Energy Efficient Scotland: partial business and regulatory impact assessment

1. Purpose and intended effect

1.1 Scope

This Business and Regulatory Impact Assessment ( BRIA) accompanies the consultation on Energy Efficient Scotland. It focusses on the following four key proposals, each of which sits under the overarching Programme banner:

• a long-term standard for all domestic properties in Scotland;
• an Energy Efficiency Standard for Social Housing beyond 2020 ( EESSH2);
• a regulatory system for Local Heat and Energy Efficiency strategies ( LHEES); and
• a regulatory system for district and communal heating.

As the proposals set out in this consultation are at different stages of development, the degree of detail provided in this BRIA with respect to different proposals varies accordingly. In relation to the ongoing consideration regarding our proposals for LHEES and the potential for regulation of district and communal heating, it is not possible at this time for the Scottish Government to carry out a fuller analysis of costs and wider impacts than we present here, as we are currently still analysing responses to our second consultation and continue to engage with our stakeholders to finalise our policies. In addition, further review will examine future improvement targets and a long-term standard for non-domestic buildings. As there are no regulatory proposals developed for this policy, it is not reported within the scope of this BRIA. As the policy is developed, a separate BRIA will be prepared and issued.

1.2 Background

Scottish Ministers designated energy efficiency as a national infrastructure priority in 2015, recognising the many benefits delivered by improving the energy performance of our buildings. Energy Efficient Scotland (the Programme) sees us delivering on this priority.

Energy efficiency has been a long-term priority for the Scottish Government – by the end of 2021, we will have allocated over £1 billion pounds over the period from 2009 on tackling fuel poverty and improving energy efficiency. The Programme builds on our existing, well-established and successful schemes.

Achieving our vision will take time. That is why the Programme contains a set of actions over a 20-year time period which will move us decisively towards our ultimate vision of making Scotland’s existing buildings near-zero carbon where feasible by 2050, in a way that is socially and economically sustainable. It is a cross-cutting programme, designed to help improve the co-ordination of activity across all building sectors through the provision of standards, regulation, legislation and funding to deliver our vision. By the end of the Programme we will have transformed the energy efficiency and heating of Scotland’s buildings, making our existing homes, shops, offices, schools and hospitals more comfortable and easier to heat.

1.3 Objective

The Programme delivers across two key policy areas of Government: fuel poverty and climate change. Because of this it has two main objectives:

• Supporting the eradication of fuel poverty, by removing poor energy efficiency as a driver of fuel poverty.
• Reducing greenhouse gas emissions through more energy efficient buildings and by decarbonising our heat supply.

The Programme contributes to the Scottish Government’s Greener and Healthier Strategic Objectives, and has a positive impact on the following National Outcomes:

• We reduce the local and global environmental impact of our consumption and production
• We value and enjoy our built and natural environment and protect it and enhance it for future generations
• We live in well-designed, sustainable places where we are able to access the amenities and services we need
• We live longer, healthier lives
• We have tackled the significant inequalities in Scottish Society

1.3.1 Fuel Poverty targets

According to the current definition, a household is fuel poor if energy costs to keep their home sufficiently warm are more than 10% of their income. The Scottish Government consulted on a proposed new definition of fuel poverty in November 2017 and analysis of the responses to this consultation will be published in spring 2018. The Fuel Poverty (Scotland) Bill, due to be introduced to the Scottish Parliament in June 2018, will set out the final form of the new definition and propose a new statutory target to eradicate fuel poverty by 2040.

Fuel poverty rates are monitored through the Scottish House Condition Survey. The latest data indicates that, under the current definition of fuel poverty, an estimated 649,000 households (26.5% of all households) were in fuel poverty in 2016. This is a reduction of 99,000 households compared to 2015, when 748,000 households (30.7%) were in fuel poverty. However, Figure 1 illustrates that this recent moderation in fuel poverty rates is in the context of a longer-term increase, the result of large increases in fuel prices which have more than offset improvements in energy efficiency and household incomes.

