Green Heat Finance Taskforce: report part 1 - November 2023

2. Zero Direct Emissions Heating; Finance For Individuals

2.1 Introduction

Human activity is driving changes to the Earth’s climate, which will have both international and local impacts through increased instances of extreme weather, more devastating wildfires and greater examples of flash flooding, amongst other changes. Climate change will affect people’s everyday lives and the operation of businesses, through issues like food chain disruption and wider supply chain bottlenecks, while, at a global level, there is a heightened risk of conflict over scarce resources like water and the displacement of people as a result of weather-related emergencies.

That is why it is vital that action is taken to reduce and end the harmful climate impact of human activity by reducing carbon emissions and supporting measures to enable natural habitats to recover. Through a combination of reaching Net Zero emissions and fostering diversity within the natural environment, we will be able to limit the increases in global temperatures and prevent the worst case climate scenarios becoming our reality. As many respected commentators have said, this is fundamental to protecting the planet and quality of life for current and future generations.

Like many people, this Taskforce realises that addressing this global challenge is one of the most complex challenges humankind has faced. It will require leadership, commitment and collective efforts right across the world. We are not experts offering prescriptions for how to solve the overall climate challenge. However, we do believe that there are steps we can all take, and changes in behaviour we will need to make, as part of wider efforts to reduce emissions and ensure a sustainable future planet.

One of the areas touching all individuals and businesses that will need to transition to Net Zero emissions over the next two decades is that of energy use, and, in particular, how we heat our homes and buildings. In 2021, space heating (including fireplaces) and water heating together accounted for 95% of Scotland’s domestic emissions. For non-domestic emissions (heating and cooling) it is 82% ^[4]. Transitioning to ZDEH can therefore make a significant contribution to reaching Scotland’s target to reach Net Zero emissions by 2045.

Complementary to decarbonising heating systems is improving the energy efficiency of buildings, so that they require less energy to heat and keep warm. This will help people live healthier lives by preventing illnesses caused by things like damp living conditions as a result of poorly insulated buildings. This will generate wider impacts in terms of reduced demand on healthcare, as well as supporting increased productivity and economic activity through less days lost to sickness.

The focus of this Taskforce has been on one aspect of supporting a transition to ZDEH systems, that is, identifying how individuals and businesses can or could finance the work needed as we move away from heating by means of fossil fuels. The main body of this report focuses on explaining what the current structure of heating is across Scotland’s buildings, setting out the state of the private financing market for energy retrofitting measures, and proposing a set of recommendations that can help unlock deployment of private finance at scale.

The report discusses ZDEH and energy efficiency in combination, something that may be termed as green heat. ZDEH relates to the heating system in a property and means heating by means of a non-fossil fuel source, generally some form of electric heating, as this will become increasingly zero emissions as renewables account for greater proportions of overall generation. However, conversion of all properties to ZDEH will take time, including for heat networks to be built to connect some. This means increasing energy efficiency across all properties is also important, both in terms of reducing overall emissions and in helping consumers lower their energy bills, as energy efficiency measures can make a big impact on the level of energy a property uses.

Before delving into the detail of the report, however, we believe it would be helpful to set out some illustrative examples of how individuals are currently able to finance the installation of ZDEH systems and improve energy efficiency of their properties. These examples serve to demonstrate how different, currently small scale financial products, can be combined with existing financial support available from the Scottish Government and used to install ZDEH solutions.

For clarity, these are illustrative examples and do not provide financial or investment advice. Individuals considering different financing options for any planned upgrades to their property should seek professional financial planning advice as necessary.

2.2 Green mortgage (secured loan) illustrative example

Mr and Mrs Henderson are in their early 40s and own a 1930s semi-detached house in an urban area in which they have a mortgage. The house has a pre-1998 standard gas boiler and double glazing which is over 20 years old.

The Hendersons contacted Home Energy Scotland for free and impartial advice on how to make their home more energy efficient. They received a tailored report and a home visit by an adviser, following which they decided to replace their gas boiler with an air source heat pump, and to replace their old double glazing with new triple glazed windows.

The Hendersons contacted their mortgage providers and received confirmation that they were eligible for a green home loan of up to £25,000 on a five year fixed rate. They then sought quotes from accredited installers through the Micro Certification Scheme and selected a preferred supplier for both heat pump and windows. The combined total of work for their house came to an estimated £20,000.

