Energy Efficient Scotland programme: analysis of delivery mechanism

1 Executive summary

1.1 Background

The Scottish Government has developed a Strategic Outline Case (SOC) for a National Delivery Mechanism for its Energy Efficient Scotland (EES) programme.

Energy Efficient Scotland is an ambitious, 20 year programme aimed at making Scotland’s existing buildings near zero carbon wherever feasible by 2050, in a way that is socially and economically sustainable. It will deliver across two key policy areas:

• Fuel poverty: the programme aims to remove poor energy efficiency as a driver of fuel poverty;
• Climate change: the programme supports Scotland’s targets to reduce greenhouse gas emissions, with projected emissions reductions in the residential and services sector of 23% and 59% respectively by 2032 (versus 2015 levels).

In a 2017 consultation, Scottish Government asked about how best to deliver the Energy Efficient Scotland programme. One of the messages it received was the potential need for a national mechanism to oversee the delivery of the programme. A national delivery mechanism was suggested as it reflects the duration and complexity of the programme, and the significant investment involved.

1.2 Approach

Part 1 of this Strategic Outline Case presents an assessment of the state of development of the EES programme relative to its overall targets, and a consideration of the potential gaps and/or additional activities that might be expected to maximise its chances of meeting its objectives on a timely and effective basis, in order to make the strategic case for a National Delivery Mechanism (NDM).

The analysis identifies 10 potential areas (the roles) where additional activity, capabilities and resources may be beneficial. This established a baseline of “programme need” against which to consider the merits of various delivery model options.

In Part 2, the 10 Roles were tested, validated and refined. Adjustments were made to reflect detailed circumstances of existing activities and the latest developments in on-going work.

The resulting 10 Roles were then used as a framework against which to consider a range of potential delivery body options, to assess at a high level the extent to which the delivery body would be expected to be suited to carry out each individual role.

In assembling the list of NDM options, a wide spectrum of structures were considered, starting with those requiring the least change and within Central Government and extending to arm’s length bodies that would require greater work to establish but would have greater potential autonomy. Certain cases were discarded as they offered little obvious benefit relative to a similar option that was evaluated more fully. For example Community Interest Companies and Charities were not separately evaluated but were considered to be adequately encompassed by the evaluation of Public Corporations (which can be established with a not for profit distributing remit). Similarly the Trading Fund option was not evaluated on the grounds that there is almost no recent example of the structure being employed anywhere in the UK. Included in the evaluation was a baseline case of the existing trajectory of development work, which itself is likely to see considerable enhancement to capabilities within the Programme and Scottish Government resources.

Our initial evaluation of the 10 Roles against the models selected highlighted that the operating characteristics of the different models influences the likelihood that they can effectively tackle the different role, but at the same time different models have different mixes of strengths and no single model is likely to perfectly address all 10 roles. The outcome of this evaluation led to a proposed shortlist of 7 models to take forward for further consideration in the SOC.

For each of these, a second tier evaluation was carried out against a set of criteria designed to identify how well each NDM option might be expected to perform in terms of its Commercial, Financial and Management Cases. Given the early stage of model development, this evaluation is indicative. The evaluation does however provide a guideline for those models likely to be the best fit with the Roles and which should be the focus of further development beyond the SOC stage.

The commercial case considered the likely contractual and business framework within which each model would need to operate to deliver the Roles (and its wider functions as appropriate). Distinctions between models can be catered for by adapting a basic framework of relationships with the Scottish Government itself, with Local Authorities, the supply chain and owners & occupiers of buildings, that would allow any of the options to function.

The financial case considered at a preliminary level, the potential indicative differential costs of creating and operating each model (relative to the baseline of existing Scottish Government activities). This analysis concluded that the financial case was unlikely to be a major differentiator between options, although of course a more developed view of the costs of operation (in particular) will need to be set against affordability constraints in due course at the next stage of Business Case.

The management case recognises that the trajectory to create more substantial arm’s length entities will be more complex, costly and time consuming, than to proceed with largely internally driven enhancements to Scottish Government’s own delivery capabilities and resources. Our evaluation considered the timeline during which the 10 Roles would be likely to come on stream and the effect that this could have on whether a particular model was likely to be appropriate shorter or longer term, and whether a transition from one model another over time might be appropriate. A key potential trigger for Role driven change is likely to be the point at which regulatory intervention is expected to be active. This is considered in the management Case.

The Socio-Economic case considered the potential impact of the programme’s goals, as well as considering the scale of the Programme in the context of the likely indicative range of financial costs of any of the options.

The analysis demonstrated in the document demonstrates the costs are likely not to be material in the context of programme benefits, in effect if any NDM is able to materially increase the probability of benefits being released or to accelerate likely benefit realisation by some years, the present value of those benefits is likely to be decisive. However this conclusion does require further validation beyond the SOC stage.

