Incentives and measures to promote Solar Water Heating in Barbados

There were only a very limited number of solar water heating units installed in Barbados in 1974. After the enactment of the Fiscal Incentives Act this number started to rise gradually. In 1979 there were about 1000 units installed nationwide. In 2009, a total of approximately 45000 water heating systems were operating in Barbados (about two out of five households (Schwerin A. 2010, p. 34), or about 70 percent of those having water heating at all).

The aim of the policy was to diffuse solar water heaters among Barbadian residential, commercial and industrial consumers. Economic incentives were created to lower the costs of solar water heaters and other Renewable Energy Technologies (RETs), to reduce risks associated with the purchase of new technologies, create a local market for water heaters, encourage their local production, and capture societal benefits such as reducing environmental emissions and oil imports.
Domestic companies who receive “Approved Enterprise Status” under the Fiscal Incentives Act of 1974 could benefit from the import preferences and tax holidays. For example, import tariffs for producers were withdrawn on importing SWH applications. At the same time the government placed a 60% consumption tax on imported gas and electric units to discourage their consumption.
These measures were coupled with further inducements to consumers for using SWHs. The consumers were targeted through following incentives (Government of Barbados, 2001, p. xxi):

• Taxes on non-solar water heaters were kept high (60%) or increased.
• Householders who purchased solar water heaters were allowed a 100% rebate on the cost of the heaters on their income taxes.

Hotels that borrowed from the government-run Development Bank were compelled to carry out energy audits. These audits usually suggested the use of solar water heaters.
Furthermore, the government is committed to using solar water heaters in its Housing Program. The National Housing Corporation consistently installed SWHs in the building sites that it completed such as the Husbands in St. James (1980), the St. George and Orange Hill (1990) and London Bourne Towers (2000).

It is a national policy.

Relevant sectors

• Services
• Residential
• Industrial

Through the exemption of import tariffs and by giving fiscal incentives to consumers on the installation of SWH systems the government of Barbados (GOB) aimed to create a market for solar water heating systems in the country. SWH units were installed in a large number of households, hotels, schools and hospitals. SWHs can be used to preheat water for more extreme temperature requirements or in medium temperature usage conditions in the commercial and industrial sectors.

GOB incentives targeted the installation of SWHs in households, hotels, and for medium temperature usage requirements in the commercial and industrial sectors.
Hotels that borrowed from the government-run Development Bank were compelled to carry out energy audits. These audits usually suggested the use of solar water heaters.

Relevant target groups

• Manufacturer Manufacturers and importers of water heaters are expected to produce or import and market solar water heaters (SWH), with the help of the removal of import tariffs for material needed for the production of SWH
• Investor Investors receive incentives to purchase solar water heaters

Indirect beneficiaries are energy auditors and plumbers or building contractors who take advantage of the GOB directive which compels hotels that borrow from the government-run Development Bank to carry out an energy audit and are advised to install solar water heaters.

Direct beneficiaries

• Manufacturer

  Manufacturers/importers of solar water heating equipment are direct beneficiaries. They benefit from the removal of import tariffs for material used to manufature solar water heaters and from an increase in business.

• Investor

  Investors who install solar hot water systems benefit directly through the possibility of income tax deductions.

• Investor-occupier

  Investor-occupiers who install solar hot water systems benefit directly through the possibility of income tax deductions.

Indirect beneficiaries

• User

  Hot water comfort of solar water heaters may be greater than that from the simple electric or gas heaters they replaced.

• Installation contractor

  Increased business from installation of solar water heaters

• Retail company

  Increased business from sale of solar water heaters

• Tenant

  Hot water comfort of solar water heaters may be greater than that from the simple electric or gas heaters they replaced.

The P&M is adequate to address above mentioned barriers as the fiscal incentives shortened the payback period of the investment into solar water heating systems, reduced the risk associated with their purchase and made them competitive with the conventional electric and gas water heaters by placing a 60% consumption tax on these technologies to strengthen the demand for solar water heaters. On the supply side the producers gained import preferences that allowed them to manufacture solar water heating systems benefiting from subsidised costs of raw materials.

