Part 3: practice note 3 - 2000 and 2005
The Valuation Office Agency's (VOA) technical manual for the rating of business (non-domestic) property.
Background
SI 2001 no. 846 grants exemption to certain items of plant including Combined Heat and Power Plant provided the occupier of the hereditament has been granted an appropriate certificate by the Secretary of State. The first of the certificates are starting to come though, and it is necessary to deal with these on pinks by the end of rate.
General
Combined heat and power plants most often use an engine of some description (usually gas oil, occasionally a gas engine or a steam / gas turbine) to drive a generator, producing electrical energy. The Waste heat is used via heat exchangers to provide space or water heating.
The efficiency of the system is typically around 70% and can approach 80% in total broken down as follows:
| % Of Total Energy input | |
| Electrical energy | 30 |
| Heat Energy | 50 |
This compares with the efficiency of the conventional delivery of electricity, via the grid from thermal generation at a power station to net useable energy at the point of delivery at around 28%
In terms of CO2 production the use of CHP saves about 1Kg/Kw of emission compared with conventional electricity generation and space/water heating.
To encourage development of such schemes fuel for CHP schemes is exempt from the climate change levy, there are advantageous capital allowances on the purchase of new plant and also the new exemption from rating.
Financial Advantages
Most CHP units are fired by natural gas, and in the early 1990 when many of these schemes where introduced the cost of gas relative to the cost of electricity was very low, this made the schemes very attractive. However through the 1990’s the balance shifted as gas prices rose and electricity cost fell. This may have contributed to the timing of the current rating provisions as the financial climate has militated against new schemes
Impact of the schemes
The results of (very meagre) investigations so far suggest that the effect on a hereditament can be quite small; one scheme suggests that the total amount of electricity produced is about 25% of the hospital, but that the contribution towards space and water heating is “a very small proportion”. The value effect of the course of action suggested below is very small on this particular scheme, and this may be the case for most schemes.
Implications for rating
If the schemes are producing a small proportion of the required energy for space and water heating, the clear implication of this is that there is still a need for conventional heat sources, and that the exempt CHP plant is an addition to the conventional plant. Non-the-less it will no doubt be possible to reduce the size of the conventional source to allow for the capacity of the (exempt) CHP Plant. No matter how small a reduction in the assessments is warrant in all cases where there is an exempt scheme (i.e. one with the proper certification)
See Rating Manual Volume 4 Section 3 Plant and Machinery
Action on Current work
On qualifying schemes, see relevant practice notes above, the items that are required to be taken out of the assessment are set out in SI 2000 No 540 Class 1 Table 1. (b), (c),(d) and (k).
Basically these are generating sets and for diesel / gas engine sets reference to the 2005 Cost Guide – Electrics – Generation Sets – 207D – series should be considered.
Information required to operate the scales is :-
(i) the output of the alternator kVa
(ii) the voltage ( likely to be 11 kV or 415 V )
(iii) whether the “set “ is in its own acoustic box or located in a basement or separate power house / building. (the power house / building will be rated separately the acoustic box is included in the costings)
The cost of the new “ set “ should be as per the Cost Guide whereas the cost of an old set should be reduced in value in accordance with the P & M allowance scales (see Cost guide Guidance Notes).
Adjustments for contract size adjustment and fees should be ignored.
On all qualifying schemes, it is suggested that the cost of a diesel or gas turbine set of equivalent (In terms of Electrical Power) output is taken from the valuation at the appropriate stage – see below
This figure appears to be Item 1 in the list of 7 items on the first page of the certificate and is measured in kW or mW (1mW or Megawatt = 1000 kW) and is described as the POWER CAPACITY of the scheme.
To distinguish from power in other forms some certificates use the suffix e i.e. MWe to denote electrical energy as opposed to the heat energy of the scheme.
