Energy Efficient Scotland: consultation on further development of the programme

Part 2 - Timeframe for Delivery

What the Route Map proposed

The Energy Efficient Scotland Route Map, published in May 2018, set out a pathway to making our homes and buildings warmer, greener and more efficient. It set out the steps we would take to ensure that all homes and non-domestic buildings are improved so that they achieve a good level of energy efficiency, where technically feasible and cost-effective.

Framework of Standards

Energy efficiency standard in the social rented sector - Maximise the number of social rented homes achieving EPC Band B by 2032.

Energy efficiency standard in the private rented sector- Private rented homes to reach EPC Band E by 2022, EPC Band D by 2025, and EPC Band C by 2030 (where technically feasible and cost effective)

Energy efficiency standard for owner occupiers - All owner occupied homes to reach EPC Band C by 2040 (where technically feasible and cost effective) using a period of encouragement to 2030 before compelling home owners to improve the energy efficiency of their properties

Energy efficiency target for households in fuel poverty - All homes with households in fuel poverty to reach EPC Band C by 2030 and EPC Band B by 2040 (where technically feasible and cost effective).

Underpinning Energy Efficient Scotland is a framework of standards, phased by tenure, taking into account the progress that has been made to date. For Scotland's homes, on which this part of the consultation is focused, that means achieving at least EPC Band C by 2040, where technically feasible and cost-effective. It is the timing of this framework which we are now seeking views on.

What you told us

A broad range of those responding to the consultation agreed that there is value in setting long-term targets. Views on the level of ambition were mixed, with some respondents expressing concerns that achieving at least EPC Band C is unrealistic or too ambitious. Some respondents highlighted instances where properties may not be able to reach an EPC Band C, with the majority of respondents agreeing that instances where a property does not need to reach EPC Band C should be allowed. These responses related to all sectors.

There were similarly mixed views about the proposed target date i.e. 2040. The most common response was that 2030 would be a more appropriate date, however a number of different combinations of EPC ratings, dates and tenures were also proposed, including suggestions that all homes should reach EPC Band C by 2032, 2035 and 2040.

The Scottish Parliament also considered the timescales for Energy Efficient Scotland, with a majority supporting an amendment in May 2018 calling on the Scottish Government to bring forward the date for all homes to achieve EPC Band C to 2030, from 2040. Most recently, and with regard to the 2040 target date contained in the Fuel Poverty (Target, Definition and Strategy) Bill, the Local Government and Communities Committee's Stage 1 Report on the Bill, published on 29 January 2019, recognised arguments that the reduction of fuel poverty will lean heavily on applying technologies which are still in development. Accordingly, the Committee considered it to be realistic to build in time for these technologies to come on-stream.

We want to ensure we avoid adverse consequence of increasing fuel poverty levels due to higher installation or operating costs for householders who would be required to implement further upgrades at unnecessary expense in order to move to the low carbon technologies that would be required to change objectives that are in synch with both our fuel poverty targets and energy efficient programme.

The remainder of this section explores what going faster, i.e. bringing forward the target from 2040, would mean in practice and seeks views on the impacts of doing so and how these could be mitigated.

Delivering our vision

As the standards framework has proposed to ensure that the number of socially rented homes reaching EPC Band B is maximised by 2032, that homes with fuel poor households achieve EPC Band C by 2030 (and EPC B by 2040) and all privately rented homes reach EPC Band C by 2030, the issue of going faster relates specifically to owner occupied housing.

Energy Efficient Scotland builds on our previous energy efficiency programmes such as our Home Energy Efficiency Programmes for Scotland which have been running for many years. These programmes have helped to raise awareness and build relationships to encourage take up, supporting the delivery of energy efficiency measures to households across Scotland. In considering the speed of travel to achieve the vision, we must consider momentum within the sector, as well as the need to change public attitudes and opinions towards energy efficiency, particularly as we expand out into the self-funding segment of the owner occupied sector.

The latest Scottish House Condition Survey shows that there are approximately 930,000 owner occupied dwellings with an EPC rating below Band C. The following sections outline what delivery would look like under the existing Route Map proposal for all homes to achieve EPC Band C by 2040 and what delivery would look like if the target is moved a decade earlier.

Pace of Delivery

Responses to the consultation in 2018 supported target setting and generally supported the aspiration of reaching EPC Band C for all housing as an appropriate way of achieving the vision of Energy Efficient Scotland. In establishing a robust, credible and evidence based pathway, we must balance the aspiration to engage positively with home owners across Scotland, with the need to secure energy efficiency improvements.

