Energy Efficiency Standard for Social Housing post-2020 (EESSH2): consultation

Part Three: Financial Implications

52. The proposed EESSH2 standard^[15] has been developed through the EESSH Review Group and relevant Sub-Groups (Level and Measurement, Funding and Costs, Health and Affordable Warmth, and Innovation and New Technology). Membership of the Sub-Groups was drawn from the wider Review Group members and other relevant organisations/experts (e.g. other social landlords, architects).

Methodology

Social landlord case studies

53. In estimating the impact of the proposed new standard, a similar process was undertaken to that which was introduced when developing EESSH1. A number of social landlords, both local authorities and RSLs, volunteered to model how much of their stock could be upgraded to the new standard, and at what cost. The volunteers were selected to represent a broad range of landlords (e.g. landlord/dwelling type, urban/ rural). Their stock comprises around 19% of local authority stock, 5% of RSL stock, and 12% of total social sector stock. The representativeness of the case study stock was assessed using Scottish House Condition Survey (SHCS) data. This indicated that the stock of the case study landlords was broadly representative of the wider Scottish social housing stock.

54. In the first stage of the modelling, landlords upgraded their stock to meet EESSH1 in 2020, and reported how much of their stock would already comply with EESSH2 in 2020. The second stage involved applying a set of reasonable measures to the dwellings which failed to meet EESSH2. These measures are classified as "reasonable" on the grounds that they offer reasonable payoff in terms of fuel bill savings relative to the cost of installing them. The third stage involved applying a set of additional measures to the upgraded stock, and recording dwellings that will meet EESSH2 after reasonable and additional measures had been applied. "Additional measures" refer to measures which tend to offer a lower payoff than reasonable measures. The fourth and final stage involved recording dwellings that will meet EESSH2, after reasonable, additional and further energy efficiency measures have been applied. The set of "further measures" was not pre-specified, but instead landlords were free to model the impact of any other upgrades that they thought might be relevant for their stock. Table 5 sets out the measures modelled under each of these stages.

Table 5: Measures modelled by case study landlords for EESSH2

Reasonable Measures

• Switch from existing heating system to condensing gas boiler
• Upgrade existing gas boiler
• Double glazing
• Secondary glazing
• Heating controls
• Storage heaters
• Loft insulation top up
• Floor insulation
• Compact fluorescent lighting
• External Solid Wall insulation
• Internal Solid Wall insulation
• Water heat reclamation
• Thermostatic Radiator Valves (TRVs)
• Cavity Wall Insulation
• Hot water tank and pipe insulation
• Replace secondary heating
• Flat roof insulation
• Room-in-the-roof insulation
• Switch from storage heaters to electric wet
• Switch from storage heaters to gas
• Switch from storage heaters to air source heat pump
• Switch from storage heaters to quantum storage

Additional Measures

• Biomass boiler
• Air source heat pump
• Ground source heat pump
• Solar hot water (solar thermal)
• Solar Photovoltaic (PV)
• Micro combined heat and power

Further Measures

• Insulated doors
• Cavity wall insulation with external
• Triple glazing
• Flue Gas Heat Recovery
• Battery storage linked to PVs

National Household Model

55. A parallel cost/benefit analysis was undertaken by the Scottish Government using the National Household Model (NHM), which is also used by the UK Government and the Committee on Climate Change. The base year stock was drawn from the SHCS, and an assumption for demolitions and new build was then applied for future years. The flexibility of the NHM allowed a slightly different modelling approach to be used – instead of applying upgrades in a set order, the model searched through a set of measures (see Table 6) to find the subset of measures which met the specified EPC rating at the lowest upgrade cost.

Table 6. Measures modelled in National Household Model for EESSH2

Insulation and heating efficiency

• Gas boiler upgrades
• Cavity wall insulation
• Double glazing
• Draught proofing
• External wall insulation
• Floor insulation
• Internal wall insulation
• Loft insulation (top-up)
• Low energy lighting
• Secondary glazing
• Storage heater
• Tank insulation

Renewables

• Air source heat pumps
• Biomass boilers
• Ground source heat pumps
• Solar PV
• Solar thermal

56. The list of measures modelled in the NHM is not exhaustive; for example, community heating was not modelled as the NHM is not designed for spatial analysis. In addition, various restrictions were placed on the availability of measures to try to account for problems that may arise in practice. For example, only 50% of pre-1919 stone dwellings were assumed to be suitable for wall insulation, and for solar PV, not only were mid- and ground-floor flats excluded, but in addition it was also assumed that only 50% of top-floor flats and houses which have a roof of at least 30m² also have a suitable pitch and orientation for solar panels.

57. The base year stock was first upgraded to meet EESSH1 in 2020 at least cost, and the costs and benefits of EESSH2 were then calculated by upgrading this stock to meet EESSH2 in 2032.

Attainment rates and costs

58. As set out previously, the case study exercise was broken down into four stages: upgrading to EESSH1, then applying reasonable, additional and further measures. Figure 1 shows how the attainment rate of EESSH2 increased at each stage of the modelling.

