On 8 February 2024, ICAEW Scotland hosted a roundtable of industry leaders to discuss the challenges and opportunities in shaping Scotland’s energy transition. The Scottish National Investment Bank kindly hosted the session, with leaders attending from across project development, financial advisory, legal services, and capital provision verticals. A summary of the key discussion points is set out below.

Funding gaps

Despite Scotland’s commitment to renewable energy expansion, funding gaps remain a significant challenge. The macroeconomic environment characterised by higher interest rates has ramped debt costs for borrowers. This has led to an emerging shift towards floating interest rates, and away from fixed rates. As higher debt costs squeeze equity returns, investors and sponsors are more aware than ever that projects must be commercially sound to withstand the challenging macroeconomic backdrop.

Policy environment

The policy landscape plays a crucial role in shaping the trajectory of renewable energy projects. Clear and consistent policies are essential for investor confidence and project bankability. Government-backed schemes such as Contracts for Difference (‘CfDs’) are particularly crucial, especially for emerging technologies like tidal energy. The future of CfDs is pivotal for the bankability and scale deployment of renewable energy projects. The success of Scottish businesses such as Orbital Marine Power and SAE Renewables in securing CfDs for tidal projects underscores the importance of government in driving project viability. Ensuring that AR6 CfDs remain attractive is critical for achieving Scotland’s renewable energy targets.

Grid infrastructure

Grid congestion poses a significant barrier to the deployment of renewable energy in Scotland. Feedback from developers on the rarity of obtaining a pre-2030 grid connection is a clear warning that sufficient grid infrastructure is lacking. Interconnection capacity between Scotland and England is notably suboptimal, leading to underutilisation of Scotland’s world-leading renewable energy resources. Furthermore, grid operators approach developments in the connection request queue piecemeal, rather than addressing the lack of grid infrastructure from a wider systems perspective. Leveraging battery storage opportunities could play a vital role in reinforcing the grid and mitigating congestion challenges.

Ports as a gateway to net zero

Ports play a crucial role in supporting both onshore and offshore renewable energy development. However, most ports operate under trust structures, limiting their ability to take the risks involved in transformational long-term infrastructure investments. Given the susceptibility of long-term infrastructure investments to challenging macroeconomic factors, there is a clear role for patient capital and government support, and also for developers, where finding innovative ways to provide revenue visibility for asset owners can help unlock financing gaps.

Skills development

Addressing skills gaps is a key requirement to support the transition of Scotland’s workforce to clean energies. Initiatives such as Scottish National Investment Bank’s recent investment into Aurora, a company which upskills oil and gas workers into renewable energy roles, highlights the need for targeted workforce development strategies. Furthermore, recognising the overlap in skills between the fossil fuel and renewable energy sectors is crucial for effectively leveraging existing talent pools.

Shaping the hydrogen business model

Hydrogen presents a promising case to catalyse decarbonization, including potential applications to long-duration storage and heavy transport. However, development of a viable hydrogen production and sale business model requires overcoming significant hurdles to reach final investment decisions.

Conclusion

Scotland’s journey to net zero is not without pervasive challenges, but it presents significant economic opportunities. Overcoming funding gaps, navigating policy uncertainties, addressing grid constraints, and investing in skills development are essential steps in realising Scotland’s renewable energy potential. By tackling these challenges head-on and leveraging the opportunities decarbonisation brings, Scotland can continue to be a global leader in renewable energy and sustainability.

Sources

15GW of installed renewables capacity
Additional 20GW of renewables capacity by 2030
Scottish National Investment Bank investment into Aurora 

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ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

Following the Spring Budget 2023, HMRC launched a call for evidence seeking views on whether the VAT zero rate for the installation of energy saving materials (ESMs) should be extended. The call for evidence considered the extension of the relief to additional technologies and to installations of ESMs in charitable premises. 

Having reviewed the responses to the call for evidence, including a response from ICAEW, HMRC has now announced an extension to the scope of the VAT zero rate. The extension of the zero rate, as detailed below, will take effect from 1 February 2024. 

Electrical battery storage 

Electrical battery storage already qualifies for the VAT zero rate when installed in conjunction with a qualifying ESM.  

From 1 February 2024, the zero rate will be extended to electrical battery storage that is retrofitted to a qualifying ESM. Installation of electrical battery storage as a standalone technology connected to the grid will also qualify for the zero rate of VAT. 

Other technologies 

A wide range of technologies were suggested by respondents to the call for evidence for consideration for the VAT zero rate.  

The government has confirmed that the following will be included within the zero rate from 1 February 2024: 

• water-source heat pumps; and
• diverters retrofitted to ESMs such as solar panels and wind turbines. 

Heat pump groundworks 

The intention of this VAT relief is to relieve the whole installation process of VAT. The government recognises that groundworks are integral to the installation of ground-source and water-source heat pumps. The relief will therefore be extended to some groundworks. A discrete list of named groundworks that will qualify for the zero rate will be defined in VAT legislation. 

Charities 

Until August 2013, UK legislation provided a VAT relief for the installation of ESMs in a building intended for use solely for a relevant charitable purpose. This VAT relief will be reinstated from 1 February 2024. Qualifying charities will be able to install all ESMs within scope of this relief without incurring VAT until 31 March 2027. 

A relevant charitable purpose is defined as use by a charity “otherwise than in the course or furtherance of business.” This also includes use as a village hall or similar building (see section 14.7.1 of VAT Notice 708). 

Sunset clause 

The VAT zero rate for ESMs is currently only temporary. It is due to expire on 31 March 2027. At this point, the installation of technologies within scope of the relief will revert to the VAT reduced rate (5%). This includes the ESMs added from 1 February 2024 and installations within charitable buildings. 