Figure 1: Fuel Poverty and Extreme Fuel Poverty since 2003/4

Source: Scottish House Condition Survey

1.3.2 Climate Change targets

Climate change is expected to have profound effects on Scotland and the wider global community, and action is required at all levels in order to mitigate its harmful consequences. The Climate Change (Scotland) Act 2009 therefore set an ambitious target of an 80% reduction in greenhouse-gas emissions on 1990 levels by 2050, which will contribute to meeting abatement targets set at the UK, EU and international levels. We are currently in the process of strengthening this target through the new Climate Change Bill. If we are to meet our target, significant shifts in the way energy is produced and used are required. Improving energy efficiency and moving from fossil fuels to renewable sources of energy will play a key role in the shift to a low-carbon economy.

The Scottish Government’s Climate Change Plan, published in February 2018, details how progress towards the 2050 target will be taken forward over the period to 2032, and sets a target of a 66% reduction in emissions by 2032 against 1990 levels. Emissions from the residential sector, which comprised 12.7% of total direct emissions in 2015, fell by 25% between 1990 and 2015, although there were substantial annual fluctuations around this declining trend due to varying weather conditions. The Plan proposes that residential emissions, which are principally derived from space and water heating, will be reduced by 23% by 2032 on 2015 levels, while emissions from the services sector will be reduced by 59% over the same period. Improvements to the building fabric will help reduce heat demand by 15% and 20% in domestic and non-domestic properties respectively by 2032.

1.3.3 Energy Strategy Targets

The Programme brings to life one of the six energy priorities as set out by our Scottish Energy Strategy: that of improving energy efficiency. The strategy, published in December 2017 is a ground breaking first energy strategy for Scotland and sets out the Scottish Government’s vision for the future energy system in Scotland. The strategy sets a vision to achieve by 2050 ‘A flourishing competitive local and national energy sector, delivering secure, affordable, clean energy for Scotland's households, communities and businesses’.

The Energy Strategy recognises that we cannot be entirely certain what our energy system will look like by 2050, so sets ambitious targets for 2030 which supports the principle of the pursuit of low or no regrets options to set us on the right path to the low carbon future:

• The equivalent of 50% of the energy for Scotland’s heat, transport and electricity consumption to be supplied from renewable sources;
• An increase by 30% in the productivity of energy use across the Scottish economy.
  
  

1.3.4 The Programme

The Programme is a vehicle to marshal the wide range of initiatives to improve and promote energy efficiency and decarbonisation of Scotland’s buildings. It brings a focus to delivery across the whole of Scotland, across all types of building.

The Programme contains a range of projects which will strengthen processes, delivery and engagement across Scotland. It will:

• set a long-term standard for all domestic dwellings in Scotland, as well as targets for households in fuel poverty;
• extend regulations to all non-domestic buildings by 2040 where this is technically feasible and cost effective;
• build on collaborative work to support the public sector to act as the vanguard of energy efficiency;
• establish adequate quality assurance and customer protection;
• provide support and actively promote opportunities to ensure a robust supply chain; and
• consider the need for legislation to create a statutory duty for local authorities to develop local heat and energy efficiency strategies and to regulate district and communal heating.

Achieving these objectives will deliver multiple benefits. Investment in improving the energy efficiency and decarbonising the heat of Scotland’s buildings will:

• put more money in people’s pockets by cutting the cost of heating their homes – supporting our ambitions to eradicate fuel poverty;
• improve business competitiveness by making sure every pound spent on energy maximises productivity;
• substantially reduce greenhouse gas emissions, contributing to meeting our ambitious climate change targets;
• boost GDP, with research showing a 10% improvement in the energy efficiency of all UK households leads to a sustained GDP expansion of around 0.16%; ^[1]
• help create a substantial Scottish market and supply chain for energy efficiency services and technologies, with every £100 million spent on energy efficiency improvements estimated to support approximately 1,200 full-time equivalent jobs across the Scottish economy; ^[2]
• increase the likelihood of health and wellbeing benefits through improved housing conditions; and
• help regenerate our communities through upgrading building stock.

