Social housing net zero standard consultation: business regulatory impact assessment

Social Housing Net Zero Standard in Scotland - Business and Regulatory Impact Assessment

References in this document are to the existing funding offers available and may change in future.

1. Title of proposal

1.1.1 Proposals for a new Social Housing Net Zero Standard in Scotland consultation.

2. Purpose and Intended Effect

2.1 Background

2.1.1 Climate change is expected to have profound effects on Scotland and action is required at all levels of the public sector to meet the challenges these effects will bring. If we are to meet the 100% reduction by 2045, we will require significant shifts in the way energy is produced and used. Ambitious national targets further contribute to climate change abatement targets set at the UK, EU, and international levels. Energy policy highlights the importance of energy efficiency, and the need to achieve a shift from fossil fuels to renewable sources of energy.

2.1.2 Housing is a major emitter of greenhouse gases, and reducing these emissions will make a vital contribution to achieving the 2045 targets. The new Social Housing Net Zero Standard will place a responsibility on social landlords to install energy efficiency and clean heating in their housing stock. The potential contribution achievable from the housing sector is significant.

2.1.3 This partial Business and Regulatory Impact Assessment (BRIA) is prior to the Scottish Government’s public consultation on a new Social Housing Net Zero Standard.

2.1.4 The Scottish Social Housing Charter sets out that social landlords must manage their business so that when homes are allocated they “meet the Scottish Housing Quality Standard (SHQS) and any other building quality standard in place throughout the tenancy, and also meet the relevant Energy Efficiency and Zero Emission Heat Standard.”^[1] The Social Housing Net Zero Standard will be the relevant standard for the purposes of the Charter.

2.1.5 The first standard for energy efficiency in social housing in Scotland was included in the Scottish Housing Quality Standard in 2004. The SHQS set out a minimum standard for specific housing elements, such as insulation, boiler efficiency and the presence of a central heating system. When this standard was introduced, less than half of social housing met this minimum standard.^[2] By 2015, the independent Scottish Housing Regulator reported that over 90% of social homes met SHQS.^[3]

2.1.6 The Energy Efficiency Standard for Social Housing (EESSH) was launched in March 2014, and aimed to encourage social landlords to help remove poor energy efficiency as a driver for fuel poverty and contribute to achieving the Scottish Government’s ambitious climate change emissions reductions targets.^[4] EESSH replaced the energy efficiency elements of SHQS.

2.1.7 The first EESSH milestone required social landlords to meet an energy efficiency rating equivalent to Energy Performance Certificate (EPC) Band C or D (Energy Efficiency rating) by 2020. The standard was designed to reduce energy consumption to reduce fuel poverty and emission of greenhouse gases. EESSH was reviewed in 2018-19 with a view to setting a new milestone for 2032. This was known as EESSH2 and required that all social housing meets, or could be treated as meeting, EPC band B, or is as energy efficient as practically possible, by the end of December 2032 and within the limits of cost, technology, and necessary consent. In addition, no social housing below EPC B and D should be re-let from December 2025, subject to temporary specified exemptions. ^[5]

2.1.8 The Climate Change (Scotland) Act 2009, as amended in 2020, sets a statutory target to reach net zero carbon emissions from heat by 2045.^[6] The Scottish Government committed in the Heat in Buildings Strategy to reviewing EESSH2 in 2023 with a view to aligning it with this net-zero targets.^[7] The independently chaired Zero Emissions in Social Housing Taskforce (ZEST) recommended the EESSH2 review be accelerated to ensure alignment with net zero and provide clarity for social landlords. ^[8]

2.1.9 The review of EESSH2 also takes account of the Scottish Government’s proposals for the reform of Energy Performance Certificates, ^[9] the consultation on a domestic heat standard in the Heat in Buildings Strategy, and the recommendations of the Scottish Parliament Climate Change Committee.^[10]

2.1.10 The EESSH2 Review Group began work in September 2022 and reported its recommendations to Ministers in June 2023. The group’s remit was to propose a new standard for social housing which is aligned with the target for net zero heat in buildings by 2045 and which ensures a just transition so that people are not left behind.^[11]

2.2 Objective

2.2.1 The objective of this partial BRIA is to set out potential impacts of the Social Housing Net Zero Standard proposals.

