Heat in buildings strategy - achieving net zero emissions: consultation

Chapter 6 Kick-starting Investment in the Transition

Transforming Scotland’s homes and buildings over the next 24 years is a significant investment opportunity that will support supply chains, jobs and economic growth.

The Scottish Government will kick start this transition with almost £1.6 billion of capital funding during the next five years. We will target our funding to support the most vulnerable and to strike the right balance to ensure fairness, particularly between those who make the transition early (and so potentially face higher lifetime costs) and those who, because, for example, infrastructure is not available, transition much later. To do this we will target our interventions through our delivery programmes so that they do not have a detrimental effect on fuel poverty and will build in additional support where required to ensure people can continue to enjoy warm homes that are affordable to heat.

Alongside raising awareness of the scale of the transition needed for our building stock, improving quality and consumer trust in the supply chain will be an important part of this journey. We will use our investment to drive up quality and work with the sector to put in place and make it as easy as possible for people to make the changes, and secure the action needed over the next decade to transform our building stock.

Delivering Early and Significant Progress

Investing in energy efficiency and zero emissions heating is not new for the Scottish Government. We have successfully funded heat in buildings delivery programmes for a number of years (see table of current delivery programmes below and in annex for more detail), supporting those living in fuel poverty, and encouraging others, including small and medium businesses and the public sector, to retrofit their properties to reduce their energy costs and emissions. We have also supported large scale low carbon energy infrastructure projects, including a number of heat networks across Scotland.

Summary of Scottish Government Delivery Schemes

Domestic support

Home Energy Scotland

Free, independant advice on energy efficiency and low and zero emission heating. Also acts as a referral scheme for the Warmer Homes Scotland scheme. Portal for accessing number of support packages including HES loan, PRS loan, cash back incentives, equity loan pilot and Warmer Homes Scotland.

Delivered by Energy Saving Trust.

Warmer Home Scotland

Fuel Poverty scheme which enables eligible households to recieve energy efficiency and heating improvements. Primarily delivers heating measures including an increasing number of heat pumps. Recently extended grant levels of increase support for heat pumps.

Delivered by WarmWorks.

Energy Efficient Scotland - Area Based Scheme (ABS)

Provide energy efficiency improvements to households in or at risk of fuel poverty living in their own home or a private rented property, leveraging Energy Company Obligation (ECO) finance and private investment. ABS is effective in delivering large numbers of improvements to mixed tenure, multi-occupancy properties (e.g., flats, terraces, council estates/projects).

Deleivered via local authorities.

Home Energy Scotland Loans and Cachback

Interest free loans and cashback (grant) for eligible energy efficiency measures and up to 75% cashback (grant) up to £7,500 for renewable heating systems. Operators on first come first served basis. Householder is responsible for arranging and managing.

Delivered by Energy Saving Trust.

Business Support

Energy Efficiency Business Support Service

Free advice and support package to Scottish SMEs to help improve energy effeciency and decarbonise heating in their premises.

Delivered by Zero Waste Scotland.

Energy Efficiency Business Support SME Loan and Cashback

Low-cost loans and cashback (grant) for eligible energy efficiency and renewable heat measures.

Delivered by Energy Savings Trust

Communities and Public Sector

The  Community and Renewable Energy Scheme (CARES)

Advice and funding support to community groups and other eligible organisations seeking to explore their renewable energy options.

Delivered by Energy Saving Trust under the local Energy Scotland brand

Public Sector Non-Domestic Energy Efficiency Framework

Energy Performance Contract Framwework designed for public sector projects. Improvement measures are financed via savings.

NDEE Support Unit supports project delivery.

Multi-sector support

Low Carbon Infrastructure Transition Programme

Provides a range of support, from expert advice to financial support to assist the development and delivery of private, public and community low-carbon projects across the country. Includes capital support for heat networks and support for social landlords for heat decarbonisation.

Delivered in house with support from Project Partners including SFT and Zero Waste Scotland.

District Heating Loan Fund

Loan fund for district heating projects open to local authorities, social landlords, SMEs and ESCOs with fewer than 250 employees. Depending on loan value may require co-investment.

Delivered by Energy Saving Trust.

As outlined in Chapter 3, we will continue invest in our Home Energy Scotland and Energy Efficiency Business Support advice services, improving our digital presences and extending the support to provide more in-depth support.