It is important not to confuse the electrical energy with the heat energy that is produced and is shown on the certificate in MWh or KWh in item 3 (this confusingly is a measure of energy not power)
The costs of the generator sets are set out in appendix 1 (Acknowledgements to Dave Raley)
The cost should be written down appropriately for age and obsolescence and treated as a deduction in the valuation (the certificates do not show the age of the equipment so a phone call to the site is required). I have used the A and O for the buildings on the generators though strictly the P and M figure may be appropriate, and work through the remainder of the valuation so that the fees CSA etc are altered.
Please note that the location Factor should not be applied to the generator sets so the ARC of the unit should either be subtracted after application of the location factor, or grossed up to cancel out its effect
E.G. Hospital with a 1000 kVa generating set in a CHP unit
Voltage 415 V
Engine normal working speed 1500 rpm
50 hz (normal electrical current)
see Cost guide 207D94
Cost new as at 2003 AVD
£59,900 ERC
decap 3.33 %
RV deduction £1,995
Say £2,000
See relevant Cost Guide entries for Gas Turbines et cetera.
Many hereditaments have the benefit of Combined Heat and Power facilities. Indeed most “public” establishments such as Hospitals, Swimming pools, Institutional Buildings, Libraries, and Local and Central Government Buildings have installed, especially when the property is new, a CHP system. Modern Offices and Industrial / Commercial hereditaments also take advantage of the CHP systems.
In themselves any CHP installation will attracts FULL Rates to all relevant parts under Class 1, Class 2 and Class 4 of SI 2000 No. 540. A minority will receive rate relief under the SI 2001 No.846.
There is NO “excepted plant and machinery“ reduction within the CHP scheme as such and ONLY if the full requirements of SI 2001 No.846 (Rating and Valuation, England) (The Valuation for Rating (Plant and Machinery) (England) (Amendment) Regulations 2001) are complied with can a reduction in rateable value be contemplated.
Combined Heat and Power Plants produce for the occupier of a hereditament all or a reasonable amount of the total power requirements (usually electrical power but could be pneumatic) and heat (usually in the form of hot water or steam for radiator/air management but can be heat used in the operations of the manufacturing processes)
Gas engines, Diesel engines, Gas turbines and Steam turbines are the main “motors“ that produce mechanical power which is converted into electrical power and heat. (The word power is used in its Rating context).
Whereas the production of electricity from a carbon-based fuel is only 35% efficient when the heat is also utilised then over 80% of the calorie input is utilised. i.e. efficiency is markedly improved. This also has a positive “ green “ impact.
The motor “ engine “ turns a shaft which rotates within the alternator / dynamo thus producing electricity. The waste gasses from the combustion (or waste steam after the turbines have been turned) are hot, of large volume and of a reasonable pressure. They are used to heat water and this is captured in a boiler usually in the form of steam or at the very least very hot water. It is this steam / hot water that is utilised in the hereditament for heating et cetera.
In terms of CO2 production the use of CHP saves about 1Kg/Kw of emission compared with conventional electricity generation and space/water heating.
The systems are very complex and are not always easy to maintain at over 80% efficiency i.e. over 80% of the fuel calories are utilised in the CHP system. Nevertheless some establishments are able to consistently, over several years, maintain their CHP system efficiently.
The Government, in recognition of the Environmental advantages decided to reward Good Quality CHP operators in the form of Tax relief. These consisted of Capital Allowance benefits on purchase of new equipment, Fuel Charge levy on the inputted fuel and rates.
It is this latter category in which the VOA has an interest.
The first requirement for any occupier to be considered for CHP Tax relief’s is to be able to demonstrate that the CHP system that is operating can be consistently maintained at the required levels over a period of continuous running.
On some sites TWO CHP lines will be running and in such cases EACH line is treated as an individual.
Each CHP line has to be registered with DEFRA and it will be inspected and a “log book” provided to ensure that the CHP line is running within the Good Quality CHP Guidelines.
After 12 months, assuming the system has complied with DEFRA’s CHP guidelines, a 12 month certificate is issued. This states at the bottom of the form that it is for 12 months validity only.
