Expert Commission on Energy Regulation: main report

Advice On Ways In Which An Independent Scotland Can Promote Fairer, More Affordable Energy Prices, Given The Need To Address Fuel Poverty And Measures To Improve Energy Efficiency

• The Scottish Government must retain a concerted approach to tackling fuel poverty
• The establishment of a Fuel Poverty Agency would help drive strategic and structural changes aimed at tackling fuel poverty issues across Scotland
• The Scottish Regulator could review the structure and operation of the retail market across Scotland in view of Scotland's varied customer needs
• Greater competition in energy supply, and a new set of responsibilities for gas and electricity distribution businesses, can deliver better deals for Scotland's homes and businesses
• Certain 'social' and environmental policy costs should be removed from consumers' bills - as long as funding for those initiatives is maintained
• Area based delivery and trusted local intermediaries can help ensure that vital energy efficiency efforts and funding are tailored to reach and benefit more difficult and costly households and businesses
• There is scope for improvement in the roll-out of smart meters which will help realise their potential benefits to Scottish customers
• The wider use and penetration of both district heating and CHP should continue to be widely and actively explored in Scotland.

Our ability, or inability, to pay for the energy we need has seldom had such a high profile. The rise in energy costs and bills over the last decade, allied with the poor condition of some housing stock, has had a significant impact on business competitiveness and household budgets, upon the number of homes and families living in fuel poverty, and on the importance and effectiveness of policies and programmes aimed at reducing demand for energy.

These issues are particularly acute in Scotland; where there is greater concentration in the retail market, higher average consumption due to the colder climate and nature of the building stock, fewer customers with access to a gas supply and a concentration of expensive all-electric heating in rural areas, away from the gas grid - all of these things lead to unacceptable levels of fuel poverty.

While different criteria are used between Scotland and the rest of the UK to calculate the number of people in fuel poverty, any measure which consistently results in high numbers of consumers (2.4 million households were fuel poor in England in 2011), or a high percentage (27.1% of households in Scotland were in fuel poverty in 2012) demonstrates the need for a more radical approach to tackle fuel poverty.

Policies dealing with fuel poverty and energy efficiency are only partially devolved at the moment. The Scottish Government has the power to set its own targets - these include a target to eradicate fuel poverty as far as is reasonably practicable by the end of November 2016, and to reduce total final energy demand by 12% by 2020 - it has also introduced new measures and programmes for Scotland. However, the devolved powers do not extend to measures requiring wider energy market regulation.

In the view of the Commission, it is apparent that under the current powers of the devolved Parliament in Scotland there has been a significant effort to address fuel poverty and delivery of energy efficiency as a priority. However, due to a combination of factors including the recession, increases in energy costs, and changes to the Energy Company Obligation ( ECO) announced in the Chancellor's 2013 autumn statement, the Scottish Government's target to eradicate fuel poverty will not be met. It is important to acknowledge this, and to ensure that sufficient financial resources and strategic direction remain focused on tackling this issue.

Establishing a Fuel Poverty Agency with the correct legal structure and powers to deal with information and data discontinuities, and coupled with Local Authority partnership to integrate social security information and vulnerable consumers, would provide a significant step forward in dealing with fuel poverty.

The Commission agrees with the Scottish Government that a Scottish Regulator would be better placed to deliver Scottish solutions. A suite of changes to energy supply functions, coupled with a greatly enhanced role for electricity and gas distribution businesses, could result in a stronger focus on local needs and better outcomes, identify those most vulnerable and do much more to cut fuel poverty.

In April 2013, the Scottish Government launched its own Home Energy Efficiency Programmes for Scotland ( HEEPS) to provide targeted funding support to help eradicate fuel poverty. This was heavily predicated on funding contributions being available via ECO, changes to which have put this at serious risk in Scotland.

The provision of funding for energy efficiency and fuel poverty through general taxation can be argued to be both fairer and less distortive of energy costs.

Of late, the major parties have generally supported a shift from collection through energy bills to wider taxation. Allocating a suitable level of resources from central government funds can eliminate the risk that fuel poverty initiatives might be diluted. However, irrespective of how the money is raised, if the action programmes are embedded and locally relevant, then the outcomes will be more enduring and deliverable. This funding must be sufficient to support delivery across Scotland.