We will also take action to deepen the level of public engagement though simplification of our branding to make the delivery landscape easier to navigate and expansion of the existing Green Homes Network so that people can learn from those who have already made the transition to zero emissions heating.

Scaling up delivery – aligning support to strategic priorities

We recognise our delivery programmes must now move to a new phase; one capable of supporting deployment at an unprecedented scale. Our delivery programmes – and auxiliary support – will need to underpin the mass move from fossil fuel reliant systems to low and zero emissions heating in tandem with achieving a good standard of energy efficiency across all buildings.

To achieve this, we will use our £1.6 billion investment to build upon, expand and improve existing programmes, and bring forward new mechanisms where necessary and maximise investment from other sources. We recognise there are choices to be made around how best to maximise the impact of our funding. We will need to strike a balance between supporting the vulnerable and ensuring that they are not left behind in the transition and making demonstrable and sustained progress in those areas where we have most ground to cover, such as increasing the absolute volume of zero emissions heat installations.

What we have set out in this draft Strategy is an indicative prioritisation of our available capital funding over the lifetime of this Strategy. We propose to expand existing delivery programmes to focus on accelerating deployment against the following four strategic priorities with £465 million to support those least able to pay through our domestic energy efficiency programmes and over £1 billion to support heat decarbonisation and energy efficiency across our other strategic priorities.

We know the importance of targeting government funding where it can best have impact and unlock barriers to transforming our building stock. A balance will be needed on how best to split our investment between energy efficiency measures and heat installations as well as the level of intervention needed to act as catalyst to decarbonise at the scale and pace needed and to stimulate more private investment. We are actively seeking views on how to balance our priorities and the opportunities and challenges we face in investing almost £1.6 billion over the next five years.

Strategic Priorities

1 - Supporting those least able to pay

We will expand our domestic energy efficiency programmes to support more households to eliminate poor energy efficiency as a driver of fuel poverty and accelerate the deployment of zero emissions heat across Scotland’s social housing stock. We will target our intervention so that it does not have a detrimental effect on fuel poverty and will build in additional support where required to ensure people can continue to enjoy warm homes that are affordable to heat.

2- Investing in strategic technologies in low or no regrets areas

We will target at scale deployment of strategic technologies and will seek to maximise private investment through the aggregation of demand. This investment will be targeted through the successor to the Low Carbon Infrastructure Transition Programme (LCITP), the District Heating Loan fund (DHLF) and community-focused schemes such as CARES, including dedicated support for islands and remote communities.

3- Showcasing Net Zero leadership and share learning through early adoption in key areas of focus

Supporting market growth in heat technologies by growing demand and customer base to help scale and attract further private investment through our successful domestic and SME cashback schemes, developing a new support programme to enable those households and SME businesses - who want to – to take early action, and investing in the retrofit of public sector buildings to showcase zero emissions buildings and to act as a catalyst for wider action.

4- Investing in innovation and demonstration to drive forward competitive advantage

We will need to continue to innovate and demonstrate in order to develop the business models, finance and technology to meet the needs of the future, and to overcome existing barriers in zero emissions heat deployment. We will support innovation and demonstration in strategic areas such as electrification, hybrid systems and network impact and in the more challenging aspects of decarbonisation such as multi-tenure buildings.

Our investment will continue to be underpinned by a place-based focus for our programmes as Local Heat and Energy Efficiency Strategies are rolled out, to ensure alignment with LHEES designations of heat decarbonisation zones, and to support locally-driven Delivery Plans. We will take early action to strategically plan deployment and delivery with a focus on the no and low regrets areas and strategic technologies identified earlier in this strategy (see Chapter 2)

• Energy efficiency
• Heat pumps in off gas areas
• Heat pumps in on gas areas
• Low and zero emissions heat networks

Supporting home owners, landlords and tenants

We believe support for early adopters will be essential if we are to deliver our targets. We propose to continue to offer interest-free loans accessed via Home Energy Scotland, with an additional proposed commitment to run our cashback scheme, with an opt-in monitoring programme, until at least 2023 to help households overcome the upfront cost of taking early action.

We will continue to monitor the success of these schemes, and undertake user research and market testing to understand the need for other products which may support and smooth the consumer journey including the option for a self-funded pre- and post-installation service. We will take an evidence-based approach to the development of proposals for supporting self-funding households over the longer-term, and as we move into a regulatory framework. We are currently evaluating the area-based equity loans pilot and any future equity scheme will be considered in light of this evaluation.