1.3 Findings

Part 1 uses the current state of the Scottish energy efficiency landscape to identify the delivery roles a new mechanism could take on in order to enhance the delivery of EES. It also includes a number of observations in relation to the current energy efficiency delivery landscape in Scotland, including:

• Meeting all EES targets will require delivery on a significant scale over a prolonged period: bringing all of Scotland’s housing stock up to the required standard will necessitate an average of 66,000 measures installed a year between now and 2040.
• Meeting some targets will require measures over and above energy efficiency: meeting EPC Band B necessitates the installation of renewable low-carbon energy systems, whose greater complexity will need to be appropriately managed in delivery.
• Property owner “buy in” is required: engagement will be needed to ensure that householders are convinced of the benefits of the programme.
• Engagement with private landlords is needed to raise awareness of the incentives on offer.
• A significant escalation of help to fuel poor households is required, in particular Warmer Homes Scotland.
• A focal point for non-domestic properties is required to drive awareness and uptake.
• Greater coordination between supply chains and consumers is needed to maximise opportunities in the sector.
• The trajectory of energy efficiency installation in Scotland is in line with the rate required to meet EES targets, although there has been a slowing of progress in recent years.

Part 1 also includes analysis of a number of delivery areas where particular improvements are needed (the ‘case for change’), namely:

• Enforcement.
• Engagement and education.
• Funding.
• Monitoring and data.
• Coordination and coherence.
• Capacity building.
• Quality assurance.

The 10 Roles identified for the delivery mechanism stem from the needs in each of these areas. Part 1 concludes by assessing the case for each of the 10 Roles to be carried out by a national delivery body. There is a case for a delivery body to take on these roles.

The analysis presented in Part 2 suggests the following conclusions can be drawn:

• A ‘plain vanilla’ steering group structure is unlikely to provide the coordination or resource required, and in any case the Scottish Government has already created an Energy Efficient Scotland Steering Group with resources in the relevant directorates. Our counterfactual is therefore a Scottish Government steering group with roots in the relevant directorates and a collaborative structure to facilitate the involvement of other EES delivery partners (e.g. Local Authorities, supply chains).
• A bespoke EES Directorate in Scottish Government offers advantages over a steering group structure offering a central point of reference, while also relatively easy to configure. It could provide a single point of contact with delivery partners, and provide clear signals to the market, and would provide Scottish ministers with a high degree of control.
• An Executive Agency appears to offer relatively little advantage over a bespoke Directorate, given that it remains under direct ministerial control. It is not clear that it would offer any material improvement in delivering the functions identified.
• A Non Ministerial Office(NMO) has parliamentary accountability. It appears that the functions identified generally suit accountability to Ministers better (to ensure alignment with policy objectives), although it will be important to address concerns around regulatory responsibilities sitting in central Government.
• The case for a Public corporation depends critically on the case for revenue generation. This needs further work to explore whether such a case really exists in a way that will enhance delivery since the major sources of revenue would need to be commercial. The Scottish Government do not use Public corporations often, mainly due to the 50% commercial funding requirement.
• A Non Departmental Public Body (NDPB) could act in a regulatory role without creating a conflict. However, its creation will require significant time and resources, as legislation will be required.

1.4 Conclusion

Based on analysis within Part 2 of this Strategic Outline Case, the leading options would appear to be a new EES Directorate and an NDPB. Summarised below are the key points from our assessment of each of the four cases which make up Part 2.

Table 1: Key comments on all models

	Economic	Financial		Commercial		Management
Key comments on all models	Differences in cost between different models are likely to be small, relative to the benefits of the EES programme. The key driver of the economic case (in future iterations of the business case) will therefore be the degree to which models maximise the likelihood of delivering programme benefits. The delivery body working on the rollout of Broadband as part of the UK Universal Service Commitment is very similar in structure to that of our EES Directorate combined option working alongside LAs.		Models that are closer to Government are cheaper to set up and run as they involve no new external structures. More arm’s length bodies outside the Civil Service may have greater potential for driving operational efficiencies. This means that the Executive Agency and Non-Ministerial Office have a weaker financial case, as these involve a new structure within Civil Service.		New bodies outside of the Civil Service perform best as they offer flexibility around delivery, charging and performance incentivisation. Steering Group and local delivery models have less accountability to ministers due to their decentralised structure, i.e. drawing members from different directorates while working with a number of other bodies. NMOs have limited ability to remain flexible due to the increases time required for parliamentary approval for changes in function.		NDPB and Public Corporation performs strongly across all aspects of the management case. A new ministerial Directorate also perform strongly, although it may be constrained in its ability to offer long term commitments beyond the current political cycle.

Work is ongoing on the regulatory model for the programme, and is expected to report in spring. That would seem a good point at which to revisit the possibility of a revenue based model such as a Public Corporation, but also to look at the question of whether the regulatory function should be hived off in a separate entity.

The issue of how a new delivery body would catalyse and distribute funding also needs to be addressed in future iterations of the business case, when there is greater clarity around funding availability and mechanisms.