1.4 Background to proposals

1.4.1 Long-term domestic standard

In 2016 there were around 2.5 million ^[3] domestic properties in Scotland and it is likely that over 80% of them will still be in use in 2050. Three quarters of our homes were built before 1982, and a fifth were built before 1919 using traditional methods of construction. ^[4] Approximately 61% of occupied homes are owner occupied, 15% are privately rented, and 23% are socially rented. Mains gas is the primary heating fuel for 79% of dwellings, with electricity accounting for 11%, oil for 6% and a range of other fuels for the remaining 4%.

We have chosen to use Energy Performance Certificates (‘ EPCs’) to set the standard as our consultation in 2017 showed that EPCs are widely known and provide a clear way to model and understand the energy performance of a building. The consultation also raised some issues with EPCs. We have listened and already commissioned research to identify how we can improve EPCs. Following this we will be doing more work with partners to make sure EPCs more accurately record the energy efficiency of buildings.

The average (mean) Energy Efficiency Rating ( EER) in the domestic sector, calculated using the Standard Assessment Procedure ( SAP 2012), is 64. The EER is measured on a scale of 1 to 100, with a higher score reflecting greater energy efficiency. For the purposes of EPCs, EER scores are divided into seven bands, labelled A to G. Band A ( EER 92 to 100) represents the highest energy performance, while band G ( EER 1 to 20) denotes the lowest energy performance. The average score of 64 for the domestic sector falls into EPC band D.

While energy efficiency across the domestic sector has been improving in recent years, as illustrated by Figure 2, the rate of improvement in the share of dwellings rated C or better is unlikely to be sufficient to ensure that all dwellings will meet a minimum EPC of C within the required timescales if improvements in energy efficiency is left to the voluntary decisions of owners.

Figure 2: Grouped EPC Bands under SAP 2009 and SAP 2012, 2010-2016

Source: Scottish House Condition Survey

Note: The number of A-rated dwellings is too small to be identified in the survey, given sample-size restrictions.

The role that regulation can play is illustrated by the significant differences in energy efficiency between sectors. Energy efficiency in the social rented sector has been regulated by the Scottish Housing Quality Standard, which had to be met by 2015, which was further strengthened by the Energy Efficiency Standard for Social Housing, which sets out minimum EPC ratings to be met by 2020. The impact of this stronger regulatory environment is reflected in the fact that in 2016 the average (mean) energy efficiency rating in the social rented sector was 68, as compared to 63 in the owner occupied and 62 in the private rented sector.

Table 1 illustrates the corresponding differences in the distribution of dwellings between EPC bands in the different tenures. It is notable that 53% of dwellings in the social rented sector already have a minimum EPC of C, as compared to 34% in the owner occupier sector and 38% in the private rented sector. Furthermore, the share of dwellings with the worst energy efficiency ratings (F and G) is only 1% in the social sector as against 5% in the owner occupier sector and 7% in the private rented sector.

Table 1: EPC Band by Broad Tenure in 2016, SAP 2012

EPC Band	Owner occupied		Private rented		Social sector		All Tenures
	000s	%	000s	%	000s	%	000s	%
A (92-100)	-	-	-	-	-	-	-	-
B (81-91)	27	2%	11	3%	15	2%	53	2%
C (69-80)	483	32%	113	34%	314	50%	910	37%
D (55-68)	701	47%	120	36%	247	40%	1,068	44%
E (39-54)	220	15%	62	19%	39	6%	321	13%
F (21-38)	60	4%	20	6%	8	1%	88	4%
G (1-20)	10	1%	3	1%	-	-	13	1%
Total	1,500	100%	329	100%	622	100%	2,452	100%
Sample		1,790		344		716		2,850

Source: Scottish House Condition Survey

When we consulted on the Programme in January 2017 there was a clear consensus around setting long-term targets, providing certainty and a clear direction of travel. To give that certainty and clarity we are proposing a long-term standard that by 2040, where technically feasible and cost effective, all domestic properties must have an EPC of at least C. To support our statutory target on fuel poverty we are setting a more ambitious target that households in fuel poverty will live in homes with an EPC of C by 2030 and of B by 2040.