The Energy Efficient Scotland Route Map proposed that all owner occupied homes meet EPC Band C by 2040 and that this should be achieved in two phases: an encouraging phase up to 2030, with a compliance or mandating phase commencing thereafter.

Currently, the number of owner occupied dwellings with an EPC below C is decreasing by around 40,000 per annum.^[5] Assuming this can be maintained over the next 20 years, Figure A shows that this would be approximately in line with an even delivery path to the 2040 target. However, without further stimulus it is likely that the rate of homes achieving EPC Band C will drop below the rate we've seen in recent years as the number of "easy wins" (easier-to-treat properties whose owners are more engaged with energy efficiency) diminishes. In contrast, if the deadline for the EPC Band C target is moved forward from 2040 to 2030, an immediate and sustained doubling of the current annual rate of improvement, up to 80,000 homes per annum, would be required.

Figure A. Possible delivery paths of EPC Band C target, assuming business as usual delivery remains at 40,000 dwellings p.a.

The accelerated rate of delivery required by a 2030 target will most likely lead to increased demand for existing Scottish Government funded schemes such as our Area Based Schemes, Warmer Homes Scotland programme and our low-cost loans, requiring a significant increase in funding for energy efficiency. This raises the question of where this additional funding would come from, with the options being cutting budgets for other Scottish Government programmes or raising additional revenue through increasing taxes or through placing additional levies on energy bills where all the levers may not be within the control of Scottish Ministers.

The pressure on Scottish Government budgets from a 2030 target, or even from a 2040 target if business as usual delivery falls, may require an obligation to be placed on households to improve their homes to an EPC Band C as an alternative to providing additional public funding. The Route Map outlined that, if sufficient progress had not been made in the owner occupied sector, we would take steps to make it compulsory to reach EPC Band C from 2030.

One of the options for the mandating action would be to introduce a requirement that dwellings must be at an EPC Band C at the point of sale. While this could help increase the rate of improvement, especially amongst owners who are more reluctant to undertake improvements, estimates using data from the Scottish House Condition Survey on the length of tenure at an address show that over a ten year period a requirement for improvement triggered at the point of sale would only capture around a third of the stock falling below EPC Band C.

Table 1. Proportion of dwellings with an EPC below C experiencing at least one change in ownership (owner occupier sector) or tenancy (private rented sector)

At end of year	Owner occupier sector	Private rented sector
1	5%	44%
5	20%	83%
10	36%	93%
15	51%	96%
20	65%	98%

Source: Scottish Household Survey (combined 2014-2016 data), using length of tenure at current address.

In contrast, over 90% of privately rented dwellings are estimated to have at least one change in tenancy in ten year period.

Figure B. Proportion of dwellings with an EPC below C which will have had at least one change in ownership/tenancy over a ten year period.

Source: Scottish House Condition Survey (combined 2014-2016 data).

Figure C illustrates the impact of reaching an EPC Band C if the business as usual falls to 20,000 per annum due to a diminishing pool of "easy wins". In this scenario, even meeting a 2040 target will be stretching, and business as usual delivery may need to be supplemented by regulating at the point of turnover.^[6] While such regulation will narrow the gap between the business as usual and the level of delivery required to hit the 2040 target, it will still leave a backlog of dwellings needing to be upgraded in 2040, even if regulation begins in 2025 instead of 2030.

Figure C. Possible delivery paths of EPC Band C target, assuming business as usual delivery falls to 20,000 dwellings p.a.

Given that turnover will have a slower effect in the owner occupier sector than the private rented sector, we are interested to hear views on what other trigger points could be used to require improvement and on the timescales for such actions. Further proposals on what this mandatory phase could look like will be set out this Autumn.

As discussed earlier, a 2030 target would be extremely stretching even if the current business as usual of 40,000 dwellings can be maintained. Figure C shows that if the business as usual declines to 20,000 dwelling per annum, even regulating at the point of turnover would not be enough to prevent this gap from widening. Therefore there could be significant additional demands on the public purse, as well as the need for more sweeping regulations. Moving this date forward may also mean that many more dwellings could be exempt from the EPC Band C requirement due to cost effectiveness and technical feasibility considerations. The longer time frame of 2040 could help maximise the proportion of dwellings which meet the EPC Band C target, through reduced upgrade costs as a result of technological progress and greater supply chain capacity.

