Heat in buildings strategy - achieving net zero emissions: consultation

Chapter 10 Working with the UK Government

Transforming our building stock requires a step-change in deployment rates, supported by new policy and updated regulation across a wide range of areas. Some of the powers likely to be needed, such as regulation of building level greenhouse gas emissions, are currently devolved to the Scottish Government, while others, including many aspects of energy policy, remain reserved to the UK Government and, as a consequence, we need UK Ministers to take decisions that facilitate Scotland’s meeting of pathways set out in the Climate Change Plan Update.

We believe that emissions from buildings cannot be reduced to zero in a fair and just way through action only within devolved competence. A broad suite of energy market reforms is needed, including reviewing the future role for the gas network, changes to the ways in which policy levies are applied to energy supply and new safeguards put in place to share the cost of the transition fairly across consumers. Energy generators, as well as network and supply companies need to be better incentivised to deliver zero emissions heat solutions, and investment from the UK Government and the private sector needs to be significantly ramped up.

The changes we need to see in heating are not limited to Scotland. These changes are critical to delivering the UK’s collective climate change commitments. A collaborative approach, which enables Scotland to move ahead of the rest of the UK in some areas, will enable new and innovative approaches to be tried and tested, such as Local Heat & Energy Efficiency Strategies, from which other nations and regions in the UK can learn. As such it is imperative that the Scottish and UK Governments work together to take action and deliver the change needed.

Regulation of heating systems in buildings

As set out in chapter 8, we intend to develop regulations to ensure that all buildings, across all tenures are energy efficient by 2035 and use zero emissions heating (and cooling) by 2045. We will exercise existing devolved powers to achieve this as far as possible, but to be effective, this approach needs complementary action in areas reserved to the UK Government. For example, our proposals will ensure the successful operation of our proposed 2024 new build standard, which is paralleled by the UK Government’s Future Homes Standard for England.

We are also asking the UK Government to amend the Gas Act 1986 to stop the extension of the gas grid to new properties. Following the UK Government's plans announced in the December 2020 Energy White Paper, to consult on ending gas grid connections to new homes, we are seeking urgent discussions with the UK Government to understand the full implications of any amendments to the Gas Act 1986 - particularly around how this could support the implementation of our New Build Heat Standard in 2024.

New investment, innovation and market mechanisms

We will work with the UK Government to explore options for new market mechanisms to drive investment and innovation, to drive an increasing rate of deployment of low and zero emissions heating. These options may include new obligations on market actors, product standards and innovation funding, some of which may cut across reserved and devolved competencies.

We will work with the UK Government to ensure that any future changes to the heating market supports a fair distribution of the costs of transition across building owners, consumers and market actors such as suppliers, retailers and equipment manufacturers. This should be combined with continued protection for vulnerable consumers and the fuel poor.

The whole energy system: gas network, electricity generation

We are calling on the UK Government to accelerate decisions on the role of hydrogen and the future of the gas network, and to ensure relevant regulations are updated in a timely manner to support those decisions. We also see a compelling case for a continued programme of demonstration for hydrogen and funding for Carbon Capture Usage and Storage (CCUS).

We will work with the UK Government to ensure the powers it holds to develop Scotland’s renewable electricity pipeline are exercised to best effect. This will be critical to ensure that generation capacity is adequate to meet demand, arising from the increasing role of electricity in heat and transport across both Scotland and the UK.

Ofgem’s statutory obligations need to be updated to include Ofgem enabling the delivery of net zero and interim statutory greenhouse gas emission targets, and to secure appropriate and much needed network investment. These obligations must recognise targets that apply to Scotland and Wales, as well as the UK. We seek to ensure there is a framework to support the energy network companies – both gas and electricity – that enables more flexible investment for infrastructure improvements in delivering heat decarbonisation.

Heat network customer protection

We have asked the UK Government to ensure that forthcoming UK heat networks legislation creates powers for the Scottish Government to appoint a regulator of its choosing, to enforce both UK-wide heat network consumer protection and the Scottish regulatory framework being introduced by the Heat Networks (Scotland) Bill. This should include new powers for Scottish Ministers to extend the remit of Ofgem, in relation to heat networks only, so that Ofgem can act in this capacity if desired by Scottish Ministers. We have asked for this to be clarified during the passage of our Heat Networks (Scotland) Bill, but this remains unclear at the time of writing.

Hydrogen-ready boilers

We are asking that, should evidence and decisions on the gas grid support a significant role for hydrogen in heating, and should they prove affordable, the UK Government revise product standards for gas boilers, requiring them to be hydrogen-ready, and to work with the Scottish Government on this and the subsequent regulation of such appliances. We welcome the recent UK Government commitment to assess the case for encouraging or requiring the installation of hydrogen-ready boilers and will work with the UK Government on this assessment, ensuring that the interests of Scottish consumers and our regulatory and policy landscapes are taken into account.

Taxes and levies

We are requesting that the UK Government commit to working constructively with the devolved administrations. It is critical that we work together to ensure that the distribution of costs of heat decarbonisation is fair, and that the outcomes from the Net Zero Review and any subsequent policy measures provide the right financial incentives for households and businesses to choose energy efficiency and zero emissions heating technologies, whilst supporting the eradication of fuel poverty.

We welcome the UK Government’s commitment, as set out in its recent Energy White Paper, to publish a call for evidence this year to begin a strategic dialogue between government, consumers and industry to establish a framework for affordability and fairness. Within this work we urge the UK Government to act on the UK Climate Change Committee’s recommendation to rebalance environmental and social obligation costs (levies) on energy bills to reduce the difference in unit costs between gas and electricity, and help to unlock the deployment of low and zero emissions heating. We urge the UK Government to quickly progress this work so that a fair settlement for energy consumers can be achieved which accelerates our transition to a net zero economy.