Currently, the government has chosen not to make the zero rate for ESMs permanent or extend the zero rate beyond 31 March 2027. However, it is possible that the zero rate will be extended before this expires. 

 

Further reading:

ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

The consultation response highlights the fact that, while half of the UK’s gas needs are met by fields operating in the North Sea, the licence holders of those fields are owned by multinational, private equity and state-backed firms. Reliance on these fields does not produce energy security, nor does it protect consumers from volatile commodity pricing.

The response goes on to describe the opportunities that could instead be created by investment in emerging technologies, highlighting green and blue hydrogen production as an example.

It then describes some of the barriers that currently exist to decarbonising the UK’s energy production, including a lack of skills, training opportunities, long-term planning, and investment at a national level.

The response sets out the support that could be provided through the fiscal regime for decarbonisation of the energy sector. These include:

• reform to the R&D tax regime, to focus higher relief opportunities on the renewables sector; and
• expansion of the capital allowances regime to allow relief for the design and planning of renewable energy installations.

Finally, the response highlights simplification that could be achieved through reform of the various oil and gas tax regimes, including:

• repealing petroleum revenue tax; and
• merging ring-fence corporation tax and the supplementary charge.

The report recommends keeping the energy profits levy on the statute book and setting it at an appropriate rate (including 0%) as a response to energy price shocks at any given time in the future.

ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

In ICAEW REP 47/23, ICAEW’s Tax Faculty notes that VAT reliefs are not the optimal policy tool for driving behavioural change. In this case, the behavioural change in question is an increase in the installation of energy saving materials (ESMs). 

The faculty expresses a desire to keep the tax system simple. Instead of using VAT reliefs, the government should ideally use additional tax revenue to fund carefully targeted grants to encourage the take-up of ESMs. 

However, the faculty notes that given the current state of the structure of VAT in the UK, the VAT relief for ESMs should be extended in line with the UN’s Sustainable Development Goals. As such, the zero rate should be extended to electrical battery storage and any other technologies proven to save energy (or generate clean energy).  

Whilst pointing to a body of evidence suggesting that most of any VAT saving would not be passed through to consumers, the faculty accepts that improved profitability in the sector may increase competition and indirectly lower prices.  

As a final point, the faculty suggests that VAT relief could be simplified by broadening the zero rate to any supply of ESMs, not just the installation (or supply and installation) of ESMs.  

ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

Businesses that provide and install certain energy saving materials (ESMs) in Northern Ireland will be able to apply the zero rate of VAT from 1 May 2023. 

The temporary zero rate for the installation of ESMs was introduced in Great Britain from 1 April 2022 until 31 March 2027. The government stated at the time that this could not be applied in Northern Ireland under the terms of the Northern Ireland protocol. 

Now that the UK government has ratified the Windsor Framework, the zero rate can be extended to Northern Ireland with effect from 1 May. This will reduce the VAT rate on these installations in Northern Ireland from 5% to 0%. 

Consistent with the change introduced in Great Britain, the scope of the relief has been widened to include wind and water turbines. Certain eligibility criteria that previously applied in Northern Ireland under EU rules has also been removed. 

In addition to this change, the government is currently consulting on further extending the VAT relief for energy saving materials. 

Further reading: 

VAT at 50 – where next? 

ICAEW’s Tax Faculty is hosting a full-day conference to mark the 50th anniversary of the introduction of VAT in the UK. The conference will briefly reflect on VAT’s evolution since 1973, but will focus on exploring the future of the tax over the next five to ten years. One theme of the conference will be sustainability, focusing on how VAT can be used as a tool in the government’s net zero strategy. 

Book your space  

ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

As part of Spring Budget 2023, the government has launched a call for evidence seeking views on reform of the VAT relief for energy saving materials (ESMs). The aim is to enable the relief to meet its intended objectives more effectively across the whole of the UK.  

Current position

Relief from VAT is currently available in the UK for the installation of certain specified ESMs. This includes a zero rate in Great Britain (currently available until 31 March 2027) for the installation of ESMs in residential accommodation. The supply of ESMs without installation is subject to the standard rate.

In Northern Ireland, the installation of certain ESMs in residential accommodation is subject to the reduced rate, although additional conditions apply. Subject to the ratification of the Windsor Framework, the VAT treatment of the installation of ESMs in Northern Ireland will be brought in line with the VAT treatment in Great Britain.

Call for evidence

The call for evidence seeks views on the inclusion of additional technologies within the relief. The primary technology being considered is battery storage, but the consultation also asks for views on whether any other ESMs should qualify. The current list of ESMs is contained in an annex to the call for evidence.

Second, the call for evidence asks for views on whether the relief should be extended to cover installations of ESMs in buildings intended solely for a relevant charitable purpose. This would be a reintroduction as the relief covered charitable premises prior to August 2013.

Objectives of the relief

The key objectives of the relief are:

1. Improving energy efficiency and reducing carbon emissions
   The primary purpose of any technology included in the relief should be to reduce demand for energy derived from fossil fuels. This could include onsite production of energy (eg, solar panels or a wind turbine), or improving the capability to retain or preserve energy within a property (eg, battery storage or insulation).
2. Cost effectiveness
   The tax relief should be cost-effective. The reform should change consumer behaviour without incurring a significant fiscal cost.
3. Alignment with broader VAT principles 
   Any expansion of the relief should not introduce uncertainty or additional complexity.

Next steps

ICAEW’s Tax Faculty intends to respond to the call for evidence and would welcome input from members. If you have any views on the consultation, please contact Ed Saltmarsh.

Further reading:

ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.