ECA’s and the path to efficiency
March 1st 2005

Tony Smith of Byworth Boilers looks at the financial inducements, advantages and options available to those looking to invest in new boiler equipment

The modern shell steam boiler is a paragon of engineering efficiency, regularly delivering operating efficiencies of over 90%, which puts to shame the performance of most other energy generation systems.

But as efficient as they are, a shell boiler can in each year of operation, consume fuel equal in value to several times the original purchase price of the machine, hence the constant push for even greater efficiency.

This pursuit of efficiency of operation however, is often in direct conflict with the need to operate at the lowest level of environmental impact. For example, while the addition of flue gas economisers, and condensate return systems have a beneficial effect on economics without detriment to the environment, the preheating of combustion air, while increasing the thermal efficiency of a boiler, results in a net increase in NOx emissions.

In an effort to encourage boiler users to both enhance their cost effectiveness and minimise the environmental impact of their boiler plant, two schemes have been introduced which, in effect, subsidise the cost of emissions limiting enhancements.

Firstly, a company may apply for the Enhanced Capital Allowance (ECA) Scheme, that allows a company to write down the cost of the new boiler over one year, instead of the usual 10 year period.

Secondly, using the Carbon Trust, companies may apply for an interest free loan if they are able to prove an energy saving by the purchase of new equipment.

Let’s look at the ‘standard’ Capital Allowance system:

• When a company invests in capital equipment they reduce their taxable profits for the year they bought the goods by 25% of the expenditure incurred and by 25% of the balance in each year thereafter on a reducing balance basis. (SME’s get 40% allowance in the first year, and 25% thereafter)
• If a company invests £50 000 in capital equipment, they reduce their taxable profits by £12 500 in the first year, by £9375 in the second year, and so on. By the tenth year the company would have avoided paying tax on £47 184.33 of their profits. If they pay Corporation Tax at 30%, they would have saved £14 155.30 in tax.

And now to Enhanced Capital Allowance:

• To Quote The Carbon Trust… “The Enhanced Capital Allowance Scheme enables businesses to claim 100% first year capital allowances on investments in energy saving technologies and products. Businesses are now able to write off the whole cost of their investment against their taxable profits of the period during which they make the investment.”
• Using the same example, the company would have avoided paying tax on the full £50 000 in the first year, saving them £15 000 in tax with no savings in subsequent years. The scheme does not distinguish between SME’s and larger organisations.

Given that the savings are made within the first year there is a clear advantage to customers in the Enhanced Capital Allowance scheme. Obviously a company must make profit in order to benefit from either system.

Secondly, using the Carbon Trust, companies may apply for an interest free loan if they are able to prove an energy saving by the purchase of new equipment.

This is a Government backed initiative that aims to reduce energy use for UK businesses, by using a £10 million fund. In addition, if a company’s annual energy bill is in excess of £50 000 they may qualify for a free energy survey.

Loans are available for private sector SME’s from £5 000 to £100 000, payable over a period of up to 48 months. This payback period varies according to the energy payback to the company of the new plant. There are a number of eligibility criteria, although the application process is quite straightforward. Further details may be obtained at the Carbon Trust web site: www.thecarbontrust.co.uk.

Byworth Boilers, an independent manufacturer of industrial steam boilers in the UK,has found a mixed reaction to these initiatives. The cost of equipping a boiler with equipment to ensure eligibility for the ECA has meant that generally only large scale steam users show a significant benefit. The new interest free loan scheme, has been welcomed by a large number of customers, and when viewed as a complete package, Byworth is of the opinion that the Government has a scheme to suit most UK organisations. If you are interested in replacing old inefficient plant, or are considering investment in new systems, Byworth Boilers will advise upon the most efficient solution to your needs.

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