Green Heat Finance Taskforce: report part 1 - November 2023

Annex 2 – Potential Finance Mechanisms

The following options were considered by the Taskforce and used to explore the merits of each financing method and their suitability for decarbonising Scotland’s buildings. Across the table of columns, there is a list of the broad sectors to which the financing mechanism may apply, and the strength of its relevance / suitability is provided using a scale of 0-3 (namely, 0 – unsuitable, 3 – very suitable). This reflects the appropriateness of the Scottish Government utilising the financing option to support funding of a particular sector. The table rows describe the merits of each option by providing an overview of the scheme, describing its advantages and limitations, as well as factors to consider in delivery and whether such financing has been employed elsewhere on other schemes.

Grants

Grant funding provided by Scottish Government to support direct funding of Net Zero measures.

Government Grants (Demand Driven)

Overview:

Grants are provided by Scottish Government to support the implementation of Net Zero measures.

Applicable sectors	Corporates (Private)	Corporate (Public)	PRS	Social	Owner Occupier
	1 (SME)	2	1	3	3 (low income)

Scoring Approach

Sector applicability scores are based on the extent to which building owners could be categorised as ‘unable to pay’, have low income, or operate on a ‘not for profit’ basis and therefore require direct zero cost support.

Advantages

• There is no cost / limited cost to the individual or organisation.
• Can be used as an incentive to attract or ‘crowd-in’ external finance or de-risk private sector investment.
• Can ensure compliance and reporting, as well as adequate ‘standards’ are met for measures employed.
• Provides direct Scottish Government support to drive Net Zero.
• Use of repayable grants for large infrastructure projects (e.g. district heating) where they become successfully operational could allow recycling of grant money.

Limitations

• Likely to require significant increase of current Scottish Government budget levels and therefore potentially unaffordable or sustainable.
• Grants provided unnecessarily to organisations that have alternative finance available and do not ‘need’ free finance.
• Cost to administer and prevent fraud and misuse.

Obstacles & deliverability

• Need to establish eligibility criteria for grant applicants.
• May restrict use of other incentives such as government subsidies and may have pricing control implications (if supporting corporates).
• Need to establish level of available grant and what eligible works are covered.
• Need to consider governance arrangements over grant scheme, e.g. overview through schemes such as LCITP, etc.
• Potentially significant expense of administering grant schemes.

Examples

• Various grant schemes already operate within Scottish Government relating to Net Zero measures e.g. HEEPs ABS and Warmer Homes Scotland.

Traditional Self-financing (including unsecured loans)

In a global context, according to the World Energy Agency’s 2014 Special Report on World Energy Investment^[45], 60% of all energy efficiency / Net Zero works have been undertaken using self-finance. In the World Energy Agency’s report, self-finance excludes loans, bonds and equity funding. In this context, the concept of self-finance includes existing readily available loan finance (e.g. mortgages and corporate debt) held by individuals / organisations, as well as capital budgets available to public sector organisations.

Within the broad groups considered by the GHFT, private housing (owner occupiers and the private rented sector) is likely to have access to self-finance. This is an important consideration when comparing these financing costs with existing Scottish Government provided schemes – the cost of self-financed options, compared with accessing any Scottish Government supported financing offer (e.g. HES loans) will influence the extent to which individuals / organisations use their own financial resources, and the extent to which private sector corporates (such as banks) will develop products. Government support should not crowd out self-financing of organisations / individuals, as this may result in delayed private investment in anticipation of free grants / low cost finance becoming available.

Traditional Self-financing (including unsecured lending)

Overview:

Individual sectors / property owners source their own financing requirements for undertaking Net Zero measures – this may be through existing or new sources such as cash, loans and rental income.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	3 (loan/cash)	3 (PWLB/capital budget)	3 (loan/cash/rent)	3 (loan/cash/rent)	3 (loan/cash)

Scoring Approach

Most building owners (individuals or organisations) will have access to or can secure their own ‘private’ finance and so is a benefit to Scottish Government if building owners use this.

Advantages

• No impact on Scottish Government budgets.
• Provides freedom to individual property owner for selection of Net Zero measures, and Government support can be directed to other areas such as quality assurance, skills and training, building assessment, etc.
• This may be the preferred approach for individuals and organisations, i.e. to utilise own resources rather than using externally available support.

