As reported by Utility Week at the end of June (but only picked up by the BBC and publicised by ministers in September), the European Commission has accused the UK government of being in breach of the European Union VAT Directive by charging only 5 per cent (rather than the standard 20 per cent) VAT on certain energy efficiency products. Brussels is threatening to take the UK government to court to force it to raise VAT to 20 per cent on those products. The government has committed to fighting its corner should the matter go to court.

If the EU’s challenge is successful, a further 15 per cent on the cost of a domestic energy efficiency scheme could be enough to persuade householders not to bother with the Green Deal. Energy suppliers and others have found it hard enough to persuade householders to take up free energy efficiency measures offered under Cesp and Cert (the predecessors of the Green Deal), and it will be even harder to persuade people to take out a loan to cover the cost of the measures under the Green Deal. If those costs increase by 15 per cent, this may become impossible.

It may also mean that it is harder for some measures to meet the “golden rule”, which requires that the cost of installing the measures is less than the energy savings that the measures will deliver. The additional 15 per cent cost could tip them over the edge into non-compliance, reducing the range of energy efficiency products that can be taken up as part of any Green Deal package.

Many have seen the Green Deal as doomed from the start: too complex for consumers to understand and requiring them to have a large degree of trust in those offering Green Deal packages. That trust is unlikely to be forthcoming as consumers wonder if the deals offered are too good to be true. This could be another piece of bad news for the scheme that ultimately turns off consumers.

Ministers have been trying to drum up a groundswell of support for their stance on the VAT issue. On Twitter, climate change minister Greg Barker is asking followers to show their support for the 5 per cent VAT rate and the government’s commitment to fight any EU challenge by ¬≠re-tweeting his message. This raises awareness of the issue in the UK and may lead to some form of support from UK businesses and consumers.

However, political pressure will not mean much in the dry and dispassionate air of the European courts. It will come down to a strict interpretation of the EU VAT Directive and whether the UK’s reduced rate for energy-saving products falls within the permitted reasons for reduction or not. The irony, of course, is that the EU is committed to an emissions reduction policy and this approach to VAT could potentially jeopardise that policy, at least in the UK.

However, what any awareness of the issue in the UK may bring is a short-term boom in installations, much like that seen prior to the reduction in feed-in tariff rates for photovoltaics, as people rush to take advantage of the lower 5 per cent rate before the UK government is forced to push it up to 20 per cent (if the EU’s court challenge is successful). It will be some time next year before the matter is decided by the courts. This may be catastrophic for UK businesses that gear up to provide the necessary measures, only to have demand collapse on them should VAT increase.

Is this, then, what the Green Deal promises: a short-term boom from those who intended to take out a Green Deal plan anyway, but an inability to attract consumers to participate – especially if the VAT increases? Ministers are fighting hard to administer CPR to an already ailing scheme, even before it has started. With the EU taxman delivering such a body blow, can any amount of mouth-to-mouth save it?

Adam Davidson, director,Walker Morris

This article first appeared in Utility Week’s print edition of 5th October 2012.

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