We know that not all buildings will be able to achieve this standard, and that in some cases the cost of the work may outweigh the benefits in terms of energy savings. We will work with partners over the next two years to identify those buildings that may not be able to achieve the standard but will still need to be improved as far as is reasonable.

The work being proposed under the Programme reflects a step change in energy efficiency, and we are therefore proposing a phased approach to implementation, which also reflects the different starting points of different sectors.

1.4.2 EESSH2

The Energy Efficiency Standard for Social Housing ( EESSH) was introduced in 2014 to encourage social landlords to improve the energy efficiency of their stock. ^[5] For gas and electric dwellings, it sets a minimum EPC of D or C, depending on dwelling type, which landlords must achieve by 2020. For other fuels, landlords are required to meet the energy efficiency ratings in the Scottish Housing Quality Standard. EESSH compliance is part of the Scottish Social Housing Charter, with the Scottish Housing Regulator responsible for monitoring performance. Encouraging progress has been made to date, with three quarters of the social housing stock already meeting the EESSH in 2016/17. A variety of funding sources are available to landlords to help them attain the EESSH, although the majority of investment has been from landlords’ own resources (roughly 80%). ^[6]

1.4.3 LHEES

The Programme will be a strategic partnership with local government. Throughout its development, including through the period of development of Scotland’s Energy Strategy, we have consulted and discussed the design with our partners in COSLA and across local authorities, so that we can jointly build upon the successful components of existing programmes. From the start, in our initial pre-consultation discussions with stakeholders, they identified the importance of strategic planning at local and national levels across the 20 years of the programme and the creation of investor certainty.

Given the need for this strategic planning to take place from the outset, we have already consulted in detail twice during 2017-18 on proposals for Local Heat & Energy Efficiency Strategies ( LHEES). ^[7] We propose that LHEES would be the foundation on which the Programme is delivered over the twenty-year cycle of the programme. Their purpose would be to:

• Provide the evidence base to guide the programme, locally and nationally over its 20 years. Each local authority would assess its building stock, and identify the potential for improvement of their energy performance and heat supply in order to meet long-term Programme standards. This would allow it to set objectives to deliver this improvement, and estimate the scale of the investment needed to meet this. Looking at all of the LHEES together across Scotland will give a comprehensive picture of the building stock and levels of improvement needed for the whole of the Programme.
• Act as the guiding framework for developing and funding of future investment strategies. The strategic analysis that each local authority undertakes in preparing its LHEES would help it to prioritise and cost local delivery programmes. These would be submitted to the Scottish Government for approval and funding. The LHEES analysis will also help the Scottish Government to design and support national investment programmes (where needed) that can complement local authority activities.
• Provide an investment prospectus for developers and the supply chain in the energy efficiency and heat sectors. The data underpinning each LHEES, and the objectives that they set, would provide valuable market information for investors (from both the private and public sectors) on potential new investment opportunities. The prioritisation and costing of local delivery programmes and national investment programmes would help to give investors and the supply chain certainty to help them plan for long-term delivery.

Given that we envisage that LHEES would be central to informing and shaping the overall delivery of the Programme, we are proposing that there should be a statutory duty on local authorities to prepare and deliver them. We recognise that there are resource implications for this and that additional support may be required.

We have therefore consulted twice during 2017 and 2018 on the purpose, scope, and content of LHEES, and on the powers and resources needed to deliver them. In parallel, we have been working with COSLA and with 12 local authorities to pilot the preparation of LHEES. This is allowing us to understand the processes of data gathering, objective-setting, and design and prioritisation of local delivery programmes. The pilots are testing different methodologies and providing evidence on the resources needed to prepare LHEES.