Limitations

• Capacity / willingness of owners and organisations to take on more debt or use available cash.
• Self-financing will not be possible for low income sector.
• In absence of regulation or incentives, self-finance is likely to be put to an alternative use. Certain Scottish Government loan schemes, have experienced poor uptake.
• Potential reputational risk to Scottish Government of providing only limited or no financial support.

Obstacles & deliverability

• Appetite for self-finance driven by payback period for Net Zero measures.
• Acceptability of placing financing responsibility on end-users if linked to mandatory regulation.
• Other measures required, e.g. incentives / regulation to drive demand for Net Zero implementation.

Examples

• Many examples across countries, e.g. Scotland, England and across Europe.

Green Loans or mortgages (secured lending)

Direct loans may be provided by the private or public sectors, and, if used in combination, can provide a mechanism where public funding may decrease the overall cost of Net Zero refurbishment loans. The impact and relative success of direct loans is likely to be influenced by the use of retail distribution networks or specialist banks (e.g. Ecology Building Society, Triodos) through which loans can be made. The Scottish Government may be able to provide loans directly (as it currently does through various schemes) or through partnerships with other organisations (e.g. banks) or funds.

Green Loans or mortgages (secured lending)

Overview:

Scottish Government loans are provided to appropriate sector. ‘Green’ private sector loans exist in this area and an alternative Scottish Government role may be to facilitate, market and support expansion and growth of this private lending market.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	2	1	2	1	3

Scoring Approach

Both private (e.g. banks) and public sector bodies (e.g. Scottish Government or Local Authorities with permission to on-lend) can provide loans across all sectors. The scoring above reflects how applicable Scottish Government loans would be to the respective sectors. Low scores reflect that the sector borrowing through its own sources and not directly from Scottish Government.

Advantages

• Scottish Government lending could be used to support ‘crowding-in’ of private money leverage, and potentially deployed alongside a grant programme. Scottish Government loans could also reduce the overall cost of any finance.
• Easy to roll out, but careful pre-launch analysis of supply and demand and legal / tax framework needed.
• Easy to use a ‘standard’ and familiar product offering flexibility according to individual preferences (repayment, fixed interest rate, etc.).
• Loans provide an effective tool for residential Net Zero improvements in the £2,000 to £10,000 range that are too expensive for a cash / credit purchase, but do not warrant taking out a second mortgage.
• The use of Scottish Government finance for direct loans in housing allows discretionary interest rates to be applied, depending on creditworthiness of borrower, i.e. provide increasing support to those with poorer credit scores.
• Once loan book is established, potential to refinance Scottish Government debt to commercial banks. This ‘crowds-in’ private capital and could allow proceeds to be re-lent if required.
• Potential positive impact on use of public capital budgets if additional private sector borrowing can be ‘crowded-in’.

Limitations

• Capacity / willingness of owners to incur more debt finance – but potentially offset by energy savings and enhanced market value of building on completing work.
• Potential regulatory issues to consider if lending is extensive.
• Risk aversion of banks (hence need for guarantees from Scottish Government) to lend to borrowers with poor credit.
• Leverage effect of public funds is usually less than 10x and grants are often required alongside to achieve Net Zero ambition^[46].

Obstacles & deliverability

• Transaction costs to implement and administer long-term programs with partnering institutions.
• Enhancement and establishment of robust governance processes for oversight of Scottish Government lending processes.
• Address potential subsidy control issues associated with low cost lending across sectors.
• Increased focus on financially optimal rather than long-term beneficial Net Zero standards.

Examples

• Scottish Government Loan schemes, EST – HEEPS, SALIX, KfW, NRW. BANK, Kredex, EBRD Sustainable Finance Facilities (SEFF), amongst others.

Equity Schemes

A lifetime mortgage is a type of equity release scheme available in the United Kingdom. It is a way for homeowners, typically those over the age of 55, to release some of the equity tied up in their property, without having to sell it or move out. The term "lifetime" refers to the fact that the mortgage is typically repaid when the homeowner passes away or moves into long-term care, at which point the property is usually sold, and the proceeds go towards repaying the loan.

Equity Schemes

Overview:

Equity loan schemes provide an alternative route for property owners in private housing to fund net zero improvements, particularly where Net Zero measures would be difficult to fund for lower income property owners.

