Developing an Energy Efficiency Standard for Social Housing: consultation

7. Financial implications - costs and funding sources

This chapter looks at:

• The indicative cost of meeting the Energy Efficiency Standard
• The potential funding streams available
• The financial benefits

7.1 The Scottish Government has been clear from the start that we will help landlords to minimise the financial implications of any new energy efficiency standard. We recognise that the financial capacity of both local authorities and RSLs is limited by existing commitments to build new housing and/or meet the SHQS, and other priorities identified in the investment plan. There are potential tensions between improving existing stock and increasing stock through building new homes. Equally, tenants are facing financial pressures, whether this is due to the ongoing economic downturn or other factors such as the forthcoming welfare reforms by the UK Government.

Cost of meeting the standard

7.2 The modelling work we have done (see chapter 5 for more details) included some estimated costs of installing the measures needed to meet the proposed energy efficiency standard. The case study attached at Annex A gives an example of indicative costs for improving one house type. The costs will be highly variable depending on the dwelling, the location and the economies of scale that landlords can achieve by buying measures at scale. It is our view that for many house types, the likely cost of meeting the new standard will not be much more than for meeting the energy efficiency element of the SHQS. Indeed in some instances, meeting the SHQS will mean that the dwelling meets the 2020 target.

Scottish Government funding

7.3 The table at Annex B sets out a list of funding streams for domestic energy efficiency improvements. As made clear in the table, a number of the available funds are loans rather than grants and not all of them are available across Scotland or indeed to the social rented sector (though they may help social landlords by encouraging owner-occupiers or private landlords to contribute to communal improvements.

7.4 The Scottish Government has offered a wide range of support for Scotland's housing and we are currently reviewing the landscape of a number of funding programmes such as the Energy Assistance Package, Universal Home Insulation Scheme ( UHIS) and the Boiler Scrappage programme as part of the Fuel Poverty Forum's Review ³³ , to best meet Scotland's needs. Whilst these schemes have been targeted at private tenures, the Energy Assistance Package provides free advice to everybody.

7.5 The Warm Homes Fund ³⁴ , a key manifesto pledge, is also being developed so that this complements our District Heating Loans Scheme ³⁵ , and the Community And Renewable Energy Scheme ( CARES ³⁶ ) scheme, both of which support renewable energy projects (for both domestic and non-domestic properties). The District Heating Loans Scheme is open to social landlords (including local authorities) and CARES is open to social enterprises, which includes social landlords.

UK Government Funding

7.6 The UK Government's Energy Act 2011 introduced 2 new schemes which should help improve domestic energy efficiency; the Energy Company Obligation ( ECO) and the Green Deal ( GD) finance scheme. The ECO will replace the current Carbon Emissions Reduction Target ( CERT) and Community Energy Saving Programme ( CESP) which are due to end in 2012. Secondary legislation will be required for the detailed processes of both the ECO and the GD schemes. Both schemes are expected to be implemented in late 2012, the intention being to provide a smooth transition from CERT and CESP to the new schemes.

7.7 The ECO will include carbon reduction, affordable warmth and carbon saving communities obligations. The additional support from energy companies is estimated to be £1.3bn per year across the UK, to support households in fuel poverty and those with hard-to-insulate homes ³⁷ . DECC has said that ECO will now target support, worth an estimated £540m every year, to fund energy saving improvements in the worst off households. Following the consultation on the Energy Bill, DECC is increasing the eligibility for the Affordable Warmth element of the ECO to include more fuel poor families. There will also be a wider range of measures qualifying for the Carbon element beyond solid wall insulation, including hard to treat cavity walls. The Carbon Saving Communities obligation has been developed following DECC's consultation. This will provide support to households in low income areas, including for loft and cavity wall insulation and is expected to be of significant benefit to social landlords. It is for energy companies to determine where this investment takes place in order to meet their targets, so there is no guarantee of a specific level of investment in Scotland. However, the Scottish Government is keen to maximise leverage of ECO funding into Scotland as part of its National Retrofit Programme and enable energy companies to discharge their obligations in Scotland.

7.8 The Green Deal will allow householders to make energy efficiency improvements to their homes and meet the cost through the expected savings on their electricity bill. The scheme will primarily be for individual tenants and occupants of properties rather than landlords. However, both Green Deal and ECO could also assist private owners to undertake work in mixed tenure blocks. Higher cost measures, such as external wall cladding and solid wall insulation could potentially be funded under ECO. Lower cost measures, such as cavity wall insulation in a '4-in-a-block', can also be funded, enabling private owners and social landlords to co-operate and access the Green Deal jointly. The Green Deal could therefore help overcome the financial barrier that was previously one of the factors blocking communal improvements. This 'cross-tenure' approach will be reflected in the forthcoming national retrofit strategy which will be a key element of the Sustainable Housing Strategy ( SHS).