We are now committing to providing support to all remaining local authorities in Scotland over the next two years, to pilot development of LHEES in their areas as part of the Programme Transition Programme. During 2018 we will also establish a working group with COSLA and representative local authorities to develop and agree guidance and supporting materials for LHEES, in preparation for roll-out of the Programme from 2020, and in advance of any proposed statutory duty.

We are considering the evidence from the second consultation alongside the ongoing findings from the pilots. Following conclusion of the consultation accompanying the Energy Efficient Scotland Routemap, we will consider the overall need for legislation, in the light of responses to this and to the earlier LHEES and district heating consultation, before setting out our final position.

1.4.4 District Heating

In parallel to consulting on LHEES, we have consulted twice during 2017 and 2018 on the potential for regulation of district heating. We consulted on the creation of a regulatory framework that would provide confidence for investors and would ensure protection for district heating consumers. We also proposed that the public sector could take a leading role in the development of district heating where LHEES identified it was appropriate to do so. Further development of district heating could play an important role in helping local authorities meet their objectives set out in their LHEES for the Programme.

We are considering the evidence from this consultation. Following conclusion of the consultation accompanying the Routemap, we will consider the overall need for legislation, in the light of responses to this and to the earlier LHEES and district heating consultation, before setting out our final position.

1.5 Rationale for Government intervention

This section considers why the presence of market failure means that government intervention can help improve the functioning of the domestic sector with respect to energy efficiency upgrades and reducing greenhouse gas emissions, with potential benefits not only for householders, but also wider society. Many of these factors apply to the non-domestic sector as well, although considerations relating to that sector will be set out in more detail as regulations are developed.

The first type of arguments consider various forms of market failure which mean that energy efficiency upgrades may not be installed even when the net benefit to the householder is positive. The second type of arguments broaden the discussion to consider why market failures relating to wider factors such as greenhouse gas emissions and health mean that upgrades whose social net benefit is positive may not be installed. Distributional issues, i.e. the impact on the less well-off in society, further strengthen these arguments.

1.5.1 Imperfect information

The market in energy efficiency measures in the domestic sector may be hampered by imperfect information about the benefits of installing measures. To some extent, these can be mitigated by the availability of standardised reports such as EPCs. However, the savings from an upgrade also depend on the way that a given household uses fuel and ventilates a particular property: the energy savings in the same dwelling will vary depending on how many people are in the household, how long they spend in the house, which rooms they prefer to heat and to what temperatures, their perceptions, preferences and expectations about warmth and comfort, how well they monitor and manage their energy use, etc. Thus, apart from the issue of whether households are able to understand EPC reports so that they take the EPC rating into account when deciding whether to undertake improvements, there is the further issue that it may not be easy for them to know on the basis of an EPC – which uses standardised occupancy and use assumptions – what their actual fuel bill will be.

1.5.2 Failures of rationality

Empirical evidence suggests that people can have particular difficulties when weighing up the impact of factors which are spread over time. The costs of energy-efficiency upgrades are usually incurred upfront, while the benefits are spread over potentially quite long periods of time. ^[8] Adding to the complexity of assessing the benefits is that savings can vary significantly over time, due to the strong seasonal pattern of fuel use, as well as future trends in fuel prices.

1.5.3 Economies in the installing market

The introduction of regulation can help guarantee minimum levels of demand for energy efficiency upgrades. This can give installers confidence to invest in equipment and training to meet the demand, and a larger market may also provide efficiencies through economies of scale and learning-by-doing effects.

1.5.4 Securing permission from multiple owners

The introduction of regulations in the domestic sector may also make it easier to obtain agreement for the installation of energy efficiency measures which affect communal elements, where the approval of more than one occupier is required. In particular, the proposal of a long-term standard that all domestic dwellings reach an EPC of at least C will help to secure permission from owners who are in different tenures.