With quotes for the work, and having consulted a financial adviser, the Hendersons then completed application forms for Home Energy Scotland’s grant and loan scheme, applying for the maximum grant of £7,500 and maximum interest free loan of £7,500, which was to be paid back over 10 years. They also completed an application for a £5,000 green home loan from their mortgage provider.

Once Mr and Mrs Henderson had confirmation of grant funding, and both the Home Energy Scotland loan and the green loan from their bank, they booked the installation of a heat pump and new windows.

Mr and Mrs Henderson now make a monthly payment of £65 to Home Energy Scotland, which they will do for 10 years. In addition, their mortgage repayment increased by an extra £32 monthly, which they will pay back over the remaining lifetime of the mortgage.

The combined impact of these upgrades substantially reduced the Hendersons energy consumption, reducing their CO₂ footprint and giving them a more consistently heated home.

2.3 Equity Release Illustrative Example

The Hendersons’ neighbour, Judith, is also interested in improving the energy efficiency of her home. Judith is in her late 50s and owns her house outright, having paid off the mortgage following the death of her wife a few years ago.

Judith contacted Home Energy Scotland for free advice about the home improvements that were most suitable for her property. Upon receipt of her tailored report, Judith decided to invest in solid wall insulation and a solar water heating solution. She decided a heat pump was not the right solution for her at the current time, as she installed a new gas boiler last year, although she is aware that she will need to convert to a zero emission heating solution at a later date.

Having sought quotes from accredited solar installers (via the Micro Certification Scheme) and explored sources of financing available, Judith identified the work would cost £15,000 and that she was eligible for a £7,500 grant from Home Energy Scotland’s grant and loan scheme.

As Judith was hoping to reduce her working hours in a few years’ time, she was not keen on taking out a loan to finance the remaining work.

After researching alternative options on a trusted comparison website and taking advice from a qualified financial adviser, Judith decided to raise the necessary financing through an equity release product known as a Home Reversion Plan. Through the Home Reversion Plan she sold a 10% equity stake in her house, for less than the market value of the stake, with the equity release finance provider to receive repayment when Judith’s house is sold.

The impact of the upgrades to Judith’s home are that it is warmer throughout the house, particularly in winter, and she is able to make sizable savings on energy bills. Combined with not having to make any monthly repayments, as the financing raised though selling an equity stake is not repaid until the house is sold, Judith also feels more confident that she will be able to continue to afford to live in her house when she reduces her work to three days a week when she reaches the age of 60.

2.4 Small Business Illustrative Example

‘Stylish Lines Joinery’ is a small company with a healthy order book, although the increase in input costs over recent years has squeezed margins and made the business owners decide it is important that they eliminate unnecessary ongoing costs from their business.

Over the years the business has expanded and the owners, Adam and Kaye, sought new premises to accommodate their growing needs. They purchased a unit in nearby industrial premises, with the aim of bringing the showroom, workshop and warehouse under one roof. The existing heating and lighting systems in this property were poor and in need of an immediate upgrade.

The owners approached their bank to enquire about financing options, having received marketing material about Green Business Loans from the bank. Following initial discussions with their bank, and based on information provided, the owners also contacted Business Energy Scotland (BES) to request an assessment of their requirements. An independent assessment was carried out and the report stated that the key focus areas to consider for energy savings were as follows –

• Glazing
• Insulation
• Lighting
• Heating

With steeply rising energy costs, the owners were keen to consider the recommended projects and carry out the necessary installations. The overall cost estimate for the four projects was £150,000. Having established that this business was eligible for an interest-free small and medium-sized enterprise (SME) loan of £100,000, and, upon conducting the mandatory credit assessments, BES was willing to offer the loan to carry out the necessary energy improvements.

The owners then turned to their existing bank to explore the financing options for the £50,000 shortfall they faced to cover their overall projected expenses. As they already had a relationship with the bank, the owners were able to quickly and easily agree a sustainability-linked loan of £30,000 and asset finance for £20,000 worth of centralised heating equipment. The owners were extremely pleased because they were keen to implement their projects and be energy efficient as soon as possible.

The optimal mix of financing from the Scottish Government and a commercial bank helped the business realise its energy efficiency goals. The business now estimates it will reduce its carbon footprint by over 15 tonnes annually, while saving over £16,000 on energy bills. The expert advice and support available from both the public and private sectors proved invaluable in helping Adam and Kaye to realise their business aspirations and meet their environmental goals (whilst also helping them market the business’ sustainability credentials). Both the £100,000 SME Loan and commercial loans will be repaid monthly over a 10 year period.