Heat in Buildings Bill consultation: business and regulatory impact assessment (partial)

Sectors and groups affected

8.1 Transforming the way we heat our homes and buildings will touch the lives of almost everyone in Scotland.

8.2 The following sectors and groups will be affected by the proposals.

Domestic owners (private rented sector and owner occupier) – impact as a result of energy efficiency proposals

8.3 Providing space and hot water heating to homes and non-domestic buildings^[22] accounts for around 20% of Scotland's total greenhouse gas emissions (the third-largest cause of emissions across the economy).

8.4 Emissions from buildings can be partially reduced by installing energy efficiency measures.^[23] This also reduces energy demand, and therefore bills, while improving comfort by making homes better insulated and warmer. Therefore, improving energy efficiency can also make a very helpful contribution to mitigating the cost-of-living and cost-of-doing-business crises.

8.5 It is proposed that private rented sector dwellings are required to meet the minimum energy efficiency standard by 2028 – five years earlier than owner occupiers. This quicker timeline reflects the fact that homes in the PRS sector are more likely to be in the lowest bands for energy efficiency (10% of PRS homes are EPC F or G compared to 5% of owner-occupied homes (SHCS 2019)) and that tenants have limited rights to make improvements to their homes to improve energy efficiency and make them more affordable to heat. As tenants generally pay energy bills but do have powers to undertake works to reduce running costs, homes in the PRS sector will be required to meet the energy efficiency standard irrespective of whether they have installed a clean heating system, potentially saving tenants money on their bills and reducing fuel poverty.

8.6 While the consultation proposes that a minimum energy efficiency standard should be required in all owner-occupied homes by 2033, this will not apply to those who have by then installed a clean heating system. This means that those who have removed heat-related emissions as a result of their heating system will not incur costs on energy efficiency measures. However, for many homeowners who install clean heating systems before 2033 it is likely that they will voluntarily install energy efficiency measures to improve their heating system's efficiency and to lower the system's likely running costs in turn.

Building owners and occupants (including households, businesses, and public bodies) – impact of clean heat proposals

8.7 Focusing on energy efficiency measures alone would be not be sufficient to deliver the contribution that we estimate would be required from the Buildings sector to help meet the wider emissions reduction target under our Climate Change Act. Moreover, the cost per ton of carbon removed via energy efficiency measures is much higher than via changing the heating. Emissions are only fully removed when buildings switch from direct emissions heating systems^[24] to zero direct emissions heating systems.^[25] Our consultation refers to these respectively as "polluting" and "clean" heating systems.

8.8 Around 2,200,000 (88%) Scottish homes use polluting heat, as do around 40% (c. 110,000) of our non-domestic buildings.^[26] They will all need to transition to clean heat by 2045 if Scotland is to reach net-zero.

8.9 Upgrading energy efficiency and switching to clean heating systems will have widespread impacts, though the scale and nature of these impacts will vary across different buildings and different heating options. Fabric and heating system upgrades will often be disruptive. Disruption may arise from insulation, installation or reconfiguration of an internal distribution and radiator system, ventilation, and replacement of heating, cooling and cooking appliances. In instances where this is required, new or upgraded connection to network infrastructure may also require excavation of outdoor space and streets. The extent of disruption will vary from case to case.

8.10 The consultation on proposals for a Bill recognises that over two million Scottish homes use polluting heating systems, as do almost half of our non-domestic buildings. They will all need to transition to clean heating systems by 2045 if Scotland is to reach net zero, and are likely to undergo differing degrees of disruption, which will vary in cost.

Small-to-Medium Enterprises

8.11 Small-to-medium enterprises (SME) are likely to experience varying impacts as a result of these regulations. As demand for clean heat and energy efficiency measures is likely to increase, many small businesses will see an increase in business. Research by NESTA^[27] indicates that heat pump installing businesses "tend to be small", suggesting that an increase in demand for heat pumps could lead to increased economic activity among SMEs.

8.12 SMEs also appear to show a higher rate of uptake of energy efficiency measures than businesses as a whole. In 2021, 22% of SME employers in cohort A in Scotland had installed some kind of energy efficiency measures in the prior year, and 7% had installed a low carbon heating system. However, 82% of SMEs reported no plans to install clean heating or energy efficiency measures in the next 12 months.^[28]

8.13 Initial internal research suggests that SMEs (ie those below 100m²) are more likely than large businesses to already use clean heating. Scottish Government will engage with SMEs and carry out further research to develop the understanding of how regulations will impact SMEs in Scotland.