2.2.2 The principles of the new standard are detailed within the consultation and have been co-developed as part of the review of EESSH2. The proposals are consistent with plans for the wider housing stock as set out in the consultation on proposals for a Heat in Buildings Bill.

2.2.3 The proposals will help deliver on the vision laid out in our Heat in Buildings Strategy (“the Strategy”): “By 2045 Our Homes and Buildings are Warmer, Greener and More Efficient”.

2.2.4 The Heat in Buildings Bill consultation also includes a partial BRIA which should be referenced where appropriate.

2.3 Rationale for Government Intervention

Overview

2.3.1 The Climate Change (Scotland) Act 2009, as amended in 2020, sets a statutory target to reach net zero carbon emissions from heat by 2045.^[12]

2.3.2 The Scottish Government committed in the Heat in Buildings Strategy to reviewing EESSH2 in 2023 with a view to aligning it with this net-zero target.^[13]

Fuel Poverty Targets

2.3.3 The 2019 Fuel Poverty (Targets, Definition and Strategy) (Scotland) Act (2019)^[14] sets statutory targets for reducing fuel poverty and introduces a new definition which aligns fuel poverty more closely with relative income poverty. It requires Scottish Ministers to produce a comprehensive strategy to show how they intend to meet the new targets. Statutory 2040 fuel poverty targets require that no more than 5% of households are fuel poor, and that no more than 1% are in extreme fuel poverty by 2040.

2.3.4 Work to eradicate fuel poverty is linked to the Scottish Government’s work to improve housing standards, and this has been considered as part of the 2019 Act^[15]. A Fuel Poverty Strategy was published in 2021^[16] which set out policies and proposals for national and local government and third sector partners to help make strong progress towards the established targets.

Clean Heating – Policy Context

2.3.5 Proposals to regulate energy efficiency and clean heating have been in development for many years. Scottish Ministers designated energy efficiency as a national infrastructure priority in 2015^[17] and made a long-term commitment to reduce the energy demand and decarbonise the heat supply of our residential, services and industrial sectors. 2021’s Heat in Buildings Strategy reiterated the role of regulations in delivering these outcomes.

2.3.6 The Draft Energy Strategy and Just Transition Plan (ESJTP)^[18] published for consultation in January 2023, provided an update to the Scottish Energy Strategy position statement which was published in 2021^[19]. The draft ESJTP set out key ambitions for Scotland’s energy future, including the need to transform the way we heat our homes, workplaces, communities, and other public buildings.

2.3.7 The Bute House Agreement^[20] also underlined the need to decarbonise how we heat our homes and buildings to meet the net zero pathway. It included a commitment to “phasing out the need to install new or replacement fossil fuel boilers, in off-gas [areas] from 2025 and in on gas areas from 2030, subject to technological developments and decisions by the UK Government in reserved areas”.

2.3.8 This consultation outlines our proposal for the Social Housing Net Zero Standard. This proposal has been co-developed as part of the review of EESSH2 and is consistent with plans for the wider housing stock as set out in the consultation on proposals for a Heat in Buildings Bill.

3. Consultation

3.1 Within Government

3.1.1 The Energy and Climate Change Directorate (DECC) had direct contact and discussion with the following directorates during the development phase:

• Chief Economist Directorate (OCEA);
• Scottish Government Legal Directorate (SGLD); and
• Local Government and Housing Directorate.

3.2 Stakeholder Engagement

3.2.1 The Social Housing Net Zero Standard proposals have been co-developed with a stakeholder review group. Membership includes the Scottish Government, the Energy Saving Trust (EST), the Scottish Federation of Housing Associations (SFHA), the Glasgow and West of Scotland Forum of Housing Associations (GWSF), the Convention of Scottish Local Authorities (COSLA) and the Association of Local Authority Chief Housing Officers (ALACHO) as well as academics and tenant representatives. The group also includes representatives from a range of social landlords (large/small, rural/urban, local authority/housing association). The group, which has met on several occasions, was closely involved in the development of this consultation document.