We would also like to see changes to the VAT regime so that all energy efficiency and renewable heat retrofit installations receive reduced or zero VAT rate. Reducing the VAT rate on retrofit has been shown in other countries to incentivise uptake and helps to reduce the cost for households and businesses who may otherwise struggle to make such an investment.

We will also look closely at proposals in Europe to bring natural gas for domestic heating and heating oil into the EU Emissions Trading System, as a mechanism to drive investment to reduce emissions, and consider whether these proposals are suitable and workable in a UK context, working with the UK Government and other devolved administrations as part of the proposed review of the scope of the new UK Emissions Trading Scheme.

Bioenergy

As set out in chapter 2 we see a limited role for bioenergy in heating, in line with advice from the UK’s Climate Change Committee. However, we recognise for a small number of buildings that bioenergy, in particular bio heating oil, bioLPG and biomass, may represent the only practicable option for heat decarbonisation. We are therefore urging that the UK Government work with the Scottish Government and key stakeholders to explore the role for different bioenergy fuels in buildings where alternatives are limited and, as appropriate, develop sustainability and other appropriate criteria for these forms of bioenergy. Enforcing these criteria alongside the Scottish Government’s wider approach to regulation of heat in buildings, may require UK legislation or devolution of specific powers to Scotland.

Schemes that operate across Great Britain (“GB wide schemes”)

As a result of our sustained investment since 2009, Scotland has been successful in leveraging significant additional investment from GB-wide funding programmes, such as the Energy Company Obligation (ECO) and the Renewable Heat Incentive (RHI).

The Scottish Government will continue to seek to maximise the impact of GB wide funding, to support faster progress with decarbonisation of heating systems and continued progress in improving energy efficiency, addressing one of the drivers of fuel poverty.

Energy Company Obligation

The recently published Energy White Paper indicates that the Energy Company Obligation scheme will continue beyond 2022. The Scottish Government will continue to seek to maximise the impact of this funding in reducing energy bills for fuel poor households and enabling increased progress with decarbonisation of heating systems.

We urge the UK Government to review levy funding for the Energy Company Obligation and the Warm Homes Discount and work with Scottish Ministers so that these can be brought together into a single Combined Levy to establish a single, flexible Scottish Fuel Poverty scheme, as provided for in the Scotland Act. This will support low-income households with higher energy costs, and help fund necessary energy efficiency improvements and the switch to zero emissions heating.

Clean Heat Grant (CHG)

The proposed Clean Heat Grant is a welcome first step in introducing a replacement for the Renewable Heat Incentive (RHI). However, we believe that the scope of the scheme should be extended, or complementary schemes introduced, to ensure there is continued support for larger scale projects, as currently available under the RHI. We also urge the UK Government to increase the total level of funding available across the two years of the scheme so that it can act as a true stimulus, driving the deployment of low and zero emissions heating systems and helping support the growth of supply chains in the sector.

Low and zero emissions measures can cost more to install in our remote rural and island communities. The flat grant level proposed does not recognise the likely cost differences that exist across the UK and it also limits technology choice. We believe that the flat grant level should be revisited, and increased where possible, to provide greater flexibility and help households and businesses overcome the upfront cost of investing in zero emission heating.

Access to Data

To support our analysis, planning and delivery, we are also requesting that the Scottish Government is provided with full access to data relating to low and zero emissions heat installations in Scotland resulting from all UK schemes, including innovation and funding schemes, as well as other relevant data collections. We are seeking amendments to any legislation which prevents the provision of this data.

We therefore call on the UK Government to:

• amend the Gas Act 1986 to stop the extension of the gas grid to new properties;
• work with us to identify and develop options for new market mechanisms to drive investment, innovation and deployment of low and zero emissions heating;
• work with us to ensure a fair distribution of the costs of the transition; and to put in place the right financial incentives for households and businesses;
• accelerate decisions on the role of hydrogen and the future of the gas network, and to ensure timely updates to relevant regulations;
• amend Ofgem’s statutory obligations to include a duty to enable delivery of statutory greenhouse gas emission targets across all administrations in the UK;
• ensure that forthcoming UK heat networks legislation creates powers for the Scottish Government to appoint a regulator of its choosing, to enforce both UK-wide heat network consumer protection and the Scottish regulatory framework being introduced by the Heat Networks (Scotland) Bill;
• work with us on product standards for gas boilers, for example requiring them to be hydrogen-ready;
• rebalance environmental and social obligation costs on energy bills to help unlock deployment and ensure a fair settlement for consumers;
• amend the VAT regime so that all energy efficiency and renewable heat retrofit installations receive a reduced or zero VAT rate;
• work with the devolved administrations under the proposed review of the new UK Emissions Trading Scheme, to consider how it could drive investment to reduce heat emissions;
• explore the role for different bioenergy fuels in buildings and, as appropriate, develop sustainability and other appropriate criteria;
• review levy funding for the Energy Company Obligation and the Warm Homes Discount and work with Scottish Ministers to bring these together into a single Combined Levy to establish a single, flexible Scottish Fuel Poverty scheme; and
• extend the scope of the Clean Heat Grant, increase the total level of funding available, and increase the flat grant level to recognise likely cost differences across different communities.

Questions

60. To what extent do you agree that the issues identified must be addressed jointly by the UK and Scottish governments to unlock delivery in Scotland?

61. Are there any further areas where joint action is required, for example to ensure no one is left behind in the transition and fuel poverty is addressed?