Applicable sectors (3 – strong, 0 weak)	Private sector (corporate) supported	Public sector supported	PRS	Social	Owner Occupier
	3	2	3	1	3

Scoring Approach

Scoring reflects the potential applicability to sectors where there is private housing and for the source of equity financing.

Advantages

• Average house price in Scotland is £194,000 (2021)^[47].
• Value of equity within OO market is estimated to be in the region of £150 billion. Annual house price inflation has ranged from 3-6% and so the cost of Net Zero measures could be recovered by roughly 2-3 years of house price growth.
• Almost 50% of owner occupiers are mortgage free and could potentially look to equity release to raise financing.
• Support mechanism for homeowners who are asset rich but cash poor and does not affect their current income levels.

Limitations

• Potentially costly and lengthy administration from a legal perspective for Home Reversion Plan equity products.
• Unlikely to be a financing option for owners with a high Loan to Value (LTV) on their property.
• A negative equity situation could lead to the borrower being unable to repay the loan.

Obstacles & deliverability

• Debt outstanding for an indeterminate time period (although people can choose to repay earlier if they have funds available).
• Historically, equity release schemes have a poor track record within wider market and are likely to result in legacy impacts relating to the understanding of features and benefits of products.
• Determining how Scottish Government could best support development of this market.
• Ascertaining eligibility criteria for equity loan and provision of flexibility to repay loan and/or interest.

Examples

• Scottish Government equity loan scheme pilot.

Property Linked Finance

PLF can support homeowners to fund up to 100% of the upfront costs of energy efficiency improvements – with the unique characteristic that the finance is linked to the property, rather than the property owner, which results in payment obligations transferring to the new owner when a property is sold. An underpinning idea of PFL is that the person benefitting from the energy efficiency measures at a given moment in time is also responsible for the PLF payments.

Property Linked Finance

Overview:

PLF can support homeowners to fund up to 100% of the upfront costs of energy efficiency improvements, with finance linked to the property, rather than the property owner, resulting in payment obligations transferring to new owner when a property is sold.

Applicable sectors (3 – strong, 0 weak)	Private sector (corporate) supported	Public sector supported	PRS	Social	Owner Occupier
	3	0	3	1	3

Scoring Approach

Scoring reflects the potential applicability to sectors where there is private housing and for the source of Property Linked Financing (based on US data).

Advantages

• PLF can be designed to offer attractive interest rates and focus on local delivery with a reputable supply chain.
• UK households have increased accessibility to energy efficient and low carbon home improvements through a new funding method, where traditional financial solutions may not have been appropriate.
• PLF schemes can be capitalised by public funds and institutional investment, which allows the funding structure to evolve – towards more private sources – as the market scales.
• PLF cashflows are predictable and can therefore be securitised and distributed to the market, which can further support lower interest rates for end consumers and enable institutional investors to actively participate in upgrading the housing stock.
• The GFI has undertaken significant work to develop the PLF ‘blueprint’ to date, and is seeking a suitable banking partner to adapt its blueprint to align with the banking partner’s business and operating model, as well as considering commercial considerations on the UK banking sector.

Limitations

• Establishing PLF in the UK will require co-ordinated collaboration across the finance, legal, installer and property sectors, as well as local, devolved, and central governments.
• Establishing PLF may require new legislation, which could extend the timescales to bring PLF to market.

Obstacles & deliverability

• Legislative amendments may be required to allow payment obligations to transfer to subsequent homeowners in an efficient manner.
• Determining how Scottish Government could best support development of this market.
• Financial regulations that ensure robust consumer protections and allow scope for financial innovation.

Examples

• The PACE model in the United States that has supported over $13 billion investment into energy efficiency and resiliency measures in domestic and commercial buildings.
• EuroPACE has developed a demonstrator with GNE Finance in Olot, Spain.

On-Bill Repayment

On-Bill Repayment is a mechanism used to improve the creditworthiness (or seniority) of Net Zero investments by having them repaid in the utility bill, through the existing payment collection infrastructure of utilities or public authorities. Although not a direct form of financing (this is likely to be provided by the equipment supplier) it facilitates supplier investment, since it uses the existing payment relationship between the customer and utility supplier and directly provides a “credit history” giving an accurate view of likely defaults – customer payment histories with utilities are long and exhibit low default rates compared to other forms of consumer finance such as loans.