1.5.5 Greenhouse gas emissions

The case for regulation is strengthened by taking into account the costs imposed on society from the greenhouse gas emissions produced by fuel use. Since the costs to society from climate change caused by greenhouse gas emissions are not fully reflected in the price of carbon-intensive fuels, the benefits to society from energy efficiency upgrades and switching to low-carbon fuels are even larger than the benefits to occupants from lower fuel bills. ^[9]

Furthermore, even for dwellings where due to their particular characteristics the net private payoff from upgrades may be marginal or even negative, from a social point of view the upgrades required by regulation can still have a positive payoff once the benefits from reduced emissions are taken into account. The analysis undertaken for the Climate Change Plan indicates that conservation and renewable measures in the domestic sector form part of the least-cost path to society for achieving the greenhouse gas-emissions reductions required by legislation.

1.5.6 Distributional impacts

Since the amount of energy consumed is a relatively fixed component of households’ monthly spend, expenditure on energy bills typically consumes a greater percentage of income for lower-income households than for higher-income households. This can result in these households facing a trade-off between paying for adequately heating their homes and spending on other basic goods and services. By increasing the energy efficiency of homes and reducing fuel bills, regulation can help improve the well-being of some of the more vulnerable households in Scotland.

1.5.7 Health and wellbeing impacts

Nearly a fifth of households find that their heating keeps them warm in winter only sometimes (14%) or never (4%), although this is a reduction of 5 percentage points from 2015. ^[10] Fuel poor households are more likely to have difficulties staying warm in winter and to report affordability problems: 23% of fuel poor say that their heating keeps them warm in winter “only sometimes” (16%) or “never” (6%), compared to 16% of all other households. Figure 3 provides other breakdowns for those reporting difficulties in staying warm.

Figure 3: “Does Your Heating Keep You Warm Enough in the Winter?” by Household Type, Tenure and Primary Heating Fuel

Source: Scottish Housing Condition Survey, 2016

Living in these low indoor temperatures may pose a risk to health due to the range of negative morbidity and mortality impacts associated with exposure to cold and damp conditions. The 2011 Marmot Review Team report, ^[11] the 2012 Hills Fuel Poverty Review ^[12] and the 2013 Cochrane Systematic Review ^[13] set out the strong body of evidence linking low indoor temperatures to these poor health outcomes, particularly for those most vulnerable to the effects i.e. young children, the elderly, and people with physical and mental-health conditions.

The Scottish Government recently commissioned an evidence review from Aether covering the potential wider impacts of climate-change mitigation in the built environment, published in January 2017. ^[14] The review highlighted the impact which a range of building-fabric improvements can have upon the health of residents of the building. Notably, studies have found that “improvements in insulation can result in direct effects on winter mortality and potentially morbidity as well as indirect effects e.g. through reductions in mould growth (Wilkinson, 2009 ^[15] ). In order to obtain the health benefits from energy efficiency upgrades, the measures must be installed, operated, and maintained correctly, e.g. to avoid issues such as mould growth arising due to insufficient ventilation when insulation is applied.

In addition to physical-health benefits, the evidence review by Aether highlighted research showing that fabric improvements to improve energy efficiency can offer a range of mental-health benefits. These mental-health benefits are often related to reduced stress from a lower fuel bills as a result of increased energy efficiency. Studies show that improved housing conditions can also increase wellbeing, for example with regards to increased satisfaction with the home and reduced social isolation. ^[16]

These potential health and wellbeing benefits, both physical and mental, further support the case for regulation, since imperfect information and failures of rationality are particularly likely to apply to a household’s ability to assess these long-run health impacts. Health impacts also strengthen the arguments based on distributional impacts because they are most likely to be significant for vulnerable households. Finally, the costs to society resulting from greater demand for public-sector services such as the NHS are analogous to the types of costs to society from greenhouse gas emissions.