Decarbonising heating - economic impact: report

1 Introduction

1.1 The purpose of this report

In this study we explore potential economic impacts over the period to 2030 from example pathways for decarbonising building heating in Scotland. The economic impacts (positive and negative) of scenarios for the delivery of low- and zero-carbon heat in the period to 2030 that are consistent with the Scottish Government's longer term policy goals are quantified, based on existing data and economic modelling.

The potential technology mixes used as inputs to the economic analysis are outlined only briefly in Chapter 2 of this report. The economic impacts are reported in greater detail in Chapter 3.

The rationale for economic impacts

The core focus of this analysis is the assessment of the potential economic impacts of decarbonisation pathways. Decarbonisation is often communicated purely in terms of costs. In energy system optimisation models, this is explicitly due to model design (where minimising system costs is an explicit goal of the model), and such analysis dominates mainstream understanding of the transition. Until recently, the CCC also talked almost exclusively about the 'costs' of decarbonisation, referring to a measure of resource costs for the transition. Such analysis misses the economic contribution that such activity can make; investment in an economy with spare capacity can create jobs and economic output, while such an approach also omits the difference between expenditure and investment, where investment can alter the productive capacity of the economy.

Our economic analysis is supported by technology modelling, which captures how, under different policy scenarios, future demand for Scottish heat out to 2030 might be met. This provides insight into the changing costs associated with heating (in terms of purchasing heating technologies and spending on fuels/electricity), which form the key inputs to the economic impact work.

The ultimate purpose of this research is therefore to assess the economic impacts associated with potential future pathways for achieving the Scottish Government's 2030 aims with regards to the heating of buildings, in order to highlight the opportunities that such a transition can provide to the Scottish economy for policymakers and the wider public.

The scope of the analysis

This report assesses the economic impacts of moving towards decarbonised heat in Scotland over the period to 2030. The modelling work includes explicit energy efficiency measures; it is assumed that by 2035, all residential properties in Scotland achieve an Energy Performance Certificate (EPC) rating of C, and that final demand for heating is reduced accordingly. This was based upon the draft Heat and Buildings strategy that was being consulted on when the analysis was carried out; however, the Scottish Government has since announced that such a transition to EPC band C should now be completed across the Scottish housing stock by 2033. In order to calculate impacts of these measures by 2030, a linear interpolation is applied, to calculate the reduction achieved in 2030, and therefore the trajectory for Total heat demand. However, the economic impact of these energy efficiency measures is not assessed. Such analysis has previously been carried out in (Turner, et al. 2018), and the economic impacts as described there would be expected to occur as a result of this planned energy efficiency rollout. Furthermore, in this analysis the deployment of energy efficiency is assumed to take place in the baseline as well as the scenarios, so such measures would not lead to any further differentiation between the economic impacts in the scenarios.

1.2 Current policy aims

The Climate Change (Emissions Reduction Targets) (Scotland) Act 2019 sets targets for Scotland to achieve net zero by 2045 at the latest. In order to deliver this, interim emissions reduction targets as compared to emissions in 1990 have been set; emissions should be 56% below 1990 levels by 2020, 75% below by 2030, and 90% below 1990 levels by 2040.

The energy efficiency of the Scottish housing stock is improving (as noted in the Scottish house condition survey 2018). However, according to the Scottish Energy Statistics Hub, heating was responsible for 78% of Scottish household energy consumption in 2019. At the same time, 81% of Scotland's housing stock relies on mains gas as the primary heating fuel, and 6% on oil. This suggests that around 2.3m existing dwellings will have to shift to zero-carbon heating technologies before 2045, plus any new dwellings built since 2018 which do not use heating technologies which have the potential to be zero carbon. This highlights the scale of the challenge of achieving net zero in the domestic housing stock.

To specifically address this challenge, the Scottish Government has published the Heat in Buildings Strategy, which includes an update to the Energy Efficient Scotland route map.

There are multiple potential pathways to deliver a zero-carbon building stock. Most fundamentally, there is a balance between energy efficiency measures and switching to zero-carbon fuels; the deployment of efficiency measures can reduce the heat energy demand of households, reducing the additional electricity required to facilitate a switch away from fossil fuels. There are also complementarities between technologies and measures; for example, heat pumps become much more viable as a heating technology in an energy efficient home, where the lower peak output (and improved coefficient of performance at lower heating temperatures) are less impactful on the performance of the heating system.