Consultation Questions

1. With regards to achieving an accelerated delivery of the standards proposed, do you think mandatory action for owner occupiers would be required? Please provide a rationale for your answer.

2. What trigger points, e.g. sale, renovation, etc. could be used to require owner occupiers to undertaken energy efficiency improvements?

3. If you think mandatory action would be required to achieve an accelerated delivery of standards, when should mandatory energy efficiency targets be introduced in the owner-occupied sector?

Quality and supply chain implications

It is widely acknowledged that the capacity of the supply chain will need to increase in line with the scale of Energy Efficient Scotland and with estimates of around £12 billion in investment needed to fully deliver its objectives. Whilst this presents both a challenge and an opportunity for suppliers in Scotland, there are a number of considerations relating to supplier capacities and capabilities. These include:

• Remote rural and island areas where there is a large number of micro-sized businesses (10 employees or less) and in some areas insufficient capacity to meet demand^[7].
• An ageing workforce with not enough young people entering the trades.
• The impact of Brexit on Scottish suppliers who rely on EU workers.
• A shift towards having to deal with more hard to treat properties which will require much greater levels of interventions across a broad range of measures. Consequently this will require a greater skills set amongst suppliers.
• General cynicism with previous schemes, in particular the UK Government's Green Deal.
• The need to develop suppliers in line with the quality assurance expectations of the Programme to ensure consumers receive high quality work with adequate consumer protection.
• The general need to raise awareness amongst suppliers of the Energy Efficient Scotland Programme to provide them with confidence that there is a sufficient market available to them to justify bringing in more staff and upskilling their workforce more generally.
• It is acknowledged that some of these challenges are complex to deal with (for example attracting young people to the trades) and many of these will take a significant amount of time to deal with.

Consultaion Question

4. From a supply chain perspective, do you think bringing forward the timescales for the Programme would have a positive or negative effect on quality, skills & capacity and consumer protection? Please provide a rationale, and evidence where possible.

Impact on Fuel Poverty & Climate Change

The Energy Efficient Scotland Route Map already sets out an additional, more stretching target for households that are in fuel poverty, which would see them prioritised so that they achieve EPC Band C by 2030, and then EPC Band B by 2040, where technically feasible, cost-effective and affordable.

These timescales are consistent with the targets set in the Fuel Poverty (Target, Definition and Strategy) Bill and will guide our delivery programmes, ensuring that support continues to be targeted to those most in need. Accelerating the target for all homes may risk increasing levels of fuel poverty by forcing households to install low carbon or renewable technologies that may be more expensive to run – therefore increasing fuel costs and before the cost of the technologieshave been further driven down by innovation in the sector.

Meeting the targets for the various sectors set out in the Energy Efficient Scotland Route Map, including making steady progress in the owner occupier sector towards achieving at least an EPC Band C by 2040, is in line with the trajectory for the reduction in heat demand set out in the Climate Change Plan, which would see demand in domestic properties fall by 15% by 2032. Bringing this target forward to 2030 would support efforts to reduce emissions more quickly. However, it risks forcing some households to take decisions about their heating systems prematurely, which may result in stranded assets or households having to make multiple changes to their heating systems over the next twenty years. A longer time horizon to 2040 is more in line with the longer-term decarbonisation of the heat supply and will more readily enable optimisation across demand reduction and supply, which is important if we are to reduce emissions to near zero in a cost-effective manner.

Consultation Question

5. In your view, how would accelerating Energy Efficient Scotland help, and/or how would it hinder, plans to address fuel poverty?

6. With regards to reducing the emissions associated with the supply of heat, what are your views on consideration of energy efficient improvements alongside changes to heating systems?

What the evidence tells us

In considering your responses, the following may assist in understanding the implications of an accelerated target.

Reaching EPC Band C – the scale of the task for owner occupiers

Based on the most recent (2017) Scottish House Condition Survey, there are around 1.4 million dwellings with an EPC rating below Band C. The social housing sector is the most efficient, with more than half (55%) achieving at least EPC Band C, as compared with 39% of properties in the private rented sector and 37% in the owner occupier sector.

There are approximately 930,000 owner occupied dwellings with an EPC below C which will require upgrading over the next 10-20 years, depending on the time horizon specified.