Supporting those least able to pay

We have already committed in the Programme for Government 2020 to guaranteeing our existing capital commitment for domestic energy efficiency programmes as well as committing an additional £55 million to support work to eliminate poor energy efficiency as a driver of fuel poverty. Over the next five years, this will mean directly investing £465 million in domestic energy efficiency. We propose to continue delivery of energy efficiency investment to support fuel poor households in order to make homes warmer and cheaper to heat and to reduce the impact of any increased running costs from zero emissions systems, including recognising the distinct challenges faced by island, rural and remote communities and seek to improve targeting so that we can reach more households in fuel poverty.

Over the next five years, it is our intention that our Area Based Schemes will increase their reach to support higher numbers of households in or at risk of fuel poverty, prioritising those in greatest need (that is, the least energy efficient) and those in the highest emitting properties – in order to maximise reductions in emissions. As well as prioritising insulation measures, through our Area Based Schemes we propose to deliver an increased number of ‘whole house’ retrofits to fuel poor households and will adopt a ‘zero emissions first’ approach (outlines in Chapter 3: People) in improving heating systems.

The Warmer Homes Scotland contract is due to end in September 2022 and we propose to replace it with a new and enhanced 7-year national scheme which will continue to have support for fuel poor households at its heart. We propose that the new scheme will embed increased support for zero emissions heating, enabling a zero emissions first approach (outlined in Chapter 3: People) and we will consider if it should also be designed with scope for expansion to support a wider range of households in the future.

Support for Non-Domestic and Small & Medium Sized Enterprises

We support Small and Medium Sized Enterprises (SMEs) via our Energy Efficiency Business Support service (formerly Resource Efficient Scotland) and SME Loans to take action to reduce their energy use and cut emissions. SME businesses can continue to access free and impartial advice and support as well as low-cost loans to help spread the upfront cost of investing in energy efficiency and zero emission heat. We propose to continue to run our SME loan cashback schemes until at least 2023 to help reduce the cost of investing. In order to understand the support and investment SME businesses need to secure an accelerated rollout of energy efficiency and zero emission heating systems we will consult and work with the sector to develop new policies and proposals for SMEs.

Larger businesses and organisations can access support on the open market to invest in decarbonising their property assets. Many larger organisations already have strong corporate social responsibility policies which are driving low carbon decision making, with many organisations retrofitting their properties to reduce running costs and cut emissions. During 2021, we will ensure that our work on regulations and finance consider how to drive early action so that this segment of the market can help lead the way and support and develop enhanced supply chains in Scotland.

Supporting Communities

Scotland is already recognised as an exemplar when it comes to our approach to supporting and investing in community energy. We want to continue to support communities to take the necessarily steps to transform their assets so that they are ready for a net zero Scotland. The next CARES contract period is due to commence in April 2021, and will run until March 2025, and will have a greater focus on supporting heat decarbonisation in community-led projects and supporting community engagement in Local Heat and Energy Efficiency Strategies (LHEES).

We propose to extend our financial support for our most remote rural and island off-grid communities, ensuring that security of supply is maintained and decarbonised – acting across electricity, heat and energy efficiency – helping to transition these communities to a net zero future.

Case study : Decarbonising heat and cooking on the Small Isles and Shetland

There are 93 inhabited islands in Scotland, with a population of 103,700^[xlvi]. The Islands of Rum, Eigg, Muck, Canna, Foula and Fair Isle are some of our smallest islands and all completely ‘off-grid, not connected to the national electricity or gas networks. These remote islands have set forward an ambitious vision^[xlvii] to reduce emissions associated with space and water heating by 80%, and to reduce the volume of fossil fuels used for cooking by 50%, all by 2025. In order to deliver on this progressive vision these islands will initially target those using higher carbon systems. The islands will also look at ways to renovate and retrofit existing buildings to make them more energy efficient, helping to meet the ambitious vision.

Public sector

The public sector must demonstrate its commitment to transforming Scotland’s buildings by taking early and sustained action to decarbonise the public sector estate and improve the energy performance of all public buildings. Over the next Parliament, we will invest at least £95 million in the Scottish public sector estate to improve and reduce energy use and install zero emissions heating systems. We propose to bring forward a new Scottish Green Public Sector Estate Scheme during 2021 - which will draw together capital grants, loans, and other revenue funding mechanisms and in corporate and build upon our existing Non-Domestic Energy Efficiency Framework - as the main government-led capital funding mechanism to support leadership for heat decarbonisation right across the public sector. As an example, the Scottish Government’s Learning Estate Strategy has a greener and more sustainable learning environment as one of their core outcomes.

