Social housing net zero standard: consultation

6. Cost and Funding

6.1 Cost Overview

6.1.1 The cost of meeting EESSH2 by 2032 was estimated at £3.4 to £3.7 billion in 2018^[44], with a similar estimate, modelled for housing associations, made by Changeworks^[45].

6.1.2 However, we know that costs have increased since this modelling was done and that a new net zero standard would require replacing polluting heating systems where those are still in place.

Source: SHCS Key Findings 2019: table 5 ^[47]

6.1.3 The social housing sector is heavily reliant on gas as a heating fuel. As outlined above, there are around 633,000 SRS dwellings in Scotland, of which 511,000 use gas or oil as their primary fuel.

6.1.4 Heat pumps and heat networks can be deployed in many areas and buildings as no- or low-regrets interventions to reduce direct emissions from buildings. The capital cost of a heat pump alone is estimated at under £7,000; however, there are additional costs associated with decommissioning and water/thermal storage, which on average cost an additional £2,000. Much of the Social Housing stock will also need energy efficiency upgrades if heat pumps are to run as efficiently as possible, which are estimated at an average of around £4,500. Therefore, the average total estimated cost to convert a home to highly efficient clean heating is estimated at around £14,000^[48].

6.1.5 Assuming a cost per ASHP of approx. £9,000, this suggests a total capital cost of around £4.6 billion for clean heating.

6.1.6 SRS dwellings are typically already fairly energy efficient, with 56% at C or above (compared to ~45% of all stock)^[49]. Assuming an average cost of ~£4,500 per home to reach upgrade improve the energy efficiency, this suggests a total capital cost to upgrade of around £1.28 billion.

6.2 Support and Funding

6.2.1 While the steps required to comply with EESSH have never been fully funded by the Scottish Government, landlords are encouraged to make use of available funding sources. These currently include the Social Housing Net Zero Heat Fund (SHNZHF) and other SG schemes. While the current funding is offer is set out below, future levels of available funding will depend on decisions at those times.

6.2.2 The SHNZHF launched in August 2020 with at least £200 million available to social landlords until 2026 to support the retrofit of their existing housing stock.

6.2.3 The fund has undergone a review to ensure that it continues to provide the best support to RSLs in their transition to net zero. This includes, based on feedback from the sector, the extension of “Fabric First” funding support until 2026 so that RSLs can continue to undertake projects that support more energy efficient homes.

6.2.4 The intervention rate for the installation of clean heating has also been increased to 60%, meaning that RSLs will benefit from a reduced match funding requirement.

6.2.5 Social housing in rural and island communities faces different challenges when delivering decarbonisation projects, which is why the fund now includes grant uplifts. For projects in rural areas, grant funding will be increased by 11% and in remote areas by 22%. Rural and remote areas can be identified using the 6 Fold Scottish Government classification^[50].

6.2.6 In 2023 we launched the Social Housing Net Zero Development Fund - designed to support the social housing sector with applications that can be completed by 31 March 2024. This £250,000 fund supported a range of development activities including feasibility studies, research, stock analysis and pre-capital support to support future capital bids to the SHNZHF. Although this fund is now closed to new applications we will continue to consider options for supporting the social housing sector plan and develop a pipeline of projects to decarbonise their housing stock in future financial years.

6.2.7 Our £300 million Heat Network Fund makes capital grant funding available to public and private sector organisations to support the roll out of zero emission heat networks across Scotland, and which we believe can play a significant role in enabling a large proportion of the social housing stock to convert to clean heating.

6.2.8 We have also established a Green Heat Finance Taskforce to explore ways to encourage a greater flow of private finance, complementing that available through the wider public sector, and which is designed to help property owners access the necessary investment in a form which works best for their individual circumstances.

6.2.9 The Taskforce has brought social landlords and their representatives together with financial investors to discuss options for financing the transition of the existing social housing stock to net zero. The Taskforce’s final report will be published in 2024 and will include consideration of financing options to enable social housing investment in clean heating solutions.

6.2.10 Retrofitting both energy efficiency measures and heating systems is challenging – both in terms of cost and disruption and requires relevant technical expertise and access to a skilled workforce. We will continue to work with social landlords to understand these challenges, and to explore and develop new ways to finance retrofit works, including the role of place-based or area-based delivery models.

6.2.11 Local authorities are developing Local Heat and Energy Efficiency Strategies (LHEES), which are long term plans for an entire local authority area to decarbonise heat and improve energy efficiency. LHEES will set out how each segment of the building stock needs to change to reach net zero and prioritise areas for the delivery. We would encourage social landlords to engage with local authorities as they develop and implement their LHEES.