Relevant barriers

• Economic and financial barriers: The GOB brings down the cost of raw materials used to manufacture solar water heaters by eliminating import tariffs. Furthermore, the imposition of a consumption tax of up to 60% on all electric and gas water heaters make their purchase unattractive. And the GOB provides rebates to consumers by allowing them to deduct the full installed cost of a solar water heater up to a maximum of BBD 3500 (approx. €1,400) from their income tax.
• Knowledge and information barriers: The GOB informs investors about the cost-savings arising from installation of solar water heaters through workshops, seminars and education programmes in joint efforts with the industry.

Relevant incentives

• Saved energy costs: When replacing electric water heaters, energy cost savings are so high that the simple payback period is less than two years.
• Unique selling proposition for suppliers: The imposition of a consumption tax of up to 60% on all electric and gas water heaters make their purchase unattractive but the purchase of solar water heaters attractive.

GOB adopted a number of measures for the diffusion of solar water heaters including establishing fiscal incentives to consumers on installing solar water heaters, exempting producers of SWH systems from import tariffs, placing a consumption tax of 60% on the electric and gas water heaters. Hotels that borrowed from the government-run Development Bank were held accountable for their energy use and were required to carry out energy audits. These audits usually suggested the use of solar water systems.
Furthermore, the government conducted seminars, workshops, and video recordings of success stories in collaboration with the industry to demonstrate tangible energy and operating cost savings through the application of SWH technologies.
In addition, the GOB purchased a significant number of SWHs for housing projects it carried out through the National Housing Corporation, a division of the Ministry of Housing. To enhance the consumer confidence in SWHs the manufacturers established and maintained a policy of installing only rightly sized systems suitable for their respective use. Another confidence builder was the voluntary testing of a 66-gallon unit at the Florida Solar Energy Centre.

A planned interaction between above measures was built in the design of Barbados SWH Program.

The programme has two innovative elements.

• Combination of fiscal incentives on purchasing SWHs with the imposition of a very stringent consumption tax (i.e., 60%) on the non-solar based water heaters i.e., both electrical and gas water heaters.
• Producers were offered benefits in the form of import tariff exemptions on raw materials used to manufacture SWHs which supported the infant technology in gaining hold in the market

Yes, the P&M could be optimized.
Tax cuts and financial incentives established to induce the SWH industry and consumers have been in place since 1974. During this time period,the incentives twice became either completely rolled back or questioned for their justification. In 1985, the Ministry of Finance in Barbados questioned their justification when the country’s economy was experiencing structural adjustment difficulties caused by the second world oil price crisis. However, the industry was rescued thanks to a World Bank financed Energy Conservation Project and its component, the Barbados Energy Awareness Program. In 1993, again the structural adjustment problems resulted in the suspension of many homeowner benefits including the income tax incentives on home repairs and solar water heaters installation.
These events point to the need for sustainable development of the SWH industry. An option could be to use regulations to make it a condition for the property developer to install solar water heaters in all new buildings. This would help the industry grow despite the withdrawal of incentives in difficult economic conditions.

The following pre-conditions are necessary to implement Incentives and measures to promote Solar Water Heating in Barbados:
Agencies or other actors responsible for implementation
Ministry of Finance to supervise the implementation of income and tax incentives.

Funding
The treasury allots funds for different rebate schemes and consumers, and also for the industry, for example US$5000 was allotted per year under the 2008 modified Income Tax Allowance for Home Improvement. Out of $5000 up to $1000 can be used for energy audits and under the Energy Conservation and Renewable Deduction, homeowners can claim a reduction of 50 percent of the cost of retrofitting a residence or installing a system to produce electricity from a source other than fossil fuels (UNEP, 2012).