Energy efficiency is the main way in which energy affordability can be delivered and achieved on a long-term basis, for households and businesses alike. More efficient use of energy also directly reduces Co2 emissions by avoiding burning fossil fuel, i.e. 'doing more with less'. The importance of energy efficiency links directly to the costs underlying much of our economy and to the productivity and competitiveness of our industry and services. A strong focus on energy efficiency should be a natural priority for Scotland, a country whose business balance is heavily weighted towards the energy sector and which recognises the value in its use, and whose northern climate makes domestic heating a necessity.

European heat networks benefit from very high efficiency Combined Heat & Power generation ( CHP) from a range of fuel sources (fossil and renewable). District Heating ( DH) with CHP has been shown to provide a very high efficiency solution for heating, and the Commission believes that its use in Scotland should be more widely explored.

The increasing integration of electricity and heat within networks, and the use of gas as a fuel source, highlights an increasing future role and responsibility for the regulator in the economic regulation of heat networks, as well as in the traditional electricity and gas markets as the cost and pricing of gas becomes of increasing importance.

The roll out of smart electricity and gas meters in the UK is taking considerable time to implement. Once completed, the meters will provide remote reading and more accurate billing, thus playing a potentially meaningful role in helping to tackle fuel poverty. However, there has been further progression in smart meter functionality since the roll out programme commenced. Further action in this area could produce a number of benefits, and deserves to be treated as a high priority.

Energy Affordability and Fuel Poverty

Energy affordability encompasses interrelated issues, including retail prices and tariff structures, household income, and household energy demand, and is in turn related to the energy efficiency of buildings. Responsibility for these elements under the current constitutional arrangement is split at present, with a degree of devolved power and responsibility balanced by the reservation of powers over energy market regulation.

The UK Government guides Ofgem with respect to regulation of the energy retail sector, and can influence the size and content of energy bills through the placement of obligations on energy supply companies to raise levies to support particular policy outcomes.

An example can be found in the UK Government's requirements for energy companies to achieve emission savings by installing domestic energy efficiency measures. The costs of these obligations are assumed to be passed onto consumers through their energy bills. Schemes such as the current Energy Company Obligation ( ECO), and previously Carbon Emissions Reduction Target ( CERT) and Community Energy Savings Programme ( CESP), have been the main source of funding for retrofit energy efficiency measures for many years.

The Scottish Government, meanwhile, has the power to set its own targets, and has done so both with respect to fuel poverty (to be eradicated as far as is reasonably practicable by the end of November 2016) and energy efficiency (a reduction in total final energy demand of 12% by 2020 from a 2005-2007 baseline, covering all fuels and sectors). The Scottish Government invested £220 million towards measures tackling fuel poverty (and supporting energy efficiency) between 2009-2010 and 2012-2013, and has announced plans to spend around £250 million pounds between 2013-2014 and 2015-2016.

These and other measures, such as the setting of standards for the construction of new buildings as well as standards for energy efficiency of existing housing in the social rented sector, demonstrate the division of powers that exists and the suite of actions in place or proposed to help address fuel poverty and promote energy efficiency in Scotland.

Energy affordability could, in theory, be addressed by a mixture of reducing prices, increasing incomes, or improving energy efficiency and it is clear that Governments are sincere in their efforts to deal with these issues. The Commission believes that additional powers would open up new possibilities, which could better address Scotland's specific circumstances and more acute needs.

The graph below, taken from the Scottish Fuel Poverty Forum Report published in March 2014 ^[56] , shows trends in fuel poverty and extreme fuel poverty in Scotland.

Fuel Poverty and Extreme Fuel Poverty since 2003-2004 ^[2]

The affordability situation in Scotland is exacerbated by a number of factors, including the:

• colder climate, requiring greater levels of heating over a longer period
• number of off gas grid properties (about 10% according to the 2012 Scottish House Condition Survey ^[57] ), including many with electric heating - which could carry a disproportionate burden of social and environmental policy costs on their bills ^[58]
• high numbers of flats and tenements in the housing stock - which can be better in energy efficiency terms than some other types of dwellings, but are harder to improve.