Supply chain business

8.14 In 2021, the low carbon and renewable heat and energy efficiency sectors in Scotland generated an annual turnover of around £7.5 billion, with full time equivalent employment of around 22,200. Of these, low carbon heat is estimated to employ around 1,500 people, and energy efficient products around 7,200 people.^[29] As uptake of energy efficiency and clean heating systems increases, these figures are expected to increase.

8.15 To meet the increased demand for clean heating, and to ensure that workers can benefit from new employment opportunities, we will need to grow the skills base in Scotland across the following a number of areas including:

• Building assessment
• Manufacture and installation of energy efficiency measures
• Manufacture, installation and servicing of heat pumps
• Design, installation, operation and servicing of heat networks
• Ancillary services including smart heating controls, support services, innovation and financing
• Delivery, conversion, maintenance and servicing of hydrogen ready boilers, if this becomes a relevant technology in the next decade.

8.16 The proposals included in the consultation do not discuss the impact on supply chains in detail as this is contained within the Strategy. The Strategy commits to building local supply chains, maximising local job creation, and ensuring a just transition. Our Heat in Buildings Supply Chains Delivery Plan, published in November 2022, sets out the practical steps that we are taking to support the growth of the clean heating sector.

8.17 The Supply Chains Delivery Plan provides an overview of Scotland's heating and building improvement sector, background to the challenges and opportunities of developing the supply chain and sets out how the supply chain will need to grow and change to meet future demand driven by our proposed regulation of heating and energy efficiency. It outlines our commitment to work in partnership with the sector to overcome supply chain constraints and fill the skills gap.

8.18 We are exploring the potential for a new supplier-led funding scheme to be delivered in Scotland, which will help sharpen the impact of our financial stimulus, drive supply chain development through economies of scale and also provide a vehicle to drive up quality standards alongside fair work, diversity and equality objectives.

All non-domestic properties

8.19 For non-domestic properties, just over half are thought to already comply with the proposed new standard. Of the £33 billion quoted above, around £6 billion is estimated to relate to the decarbonisation of the remaining roughly 50% of the non-domestic stock which continue to use polluting heating. However, as outlined further in section 9.30, there is significant heterogeneity present in the non-domestic stock which limits the accurate prediction of capital costs. Therefore, estimates relating to non-domestic properties remain under review and should be treated as indicative only.

8.20 For commercial properties, those purchasing such properties in Scotland are likely to face increased costs compared to England and Wales. This may make it less attractive to invest in Scotland. However, phasing in these regulations (or providing additional time to inward investors) could reduce this impact. We will gather more information on this as the consultation progresses, and use this to inform the final BRIA.

Local authorities

8.21 Local authorities will be affected in various ways beyond their role as building owners/occupants.

• Potential role in enforcement of regulations: As we develop our regulatory framework through the Heat in Buildings Bill, we will work with local government to identify where responsibility for enforcing standards should lie.
• More widely we continue to work with local authorities and COSLA on progressing LHEES. We are committed to supporting local authorities to deliver these, including through resource provision.
• While the proposals in this consultation do not impact social housing, there remains a role for local authorities in supporting deployment, including building on our Area Based Schemes.

8.22 Local authorities will have a role to play as we develop our approach to heat network support, which will facilitate local authorities achieve their own fuel poverty and net zero ambitions.

Private Sector Landlords and Tenants

8.23 The proposals would require that homes in the private rented sector meet a minimum energy efficiency standard by the earlier date of 2028. This quicker timeline reflects the fact that homes in the PRS sector are more likely to be in the lowest bands for energy efficiency (10% of PRS homes are EPC F or G compared to 5% of owner-occupied homes (SHCS 2019)) and that tenants have limited rights to make improvements to their homes to improve energy efficiency and make them more affordable to heat. As tenants generally pay energy bills but do have powers to undertake works to reduce running costs, homes in the PRS sector will be required to meet the energy efficiency standard irrespective of whether they have installed a clean heating system, potentially saving tenants money on their bills and reducing fuel poverty.

8.24 Scottish Government will build on existing small-scale qualitative research around the impact of regulations on PRS landlords to better understand how the sector will be affected.