Other pre-conditions
A consumption tax of up-to 60% on all electric and gas water heaters is charged in order to make their purchase unattractive.

Barbados’s over-reliance on imported fossil fuels provides an impetus for the country to explore renewable energy options (Moore, W. et al., 2012). Through a project with church members, the first solar water heating unit was introduced in Barbados in 1964. However, the commercial break-through started during the first oil crisis with a small solar thermal industry in the early 1970s (Schwerin A. 2010, p. 34). Energy security considerations coupled with promising technology and cost-effectiveness were the driving factors for the government to establish policies and fiscal incentives to diffuse SWH in the country.
The Government of Barbados (GOB) introduced the first Fiscal Incentives Act in 1974. The Act eliminated import tariffs on the raw materials required for the local manufacturing of solar water heaters. At the same time, a consumption tax was imposed on all electric water heaters and this made their purchase less attractive. Meanwhile the National Housing Corporation, a division of the Ministry of Housing included solar water heaters for its housing programme, which signalled that there was a promising market for solar water heaters. Such concessions were necessary for the start-up of incipiant Barbadian SWH industry.
Despite the support given to the SWH industry by the aforementioned measures, high installation costs were becoming a barrier to the diffusion of units within the Barbadian consumers. In 1980, the government implemented Household Tax Benefits for solar water heaters and modified them in 2008. A sum of US$5000 per year was allotted for Income Tax Allowance for Home Improvement under the modified Income Tax Allowances in 2008. Up to $1000 of the $5000 per year of the Income Tax Allowance can be used for energy audits. In addition under the Renewable Energy Deduction, consumers can claim 50 per cent of the costs for installing a system, which produces electricity from a source other than fossil fuels. Homeowners who install solar water heaters also qualify for deductions under the Income Tax Allowances (UNEP 2012).

Quantified target
The P&M had no concrete quantified target. However, the government is committed to enhancing the contribution of renewable energy to the country’s primary energy.

International co-operations
Canadian funds through Barbados Institute of Management and Productivity (BIMAP) and Christian Action for the Development of Caribbean (CADEC)’s financial support played a crucial role in the entrepreneurial start-up of the solar water heater industry (United Nations/Economic Commission for Latin America (UN/ECLA), n.d.).
In 1985, the Ministry of Finance in Barbados questioned tax incentives when the country’s economy was experiencing structural adjustment difficulties caused by second world oil price crisis. However the industry was rescued thanks to a World Bank financed Energy Conservation Project and its component, the Barbados Energy Awareness Program.

Actors responsible for design
Central treasury approves and amends fiscal incentives. Energy Division of the Ministry of Finance, Investment, Telecommunications and Energy is in charge of initiatives to enhance the awareness of the population about renewable energy technologies and their benefits.

Actors responsible for implementation
Ministry of Finance (MoF) is responsible for monitoring the implementation of the Income Tax Allowances for home improvement, which target homeowners. The MoF also supervises economic incentives, which are given to the SWH producers.

Monitoring
Ministry of Finance monitors the Income Tax Allowance and Fiscal Incentives.

Evaluation
Yes, an ex-post evaluation including economic benefits and costs is available:
Perlack & Hinds (2003), Evaluation of Renewable Energy Incentives: The Barbados Solar Water Heating Experience,http://solardynamicsltd.com/wp-content/uploads/2010/07/SWH-report1-2.pdf
Evaluation results can be found in the Policy impact section of this good practice example.

