Heat in Buildings Strategy - achieving net zero emissions in Scotland's buildings

Chapter 10 Working with the UK Government and Authorities

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. 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. Emissions from buildings cannot be reduced to zero in a fair and just way through action only within devolved competence.

We therefore reiterate our call for the UK Government urgently to set out in its Heat and Buildings Strategy and wider net zero policy a clear vision for how the energy markets will be reformed to support decarbonisation of heat and how the UK Government will ensure the costs of the transition are shared equitably. A broad suite of energy market reforms is needed, including taking strategic decisions, and urgent first steps to implement those, on the future role for the gas network, changes to the ways in which policy costs 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 better incentives 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. They are critical to delivering the UK’s collective climate change commitments. A collaborative approach, which enables Scotland to move faster than the rest of the UK in some areas, will enable new and innovative solutions to be developed. As such it is imperative that the Scottish and UK Governments work together to take action and deliver the change needed.

Below, we set out a clear series of actions that we need and expect the UK Government to take. If the UK Government fails to take these actions, there is significant risk to our ability to achieve the necessary emissions reductions from buildings. The Committee on Climate Change has already highlighted the need for strong coordination and an effective devolution of powers and responsibility to drive delivery.

New investment, innovation and market mechanisms

We are working with the UK Government on their plans to develop new market led incentives to drive investment and innovation, to accelerate deployment of low and zero emissions heating. These options may include new obligations on market actors, product standards and innovation funding, many of which are likely to cut across reserved and devolved competencies. We welcome progress in this area and look forward to BEIS consulting on options in the near future.

We will work with the UK Government to ensure that any future changes to the heating market support 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. In relation to this, we welcome Ofgem’s confirmation this year that it will implement market-wide half-hourly settlement in the mid-2020s, which we agree can support the kinds of flexible consumer options and behaviours that will be an essential part of a decarbonised energy system.

We welcome the UK Government’s proposals detailed in their ‘Improving home energy performance through lenders’ consultation^[lxxxiii], making a mandatory requirement for lenders to disclose the average EPC performance of properties on their mortgage portfolio, and for lenders to adopt a voluntary target of meeting a portfolio average of EPC C by 2030. In particular, the scope to make this target mandatory, could help drive change if insufficient action is undertaken.

Decarbonised heat within the wider energy system

Heat demand is a major part of the energy system in Scotland and the UK. Making good decisions for heat means considering the consequences and the opportunities for other energy sectors. For example, to deliver zero emissions heat across Scotland’s building stock, we need to ensure appropriate supplies of low carbon energy and appropriate infrastructure to deliver it. Many of the decisions associated with these wider aspects of our energy system are reserved to the UK Government and it is critical that there is a shared understanding between Scottish and UK Government of the scale and speed of the heat transition, and its wider effects.

We continue to urge the UK Government to take parallel action at the pace needed to help Scotland meet its legislated statutory targets for 2030 and 2045, as recommended by the Climate Change Committee in its 2019 Net Zero Report^[lxxxiv].

The UK Government must use its reserved powers over energy markets, prices and consumer protection to support the Scottish Government in exercising its devolved competence to reduce emissions from heating buildings, or it should grant further devolution. Without this action from the UK Government, or further devolution, there is a significant risk that Scotland may not be able to meet its 2030 share of emissions reduction from the buildings sector.

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 continue to stress to the UK Government and Ofgem the importance of ensuring that their reserved policy and regulatory decisions support the development of Scotland’s renewable electricity pipeline – such as the design of the Contract for Difference scheme and the approach to transmission network charging. These will be critical to ensure that generation capacity is adequate to meet the increasing role of electricity in meeting heat and transport demand across both Scotland and the UK.

Ofgem’s statutory obligations need to be updated to reflect its role in enabling the delivery of net zero and interim statutory greenhouse gas emission targets in Scotland and across the UK. This could be achieved through a Strategy and Policy Statement for the Regulator, upon which the UK Government committed to consult during 2021 in its Energy White Paper.

Also during 2021, Ofgem along with the Scottish Government and Scotland’s Energy Network Companies agreed a set of ‘Principles for the development of Scotland’s Gas and Electricity Networks’^[lxxxv]. These Principles agree on the important need for network companies and the regulator to recognise and respond to Scotland’s faster net zero commitment, and ensure that there is sufficient network investment and growth to deliver on our statutory targets. As part of these principles the Scottish Government has committed to supporting network companies in building the evidence base needed to justify these investment decisions, the costs of which are ultimately paid for through gas and electricity bills.

