Britain's discount VAT rate on such goods breached EU legislation, the Commission said in a statement.
"Under EU VAT rules, member states can only apply reduced VAT rates to a limited number of goods and services," it said, adding that those did not include the supply and installation of energy-saving materials.
The Commission gave Britain two months to bring its legislation into line, or be sued in the EU Court of Justice.
Britain applies a lower rate of VAT on the supply and installation of solar panels, wind and water turbines, controls for heating and hot water systems, as well as insulation, among other materials.
But these do not figure in the list of products and services eligible for reduced VAT rates spelt out in Annex III of the VAT Directive, which includes items such as medical equipment, passenger transport and theatre or cinema tickets.
The list was last updated in 2009 to include local services such as meals, haircuts and home repairs. It can only be changed by unanimous decision from the 27 EU member states, making any amendment difficult.
France and Britain have long tried pushing for environmentally-friendly goods, such as energy efficient light bulbs and insulation materials to be added to the list. But most EU countries rejected the idea, saying other tools should be preferred.
The Commission trIed breaking the stalemate in a broader proposal for an energy taxation directive, which was recently shot down by Parliament.