3.2.2 Four subgroups were established to advise the main group on specific issues:

• Just Transition, Metric and Heating System – remit to advise on a broad measurable target that reduces the effects of fuel poverty.
• Measures and Finance – remit to advise on appropriate measures for housing stock, and routes to funding and financing.
• Fabric and Hard to Treat – remit to advise on ensuring the largest proportion of stock that can achieve the new standard, including the development of archetype and pattern book approaches.
• Gypsy/Traveller Sites – remit to advise on options for extending the scope of a new standard to include these sites.

3.2.3 The remits, agendas, and notes of meetings of the different stakeholder groups are available on the Scottish Government website.^[21]

3.2.4 A public consultation on the proposals will be open from 28 November 2023 to 8 March 2024. The consultation paper aims to continue and broaden these conversations by summarising what we learned. We would encourage social landlords and others to discuss their own ideas for the Social Housing Net Zero Standard proposals, and will take account of these views in preparing a finalised standard.

3.3 Public Consultation

3.3.1 This section will be completed once the public consultation has taken place and feedback has been received.

3.3.2 The Scottish Government will commission an independent report on responses to this consultation. We will reflect on this report before publishing a response setting out what we will do next.

4. Options

4.1 Do Nothing Approach

4.1.1 The do-nothing option would be to continue with the Energy Efficiency Standard for Social Housing 2032 target (EESSH2). EESSH2 already requires substantial investment and will improve the energy efficiency and affordability of social homes. It will not, however, assure compliance with the 2045 net zero heat target; this is because the targets set in EESSH2 can be met by fossil and carbon fuelled heating systems.

4.2 Social Housing Net Zero Standard

4.2.1 The alternative option is the Social Housing Net Zero Standard proposal (see box below). This proposal has been co-developed as part of the review of EESSH2 and is consistent with plans for the wider housing stock as set out in the consultation on proposals for a Heat in Buildings Bill.

The proposed new standard for Social Housing (to replace EESSH2) includes the following:

• A fabric efficiency rating^[22] (which focuses on the amount of energy for heat consumed by a property) measured in kWh/m²/year [level and date TBC – see consultation]
• A requirement to replace polluting heating systems^[23] with a clean heating alternative by a backstop date of 2045 [interim targets TBC – see consultation]

We are seeking views within the consultation on possible additional requirements to:

• Ensure good air quality^[24]
• Prevent a property which can’t meet a minimum standard by a certain date being relet after that date.

5. Sectors and groups affected

5.1.1 The Social Housing Net Zero Standard will directly affect social landlords, a large proportion of the social housing tenant population and the wider community.

Social Housing Providers

5.1.2 Registered social landlords and local authorities will be obliged to progress the installation of energy efficiency technologies in their housing stock.

5.1.3 The Social Housing Net Zero Standard consultation recognises that approximately 80% of social homes use polluting heating systems. They will all need to transition to clean heating systems by 2045 if Scotland is to reach net zero. The consultation is also looking at the option of interim targets for the installation of clean heating. This means that those buildings upgrading their heating systems during the period following our proposed consultation are likely to undergo significant disruption, which will vary in cost.

5.1.4 The cost faced by social landlords in upgrading energy efficiency and installing clean heating systems will depend on how measures are funded and financed. Financial support is available at the moment under funding sources which include the Social Housing Net Zero Heat Fund and other SG schemes. The Scottish Government has committed to making available at least £1.8 billion in heat and energy efficiency programmes during the current parliamentary term, building upon, expanding, and improving existing programmes.

Tenants

5.1.5 Social housing tenants will benefit from living in warmer homes with the potential to manage their energy consumption more efficiently, giving them the scope to reduce their fuel bills.

5.1.6 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 clean heating options.

5.1.7 Fabric and heating system upgrades will often be disruptive. Disruption may arise from work to improve insulation, installation or reconfiguration of an internal distribution and radiator system, ventilation, and replacement of heating, cooling, and cooking appliances. In instances where it 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.

