Are businesses missing out on energy efficiency cost savings?
Enhance Capital Allowances enable all of the costs of energy-efficient equipment such as Daikin’s VRVIII heat-pump air-conditioning system to be offset against pre-tax profits in the first year — as well as associated costs such as design, transport, installation and commissioning.
Businesses need to embrace every opportunity available to them if they are to achieve cost and carbon savings says John Durbin.Even in the current economic conditions, climate change has never been far from the headlines. The recent Government announcement to increase the UK CO2-reduction target from 60% to 80% serves as a reminder of the importance of addressing carbon emissions. To reduce emissions and achieve the targets, businesses have been called on to reduce energy consumption. Yet, with companies typically required to invest in energy-efficient technology to make ongoing savings, many will be faced with the question of how to balance investment against gain. Even though lower energy consumption will typically lead to lower energy costs, calculating the right level of capital expenditure based on the efficiency gains provided is not always easy. Given the uncertainty in the economy, deciding whether to make the investment in energy-efficient technology can be particularly challenging, but the cost savings available through efficiency improvements, as well as the CO2 reduction, means it is an investment businesses cannot postpone. The Government has developed a number of incentives to support businesses in the adoption of energy efficient technology, including the Enhanced Capital Allowance Scheme (ECA). Yet, despite it having been launched some five years ago, awareness of the ECA scheme appears to be lacking. Lack of awareness
Research by Daikin in 2008, involving 1300 businesses, revealed that 92% companies are currently unaware of the ECA scheme. At a time when businesses need to be improving energy efficiency for cost and environmental gains the concern is that this lack of awareness may be slowing adoption of new technology by businesses. The study revealed that heating and cooling technology is one important area where businesses could be failing to improve efficiency, with 61% being aware that investing in new heating and cooling technology would help improve energy efficiency. Incentives can play a role
Despite this, cost is still clearly an issue, with 61% stating it as a barrier for investment in new technology. The initial cost will always be an influential factor, but the incentives available through the ECA could make the difference in justifying the investment. The generally available capital allowance lets businesses deduct 25% of qualifying capital expenditure from pre-tax profits. This is repeated on the 75% residue the following year and every year thereafter until the equipment is amortised. Normal capital allowance can therefore take many years to claim. The ECA scheme provides businesses with 100% first-year tax relief on their qualifying capital expenditure. This boosts cash flow, reduces borrowing, increases investment and, over time, is worth far more than normal capital allowance. An air-conditioning installation that qualifies for an ECA, for example, not only includes the equipment but also the design, transport, craneage, installation costs and commissioning. ECA of 100% of this total sum can be claimed against pre-tax profits in the first year. If corporation tax is 30% then for every £1000 spent on the installation there will be a one-off reduction in first-year tax bill of £300. The normal capital allowance this would be £75 in the first year, £56.25 in the second, £42.18 in the third and so on. The saving generated through the ECA is also enhanced by the reduction in energy bills as it relates to lower energy use compared to less-efficient equipment. The ECA scheme sets the qualification at the top 15 to 20% of products on the market. As equipment design improves, the qualifying standard is reached by more units so qualifying equipment is shifted upwards to the new top 15 to 20%. Qualifying technology is included on the Energy Technology List, managed by the Carbon Trust. The list is continuously updated and available to view at www.eca.gov.uk/etl. Identifying areas for investment
Heat-pump technology will typically be a highly efficient and viable solution for commercial premises . The latest technologies achieve efficiencies over 48% higher than technology from 1993, in many cases. A number of heat-pump based technologies is included on the Energy Technology List. The Daikin VRV III (variable refrigerant volume) and the VRV III HR (heat-recovery) system, for example, both exceed the energy-efficiency targets set out by the Government in Part L of the Building Regulations. Their CoPs and EERs are up to 4.3 and 4.1, respectively, obtained at 100% connection. They also exceed the rigorous criteria set out by the ECA qualification. Encouraging adoption With the technology available and the ECA providing the financial support to aid investment, education is now paramount. Together with installers and suppliers of air conditioning, building-services engineers have an opportunity to make a real difference in demonstrating the value of energy-efficient technologies and encouraging the adoption of these technologies using the financial incentives on offer, including the ECA. To help businesses understand how they can reduce their tax bill and invest in energy-efficient heating and cooling technology, Daikin has produced a free guide to the ECA. To request a copy visit www.daikin.co.uk/comfort. To view the extensive list of Daikin products that qualify, visit www.eca.gov.uk/etl. John Durbin is engineering department manager with Daikin UK.