Figure 1. EESSH2 attainment rates after different stages of case study exercise

59. As the case studies cover a significant share of the total social housing stock (c.12%), and the case study stock is broadly representative of the wider social stock, the case study results were grossed up to estimate indicative figures at the Scottish level. These are reported in Table 7, which also provides the results from the NHM by way of comparison. While the results for case study landlords are broken down into the local authority and RSL sectors, this breakdown should be regarded as less robust than the results for the sector as a whole, due to any bias as a result of the smaller sample. While the same point applies to the NHM results, the effect may be smaller due to the random nature of the sampling as well as the weighting factors to ensure the survey results reflect the overall stock. Given that over the period to 2032 there are likely to be significant technological developments which could affect the type and costs of upgrades, as well as the cost and carbon intensity of different fuels, the figures should be regarded as indicative rather than precise.

Table 7. Projected compliance rates and costs of EESSH2

	LAs	RSLs	All social landlords
Case studies grossed up to sector level
EESSH 2 compliance	55%	87%	62%
Total cost	£1.5bn	£1.9bn	£3.4bn
Cost per dwelling not meeting EESSH 2 in 2020	£5,500	£9,300	£7,100
Cost per all dwellings in stock	£4,800	£6,900	£5,800
National Household Model
EESSH 2 compliance	47%	51%	49%
Total cost	£1.7bn	£2.0bn	£3.7bn
Cost per dwelling not meeting EESSH 2 in 2020	£5,100	£5,600	£5,400
Cost per all dwellings in stock	£5,000	£5,400	£5,200
Cost per upgraded dwelling1	£5,300	£6,100	£5,700

1. The case study results did not report on the number of dwellings which will not meet EESSH2 in 2020, but which were not upgraded in the modelling because no upgrades were considered technically suitable. This is likely only to apply to a small number of dwellings, as confirmed by the NHM modelling – the cost per upgraded dwelling in the NHM results (£5,700) is only somewhat higher than the cost per dwelling not meeting EESSH2 in 2020 (£5,400).

60. The results in Table 7 show that, based on the case study results, it is estimated to cost around £3.4bn to achieve just over 60% attainment of EESSH2, as compared to a cost from the NHM modelling of £3.7bn to raise about half of the stock to EESSH2. Given the somewhat different characteristics of the stock in the two modelling exercises, differences in software used, and different modelling approaches, these results can be considered to be broadly similar.

61. The average costs are calculated in different ways. Dividing the total cost by the stock which will not meet EESSH2 in 2020 gives an average cost of £7,100 in the case study exercise, as compared to a corresponding cost of £5,400 in the NHM exercise. Dividing the total cost by total stock gives an average of £5,800 for the case study as compared to £5,200 for the NHM. Thus the NHM results have both a lower average cost as well as a lower projected attainment rate. The reason why the average cost in the NHM is lower but total cost is higher is because, as noted above, the NHM modelling allows for a degree of demolition and new build over time, and thus the total stock for EESSH2 is larger than in the case study results, which are grossed up using the latest (2016) published stock figures.

Benefits

62. While the benefits of meeting EESSH2, in terms of fuel bill and energy savings and carbon abatement, were not reported in the case studies, they are available from the NHM modelling, as set out in Table 8.

Table 8. Benefits of meeting EESSH2 (NHM modelling)

Total annual fuel bill savings	£110 million
Average fuel bill savings for upgraded stock	£160
Total annual energy savings	1.3 TWh
Average annual energy savings for upgraded stock	940 kWh
Carbon abatement – including electricity	0.4 MtCO2e
Carbon abatement – excluding electricity	0.2 MtCO2e

63. Tackling fuel poverty is at the forefront of our ambitions for EESSH2, and NHM projections indicate that meeting the new standard could reduce the average annual fuel bill of homes which are upgraded by c.£160, producing total savings of over £100m per year.

64. Meeting EESSH2 is further estimated to reduce annual carbon emissions by around 0.4 MtCO₂e for all fuels. This estimate is based on current carbon intensity factors; the saving will be lower depending on the degree to which the electricity and gas grids are decarbonised over time. Since emissions from generating electricity are attributed to the energy rather than the residential sector for the purposes of climate change reporting, Table 8 includes the estimated annual carbon abatement from fuels other than electricity, of 0.2 MtCO₂e.