On-Bill Repayment

Overview:

Obligations are provided on utility companies for the collection and payment of ‘savings’ to the provider of the Net Zero investment. On-bill repayment reduces the risk of repayments not being made and therefore raises attractiveness for investment.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	1	1	3	3	3

Scoring Approach

This option does not provide direct finance from Scottish Government, but typically from a supplier of Net Zero works or third party financier such as the Green Deal Finance Company. As such, the scoring reflects the difficulty of Scottish Government being able to support direct financing of investment.

Advantages

• Energy savings connected to energy bills.
• A similar mechanism could be developed with collection linked to council taxes.
• Reduced administration costs as systems already in place.
• Overcomes split incentives as measures are connected to the property and not occupant.
• Can overcome the lack of finance capacity of low income householders.

Limitations

• Can be a complex scheme to manage / market / implement.
• Can be perceived as complex by users.
• Restricted to gas and electricity utilities.
• Only savings from Net Zero measures are used to repay the investment, resulting on focus of short payback measures and inhibits deep retrofit measures.

Obstacles & deliverability

• Modification needed to utility collection processing systems.
• Potential legal considerations need to be considered with utility companies.
• Scheme can easily become overly complex.
• Following the impact of the Green Deal, market sentiment appears not to favour this approach compared to others.

Examples

• Green Deal in UK.
• Widely used in the United States (New York, Pennsylvania, Connecticut, Vermont).

Heat as a Service

An Energy Services Agreement (ESA) more commonly called Heat as a Service (HaaS) is a "pay-for-performance" service contract between a third-party investor and a building owner to deliver energy savings as a service to the building. The ESA is an evolution of the traditional shared-savings model, provided through Energy Performance Contract (EPC) described above. A 3rd party investor and a building owner enter a HaaS contract (for a fixed period of time) where the building owner pays the 3rd party investor for delivery of a level of heat that meets certain comfort levels. That 3rd party invests into money-saving, energy efficient opportunities, and owns and operates that equipment, making a return on its investment.

Heat as a Service

Overview:

Private sector supplier provides finance investment and installs Net Zero measures, and receives income from property occupant.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	2	1	1	3	1

Scoring Approach

The scoring reflects how easy it may be to get the scale of subscribers needed for a HaaS scheme to be established.

Advantages

• Direct contract between supplier and customer that gives customer specified levels of heating.
• May overcome some traditional barriers (e.g. split incentives) as enhanced savings may be shared between the building owner and investor.
• No capex for building owner required. Aligns incentives of project developer, building owner and investor through savings being shared amongst all parties.

Limitations

• Limited scale to date.
• Fragmented market.
• Up to 10-year contract period say, may limit 3rd party measures installed to ‘easy’ Net Zero measures (high returns).
• Increased transaction costs may arise through detailed monitoring and validation of savings.

• Requires more developed skills on the client side.
• Lack of standardised framework and templates.

Obstacles & deliverability

• Education of building owners and project developers.
• Need for more pilots to help develop the market.
• Need to consider accounting and budgetary issues for public sector projects.

Examples

• UK example of Sustainable Development Capital LLP.
• US providers such as Transcend Equity, Metrus Energy, Green City Finance, Abundant Power.

Dedicated Property and Investment Funds

Property and infrastructure funds already provide a large amount of ‘invisible’ energy efficiency investment in the building sector. This investment takes place during a fund’s investment life cycle, with new developments, refurbishments, planned and preventive maintenance and active building management. Property investment may scale up finance in Net Zero in buildings, both through increased equity investments in the funds and through increased fund activity in Net Zero, where it can be facilitated by strong regulatory and market frameworks. Again, this does not represent direct investment by Scottish Government, but may facilitate investment through standards and regulation being applied to buildings.

Dedicated Property and Investment Funds

Overview:

Private sector and Institutional Investor funding and Property Equity Funds investing in companies in the commercial and residential property sector.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	3	3	2	1	1

Scoring Approach

This is not a form of direct finance from Scottish Government. Scoring reflects Scottish Government’s influence on financing being essentially through regulation.

Advantages

• Many property funds exist across the EU.
• Funds are able to attract in private sector debt.
• As buildings are renovated, standards ensure efficiency measures are implemented.
• Sustainability and environmental criteria can be embedded as part of companies’ due diligence and valuation process.
• Fund managers can influence companies’ environmental policies in relation to Net Zero.
• Aggregating Net Zero gains from buildings to portfolio level.

