Energy Bill
Debate between Lord Bishop of Chester and Lord Roper
Lord Roper
My Lords, this amendment was originally tabled by the noble Lord, Lord Cameron, who very much regrets that he cannot be here today, and therefore I shall speak to it. He asked me first of all to make it clear that he is not personally involved in any microhydro scheme although in the west country where he comes from, and elsewhere in our countryside, a growing number of families and individuals are trying to make the best use of our many rivers, old mill leats and mill houses to create small amounts of renewable power both for themselves and their communities. Therefore, it seems odd that one part of government, DECC, should arrange a subsidy to encourage such investment through feed-in tariffs and ROCs, while another part of government, the Treasury, through the Valuation Office Agency, seeks to remove part of that subsidy.
The noble Lord, Lord Cameron, has set out nine reasons why microhydro should not be assessed for business rates and, with the Committee’s indulgence, I shall quickly go through them. Domestic hydro sites may be located on rivers that are able to provide much more power than the owners require for their own consumption. It is obviously in the interests of the nation that domestic owners be encouraged to generate as much power as their sites are able to provide and consume as little of their output as necessary, otherwise the potential benefit of their hydro plants’ contribution to the grid and the community as a whole is diminished.
Domestic owners do not want the complication of their residential property being designated as a business. There is already clear evidence of gaming around the capacity bands chosen for the feed-in tariff, and some owner-operators will perhaps downsize the scale of their investment to avoid non-domestic rates being levied, which, again, cannot be in the interest of the nation as a whole.
The Valuation Office Agency’s rating models have not been designed to accommodate domestic hydro plants, where there is no landlord, no tenant and no market rents to test the validity of the office’s assumptions. Indeed, its rating model and the DCLG legislation on non-domestic rates are insensitive to yearly variations in the weather. For example, the output from the run-of-river site may vary by more than 40% from one year to the next, depending on rainfall. There are no operating costs that an owner-occupier can cut to offset the consequential losses in revenue.
A site’s revenue will be reflected in the income of the owner and taxed accordingly, taking into account capital allowances for this very long-term investment. The approach of the Valuation Office Agency to calculating rateable value does not allow for the repayment of loans or the cost of borrowing and assumes that funding will be through equity, which, in the view of the noble Lord, Lord Cameron, is a ridiculous assumption for domestic microhydro. Non-domestic rates have been applied retrospectively, creating havoc and uncertainty for a number of domestic-scale financing plans. Indeed, according to evidence supplied by DECC, no allowance was made for non-domestic rates when the state subsidies were originally established.
A further example of the inflexibility of non-domestic rates means that when the subsidy ends, the drastic reduction in revenue—a reduction of 40% in the case of the renewables obligation and 75% for the feed-in tariff—will not be acknowledged or included in the calculations for rateable value until the five-yearly antecedent valuation date arrives. It will then be another two years before the adjusted rateable value comes into operation. Clearly, these two systems are incompatible. It is also worth pointing out that no other domestic renewables, for example photovoltaic solar panels, are charged business rates on the amount of power they export. This is a strange anomaly, and the noble Lord, Lord Cameron, was right to bring an amendment in these terms to the Committee. I look forward to hearing the response of my noble friend the Minister.
The Lord Bishop of Chester
My Lords, I very much support the amendment. This may well be the last time I speak in this Committee and I thank the Minister for the way in which she has conducted herself and for writing to me with answers to some previous questions that I raised.
In addition to the reasons which have been so clearly enunciated, I would like to inject into the discussion the issue of culture, because much of what we are about in energy policy in this country is working on a change of culture. It has become a fashionable word. The Second Reading of the Financial Services Bill was all about changing the culture of banking and financial services, and that is absolutely right. However, the same applies in the energy realm. The sort of installations that we are talking about are relatively small in themselves but speak more widely.
I will digress very slightly to a non-domestic instance. In Chester in the 1920s, the tram system was powered by a small hydroelectric plant on the River Dee. The University of Chester, where I am president of the council, is in the process of bringing that hydroelectric plant back into operation, partly to satisfy its obligations to HEFCE vis-à-vis its green credentials but also as a very reasonable project in itself. It will have a cultural impact in Chester quite beyond the actual electricity component of the project, and I think that the same will apply in the circumstances we are discussing.
There is something about hydroelectric power that goes with the grain of the countryside and nature rather better than windmills and some of the other things we are doing. We should do more to encourage local use of natural resources. If the projections about future rainfall are right, there will be even more rain flowing into our rivers to power these microhydro projects. Although I cannot comment on the precise terms of the amendment, it seems to me that the spirit of it is absolutely right at the present time.