Property Market

8.25 As the consultation proposes that those purchasing a home will be required to transition their new property to a clean heating system within a specified grace period, and sets backstop dates for homes to meet both the energy efficiency and clean heat elements of the standard, we are aware this may have various impacts on the housing market, including impacting the value of homes which do not comply with regulations. The consultation makes clear that homes will not be banned from being sold should they not meet the Standard.

8.26 We have commissioned a project with Climate Exchange to investigate any potential housing market impacts of introducing heat and energy efficiency regulations. This work will include investigation of the impacts on: the PRS market of being required to meet the minimum energy efficiency standard in 2028, ahead of the 2033 backstop date for the rest of the privately owned housing stock; house prices; number of homes let; rental prices; length of time homes are on the market; and the geographical distribution of homes sold and let.

8.27 In the near term for those impacted by the property purchase trigger, most buyers are already considering large sums of money, with many using financial products like mortgages and having their ability to make repayments considered independently by banks. Continued development of the green mortgage market means that the private finance market can play a key role in supporting the transition through this route.

Cost impacts for all

8.28 The regulations and requirements which will flow from our proposed Heat in Buildings Bill, and which homeowners, landlords, businesses and other organisations may need to meet, will involve considerable costs. Our Heat in Buildings Strategy put total costs for property level retrofit for both domestic and non-domestic buildings, including energy efficiency and clean heat, at an estimated £33 billion by 2045, with investment to meet the interim 2030 emissions target estimated at £14 -16 billion (for residential buildings). This cost does not include the cost of energy network upgrades and reinforcement or the costs of the extra energy generation required – these costs are additional.

8.29 Our initial internal analysis has produced an estimated cost for individual homeowners of circa £14,000 to meet the proposed Standard – although this is an average figure, and will vary considerably depending on the size, condition and other circumstances of each building. Of the £33 billion quoted above, around £27 billion is estimated to relate to decarbonisation and improving energy efficiency of domestic dwellings.

8.30 The cost faced by building owners in upgrading energy efficiency and installing clean heat will depend on how measures are funded and financed. In the near term financial support is available under GB-wide and Scotland-specific programmes. The Scottish Government has committed to making available £1.8 billion in heat and energy efficiency programmes over the current parliament, building upon, expanding and improving existing programmes. In the near future we will review current programmes to ensure best value, which could include a shift from the current universal programme of grants towards a means-based provision. We will also consider the eligibility criteria to ensure those most in need get the help they need.

8.31 We will continue to focus our spend on those most in need, through existing funded programmes such as Warmer Homes Scotland.

8.32 Work is required to identify future funding packages past 2026 to set out the choices as to the levels of financial support provided by the Scottish Government as compared to individuals in the future, how this could be funded, how this can be targeted appropriately and the implications that this has for the Scottish budget and our commitment to ensure a just transition.

8.33 The priorities identified above will directly support building owners manage upfront costs, supporting those least able to pay, and expand our domestic energy efficiency programme to support more households eliminate poor energy efficiency as a driver of fuel poverty. A number of financing options already exist which could help property owners cover the upfront cost of retrofit, including green mortgages, home improvement loans and equity release products. These financing options can be combined with varying levels of governments grants and loans.

8.34 The Scottish Government has also considered further the need to provide funding to meet the requirements of the energy efficiency standard. Initial analysis which looked at a selection of data drawn from across Dumfries and Galloway, Fife and Orkney estimated an average cost of meeting the list of measures (suggested in our consultation as comprising evidence that the new energy efficiency standard has been met) of £2,500.^[31] Including underfloor insulation, 75% of dwellings are expected to need to spend £3,500 or less. Excluding underfloor insulation, 75% are expected to spend £1,200 or less.

8.35 The Scottish Government has also established a Green Heat Finance Taskforce to mobilise and work in collaboration with the private sector to leverage investment beyond that provided by the public sector. The interim report from this work will be published before the end of 2023. In considering the impact of these proposals we have drawn on the work of this task force, together with ongoing work with Scottish Futures Trust, and discussions with Scottish National Investment Bank, and engagement with the First Minister's Investor Panel.

8.36 The impact of changing heating systems on running costs in the medium- to long-term will be influenced by tariffs available in the energy market. The present differential in cost between gas and electricity and the situation where gas costs are setting the marginal price of electricity remains politically unsustainable; although the UK Government has committed to rebalancing electricity and gas costs, this may still be quite some time from happening. Until it does, the higher running costs of electric clean heating systems will raise concerns that the proposals in this consultation could have a significant impact on energy bills for anyone currently using gas for any form of heating.