Affordability and fairness

All four governments in the UK must work constructively together to develop coherent policies and programmes that deliver a fair and just transition for all communities across the UK. We must ensure that the outcomes from the Net Zero Review and any subsequent policy measures at UK level provide the right financial incentives for households and businesses across the UK to choose energy efficiency and zero emissions heating technologies, whilst supporting the eradication of fuel poverty.

We welcome the UK Government’s commitment 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. We await the full Call for Evidence package.

Alongside this Call for Evidence, we will work with the UK Government to consider how best to ensure that all Scottish consumers can benefit from future changes to the energy market proposed in the Energy White Paper. These include ensuring that new business models within the energy sector (such as third party intermediaries) and new frameworks such as opt in (and potentially opt out) supplier switching are designed to meet the needs of all consumers. Any such changes must be undertaken with accessibility as a priority and whilst considering the circumstances of consumers in rural and island locations. In order to facilitate these changes, all households should have access to smart meters as soon as possible regardless of household heating technology or geography.

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.

Some respondents to the draft Heat in Buildings Strategy consultation also called for the disparity in levies between electricity and gas to be addressed, to reduce the price of electricity. The UK Government should progress this work quickly and deliver a fair settlement for energy consumers 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 a 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 look closely at proposals in the EU 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 (ETS). We will work with the UK Government and other devolved administrations within the UK ETS Authority to consider the UK’s proposed commitment to explore expanding the UK ETS to the two thirds of UK emissions not currently covered by the scheme, whilst carefully considering any potential just transition impacts to ensure that we secure the benefits in carbon terms whilst avoiding any detriment to fuel poverty.

Regulation of the gas system

We are seeking urgent clarification from the UK Government on the full implications of its proposal to amend the Gas Act 1986 to prevent extension of the gas grid to new developments.

These proposals will help to support the implementation of our New Build Heat Standard in 2024. In addition, we are seeking clarification from the UK Government on how future enforcement of, or amendments to, the Gas Act may also help ensure that existing buildings in Scotland are able to comply with any new zero emissions heat standards introduced within our competence.

We also urge the UK Government to expedite commitments in the Energy White Paper to ‘review the overarching market framework set out in the Gas Act’, including gas quality standards to enable the widest range of gases to be used to decarbonise heat, and the Domestic Load Connection Allowance.

Heat network customer protection

We have asked the UK Government to ensure that 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) Act. 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.

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 consult later this year on encouraging or requiring new gas boilers to be hydrogen-ready by 2026, 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.

Bioenergy

As set out in the draft Heat in Buildings Strategy consultation, we see a limited role for bioenergy in heating, in line with advice from the UK’s Climate Change Committee. We recognise there may be a small number of buildings for which bioenergy, in particular bio heating oil, bioLPG and biomass, may represent the only practicable option for heat decarbonisation.

Following the publication of the Bioenergy Update in March 2021, we have established an internal Bioenergy Working Group, and are in the process of establishing an Expert Panel to support this group, to consider and identify the most appropriate and sustainable use of bioenergy resources within Scotland. This will inform a Bioenergy Action Plan which we will publish in 2023.

We continue to urge the UK Government to 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).

As supported by respondents to the consultation, 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 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 Home 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.

Green Gas Support Scheme

The UK Government Green Gas Support Scheme will run for four years from Autumn 2021. The scheme will support biomethane injection into the gas grid, which is expected to contribute 21.6 MtCO₂e of carbon savings over the lifetime of the scheme. The scheme will be funded via a Green Gas Levy and we urge the UK Government to prioritise the transition of the levy from a per meter point design to a volumetric mechanism.

We therefore call on the UK Government to:

• take parallel action across reserved areas at the pace needed to help Scotland meet its statutory targets for 2030 and 2045;
• clarify the full implications of its proposal to amend the Gas Act 1986 to prevent extension of the gas grid to new developments. These proposals will help to support the implementation of our New Build Heat Standard in 2024;
• clarify how future enforcement of, or amendments to, the Gas Act can help to ensure that existing buildings in Scotland are able to comply with any new zero emissions heat standards introduced within our competence;
• 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 expedite 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 reflecting the principles agreed this year between Scottish Government and the energy networks sector;
• ensure that 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) Act;
• work with us on product standards for gas boilers, for example requiring them to be hydrogen-ready;
• progress the consultation on enabling or requiring hydrogen-ready boilers;
• rebalance environmental and social obligation costs on energy bills to help unlock deployment and ensure a fair settlement for consumers;
• ensure that new frameworks within the energy supply market (such as opt in switching) are designed so as to allow all consumers to benefit;
• 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 bioenergy in heating, and 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 Home 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
• prioritise the transition of the Green Gas Levy to a volumetric mechanism.