Funding

65. Data on investment to date indicates that most of the funding for meeting the EESSH has come from landlords own resources^[16]. A variety of funding sources to help landlords meet EESSH are available, and these include:

• Climate Challenge Fund (CCF) delivered by Keep Scotland Beautiful on behalf of the Scottish Government. CCF provides support to communities to take local action on the impacts of climate change.
• Energy Company Obligation (ECO) UK Government scheme placing an obligation on energy suppliers to meet carbon and fuel bill reduction targets. Funding available via energy companies for energy efficiency measures, subject to certain criteria^[17].
• Help to Heat Subsidises gas connections for households that meet certain criteria relating to fuel poverty risk. This can include connections carried by independent gas transporters.
• Feed in Tariffs Delivered by energy providers. Whoever owns the renewable system will be paid for any electricity generated and surplus electricity exported to the national grid.
• Renewable Heat Incentive (RHI) Similar to the feed in tariffs however there are some important differences due to the fact there is no 'National Grid for Heat' and so importing and exporting heat is not relevant.
• Home Energy Efficiency Programmes for Scotland: Area Based Schemes (HEEPS:ABS) Delivered by the Scottish Government via local authorities. Provides funding to private sector households for installation of energy efficiency measures. Can be accessed by social landlords to help owners/private landlords in mixed tenure schemes.
• HEEPS: Loans (Registered Social Landlords Scheme) Delivered by the Energy Savings Trust. Provides interest-free, unsecured loans from £100,000 to £1m repayable over up to 10 years, to assist RSLs improve the energy efficiency of their stock or reach the EESSH target.
• Community and Renewable Energy Scheme Delivered by Local Energy Scotland. Provides loan finance of up to £150k to not-for-profit community based organisations to cover pre-planning costs for any renewable project.
• District Heating Loan Fund Delivered by the Energy Savings Trust. Provides loans up to £400,000 on a commercial basis to support district heating networks.
• Renewable Energy Investment Fund Delivered by Scottish Enterprise Scottish Investment Bank. Key areas for support are: marine, district heating and community energy.
• Scottish Partnership for Regeneration in Urban Centres (SPRUCE) The Scottish Government established SPRUCE using European Regional Development Funds in conjunction with the JESSICA (Joint European Support for Sustainable Investment in City Areas) programme. The fund manager is Amber Infrastructure. Social housing providers are invited to develop renewable energy projects and energy efficiency schemes as part of the retrofit of their existing housing stock.

66. Through the EESSH Review Funding and Costs Sub-Group, a number of recommendations were made regarding effective funding for EESSH2. It should be noted that Scottish Government does not have direct control over all funding streams available to social landlords to assist in the attainment of EESSH. Recommendations from the Sub-Group include:

• comprehensive, multi-year funding streams to be considered for introduction at the earliest opportunity in support of EESSH2. Longer-term funding will realise a wide range of benefits for landlords and contractors alike, particularly in rural areas;
• where practical, universal access and eligibility should be considered, with the launch of Energy Efficient Scotland and publication of the Energy Efficient Scotland Route Map providing an opportunity in this regard. This may be particularly helpful when considering investment in mixed tenure blocks and, beyond the existing offering through the equity loans pilot^[18] and its potential expansion, should be aligned with energy efficiency offerings to the PRS and owner occupied sector;
• given their shared outcomes, the numerous existing funding streams should be consolidated where possible to encourage a simplified and effective funding offering;
• to ensure best value is achieved and savings delivered, collaborative procurement (including through access to Scotland Excel frameworks) is to be encouraged;
• landlords should take every opportunity to share their best practice and experience (good and bad) e.g. through the EESSH Knowledge Hub or EST Green Network for Social Housing^[19];
• seed corn funding should be considered to support delivery of feasibility studies, improving levels of expertise and providing a wider resource for all landlords to inform investment decision-making;
• similarly, funding is to be considered to support the development of a small group of experts to assist landlords in delivering energy efficiency projects. This would be a national resource, of particular assistance to those landlords who may not have the capacity or experience in securing suitable funding, and may also realise benefits in employment and training opportunities for young people;
• buddying is to be developed to assist landlords in meeting EESSH2 (and should be established practice before 2020). Representative bodies (e.g. SFHA, GWSF) may assist in this regard;
• to ensure that EESSH2 is not a barrier to sensible investment, innovative interventions must be eligible for funding (e.g. technology that may not be recognised by SAP). Consideration should be given to fast-tracking such interventions, with enabling/incentivising funding to kick-start these approaches. This may also encourage smaller landlords to be involved, and again should be ready for introduction from the commencement of EESSH2.

67. With proposed targets for domestic heat from low-carbon technologies by 2032, a focus in the early years of EESSH2 on energy efficiency and bringing off-gas grid properties (predominantly, though not exclusively, rural) up to the standard is advised. Funding options are to be developed to specifically help landlords with off-gas grid properties maximise their attainment of EESSH2, and should be ready for introduction from the commencement of EESSH2.

68. EESSH2 will be delivered within the wider context of Energy Efficient Scotland. In terms of funding support, it will draw on the success to date of the HEEPS Area Based Schemes and Warmer Homes Scotland, and may include continued provision of grant and loan support followed by expanded and directed incentivisation. The Energy Efficient Scotland Route Map sets out the detail of how the programme will be implemented, including detail on energy efficiency standards for the owner occupier sector and the PRS with cross-tenure funding considerations crucial to meeting standards.

Question 12: Do you have any views on the assessment of (a) costs, (b) benefits and (c) funding implications of EESSH2?