Limitations

• Difficult to estimate proportion of funds invested in energy efficient buildings.
• Limited to cost effective investment within the investment timeframe of each fund.
• In absence of specific regulatory requirements, achievements will occur, but could be limited to best practice within the industry, or to focus on the low-hanging fruit, namely, high return and quick payback.

Obstacles & deliverability

• Regulation and/or incentives needed to drive investment in energy efficient retrofit.
• Scottish Government has lack of control of driving forward required measures and the timing of these.

Examples

• Numerous: listed and unlisted property investment fund.
• Property companies.
• Infrastructure funds.

Energy Performance Contracting

An Energy Performance Contract (EPC) is a contractual arrangement between a home/building owner and the provider of Net Zero improvements that are measured, verified and monitored during the whole term of the contract, where investments (works, supply, or service) for that measure are paid for in relation to a verified level of Net Zero improvement, such as financial savings, carbon savings, operating environment etc. Such contracts typically involve an energy service company (ESCo) which is responsible for investment and the delivery of guaranteed savings to the client.

Energy Performance Contracting

Overview:

This form of financing is attractive to private sector supply chain companies which can provide installation, financing, and operational expertise.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	3	3	2	3	? (multi-household)

Scoring Approach

EPC contracts tend to be applied to non-domestic buildings, attracting interest from contracting specialists in various Net Zero work. It is less commonly seen in the domestic market, and Scottish Government support would require further thinking.

Advantages

• A contract defines the work to be undertaken and guaranteed savings to be achieved.
• EPC provider manages the performance risks.
• Contract performance driven by EPC provider professionalism and expertise.
• ESCo may attract own source of financing.

Limitations

• Traditionally focussed on low hanging fruits rather than longer term beneficial measures.
• Transaction costs may be significant.
• Requires well developed skills and support on the client side.
• Standardised framework and templates may not apply or be appropriate for all clients.

Obstacles & deliverability

• Accounting and budgetary treatment needs consideration (on / off balance sheet) for public sector bodies.
• Market is new and growing in Scotland and so confidence as well as understanding of EPC concept needs to be promoted.
• Potential misalignment of incentives in the rental sector, e.g. energy saving benefits offset by increased rental rates.
• Extent to which deep retrofit versus shallow retrofit is appealing to EPC contractors unclear. Where deep retrofit is desired / preferable, can additional investment be obtained from owner or grants?
• Deep retrofit normally timed with general refurbishment measures which increases the overall cost. Consideration needs to be given to the additional cost and potential support level for conditions improvements.

Examples

• Scotland framework contract for corporates’ measures in public sector buildings.

• London’s RE:FIT programme, Bart’s Health Care Trust, Peterborough Council.
• Rhone-Alps OSER for deep retrofits of public buildings and Croatian ESCo HEP.

Green Bonds

Green Bonds are financial instruments where the issuer requires that cash proceeds from a bond issue are applied (either by ring-fencing, direct project exposure, or securitisation) towards climate and/or environmental sustainability purposes. Given the long-term, stable characteristics for real estate assets, debt financing has historically been the traditional approach for buildings, but the relatively new market for green bonds could be a natural place for Scottish Government or local authorities to seek capital for Net Zero investments in ‘green’ buildings, particularly where bond returns (via energy savings) are index-linked.

Green Bonds

Overview:

Bond issues by public sector (Scottish Government or local authority), private sector or institutional investors, e.g. through a fund. Proceeds from bond issue used to finance capital works and project income (e.g. through tariffs / fees) subsequently used to repay the interest (‘coupon’) on the bond.

Applicable sectors (3 – strong, 0 weak)	Private sector (corporate) supported	Public sector supported	PRS	Social	Owner Occupier
	2	3	1	2	0 (perhaps refinance?)

Scoring Approach

Scoring reflects that bond issues need to be large in value, and any proceeds need to be invested quickly (and hence reliant on demand) so that savings can be made and used to repay bond interest.

Advantages

• Large and deep pools of finance from investors exist for bonds.
• Bonds are a commonly used investment within the building sector where there are standard contracts, transactions and a known risk profile.
• Can provide a simple, single source of direct financing.
• Could have a low impact on Scottish Government or local authority budgets.
• They are a known and well understood form of investment.