This is NOT the CHP form required for rate reductions.
If the operator successfully obtains 3 (or a number specified by DEFRA) such yearly certificates they may be invited to apply for a SECRETARY of STATE CHP Certificate.
A copy can be seen in the VOA Rating Manual Volume 4 Section 3 – Practice Note 2000: 2001 Annex B – Climate Charge Levy: Combined Heat and Power Exemption Certificate.
The certificate should be signed by the Secretary of State and be dated. The date signed is the material date.
When such a certificate is produced the items of CHP for consideration MUST be determined. A request of the occupier for a FORM 4 must be made. See VOA Rating Manual Volume 4 Section 3 Plant and Machinery Practice Notes for a copy of Form 4.
A form 4 will identify ALL the plant and machinery that comes within a specific Secretary of State certificate. As stated above 2 CHP schemes may exist on a site, one has a certificate and one may not. Only the items on the certificated site will appear on Form 4. NOT all items on form 4 will be subject to rate relief BUT only those qualifying items of plant on Form 4 will receive relief.
Excepted plant and machinery is described in SI 2001 No. 846 and are those items falling under Class 1 Table 1 of the Schedule to SI 2000 No. 540, namely: -
Class 1 Table 1 (b), (c), (d), and (k).
(b) are the motors / engines
(c) the alternators
(d) batteries
(k) connections from the motor to the alternator
It will be seen that all these items are used in connection with Electrical Generation.
A CHP line may consist of a steam turbine; shaft; alternator and all these three items are mentioned in SI 2001 No. 846. The system will not operate without a steam boiler and indeed a steam boiler may be listed on CHP Form 4. HOWEVER, a steam boiler falls to be rated under Class 1 Table 1 (a) and thus DOES NOT form “ excepted plant and machinery “ thus there is no tax relief on this item.
Generally the items found in a HOSPITAL complex would be a “ gas “ engine. This is similar to a diesel (gas oil) engine but works on mains natural gas. For these purposes the gas engine can be compared with a diesel engine. A gas engine MUST NOT be confused with a Gas Turbine.
In reality the Diesel / Gas engine – alternator is similar to a diesel engine “SET” i.e. the dedicated parts are set on a steel frame and are calibrated to work as one unit.
The cost of “ SETS “ can be found in the 2005 Rating Cost Guide and this is available to the general Public see the VOA Rating Home page.
What requires to be determined
The set will either be found in a basement or dedicated room within the building or an acoustic box located outside the building.
The age of the set requires determination.
In order to determine the cost the output of the alternator must be determined. This will be for offices et cetera 415V but for Hospitals it is likely to be 11kV. With this information the relevant scale should be considered.
See 2005 Rating Cost Guide Electrics Diesel Generation Sets
If the valuation is undertaken on a Contractors Test Basis there will be a separate entry in the valuation for this item.( SET). However where such a figure does not exist the figure from the Cost Guide can be adopted.
There may be adjustments to be made to this figure re contract size but the main factor to determine is the AGE of the set. This will assist in determining the actual value of the subject item. The Cost Guide figures assume the item is new as at 1st April 2003 (AVD).
CLG require to see a reduction in the rates for this item where it qualifies and therefore a reduction must be given from the figure in the list. It is unlikely to be a large amount and may in valuation terms fall within the VOA rounding policy. Nevertheless if the rounding policy gives a figure of £750,000 RV (rounded from £752,500 RV) and the excepted CHP is £2,100 RV the figure to be entered in the list MUST be less than £750,000 i.e. £747,900 RV or less.
The material date runs from the date of the Secretary of States Certificate and may run through a rate year and a Revaluation cycle.
Where the cost guide does not give specific values for generating sets enquiries should be made of the Plant and Machinery Valuer located in the Rating Directorate.
Although CHP schemes are very common VERY FEW have a signed CHP Secretary of State Certificate and thus the majority of CHP scheme attract NO exception plant and machinery