Rising prices have also meant that concerns about energy affordability are no longer restricted to defined fuel poor groups.

Fuel Poverty Agency

The Commission believes that a bespoke body, set up with the sole focus of co-ordinating and targeting efforts to tackle fuel poverty, would be a significant step forward. This could be within Government or established as a non-departmental public body - the manner of the body's incorporation is less important than its remit.

A Fuel Poverty Agency should be capable of striking effective working and operational partnerships with a range of partner organisations across Scotland - such as local authorities, care services and energy distribution companies. It should be empowered to gather and maintain data regarding those most vulnerable to and most affected by fuel poverty, and capable of targeting the solutions (including improved energy efficiency) which work best in particular circumstances.

The roll-out of smart meters would also, with appropriate safeguards, enable a Fuel Poverty Agency to monitor those in vulnerable circumstances, and to identify for instance where financial pressure leads to customers failing to use heating systems to maintain their wellbeing.

Energy Costs

An independent Scottish Government would have greater autonomy and a range of new financial and regulatory powers, enabling it to introduce new measures aimed at tackling high energy costs and prices.

A report by the Office for National Statistics ^[59] , published in March this year, showed that the average monthly spend on energy increased, despite a reduction in energy usage, from £69 to £106 between 2002-2012 - a 55% increase. This rise has occurred while household incomes have essentially remained flat following the financial crisis of 2008 - underlining that the impact is greater on those with lower incomes.

Real 2012 prices	Gas bill	Electricity bill	Energy bill
Wholesale energy cost	£383 (55%)	£215 (37%)	£597 (47%)
Wholesale energy cost	£124 (18%)	£133 (23%)	£257 (20%)
Other supplier costs and margin	£119 (17%)	£121 (21%)	£240 (19%)
Energy and climate change policies	£33 (5%)	£80 (14%)	£112 (9%)
ECO	£25 (4%)	£22 (4%)	£47 (4%)
RO	-	£30 (5%)	£30 (2%)
EU ETS	-	£8 (1%)	£8 (1%)
CPF	-	£5 (1%)	£5 (0%)
Warm Home Discount	£6 (1%)	£6 (1%)	£11 (1%)
FITs	-	£7 (1%)	£7 (1%)
Smart Meters & Better Billing	£2 (0%)	£1 (0%)	£3 (0%)
VAT (5%)	£33 (5%)	£27 (5%)	£60 (5%)
Total (no Warm Home Discount rebate)	£691	£576	£1,267
Average rebate (inc VAT)	-	-£13	-£13
Total (with rebate)	£691	£563	£1,255

Source: DECC 2013. Figures may not add due to rounding.

Make-up of average household energy bill (DECC, 2013)

These are average costs for dual fuel users - actual costs for individual consumers vary considerably depending on:

• Payment method - direct debit is cheapest, followed by pre-payment meter ( PPM) and quarterly credit (payment on receipt of bill). Fewer options for switching supplier are available for some consumers, as many new entrants offer only direct debit tariffs. This situation is particularly acute for those using PPMs, where competition is very limited. Those who have never switched and are able to pay by direct debit are most likely to be able to make greatest savings. The introduction of smart meters should provide opportunities to address some of these issues
• Heating fuel and volume/pattern of energy use - those using electric storage heating are particularly exposed to levies on bills, as these are concentrated on electricity costs. In addition, those at home during the day, for example, are likely to have higher heating needs; Scotland has a harsher climate and lower gas penetration than other GB countries, so these issues are more prevalent
• Availability of social tariffs - these are subsidies on bills, generally applied at source (i.e. a reduction on the bill sent to the consumer) for targeted groups at greatest risk of fuel poverty. As with all universal benefits, however, some people in need are excluded, while others whose need is relatively smaller are included within the scheme
• Ability to pay, and the way in which consumers, especially those in fuel poverty, manage their costs.