Limitations

• Needs large size to raise finance (e.g. £50+ million).
• Not widely used in the Net Zero sector at the moment.
• The bond and associated interest costs do not provide flexibility for repayment.
• Should deliver adequate returns to investors, aligned with the investment risk of associated Net Zero measures. Returns may not be comparable to other similar financial instruments.
• If the bond was issued by Scottish Government or a local authority, it could have significant affordability and borrowing implications.

Obstacles & deliverability

• A strong pipeline of deliverable projects needed to avoid carrying the cost of interest on unutilised bond proceeds.

Examples

• Aberdeen City Council Bond (although not a green bond).
• Unibail Rodamco green building bond.
• Climate Bond Initiative.
• Various Development Bank issuers (World Bank, IFC, etc.) for general green bonds.

Revolving loan fund

As an extension of direct loans, revolving loan funds (RLFs) are pools of capital from which loans can be made for clean energy projects. As project loans are repaid, the capital is then re-lent to new projects. If defaults remain low, RLFs can be "evergreen" sources of capital that are recycled repeatedly to fund projects well into the future. Scottish Government, local authorities and private sector institutions could all establish RLFs to support energy upgrades potentially as joint ventures with the private sector.

Revolving Loan Fund

Overview:

Public sector financing to create RLF. Potential to attract private money leverage and could be deployed alongside a grant programme.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	3 (SME)	3	3	3	3

Scoring Approach

The scoring above reflects how applicable revolving loans would be to the respective sectors. Low scores reflect that the sector is likely to borrow through its own sources and not use a Scottish Government revolving fund.

Advantages

• Potential to provide low cost finance, with an evergreen revolving source of funds that will be available in the long-term.
• Can shape eligibility requirements to fit many markets and program goals.
• Can have minimal or no interest.
• A government-sponsored RLF could offer lower interest rates and/or more flexible terms than are available in commercial lending markets, subject pricing controls.
• A RLF is an effective tool for residential Net Zero improvements in the £2,000 to £10,000 range that are too expensive for a cash/credit purchase but do not warrant taking out a second mortgage or equity investment.
• Leveraging in private sector capital into the fund can substantially increase the capacity of Scottish Government support.

Limitations

• Scottish Government acting as administrator requires staff time and expertise to set up an RLF of scale, although good knowledge and experience exists from current schemes. Procurement required for any outsourced arrangements.
• Requires capital upfront to start the fund.
• An annual budget may be required from Scottish Government to cover the cost of any potential loan defaults.
• Often slow to revolve, especially with longer loan terms (likely for deep retrofit measures).
• Must conduct rigorous credit analysis on borrowers’ ability to pay (or risk a high default rate).
• Costly collateral or security may be required from borrowers.
• Regulatory implications.

Obstacles & deliverability

• Administration of the fund required to include application review, disbursement, collection, reporting and arrears management. Needs appropriate governance framework and processes to be established.
• Regulatory requirements would need to be considered in further detail.
• Criteria for establishing amount of loan, its length, applicable interest rate, etc. need consideration.
• Consider budgetary, pricing control and classification implications for use of a RLF.
• Controls over review and quality / nature / standard of works undertaken.

Examples

• Several Scottish Government Net Zero related schemes exist e.g. HEEPs, Warm Homes, DHLF, etc.

Fiscal mechanisms

Although not a direct form of financing, fiscal incentives / charges implemented by Scottish Government could be a useful tool to encourage private investment in Net Zero measures by providing monetary benefits to homeowners and organisations, encouraging and motivating adoption and uptake of Net Zero works, which otherwise would not take place. Likewise, penalties could also be charged and levied on those who do not wish to undertake the measures. Such fiscal measures could be developed either/or at a national, or local authority level, and could be combined. The receipt of penalty payments could be used to subsidise some of the costs of funding a programme. Some examples, and by no means exhaustive, might include the following –

Scottish Government

Land and Buildings Transaction Tax (LBTT) – differential levels of stamp duty could apply, depending on the energy rating of the building / property sold and triggered at the point of sale.

Taxation – this could be in a similar form to existing Net Zero taxes such as ECO or modified versions applied within the scope of Scotland’s devolved powers.

Consideration and potential use of other devolved and reserved powers could also be explored.

Local Authorities (LAs)

Council tax levels – discounts and premiums could be applied to building rates (domestic and non-domestic) depending on their Net Zero performance. Premiums could be used to support private investment and fund works for a systematic programme of Net Zero measures (e.g. building by building) across a local authority area.