• Dynamic market transformation and/or innovation: The Barbadian policy package for solar water heaters aimed to transform the market of water heaters and establish market conditions, which make solar water heating technologies more competitive with conventional water heating technologies.
• Avoiding lost opportunities: Without the policy package, Barbados would have missed the following benefits: GOB’s diffusion of solar water heating technology in Barbados helped to save approximately 15000 metric tons of CO₂ in 2002. SWHs also significantly reduced the country’s oil demand. According to Perlack & Hinds (2003) 35000 installed solar water heaters in Barbados by 2002 saved at least 130 thousand barrels of oil (or € 2.5 million approx in the form of money (Perlack & Hinds 2003 p. 14).
• Minimising rebound effects: Rebound effects are caused when the consumers take back the energy saving produced by an energy efficiency investment in the form of higher energy consumption. The Barbados SWH programme went along with marketing and education activities to avoid possible rebound effects.
• Minimising snap-back effects: The continuation of the financial incentives to date is aiming to minimise snap-back effects.
• Minimising free-rider effects: It was the objective of the government to design fiscal incentives in such a way that the solar water heater industry and many consumers can get them. The industry and the use of solar water heaters would most likely not have developed without the policy in the 1970ies and 1980ies, as a comparison of Barbados and its neighbouring countries shows. However, once the market was mature, the continuation of the financial incentives may have caused free-rider effects. Their size is not known.
• Creating Spill-over effects: Yes, the P&M caused spill-over effects. Barbadian solar water heaters are finding markets in neighbouring Caribbean countries. They currently supply about 80% of the solar water heater demand in the region (UNEP 2012).

Design for sustainability aspects
A positive effect on the overall economy of the country is the creation of employment opportunities in manufacturing, retail sales, and business administration as well as solar water systems design, installation and maintenance.

The following barriers have been experienced during the implementation of the policy
In 1993, the Homeowner Tax Benefit for installing solar water heaters was withdrawn due to the structural adjustment difficulties caused by the second world oil price crisis. This threatened the incipient solar water heating industry.

The following measures have been undertaken to overcome the barriers
The tax incentives were restored in 1996 when the economy recovered from the structural adjustment problems.

Concrete figures in energy savings/year
Perlack and Hinds (2003) assumed that SWHs displaced at least 50% of electric water heaters with each SWH saving an estimated 3710 kWh annually in Barbados. This saving estimate is based on a historical average tank size of 62 gallons, an operational efficiency of 90% and a water temperature change of 60ºF. The product of cumulative installations per unit energy savings and an electric water heater displacement of 50% provide an estimate of SWH energy savings. Perlack and Hinds (2003) estimate is that Barbadian SWHs are saving at least 65 million kWh annually with a ratepayer value of $BD 23 million (€9 million approx.).
Cumulative value of energy savings through year 2002 thus reaches $BD276 million (€110 million approx.).
Oil cost savings to the national economy were estimated to be at least $BD 6 million in 2002 (Perlack and Hinds, 2003).

Perlack and Hinds (2003) estimated the total tax costs of the SWH incentives at about $BD 21.5 million through 2002 (€8 million approx.).
The homeowner tax deductions account for about two-thirds of the government costs of the SWH incentives, while the tariff exemption on raw materials accounts for one-third of the costs.
At income tax rates averaging around 30 %, the cost to the investors of water heaters may have been around €25 million.

It was estimated that Barbadian SWHs had annual savings of at least 65 million kWh which amounts to a ratepayer value of $BD23 million (€9 million approx.). Average domestic electric rates were used to determine the monitory value of kWh energy savings (Perlack and Hinds 2003, pp. 3-4).

The policy is very cost effective. Cumulative SWHs energy savings (at least 65 million kWh annually with rate payers value of $BD 23 million (€9 million approx.) or $BD 267 million – €110 million approx. – through 2002) substantially exceed the tax costs of the incentives ($BD 21.5 million through 2002) – €8 million approx. At income tax rates averaging around 30%, the cost to the investors of water heaters may have been around €25 million. Oil cost savings to the national economy were estimated to be at least $BD 6 million in 2002, so their cumulative value through 2002 was already higher than the cost of the solar water heaters by then, with further savings to be expected over the useful life of the water heaters. The simple payback time to homeowners and hotels is less than two years when replacing electric water heating (Perlack and Hinds, 2003; partly own calculations based on this source).