Elements of energy bills which government energy policy should take account of, including a future Scottish Government in the event of greater devolution or independence ^[60] include:

• Wholesale gas: The largest single influence on bills is the cost of wholesale gas, which has an indirect but significant effect upon electricity costs as well as upon gas bills for consumers. The Commission acknowledges that wholesale gas prices are determined internationally and by a range of factors, meaning that they are almost entirely outside the influence of any government in the short to medium term - a matter of relevance in the context of current proposals to place a regulatory freeze on consumers' energy bills. In the longer-term, however, the costs facing consumers might be influenced as a result of Government policy and efforts to change the fuels used to produce electricity or to heat buildings
• Transmission and distribution costs, taken together, make up around 20% of consumers' bills. These costs are currently regulated by Ofgem, and indications are that this element will not rise significantly, in real terms, over the next few years. The Commission believes that there is a logical argument for the costs of upgrades to the transmission capability within Scotland, and the rest of the UK, to continue to be met by all UK consumers, on the grounds that these are designed to help deliver the legally binding carbon targets faced by the UK as a whole and to enhance system security in both jurisdictions. Electricity distribution costs are significantly higher in the
• North of Scotland than in other GB distribution areas, due to the geography in this area and the widely dispersed population
• The extension of the EU Emissions Trading Scheme will add to bills over the next few years. While the introduction of this charge is the consequence of an EU Directive, it is up to individual governments to decide how the money is spent. The Commission notes arguments on the part of Consumers Futures about the value of recycling EU ETS money towards energy efficiency measures, and the step change in funding that such a move could deliver. The Scottish Government should consider the changes to budgetary planning which would be needed to drive the implementation of such a change.

Regulation

A Scottish Energy Regulator, or the proposed Consumer and Competition Authority, would have the ability to consider and address specific Scottish circumstances. The Commission believes that this would provide an opportunity to streamline and optimise the landscape for energy customers in Scotland, and to promote wider competition in energy supply.

Levels of market engagement and switching in Scotland have historically been limited, with very high levels of consumers (compared to other GB nations and regions) remaining with their incumbent supplier. There remains a question about the competitiveness of the retail market in Scotland as a result, leading to concerns around the consolidation of a Scottish 'Big 3' - Scottish Gas, SSE, Scottish Power. There are several possible reasons for this:

• the historical difficulties involved in face-to-face selling (and poor experience of this technique by consumers) as a result of geography and the widely dispersed population
• brand loyalty to the 'Scottish' companies
• the lack of mains gas, which inhibits suppliers from marketing their preferred dual fuel deals
• dynamic teleswitching tariffs - these are used by many electric storage heating consumers in Scotland but are not supported by other suppliers, thus restricting the ability of such customers to move to a different supplier
• lack of effective choice or competition for consumers using pre-payment meters - Scotland has a greater percentage of such consumers.

Better-off consumers with internet access are generally more likely to benefit from competition in the existing retail market than are those more at risk of fuel poverty. The combination of rising energy prices and flat incomes also means that increasing numbers of households are likely to remain fuel poor even after installing standard insulation measures. While the Scottish Government has taken action in this area, which has been welcomed by consumer and campaign groups, wider changes mean that overall action on fuel poverty has been running to stand still.

In October 2013, the Scottish Government proposed that if elected under independence, it would remove ECO and Warm Homes Discount costs from consumer bills and meet those costs from central Government resources. While this transfer would add to existing pressures on public expenditure, the Commission believes that the need for such support remains and welcomes the Scottish Government's assertion that current funding levels will be maintained ^[61] .

The Commission believes that this would help level the playing field; smaller suppliers would be much better placed to compete without issues such as the Warm Homes Discount creating hard to understand points of difference.

This change could pave the way for a more detailed review of Scottish supply, charges and tariffs by the Scottish Regulator, designed to fit more coherently with the needs and circumstances of Scottish consumers. For example, the introduction of rising block tariff structures would provide lower cost energy for low users while encouraging greater consideration of energy efficiency measures among higher users. This would require legislation and a significant change in industry billing approaches.

This kind of review would be contextualised by certain factors, such as the single market wholesale cost and the additional business infrastructure costs that it might create for incumbent suppliers arising from changes in respect of their Scottish customers.

Evidence gathered by the Commission clearly indicates that utility programmes which attempt to find the most vulnerable in society are often unsuccessful, with customers ultimately paying the price. Scotland can redesign this process to improve value, improve the spectrum of measures and deliver more effectively, particularly in rural areas.