Modelling, undertaken with the National Household Model,^[8] shows that almost all the stock in the owner occupier sector could achieve an EPC Band C based on a standard set of upgrades, such as insulation measures and efficient heating systems, as well as renewables such as heat pumps and solar PV. The total cost of achieving a near 100% compliance rate^[9] is estimated in the region of £6 billion, at an average (mean) cost of around £6,000 per upgraded dwelling.

Within this total cost, some dwellings could potentially be much more expensive to upgrade than rest of the stock. In particular, costs could be higher in rural areas, because of the greater prevalence of larger, detached dwellings, with stone walls, that are off the gas grid, which will require more extensive upgrades to reach an EPC Band C.A comparison of the average modelled upgrade costs between rural and urban locations is included in Table 2. The modelling undertaken through the National Household Model uses a standard cost, scaled to the amount of insulation or size of heating system installed. It therefore captures the higher average cost in rural areas due to the different profile of rural dwellings. However, in addition to this, the cost of upgrading dwellings in rural areas could potentially be higher than in urban areas due to factors such as higher transport costs, less competition amongst installers, as well as rural areas being less suitable for the economies of scale from area-based schemes. These could result in the same sized measure costing more to install in rural areas than in urban areas.

Table 2. Capital costs and simple payback periods of upgrading owner occupier stock to EPC Band C^[10]

	Total cost (£bn)	Average (mean) cost (£)	Average simple payback period
Rural	2	11,000	16
Urban	4	5,000	13
Total	6	6,000	14

Although costs are higher in rural areas, so are the fuel bill savings, which means that that the average payback period in rural areas is not significantly longer than in urban areas. Furthermore, as a safeguard against the impact of excessive costs for some dwellings, in the Energy Efficient Scotland consultation we proposed that dwellings will not need to be fully upgraded to EPC Band C if it is not cost effective.

Work on the definition of cost effectiveness and technical feasibility is ongoing. As reported in the Energy Efficient Scotland Consultation in May 2018, by focusing on the dwellings with the lowest capital cost, a 75% attainment rate can be achieved at an average (median) cost of around £3,500. At this cost level, attainment would vary by location, with around 60% rural dwellings meeting EPC Band C, compared to around 80% in urban areas.

The ultimate cost and attainment rate for the EPC Band C target will depend on the final definitions of cost effectiveness and technically feasibility, as well as trends in the costs of energy efficiency upgrades, which could potentially reduce over the twenty year time period of the programme due to technological progress. The Scottish Government has commissioned further research to inform the development of these proposals.

Current levels of delivery

The Scottish Government is on track to making available £500 million to improve the energy efficiency of Scotland's buildings and tackle fuel poverty over the four years to 2021. This is in addition to funding under the Energy Company Obligation and private investment which is also helping to improve the energy efficiency of buildings in Scotland.

Data from the Scottish House Condition Survey show that in recent years, the number of dwellings with an EPC below C in the owner occupier sector has been reducing by an annual average of around 40,000.

The current rate of improvement is likely to be driven predominantly by our Home Energy Efficiency Programmes for Scotland and grant funding that is provided under the Energy Company Obligation. These programmes are predominantly targeted at fuel poor households and only require small levels of customer contribution, if at all. A much smaller proportion of the support currently on offer is targeted at self-funding owner occupiers.

Table 3. Annual reduction in owner occupier dwellings with an EPC below C^[11]

Year	Reduction
	SAP 2009	SAP 2012
2011	29,000
2012	41,000
2013	79,000
2014	70,000
2015	23,000	21,000
2016	1,000	28,000
2017	71,000	61,000
Average	45,000	37,000

Source: Scottish House Condition Survey, various years; Estimates have been provided for both SAP 2009 and SAP 2012 because a longer time series is available for SAP 2009; Estimates rounded to nearest thousand.

The Route Map set out that, through Energy Efficient Scotland, we would continue to provide grant funding to fuel poor households, as well as making available low-cost loans to help self-funding households spread the upfront cost associated with improvement works. As such, it is likely that the rate of improvement seen in recent years for owner occupied homes will begin to fall as we:

• target harder to treat dwellings that may be more costly or technically challenging to upgrade;
• move further out into the self-funding segment of market who have yet to take action and are not at present actively engaged on energy efficiency.

As a result it is likely that we will have to work harder to maintain current rates of improvement in future years. The Route Map outlined that if insufficient progress had been achieved during the 2020s, owner occupied households may be mandated to make improvements.