The Scottish Government Learning Estate Strategy

The Scottish Government Learning Estate Strategy sets out a range of outcomes we want to see from our investment in school buildings. One of these outcomes is an energy efficiency target that learning environments should be greener and more sustainable, contributing to Scotland’s net zero greenhouse gas emissions commitment. Our energy efficiency target for schools replaced or upgraded through the £1 billion Learning Estate Investment Programme (LEIP) is highly ambitious at 67 kWh per square meter, per year. This target is not just ambitious on paper, we will be following up with local authorities to ensure that the targets are achieved in practice, once the schools are in use.

At scale support

Since its launch in 2015, we have used our highly regarded Low Carbon Infrastructure Transition Programme (LCITP) to make technical expertise and financial support available to innovative low carbon infrastructure projects which have potential for replication. This approach has led to the successfully delivery of a number of renewable heat projects including the Queens Quay heat network in Clydebank, which utilises heat from the River Clyde, and a new heat network in Stirling, which harnesses energy from waste water and supplies heat to nearby public buildings and businesses.

As the current LCITP programme draws to a close in 2021, we must now consider how its successor can become the primary mechanism for deploying zero emissions heat at scale, co-ordinating our support for the roll-out of heat networks and heat decarbonisation infrastructure. To achieve this, we must make a financial commitment to the successor programme which matches the ambitions we need it to deliver - LCITP and its successor programme will invest £400 million over the next five years in large-scale heat decarbonisation infrastructure. Alongside this significant capital commitment, our future programme must effectively blend government support, including newer financial mechanisms such as the Green Growth Accelerator, with co-financing from the private sector to deliver our ambitious emissions reduction targets whilst delivering value for money and future financial sustainability for these schemes.

We also propose that the successor to the LCITP will maintain a focus on innovation and demonstration by creating a dedicated funding stream in the successor programme to allow us to more flexibly support further innovation in strategic areas such as electrification and hybrid systems and tackle more challenging aspects of decarbonisation such as multi-tenure buildings and whole building retrofit. We will work with stakeholders to design and develop the successor programme offering a comprehensive package of financial and wider support to large-scale heat decarbonisation projects. The Low Carbon Infrastructure Transition Programme (LCITP) – Call for Evidence will inform the development of a future programme. This will be published soon and is the first stage of this dialogue with the sector and other partners.

Social Landlords

Twenty-four percent^[xlviii] of Scotland’s domestic dwellings are social housing. In the second half of 2020, we launched the Social Housing Net Zero Heat Fund, to support social housing landlords across Scotland to take forward projects to deploy zero emissions heat, improve energy efficiency and reduce fuel poverty. We propose to extend this funding until 2026 and we will work with the sector to assess impact of funding to date and ensure that our funding effectively supports further acceleration of the decarbonisation of our social housing stock. We will also consider how this financial support for zero emissions heating will work in tandem with our domestic energy efficiency programmes.

We propose to also continue to support affordable housing providers who wish to install zero emissions heating systems in homes delivered through our Affordable Housing Supply Programme ahead of regulatory requirements in 2024.

Utilising UK Government Funding

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

The UK Government has extended the Domestic RHI until 31 March 2022, when it will be replaced by the Clean Heat Grant Scheme. This replacement scheme is expected to be available GB-wide, subject to the consent of UK and Scottish Ministers, and we will work with the UK Government to ensure that the scheme supports delivery in Scotland and that it is compatible with Scottish Government delivery schemes so that they can support its delivery.

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 will design Scottish Government delivery programmes and advice services so that they continue to maximise the contribution from UK Government funding. We will also continue to press the UK Government to provide more funding for energy efficiency and zero emissions heating via GB-wide schemes, including working with UK Government to identify a more progressive way of funding these programmes.

Summary of action we will take:

47. We propose to expand existing delivery programmes to focus on accelerating deployment over the next 5 years against the following four strategic priorities: (1) those least able to pay, (2) investing in strategic technologies in low or no regrets areas, (3) showcasing Net Zero Leadership and share learning through early adoption in key areas of focus and (4) investing in innovation and demonstration to drive forward competitive advantage.