The Commission believes that there is an argument to considerably enhance the role of the energy distribution companies. These companies, due to their provision of captive monopoly services, could pick up greater residual social responsibilities - for example, maintaining a priority register of vulnerable customers who need protection and special care during emergencies and outage. The source of data generation will depend on the reallocation of duties previously fragmented across many supply companies. This would sit well alongside wider measures to tackle fuel poverty and promote energy efficiency being driven forward by others.

The Commission believes that the distribution companies should also become responsible for all meter provision and operation in Scotland, including meter reading.

The roll out of the smart meter programme, which should signal the beginning of a major and beneficial new consumer interface in the UK, is taking considerable time to implement. Whilst the meters will provide remote reading and more accurate billing, there have been further advances in smart meter functionality since the roll out programme commenced that could enable access to time of day tariffs and additional demand response services.

By transferring responsibility to energy distribution businesses, the Scottish Regulator can mandate a statutory programme of smart meter installation that is homogeneous and co-ordinated. All electricity customers should have the benefit of a smart meter in a known timeframe.

The Commission has some concerns about the effect of such a move upon the existing distribution price control review (RIIO-ED1); if the risks attached to re-opening and delaying this review and its vital investment were considered too great, then an alternative option would be to transfer responsibility following contractual and operational delivery.

All of the steps outlined here could form part of a more concerted effort to give fuel poverty actions and policies a stronger 'local' emphasis and basis - such as, for example, the potential use of community initiatives designed to encourage better use of the schemes which are available.

The changes should also simplify the structure of supply business functions quite substantially, and could result in overall reductions in charges to customers. They would require a number of issues to be addressed, including access by wider parties to the data from smart meters; practical interpretation of cyber security and data privacy requirements; and access to data sufficiently close to real time, where needed.

Energy Efficiency

The Energy Efficiency Directive 2012/27/EU ^[62] requires energy delivery companies to reduce their energy delivered (end use) by the equivalent of 1.5% each year to 2020. This can offer an opportunity for Scotland to completely rethink the delivery of end use energy efficiency. The Directive foresees a certificate scheme as being one of the most efficient ways of delivering this result; both France and Italy are currently using this approach.

Scotland should explore access to the 4% of European cohesion funds which the EU has allocated for the purpose of energy efficiency measures. Taking a longer view of the significant challenge of renovating all existing stock to a suitable level, the trade-off between deep renovation and renewal of the appliances, energy delivery system, controls and supply should be explored. A more integrated approach to energy use and delivery through higher efficiency appliances may be a route, for certain groups and types of buildings, to achieve a significant improvement in the near term.

The co-ordinated upgrading of groups of buildings is being taken forward across Europe and is seeing some success. There is a particularly interesting and impressive example in the Netherlands, with E60 million available under the Energiesprong programme designed to foster energy neutral buildings ^[63] . With larger schemes, and the involvement of interested third parties, Energy Service Companies ( ESCOs) can become involved providing access to additional funding and expertise.

The energy efficiency of products developed in Europe is being gradually raised through the implementation of a basic efficiency requirement and an energy labelling system under ECO product design. The legislation also includes the requirement of energy labelling on energy consuming products, creating the opportunity for public organisations to set standards for energy efficiency of the products which they choose to procure. This can progressively cut their energy consumption and promote reduced energy use in the public building stock as a whole.

Energy audits are a necessary first step in identifying opportunities to reduce energy use in SMEs and industry. Encouraging Scottish companies involved in IT development to design effective, easy to use assessments for self-audit by SMEs and industry would be a useful investment for Scotland, and develop the knowledge base required to deliver wider energy efficiency in these areas. The Commission understands that Resource Efficient Scotland is currently taking forward work in this area on the Scottish Government's behalf.

The Scottish Government published Conserve and Save: The Energy Efficiency Action Plan for Scotland in October 2010. The plan introduced a headline target to reduce final energy (end-use) consumption by 12% by 2020 using a 2005-2007 baseline, and was formally reviewed in May 2013 ^[64] . The latest energy trends data, published in September 2013, indicates that, in 2011, Scotland's final energy consumption was 9.2% lower than the baseline averaged over the years 2005-2007, indicating that Scotland remains on course to meet its 2020 target.