5.1.8 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. The UK Government has committed to rebalancing electricity and gas costs, and the Scottish Government has urged that this be implemented as soon as possible.

Supply Chain Business

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

• Building assessment
• Manufacture and installation of energy efficiency measures
• Manufacture, installation, and servicing of heat pumps
• Design, installation, 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.

5.1.10 The proposals included in the consultation do not discuss the impact on supply chains in detail as this is contained within the Heat in Buildings Strategy. The strategy commits to building local supply chains, maximising local job creation, and ensuring a just transition. Our Heat in Buildings Supply Chain Delivery Plan, published in November 2022^[25], sets out practical steps we are taking to support the growth of the green heat sector.

5.1.11 The Supply Chain 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.

6. Costs and Benefits

6.1 Overview

6.1.1 As policies are not yet fully developed and the proposals are now the subject of consultation, this is necessarily a high-level estimate. All figures should be treated as indicative and viewed in the light of current uncertainties around key aspects of the transition.

6.1.2 Further understanding and outlining of the full benefits of the approaches below will be added to over the consultation period and work to build relevant regulation that would allow for the Scottish Government to ensure a successful realisation of a new standard. This will be presented in a full BRIA in 2024, along with the consultation response.

6.2 Cost Overview

6.2.1 The cost of meeting EESSH2 by 2032 was estimated at £3.4 to £3.7 billion in 2018.^[26] A similar estimate, modelled for housing associations, was made by Changeworks.^[27]

6.2.2 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.

6.2.3 The social housing sector relies heavily on gas as a fuel source.

Source: SHCS Key Findings 2019: table 5 ^[28]

6.2.4 As outlined above, there are around 633,000 SRS dwellings in Scotland, of which 511,000 use gas or oil as their primary fuel.

6.2.5 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 a highly efficient clean heating system is estimated at around £14,000^[29].

6.2.6 By comparison, replacing a fossil fuel boiler (without fabric upgrades) costs in the region of £2,000 to £3,000.

6.3 Consumer Impact

6.3.1 The main consumer impact concerns the potential for changes in the levels of consumer bills.

6.3.2 The impact on energy bills of converting a home from a polluting heating system to a clean heating system depends on property characteristics such as build form, occupancy levels, and fabric efficiency, with the geographical location also playing a part. The retail cost of energy is also an important factor. Environmental and social obligation costs (levies) play a significant role in the relative costs of different options. The development of UK Government policy in this area, along with future evolution of wholesale and other system prices, means that forecasting future relative operating costs is challenging. Therefore, while this section considers the impact on fuel bills of adopting strategic clean heating technologies according to existing evidence, it should be noted that recent fluctuations in energy costs are likely to have a significant impact on these findings.

6.3.3 Heat pumps are a key clean heating technology, and a very efficient way of using electricity to provide heat. Although one kWh of electricity is currently more expensive than one kWh of gas (currently by a factor of about 3), the median energy efficiency of an Air Source Heat Pump (ASHP) is nearly 250%, meaning that the energy demand is significantly lower. This means that, for some properties, heat pumps can help reduce bills where they are replacing older, more inefficient oil and gas heating systems, or where they are combined with upgrades to the efficiency of the building’s fabric.

6.3.4 Running costs when using a heat network are more difficult to generalise, as they depend on the configuration of the network infrastructure (and hence capital costs that are recovered through bills) and the particular heat sources used. Heat networks are best suited to high density areas where per-connection network costs can be minimised. Larger networks can generally supply at lower cost, due to their lower average cost of development and operation, driven by factors such as more consistent demand, storage potential, renewable usage, and available business models. Evidence collated by KPMG to inform the Heat Networks (Scotland) Bill Business and Regulatory Impact Assessment^[30] suggests that heat networks could provide bill savings, with a potential saving of around 17% or 1.29 p/kWh in 2019 under a central scenario, and potentially ranging up to 36% under a high scenario.

