Green Heat Finance Taskforce: report part 1 - November 2023

11. Annex 5 - Wider explanation of the market pillars

The GHFT recognises that there are major interdependencies^[53] for finance with other essential components of the market, that are also critically important to be in place for building owners to be able to improve the energy efficiency and decarbonise heat sources in their buildings by 2045.

This annex focuses on those other elements of the market which the Taskforce has indicated must also be developed so that government incentives, twinned with regulatory targets, can create a demand for improvement works by building owners, that can then be financed through the private sector and successfully executed by the supply chain.

Diagram 1 Pillars of a market framework to foster energy efficiency market

Finance

• Advice & Information

  Good quality, independent support and information

• Assessment

  Create action plan of suitable measures to meet improvement targets

• Quality Assurance

  High standards of quality, customer care, competence, skills and training, and health and safety.

• Consumer Protection

  Safeguarding customers against unfair practices in the marketplace.

• Monitoring & Evaluation

  Evaluate progress against aims and objectives to support ongoing policy development.

• Branding, Marketing & Comms

  Raise awareness and motivate occupiers to undertake improvements.

• Delivery Mechanisms

  Different routes to market for decarbonisation measures e.g. LHEES, Heat Networks

• Skills & Supply Chain

  High training standards and installers are suitably qualified

In recent years the Scottish Government has been working on developing the pillars of the market framework for accelerating growth in decarbonising Scotland’s buildings. It contributed its findings to the EU funded Energy Efficient Mortgages Initiative (EEMI) between 2020 and 2023^[54]. The pillars of a market framework diagram above outlines the key pillars of the whole market chain, when implementing energy efficiency (and decarbonisation of heat) improvements to a home (or a non-domestic building). These pillars highlight the interdependency of financing and funding with the other six aspects of the market framework. Below is the definition of each pillar as set out in the report for EEMI and a summary of what the Scottish Government is doing to develop these pillars to ensure market supply and demand enabling the uptake of finance mechanisms to fund the works.

Delivery Mechanisms and Skills & Supply – “To provide support and actively promote the opportunities of the market in energy efficiency […] [and decarbonisation of heat] in buildings for companies in the jurisdictions, as well as ensuring that the quality of the work carried out by the supply chain is of a high standard and that installers are suitably qualified.”

The Scottish Government, along with its partners, is identifying, creating and developing delivery and support opportunities to incentivise the market through a variety of mechanisms –

• Local Heat and Energy Efficiency Strategies (LHEES)^[55]. Partnership working with local government to develop area-based, locally-led heat planning, coordination and delivery of the heat transitions across Scotland.
• Heat networks^[56]. The Heat Networks (Scotland) Act 2021 sets out statutory targets for the amount of heat to be supplied by heat networks to Scottish Buildings by 2027 and 2030 respectively. The Heat Networks Delivery Plan will contribute to increasing the use of heat networks in Scotland and meeting the statutory targets.
• The Heat Network Fund recognises that targets for heat network deployment will require a substantial growth in supply chains, and the £300 million capital grant funding which is now available to public and private sector organisations will support this growth.
• To assist with the pre-capital stage of heat network development, the Heat Network Support Unit aims to identify prospective heat network projects and support their development through advice and grant funding, building capacity and expertise across the public and private sector in Scotland.
• The Energy Efficiency Standard for Social Housing 2 (EESH2)^[57] review is looking at the 2025 and 2032 milestones for achieving the Scottish Government’s ambitious climate change emissions reduction targets. Although not 100% directly funded by the Scottish Government, the Social Housing Net Zero Heat Fund has been designed to accelerate the delivery of energy efficient zero emissions heating systems to social housing projects across Scotland.
• Community and Renewable Energy Schemes (CARES)^[58] have a huge potential to help local communities reduce carbon emissions, create local jobs, upskill local people, reduce energy costs and overall allow greater investment in local economies, providing a significant contributions to Scotland’s Net Zero ambitions. CARES, delivered on the Scottish Government’s behalf by Local Energy Scotland, provides dedicated support to communities looking to engage with, participate in and benefit from the energy transition to Net Zero. Projects covering the breadth of Scotland have been supported, helping to provide clean, green power and heat, and enabling them to continue to deliver essential local services, making a tangible difference to communities.
• Business Energy Scotland is a national service, covering the whole of Scotland provides free advice, impartial support and access to funding to help SMEs save energy, carbon and money^[59].
• The SME Loan and Cashback scheme provides interest free loans of between £1,000 to £100,000 with up to £20,000 cashback, which can be used to finance the installation of energy efficient systems, equipment or building fabric^[60].
• Working in partnership with the Green Heat Sector, the Scottish Government is supporting the skills and supply sector through initiatives such as the Green Jobs Workforce Academy^[61] and funding for apprentices through the Low Carbon Skills Grant, as well as providing 75% of the initial fees required to become a Microgeneration Certification Scheme (MCS) approved supplier^[62]. The Heat in Buildings Supply Chains Delivery Plan sets out the practical steps that are being taken to support the growth of the green heat sector^[63].

Advice and information – “To provide all households with access to good quality, independent advice and information on improving the energy efficiency of their property and reducing their fuel bills.”

The Scottish Government’s new dedicated National Public Energy Agency: Heat and Energy Efficient Scotland (the Agency) will provide the leadership and coordination required to accelerate the delivery of the decarbonisation of heat in Scotland^[64]. Its initial focus will be to work with delivery partners to bring about more effective cross programme coordination and to aid public understanding and awareness of the changes required to Scotland’s homes and buildings as we transition to Net Zero by 2045. It is important to note that the Agency is not starting from scratch, rather building upon several existing delivery programmes listed below –

• Heat in Building Area-Based Schemes
• Warmer Homes Scotland Scheme
• Home Energy Scotland Advice Service
• Home Energy Scotland Grant and Loan
• Business Energy Scotland Advice Service
• SME Loan and Cashback
• Heat Networks Fund
• Social Housing Net Zero Heat Fund
• Green Public Sector Estate Decarbonisation Scheme.

