After receiving backlash for the green initiatives in its Spring Statement 2022, the UK government has approved a new set of reforms that went into effect February 1st, 2024. These reforms include greater value-added tax (VAT) relief on energy saving materials (ESMs), the most notable being the installation of energy-saving batteries. The reforms are being hailed as a great step forward in the country’s green transition efforts.
This legislative change marks a significant leap in incentivizing the adoption of cutting-edge energy storage technologies, promoting grid stability and facilitating the integration of renewable energy sources into the national power infrastructure. By expanding the battery storage systems that qualify for VAT relief, the UK is lowering the barrier for businesses and homeowners to become self-sufficient. The reform further incentivizes them to invest in renewable energy without having to shell out high upfront costs for both solar panels and BESS at once and ensure that the locally-produced solar power goes further.
What was wrong with the previous policy?
The real question is: What wasn’t wrong with the previous policy? Before its publication, the UK's Spring Statement 2022 was highly anticipated to contain bold and aggressive sustainability measures to combat the escalating global climate crisis. However, the delivered statement fell short of these expectations. While the government did address some aspects of sustainability, such as introducing VAT relief for solar panels and heat pumps, there were also counteractive policies like reducing the cost of petrol. In a country where companies are increasingly discouraging work-from-home flexibility and public transportation is costly, making petrol cheaper encourages personal car usage, which raises already high carbon emissions.
A major criticism lay in the lack of concrete policies to accelerate the transition to renewable energy sources. Despite both public and industry support for green energy, the Spring Statement failed to provide a comprehensive roadmap for scaling up renewable energy infrastructure. Advocates were looking for more substantial commitments to support clean energy projects, expand research and develop green technologies, as well as incentivize businesses to adopt sustainable practices.
Overall, the lack of progressive sustainability efforts in the Spring Statement 2022 raised concerns about the government's commitment to achieving its climate goals. In response, industries demanded greater action and the UK government launched a ‘Call for Evidence’ (CfE) to determine potential areas of reform.
What’s included in the new VAT relief policy?
The new policy expands VAT relief to include a greater array of energy storage batteries. In the UK, VAT, sometimes also known as the goods-and-services tax, is 20%. The relief will be available to both businesses and homeowners.
This will enable more households to install ESMs, improve the energy efficiency of their homes and thereby reduce their energy bills. By focusing on reducing costs on UK families, it will help to deliver on the government’s pragmatic, proportionate and realistic path to reach net zero by 2050.” – Nigel Huddleston MP, UK Financial Secretary to the Treasury
Battery storage systems added alongside solar PV
Batteries connected directly to local solar power were already included in the Spring Statement 2022. They maximize the renewable energy usage by charging during sunny periods with excess solar power and discharging at night or on cloudy days. The following battery installations were previously not included.
Retrofit batteries are batteries that are added to existing photovoltaic (PV) system installations. Including this type of battery in the new policy not only gives users the environmental and cost benefits that come with a solar battery, but it also encourages businesses and homeowners who already have PV systems to add a battery and benefit from the UK’s tax relief. It makes batteries (and their associated benefits) much more accessible to a huge portion of the population. While there are more than 1.3 million UK homes with solar panel installations, just 10,000 homes in the country have batteries. This means at least 1.29 million homes can now benefit from the extended VAT relief.
Standalone battery storage
As the name suggests, standalone batteries are fitted by themselves without local solar power. In this case, power that comes from the electrical grid is stored in a battery energy storage system (BESS) for later use. This has many beneficial applications, such as utilizing the energy during peak demands (i.e. times when energy prices are the highest) and during periods of ‘dimming’ or blackouts. Using BESS helps ease pressure on the grid when it’s most under strain, reduces the burning of fossil fuels and cuts down the costs on energy bills.
Other ESMs included
Water-source heat pumps will also benefit from 0% VAT under the new tax reform. The 2022 statement only included air- and ground-source heat pumps. Also included are diverters connected to renewable power sources, primarily PV systems. These extra ESM inclusions lower the barriers to a smart and holistic energy management even further, by incentivizing end customers to purchase multiple ESMs, such as solar panels, energy storage batteries, heat pumps and more, in order to benefit from the greatest potential savings.
As was stated in the 2022 statement, the 0% VAT for the ESMs will be available only until March 31, 2027. After that date, the VAT will revert to a reduced rate of 5%.
Reactions from experts
As expected, the new policy has been received with great accolades from energy players. The changes are seen as a noticeable step forward towards the country’s promise to combat climate change. Dave Roberts, Managing Director at GivEnergy UK, says, “This move is a critical step in encouraging the adoption of sustainable technologies. It fosters greater energy self-sufficiency for households and represents an important (if overdue) step in the right direction.”
By offering financial incentives to businesses and individuals investing in battery storage, the UK aims to not only reduce carbon emissions but also position itself at the forefront of the global transition to a more resilient and environmentally-conscious energy landscape.
Should consumers care?
Yes, they should. One of the greatest advantages this policy provides to consumers is cost saving. With VAT being 20%, savings can reach over £1,000 depending on the battery type and capacity.
Consumers are now more likely to add a battery system to their PV system, allowing them to use locally-sourced power during peak times. This lowers their costs by allowing users to leverage fluctuating energy prices and eases the strain on the grid during periods of high demand. Owners of buildings/houses that cannot accommodate PVs are now also encouraged to add a BESS, which is better for their wallet, the grid and the environment.
The move to exempt VAT on energy storage batteries both with or without solar has also recently gone into effect in the Netherlands. This is a sign that more and more countries may soon follow suit thanks to the policy’s multiple benefits.
The benefits of batteries and HEMS
The UK’s new VAT relief for battery installations complements and strengthens the value of a home energy management system (HEMS). A battery is the gateway to an effective HEMS as it gives end users the power to flexibly store and shift demand, thus providing self-sufficiency and independence from the grid. An energy management holistically and intelligently charges and discharges a battery in line with other assets and the grid, for example when solar power is high, household demand is low and/or when energy prices are low. However, a battery is just the beginning.
Ronan de la Gournerie, Senior Account Executive for the UK at gridX, says, “The UK’s new VAT relief for batteries and heat pumps is a game-changer. It removes a barrier that makes a big difference to many homeowners and it’s expected to increase demand and interest in sustainable energy products. The subsequent exponential increase in household assets paves the way for home energy management. This means the time is now ripe for energy providers to secure their place in the HEMS market to be able to meet consumers’ changing needs.”
When combined with more assets, a HEMS offers more value as it optimizes the energy flows between all assets according to individual preferences. For example, the system ensures that an electric vehicle receives its desired state of charge by the time the driver departs, while also charging it in either the most economic or sustainable manner. At the same time, household demand is met (including heating requirements), in the most cost-effective manner, while maximizing the power used from locally-generated solar power. In short, all assets in a house must work together rather than in isolation, to maximize self-sufficiency and minimize both household and overall energy system costs.