48. We will offer interest-free loans for heat and energy efficiency technologies via Home Energy Scotland, with an additional commitment to run our cashback scheme until at least 2023 to help households overcome the upfront cost of taking early action.

49. We will undertake user research and market testing to understand the need of further products which may be needed to support and smooth the consumer journey including the option for a self-funded pre- and post-installation service.

50. We will evaluate the area-based equity loans pilot and consider any future equity scheme in light this evaluation.

51. We will continue delivery of energy efficiency investment to support fuel poor households in order to make homes warmer and easier to heat and to reduce the impact of any increased running costs from zero emissions systems, including recognising the distinct challenges faced by island, rural and remote communities, and seek to improve targeting so that we can reach more households in fuel poverty.

52. Over the next five years, our Area Based Schemes will increase their reach to support higher numbers of households in or at risk of fuel poverty. We will deliver an increased number of ‘whole house’ retrofits to fuel poor households and will adopt a ‘zero emissions first’ approach in improving heating systems.

53. We will procure a new, enhanced, Warmer Homes Scotland to begin in 2022, which will support for fuel poor households at its heart, and embed increased support for zero emissions heating, adopting a zero emissions first approach.

54. We will support SME businesses via our Energy Efficiency Business Support service (formerly Resource Efficient Scotland) and SME Loans to take action to reduce their energy use and cut emissions. We will continue our new SME loan cashback schemes until at least 2023.

55. We will expand our Green Network for Businesses, so that SMEs can learn from people, businesses and organisations who have already made the transition to warmer, greener and more efficient buildings.

56. We will continue to run our SME loan cashback schemes until at least 2023 to help reduce the cost of investing. In order to understand the support and investment SME businesses need to secure an accelerated rollout of energy efficiency and zero emission heating systems we will consult and work with the sector to develop new policies and proposals for SMEs.

57. Throughout the next 5 years, we will support communities to take the necessarily steps to transform their assets so that they are ready for a net zero Scotland through our new CARES programme.

58. We will extend our financial support for our most remote and islanded off-grid communities, ensuring that security of supply is maintained and decarbonised – acting across electricity, heat and energy efficiency – helping to transition these communities to a net zero future.

59. We will bring forward a new Scottish Green Public Sector Estate Scheme during 2021 - drawing together capital grants, loans, and other revenue funding mechanisms - as the main government-led capital funding mechanism to support leadership for heat decarbonisation right across the public sector.

60. We will work with stakeholders to design and develop the successor LCITP programme through the forthcoming Call for Evidence

61. We commit to extending the Social Housing Net Zero Heat Fund until 2026 to further accelerate the decarbonisation of our social housing stock, and consider how this financial support will work in tandem with our domestic energy efficiency programmes to deliver a comprehensive approach to decarbonising our social housing stock.

62. We will support affordable housing providers who wish to install zero emissions heating systems in homes through our Affordable Housing Supply Programme, ahead of regulatory requirements in 2024.

63. We will design Scottish Government delivery programmes and advice services so that they continue to maximise the contribution from UK Government funding.

64. We will also continue to press the UK Government to provide more funding for energy efficiency and zero emissions heating via GB-wide schemes, including working with UK Government to identify a more progressive way of funding these programmes.

Questions

37. What are your views on the range of actions identified above to kick start the investment in the transition over the next 5 years?

38. Do you agree with the strategic funding priorities set out above?

39. In your view, should equal funding be allocated across these priorities or should certain priorities be weighted in terms of impact for Scotland?

40. What are the opportunities and challenges we face in maximising our £1.6 billion investment?

41. What are your views on the role of government funding over the next five years? For example, should it be focused towards significant increases in the volume of renewable heat and energy efficiency measures installed or more targeted at specific priority groups or technologies?

42. What are your views on how we can use our funding to leverage and encourage private sector and other forms of investment?

43. What are your views on the effectiveness of our existing delivery programmes in supporting different client journeys, including for those in or at risk of fuel poverty? (for example, landlords, home owners, non-domestic building owners – public and private, domestic and non-domestic tenants). In your opinion, are there any gaps in support?

44. Is there any action we can take to further tailor our support to meet the ambitions set out in this strategy, including in relation to fuel poverty? (Please include any evidence you may have to show what this might achieve.)