The Scottish Government has implemented a range of initiatives and proposals using its own devolved powers. These include:

• the introduction of a single Scottish Energy and Resource Efficiency Service ( SERES), to provide greater cross-referral and more consistent and comprehensive advice, encouraging businesses to consider a holistic approach to their low carbon transition
• the decision in 2013 to establish a new single integrated resource efficiency advice and support service for Scottish businesses, public and third sector organisations. Resource Efficient Scotland, launched in April 2013, integrates previous business and public sector services delivered through Carbon Trust, Energy Saving Trust and Zero Waste Scotland into one single service ^[65] .

The Scottish Government has already increased the energy efficiency standards required for new buildings, and has also published Scotland's Sustainable Housing Strategy in June 2013, setting out a vision for warm, high-quality homes that are affordable to heat, and for a housing sector that helps to establish a successful low carbon economy with a route-map to 2030.

Despite the considerable improvements in the energy efficiency of housing in Scotland in recent years, data show that these improvements have, overwhelmingly, been delivered through widespread take-up of low cost measures (loft and cavity insulation). These measures were delivered free, or at low cost, to all householders under the combination of the Universal Home Insulation Scheme ( UHIS) and CERT, which was the previous energy company obligation which closed in December 2012.

While there remains scope for, in particular, cavity wall insulation and loft top up, the data suggest that the majority of low cost actions have already been taken in easy to engage households ^[66] .

As a result, the potential for large-scale improvements to domestic energy efficiency through delivery of these low cost measures is now more limited. It is also likely to require different approaches to engagement and regulation compared to those in the past, perhaps working to a greater extent through trusted local intermediary organisations and focusing on the private rented sector ^[67] . Specific approaches dealing with flats and tenement properties, where the lack of communal agreement even for free measures has been a barrier in the past, are also likely to be necessary.

These issues are complicated further because of the current delivery of measures by energy supply companies under ECO. While ECO has the potential to fund a very large range of measures, including those suitable for HTT houses, Ofgem progress reports on ECO show that the great majority of measures delivered at this stage remain those with lower cost. This suggests that the measures needed to improve the energy efficiency of much of the remaining, less energy efficient housing stock are likely to be more expensive, especially where there is no access to mains gas. Fewer such houses can benefit from a given funding pot, and the installation can also be much more disruptive for consumers than basic measures.

The Commission agrees that measures such as renewable heating (through the provision of local networks, as well as at the individual building level) and solid wall insulation offer the greatest remaining potential for improvement in these areas, given the lower remaining opportunity for basic insulation measures. The Commission would expect an independent Scottish Government to continue to give a high priority to pursuing and implementing such measures.

Further action in this area helps safeguard future occupants of those houses against the risk of fuel poverty, however, the Commission is aware that the main energy efficiency challenges relate to existing housing and non-domestic buildings and processes. The Commission believes that the Scottish Government should conduct a discrete and thorough review of the potential additional measures and opportunities afforded by new financial powers and regulatory controls to support an increase in energy efficiency and demand reduction in the non-domestic (commercial, industrial and public) sectors.

Energy Efficiency in the Transformation Sector

Traditionally there has been less emphasis on efficiency in gas and electricity transformation (that is, the efficiency of transforming fuel inputs into electricity and heat outputs, and the efficient transmission of electricity and gas) and their distribution networks.

Operating an electricity network with a high density of renewables poses new challenges for the electricity network. Thermal power stations in particular need to respond efficiently when the frequency of plant cycling in response to renewable generation output is higher and the normal point of operation may shift from a base or mid-merit load, to a requirement for more flexible operation.

Article 15 of the Energy Efficiency Directive (2012/27/EU) requires energy regulators to ensure that an energy efficiency assessment of National gas and electricity networks is carried out by June 2015. The Commission recommends that the new Scottish Regulator take an overall system approach to energy efficiency which will allow for a more integrated approach to energy supply.

This new world requires the introduction of new technology and offers opportunities for development of both hardware and software to accommodate these changes and raise the efficiency of the overall system's operation. These measures should include the dynamic management of demand side consumption both in industry as well as in the home. Scotland with its high level of renewables and its relatively confined geography is an ideal place to develop such system and necessary components. This should be encouraged by policy and supported by the Regulator who should encourage and incentivise suitable innovation and its testing.

