence (APSE), which works with Local Authorities to progress renewable energy projects, is also critical of this punitive measure. 

APSE’s director of energy Mark Bramah said: “The fact that three renewable technologies were singled out for the removal of the social exemption is particularly perplexing – if there is ever a set of technologies delivering a social benefit then it is renewables.

“Our members have already put on hold a number of projects which would help reduce fuel poverty due to previous renewable energy cuts. This will further damage the ability for many local authorities to act on their ambition to improve their housing stock and reduce fuel poverty in an effective, low-carbon way.”

Greenpeace UK chief scientist Doug Parr added: “A vital part of the sustainable energy future being championed in Paris is being undermined in London by changes to VAT that must be resisted. In addition to the confusion created by dramatic cuts to solar support, this creates a new round of uncertainty for business, and more expense for homeowners who are seeking to do their bit for the climate, as loudly requested by David Cameron last week.

“This move makes a mockery of Cameron’s claims to climate leadership, and shows once again that is Osborne who is ultimately holding the reins on energy policy in the UK.”

Feed-in tariff review

This could serve as potential double blow for an anxious renewables sector which is awaiting the results of the much anticipated Feed-in-Tariff (FiT) review next week.

An increase in VAT will increase the cost for installing solar PV by 15% right away. This doesn’t take into account subsidy cuts – which could reach 87% from 12p/kWh to 1.63p/kWh – expected to be announced in the FiT review.

The review aims to reduce the supposed burden that renewable projects add to consumer energy bills, with the government admitting that the current tariff set-up will see them overstep the Levy Control Framework – which caps the amount that DECC can raise through green surcharges on energy bills.

The government’s “trigger-happy” approach to subsidy cuts has been widely criticised by environmentalists, which led to the Solar Trade Association to draw up plans for a £1 rescue plan to ‘save’ the industry.

Mike Landy, head of policy at the Solar Trade Association commented:  “Instead of just accepting the EU ruling HMRC needs to push back and argue for solar to keep its reduced VAT rate.

“The Department of Energy and Climate Change and the Treasury also need to take this massive hike in end prices into consideration in their imminent decision on how far to cut the fed-in tariff for solar.”

Deteriorating prospects

The VAT hike is particularly damaging to the solar industry. Just over seven months ago the UK was boasting the third-largest utility-scale solar capacity in the world, with 20,000 solar business projects deployed under the Feed-in-Tariff scheme alone.

But since the general election thirteen policy changes have damaged productivity with an estimated 6,500 people losing their job in the renewables sector. The REA has claimed that potential subsidy cuts will results in a loss of up £94m in lost tax revenue.

Lauren Cook, policy analyst at the REA, said: “Once again, this is bad news for the renewable energy and energy efficiency market, if the proposal is successful.  An increase in costs of 15% for all wind, hydro, and solar projects is yet another blow to an industry facing significant job losses and shifting sands when it comes to policy.

“We need more renewable power to meet our legally binding renewables targets and carbon budgets, which even Ministers admit are now looking challenging. Although this is an EU ruling, the Government has some leeway in implementing the change but has chosen to do so in the least favourable way.”

Matt Mace

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