7. Scottish Firms Impact Test

7.1.1 Social landlords have a duty, as part of the Scottish Secure Tenancy agreement to ensure that their properties are “wind and watertight, habitable and in all other respects reasonably fit for human habitation”. The model tenancy agreement also requires landlords to provide and maintain houses so that tenants can heat them to a reasonable temperature at a reasonable cost, to avoid condensation dampness and mould.^[31]

7.1.2 The new Social Housing Net Zero Standard will have an impact on all social housing providers – both local authorities and registered social landlords. They will be obliged to install energy efficiency measures and clean heating technologies in their housing stock which will benefit tenants by allowing them to heat their home more efficiently.

7.1.3 Engagement with individual local authorities and registered social landlords as well as COSLA and the SFHA has been vitally important as part of this process. This will continue throughout the consultation process and beyond until the final standard is set.

7.1.4 During the consultation period, the Scottish Government will engage through seminars and workshops. Stakeholders such as the Scottish Federation of Housing Associations, the Association of Local Authority Chief Housing Officers and the Scottish Housing Network will also be organising events for their members. Each event will provide an opportunity for face to face discussions with 6-12 individual businesses on the consultation document and its proposals.

8. Competition Assessment

8.1.1 To meet the requirements of the Social Housing Net Zero Standard, social landlords will be responsible for ensuring that improvements are carried out to a high standard by reputable contractors. The related works will go out to tender and a wide range of construction businesses will have the opportunity to bid for work. There is the potential for both large and small to medium sized enterprises to secure contracts for the installation of measures which will be necessary to meet the new Social Housing Net Zero Standard. However, the amount of work, and the nature of the work, is unlikely to impact on competitiveness of Scottish companies within the UK.

8.1.2 There is the potential for significant job creation to undertake these works. This may assist in developing skills and market in some of the newer technologies. Individual businesses and business representative bodies are invited to respond to this Business and Regulatory Impact Assessment, and their feedback will help inform the final assessment.

8.1.3 We have applied the Office of Fair Trading (OFT) competition filter questions listed below to the options, and confirmed that they are unlikely to have a significant impact on competition.

• Will the proposal directly limit the number or range of suppliers?
• Will the proposal indirectly limit the number or range of suppliers?
• Will the proposal limit the ability of suppliers to compete?
• Will the proposal reduce suppliers' incentives to compete vigorously?

9. Consumer Assessment

9.1.1 The Social Housing Net Zero Standard will support a reduction in energy demand within the social housing sector, which can help address fuel poverty. It will also support the roll-out of clean heating.

9.1.2 The Social Housing Net Zero Standard does not require the storage of consumer data.

10. Test Run of Business Forms

10.1.1 The proposals are not likely to bring in any new forms for business.

11. Digital Impact Assessment

11.1.1 No impact identified. The setting of the target should not be affected by either the availability or lack of a digital / online context.

12. Legal Aid Impact Test

12.1.1 As tenant co-operation is required before any energy efficiency measures are installed, there should be no impact on the legal aid fund.

13. Enforcements, Sanctions and Monitoring

13.1.1 Discussions are underway with the Scottish Housing Regulator (SHR) with a view to them taking responsibility for monitoring the Social Housing Net Zero Standard. The SHR consults landlords on any changes to the data and information they request as part of their annual returns and progress towards the new standard would be included in this.

14. Implementation And Delivery Plan

14.1.1 The new Social Housing Net Zero Standard consultation is expected to be finalised by the end of March 2024.

15. Post- implementation review

15.1.1 Proposals for review are set out in the consultation paper.

16. Summary and Recommendation

16.1.1 This BRIA lays out the rationale behind the consultation and the proposed Social Housing Net Zero Standard.

16.1.2 It is aligned with the Scottish Government’s commitment in the Heat in Buildings Strategy to review EESSH2 in 2023 with a view to aligning it with this net-zero targets.

17. Declaration And Publication

17.1.1 I have read the Business and Regulatory Impact Assessment and I am satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits, and impact of the leading options. I am satisfied that business impact has been assessed with the support of businesses in Scotland.

Signed: Sue Kearns, Deputy Director, Heat in Buildings Policy and Regulations

Scottish Government contact point:

socialhousingheatdecarb@gov.scot