The Role of District Heating and Combined Heat and Power

Many parts of Europe benefit from heat networks which allow both the very high efficiency generation of electricity and heat in combined heat and power ( CHP) and the introduction of a range of heat sources, both fossil and renewable, into otherwise difficult to address architectures.

Combined heat and power is adding to the efficiency and productivity of Scotland's industrial and manufacturing base today. There is currently around 500 MWe of high efficiency CHP in Scotland ^[68] , with notable examples such as the biomass CHP plants in the paper mills at Markinch and Irvine. The average penetration of CHP across Europe is 11%, although penetrations up to 25% exist in several Member States. District heating with CHP, meanwhile, has been shown to provide a very high efficiency solution for space heating.

The wider use of CHP in industry and district heating should be more widely explored in Scotland and encouraged by the Regulator as an energy efficiency measure in the transformation network itself. The Commission acknowledges the work carried out in this area to date. This includes the publication by the Scottish Government of a District Heating Action Plan and the support available under the District Heating Loan Fund ^[69] .

The Commission also notes the latest position and targets for district heating as set out within the Scottish Government's draft Heat Generation Policy Statement - an overarching target of
1.5 TWh of heat to be delivered to households and business, industry and the public sector by 2020, and a target of 40,000 homes to be supplied with affordable low carbon heat through district heating and communal heating by 2020. There are successful examples of district heating already across Scotland - such as the schemes in Aberdeen ^[70] and Shetland ^[71] .

Renewable Heat

The Commission believes that renewable heat provision has a potentially significant role to play in helping to tackle fuel poverty, as well as improving energy efficiency. The Scottish Government's target for renewable heat, elaborated upon below, is challenging, but remains an important part of efforts to secure progress in this area - as are market mechanisms such as the Renewable Heat Incentive.

Regulation of this growing sector will also play an important role over time in assisting the penetration and development of renewable heat in an independent Scotland. The style and scope of the necessary regulation should be commensurate with the scale of the heat market, keeping pace appropriately as that market grows. Such regulation should be designed to support development without creating undue barriers, or placing excessive costs on the sector which could be passed on to consumers.

Estimates suggest that heat accounts for over half of Scotland's total energy use. The Scottish Government has set a target of delivering 11% of Scotland's projected 2020 heat demand from renewable sources, such as biomass, heat pumps (ground source, air source and/or water source), heat from waste biomass and anaerobic digestion, including bio-gas, solar heating, wind to heat and geothermal heat.

The Scottish Government estimates ^[72] that, between 2011 and 2012, renewable heat capacity in Scotland increased by 0.077 GW, and output increased by 218 GWh, from 2,263 GWh to 2,481 GWh. Figure 5.9 shows the estimates of renewable heat output in Scotland between 2008 and 2012, demonstrating that renewable heat output has increased by over 150% between the measurement in 2008-2009 and 2012.

Figure 5.9: Renewable heat output, Scotland, 2008-2009 and 2012

Source: Renewable Heat in Scotland (2012), a report by the Energy Saving Trust for the Scottish Government
http://www.energysavingtrust.org.uk/scotland/Take-action/Get-business-funding/Renewable-Heat-in-Scotland-2012

The Commission is aware of the measures put in place by the Scottish Government to support renewable heat, including funding through its Renewable Energy Investment Fund and Warm Homes Fund. These incentives, alongside the requisite availability of technical advice and support, will help increase the uptake of the relevant technologies.

Stakeholder Engagement

During the course of the work of the Expert Commission, we have engaged with a diverse range of stakeholders across utilities, regulators ( UK, EU and beyond), consumer organisations, trade associations, the finance community, the European Commission, and other relevant sectors, as displayed in the chart below. All discussions were held under Chatham House rule.

Meetings (by category)

The Commission are extremely grateful for the insight and comments provided by the following organisations: DECC, The Cabinet Office, Scottish Government Energy Division, ACER, CEER, DG Energy, ENTSO-E, the SEM, DETINI, and all other stakeholders they met with.