A customer journey has also been developed for borrowers to ensure that financial lending and advice is part of the process, alongside delivery support for implementing the energy efficiency measures (and zero emission heating).

Branding, Marketing and Communication – “To build communications that motivate owners and occupiers to access the advice and support on offer, based on a strong brand for the Programme that inspires trust and raises awareness, as well as targeted messages for each sector that make the case for improving energy efficiency.”

The Taskforce recognises that there are mindset barriers to the uptake of low carbon heat solutions. Consumer awareness of what retrofit looks like, what the benefits are, who to speak to and how to make the changes, are essential to encourage building owners to make the switch, which in turn will increase demand for contractors to do the works and begin to generate a market sizeable enough to support private finance sector offers.

Figure 11-1 Customer journey taken from EEMI: Technical Report on optimal value chain of actors, relationships and resources in demonstrator jurisdictions.

• Loan drawdown

  Need to ensure loan proceeds are used as intended

• Quality Assurance / Confirmation of EPC improvement

  Confirmation that improvement has been made

• Loan application

  This will follow current Bank procedures for credit checks etc

• Advice & Information

  Potentially accessed through Bank or Government Scheme

• Assessment

  Key to understand applicable measures. Needs to tie to loan application

• Approved supplier undertakes work

  Approved or preferable supplier list needed to deliver measures

The Scottish Government recognises the need for communications that encourage owners and occupiers of buildings to access the advice and support that is on offer and so has developed a strong brand programme which will be continued on by the Agency.

Assessment – “To undertake [….] assess [….] and provide an action plan that records both the improvement targets and the measures that will be undertaken.”

The Scottish Government’s Heat in Buildings Strategy set out plans to reform EPCs. The first step is to change the headline domestic EPC rating away from a cost based metric, which currently incentivises gas heating rather than zero emissions heating systems, that typically need electricity. A new domestic EPC metric based on the home’s energy use was consulted upon in the summer of 2021.^[65] The current EPC reform work also includes non-domestic EPCs, as well as wider aspects, including ensuring EPC recommendations for measures to improve energy efficiency are appropriate, and improving EPC audit and assurance. A further consultation is planned this year alongside the wider consultation on Regulations for Energy Efficiency Standards using the reformed EPC.

Quality Assurance – “To ensure robust consumer protection, focussed on high standards of quality, customer care, competence, skills and training, and health and safety.”

The Scottish Government has powers to provide consumer advocacy and advice and can set quality requirements for installers of Scottish Government schemes.

PAS 2035: (PAS 2035:2019 Specification for the energy retrofit of domestic buildings) has been adopted by all UK and Scottish government supported retrofit projects. PAS 2035 adopts the whole building approach and is designed to improve the quality of retrofit, providing confidence for banks and lenders to provide funding for projects.

The Trustmark is a UK Government endorsed quality scheme covering domestic properties and both Retrofit Assessors and Coordinators must be Trustmark accredited to comply with PAS 2035^[66].

In designing support schemes for low-carbon technologies, the Scottish Government is committed to a requirement for strong quality assurance, ensuring that all work is carried out by skilled operatives, in accordance with enforceable industry standards with adequate redress in place to protect consumers. The Heat in Buildings Quality Assurance policy statement was published in June 2022. This policy statement covers the standards, skills and certification required for installers on Scottish Government schemes, ways to tackle scams and mis-selling, and how to improve public engagement^[67]

The statement commits the Scottish Government to require applicants carrying out energy efficiency work under the new Home Energy Scotland Grants and Loans scheme to use TrustMark registered businesses when available and retains requirements for Microgeneration Certification Scheme (MCS) approved suppliers for microgeneration work. It also commits the Scottish Government to work with stakeholders, including Trading Standards Scotland, to counteract scams and support enforcement action against those traders who do not fulfil their obligations.

By requiring improved standards for Scottish Government schemes, and by supporting consumers to access trusted suppliers while avoiding bad actors, it is hoped that this will encourage a greater level of skills and competence in the industry more generally and foster a more secure sector that customers can be confident in regardless of how their work is funded.

Consumer Protection – “Safeguarding consumers against unfair practices in the marketplace.” Access to independent, free and efficient redress when something goes wrong is a key element in building trust and encouraging take up of retrofit and low carbon heating solutions.

While consumer redress, protection and enforcement powers are not devolved to the Scottish Government (they are to the Northern Ireland Assembly) the Taskforce advocates working with the bodies that already exist to handle complaints. The Financial Ombudsman Service has statutory powers where a regulated financial product is in place, energy suppliers and networks are under the mandatory jurisdiction of the Energy Ombudsman - in due course that will extend to heat networks. Other ombudsman and alternative dispute resolution services provide access to redress but there are gaps and overlaps and engagement by traders is voluntary. There is recognition in the paper “Heat in Buildings – Quality Assurance: Policy Statement”^[68] that there is a need to improve access to redress. Trading Standards is responsible for protection and enforcement.

Monitoring and Evaluation – “To monitor and evaluate progress to ensure that aims and objectives are met. This monitoring and evaluation should allow for adaptation and flexibility where necessary.”

The Scottish Government currently monitors progress on emissions from buildings through the climate change updates every four years, certain elements are also covered through the Scottish House Condition Survey and they will also be publishing a Monitoring and Evaluation framework in 2023 to help measure progress against the commitments made in the Heat in Buildings Strategy^[69]. All Scottish Government Heat in Buildings delivery plans will have evaluation built into them, so that lessons are learned to inform future approaches.