7.9 Another DECC scheme is the Renewable Heat Incentive ³⁸ ( RHI) which provides long-term tariff support to encourage the replacement of fossil fuel heating with renewable alternatives. It opened for applications in November 2011 and currently supports non-domestic renewable heat schemes (non-domestic includes district heating schemes).

7.10 The Renewable Heat Premium Payment Scheme ( RHPP) has provided support to the domestic sector since August 2011. A second phase of the RHPP scheme, worth £25m, was recently announced. This second phase includes a new social landlords' competition building on the experiences of Phase 1 of the RHPP and a new Communities Competition which will help to bring renewable heat to a wider pool of householders. Further details on eligibility criteria and the competitions are available on the DECC website ³⁹ .

7.11 DECC intends to consult on the provision of support for renewable heating for households in the longer term in September 2012 and will set out a timetable for delivering this support at that point.

7.12 Some landlords are looking at different financial models which could work with Green Deal, ECO, RHI, etc. and combine different funding schemes into a cross-subsidy model. The Scottish Government is exploring possible new funding models to help support the step change we need to see in the scale of energy efficiency and renewables activity. These are set out in the Sustainable Housing Strategy. In addition, a range of local authority Green Deal delivery models are starting to emerge. These include:

• Limited promotion - where the local authority's role is limited to promoting energy efficiency works, for example through a portal of local, accredited Green Deal suppliers
• Framework of Green Deal Providers - where the local authority establishes a framework of preferred Green Deal providers and promotes demand.
• Green Deal Delivery Partner - where the local authority (or a group of local authorities) procures a Green Deal Delivery Partner who will work exclusively to deliver the Green Deal, with the local authority providing strategic direction and monitoring of agreed outcomes. (Funding may be provided either through the Public Works Loan Board, the Green Deal Finance Company or other sources, including capital contributions from RSLs utilising this delivery route.)
• Green Deal Provider - where the local authority becomes an accredited Green Deal provider delivering its strategy and outcome directly (funding may be provided either through the Public Works Loan Board or the Green Deal Finance Company).

7.13 It is also likely there will be opportunities for RSLs to work collaboratively with local authorities on the development of these models and to make use of them in terms of delivering energy efficiency work and maximising draw down of ECO.

European Funding

7.14 The Scottish Government will help social landlords identify other forms of green investment, including potential European funding streams and engaging with the European Investment Bank ( EIB).

7.15 A new £50m regeneration fund offering loans to eligible regeneration developments and energy efficiency projects is now in place for Scotland. The Scottish Partnership for Regeneration in Urban Centres ( SPRUCE) is part of the Joint European Support for Sustainable Investment in City Areas ( JESSICA) investment fund. SPRUCE will be managed by Amber Fund Management Limited. The Scottish Government, using European Regional Development Funds, has contributed £50 million to establish the fund which will offer loans and equity investment to revenue-generating projects in Scotland. As it is part-funded by the European Union, it is a regional fund and so can only operate in 13 local authority areas ⁴⁰ from the Lowlands and Uplands Scotland ERDF Programme, which have been selected according to the Scottish Index of Multiple Deprivation ( SIMD).

7.16 SPRUCE includes up to £15m which can be invested in energy efficiency retrofit projects. This can include energy production from renewable and low carbon technologies and schemes which pilot new or innovative approaches to energy efficiency, including the retrofit of existing social housing stock. More details, including eligible measures are listed on the Amber Green SPRUCE website ⁴¹ .

7.17 The advantages of SPRUCE are flexible loan terms and keen pricing compared with traditional bank finance. As loans are repaid, the funding will continue to be invested in urban areas after the Structural Funds Programmes that created them are closed down.

Financial benefits of improved energy efficiency

7.18 In terms of monetary gains it is recognised that the 'pay back' savings will go to the tenant's pocket (through potentially lower fuel bills). Given the more likely incidence of fuel poverty in this sector, this is a positive outcome. Nonetheless, social landlords will need to recognise this in calculating their cash flows. Further, 'pay back' for a measure is not the same as the life-span of a measure. Some measures will provide a 'quick pay back' (for tenants) and equally should likely provide a corresponding pay back of carbon emissions saved for the social landlord. Other measures may take longer to achieve pay back, or indeed never achieve payback financially, but are worthwhile in terms of saving carbon emissions.

Question 22: Are there any other relevant sources of funding that can help social landlords improve the energy efficiency of their stock?

Question 23: Given the range of financial assistance available to landlords, do you agree that the standard can be achieved without disproportionate cost? If not, please explain why.

Question 24: We see an opportunity to advance gender equality in the creation of jobs to undertake the retrofitting works in industries that have traditionally been male-dominated. Your views on how we can maximise gender equality in job creation would be welcome