Public Works Loan Board (PWLB) - LAs could use their own financial resources to fund an Net Zero programme and recover costs directly from building and homeowners. It should be noted that LAs need Ministerial permission to on-lend. LAs can use powers such as “Missing shares” that allow them to pay a share of common repair or maintenance costs on behalf of a home owner in a tenement who is unable or unwilling to pay. The powers allow LAs to recover their costs by creating a charge against property.

Incentives charging

Overview:

Incentives and/or penalties are applied to occupiers of buildings to encourage and motivate undertaking Net Zero works. The recipient of penalties can use the income to fund Net Zero measures.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	3	3	3	3	3

Scoring Approach

This is not a form of direct finance from Scottish Government, but can be used to encourage investment. Scoring reflects Scottish Government’s influence on being able to apply incentives / penalties for the sector.

Advantages

• Financing and/or funding is provided by the recipient, either through upfront capital spend (and rewarded via the incentive) or as an ongoing penalty.
• An overall scheme can be managed to be cost neutral, such that capital works (e.g. undertaken by a LA) are matched by ring fenced penalty income.
• It raises revenue that can be used to subsidise alternatives such as green electricity or support the development of favoured green technologies.
• Leads to a socially efficient outcome as it makes people pay the social cost and overcomes the excess consumption.

Limitations

• Administration required for the collection of taxes, and re-allocation for payment of Net Zero measures may be expensive and inefficient.
• Enforcement of penalties may prove difficult.
• Consumers dislike new taxes and often do not believe that they will be ‘revenue neutral’. Although not an economic argument, politically, measures may prove difficult to implement.
• Penalties may not support alleviation of fuel poverty.

Obstacles & deliverability

• The scope of devolved powers may limit the extent to which incentives / taxation / penalties may be applied.
• Difficult to know the level of external cost and how much the tax should be.
• Possibility of tax evasion. Higher taxes may encourage firms to hide carbon emissions.

Examples

• UK ECO scheme, RHI income, FITs

Guarantees and first loss capital

Scottish Government could provide risk-sharing facilities, either by way of guarantees or first loss facilities (capital) to lenders (such as banks or mortgage lenders) that reduce risk by covering part of the risk of payment default by institutions’ borrowers – either through a call on a supporting guarantee or write-off of Scottish Government capital invested as a ‘first loss’, e.g. as part of a joint fund. This option could help de-risk initial third party institutional investment in this new market.

Guarantees and First Loss Capital

Overview:

Public sector support through use of guarantees or first loss capital (e.g. into a Joint Venture fund) to a private sector finance provider that encourages ‘crowding-in’ of new capital.

Applicable sectors	Corporates (Private)	Corporates (Public)	PRS	Social	Owner Occupier
	3 (SME)	1	3	3	3

Scoring Approach

Scoring is based on ability of risk sharing facilities ability to ‘crowd-in’ external private sector finance. This is likely to be more beneficial in private owned building sectors.

Advantages

• Reduces the risk for banks/mortgage lenders and enables them to lend greater amounts and potentially with lower margins.
• There is evidence to suggest that energy efficiency loans have a better credit performance than traditional loans (since cash savings can be used to repay finance). This is a relatively new market and Scottish Government ‘risk sharing’ support may help to make Net Zero loans more mainstream and ‘vanilla’ in nature.
• Can create leverage or ‘crowd-in’ private sector capital.
• May support private sector lending to borrowers with poor credit.

Limitations

• Takes time to structure and negotiate terms of guarantee with financial institutions.
• Need to ensure that excessive risk transfer away from bank/mortgage lenders does not occur, to ensure that banks retain appropriate credit management levels.
• Knowledge, skill and experience required to ensure any scheme is set up to be efficient and effective.

Obstacles & deliverability

• Scottish Government support could be provided at an aggregated level (e.g. to a large fund) or applied through individual loans. The cost effectiveness of Scottish Government’s support would need to be assessed.
• Potentially complex and extensive handling and administration of risk shared facilities.
• Robust governance and oversight of any guarantee scheme required to monitor and ensure exposures managed effectively.

Examples

• IFC’s CEEF programme (Hungary, Czech Republic, Estonia, Latvia, Lithuania, and Slovakia).
• France’s proposal to create a national guarantee fund for renovation loans (via article 7 of EED).
• European Energy Efficiency Fund (EEEF).