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

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 a healthy economy.

The Scottish Government will kick start this transition with at least £1.8 billion of capital funding during the next five years, allowing us to accelerate energy efficiency upgrades and renewable heating deployment, creating new jobs and supply chain opportunities across Scotland. We will target our funding to support the most vulnerable, aiming to ensure that interventions through our delivery programmes do not have a detrimental impact on fuel poverty and 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 make it as easy as possible for people to make changes.

National Public Energy Agency

We are committed to establishing a National Public Energy Agency to accelerate the transformational change in how we heat and use energy in homes and buildings. To achieve this, the Agency will have a remit to raise public understanding and awareness, co-ordinate delivery of investment, and coordinate national, regional and local government delivery of heat decarbonisation and energy efficiency rollout, working closely with public, private and third sector partners. We will establish the Agency first as a virtual agency and transition to a dedicated body by September 2025. We have begun a period of evidence gathering to support the development of the scope and responsibilities of the Agency.

Delivering Early and Significant Progress

The Scottish Government has successfully funded energy efficiency and heat 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.

As outlined in Chapter 3, we will continue to invest in our Home Energy Scotland and SME 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 through 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.

Summary of Scottish Government Delivery Schemes

Domestic support

Home Energy Scotland

Free, independent 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,

Area Based Schemes (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).

Delivered via local authorities.

Warmer Homes Scotland

Fuel Poverty scheme which enables eligible households to receive energy efficiency and heating improvements. The scheme delivers insulation and heating measures including an increasing amount of air source heat pumps. Recently extended grant levels of increased support for heat pumps.

Delivered by Warmworks.

Home Energy Scotland Loans and Cashback

Interest free loans and cashback (grant) for eligible energy efficiency measures. Up to 40% cashback (grant) up to £6,000 for 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 work.

Delivered by Energy Saving Trust.

Business Support

Business Energy Scotland

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

Delivered by Energy Saving Trust from April 2022, replacing the Energy Efficiency Business Support Service.

SME Loan and Cashback

The SME Loan and Cashback scheme provides interest free loans from £1,000 up to £100,000 to small and medium sized Scotland based enterprises for the installation of energy efficiency measures and renewable energy technologies. SMEs can also receive a cashback grant of up to £20,000 for the installation of renewable and energy efficiency measures.

Delivered by Energy Saving 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 Framework designed for larger public sector projects. Improvement measures are financed via savings. NDEE Support Unit supports project delivery.

Multi-sector support

Low Carbon Infrastructure Transition Programme

Through our successor LCITP programme we will continue to provide a range of support from expert advice to financial support to assist the development and delivery of large scale zero emission heat projects. This will include 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

The refocused District Heating Loan Fund will be aimed at promoting communal heating solutions, including heat networks, across Scotland. It will provide competitive fixed rate loans to projects employing net zero emission heat technologies that demonstrate a carbon emissions reduction.

Delivered by Energy Saving Trust.

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 investment of at least £1.8 billion to build upon, expand and improve existing programmes, 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 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 four strategic priorities on the following page, which received widespread support through the consultation, with at least £465 million to support those least able to pay through our programmes targeted at those in fuel poverty 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.

Strategic Priorities

1 - Supporting those least able to pay

We will expand our 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 deployment at scale 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), a re-focused District Heating Loan fund (DHLF) and community-focused schemes such as the Community and Renewable Energy Scheme (CARES), including dedicated support for islands and remote communities.

3- Showcasing Net Zero leadership and share learning through early adoptionin 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. We will develop 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 & Energy Efficiency Strategies are rolled out, to ensure alignment with LHEES designations of strategic 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 a commitment to run our cashback scheme (or a grant replacement) until at least 2023 to help households overcome the upfront cost of taking early action. We have increased the cashback available to home and building owners on measures to improve the efficiency of buildings and install zero emissions heating. In 2022/23, we will replace current arrangements with a grant scheme to support energy efficiency and zero emissions heat improvements.

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. A Call for Evidence was opened in August 2021 and a Customer Survey and stakeholder engagement is taking place during Summer and Autumn 2021. Any future equity scheme will be considered in light of this evaluation.

Supporting those least able to pay

Over the next five years, we will invest at least £465 million to support those in fuel poverty in the heat transition and to remove poor energy efficiency as a driver of fuel poverty. We will continue to deliver energy efficiency investment to support fuel poor households to make homes warmer and cheaper to heat and to reduce the impact of any potentially increased running costs from zero emissions systems. We will 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 heat in buildings 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 and in the least energy efficient properties. We will continue to maximise energy savings for fuel poor households, as well as the overall reduction in emissions. We expect our Area Based Schemes to deliver an increasing number of ‘whole house’ retrofits to fuel poor households and we have adopted a ‘zero emissions first’ approach (outlined 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).

Support for Non-Domestic and Small & Medium Sized Enterprises

We support Small and Medium Sized Enterprises (SMEs) via our Business Energy Scotland (BES) (from April 2022 – currently Energy Efficiency Business Support (EEBS) service) 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 (or grant replacement) 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.

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.

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. 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 necessary steps to transform their assets so that they are ready for a net zero Scotland. The current Community and Renewable Energy Scheme (CARES) contract period commenced in April 2021 and will run until March 2025. The scheme will have a greater focus on supporting heat decarbonisation in community-led projects, while seeking to help inform decisions of all those participating in (or developing) local energy projects, and supporting community engagement in Local Heat & Energy Efficiency Strategies (LHEES). CARES, which is delivered by Local Energy Scotland, will provide support to those developing local and community renewable projects with Local Energy Scotland’s network of Development Officers, providing free, expert and impartial advice to community groups and organisations throughout project development. Loan and grant funding can be accessed through enablement grant funding, development grant funding, as well as through our funding calls.

Through CARES, up to £5.25 million has been made available this financial year to assist community groups in developing renewable energy projects, supporting the growth of community and locally owned energy in Scotland. In addition, our support will recognise the distinct challenges faced by island, rural and remote communities. We have made an additional £3 million available to support decarbonisation of Scotland’s most remote and rural off-grid communities by upgrading their energy systems, making them more energy resilient and sustainable for the future. We will set out more detail in our forthcoming Islands Energy Strategy.

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^[liv]. 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^[lv] 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. To achieve this we will consult the Scottish public sector during 2022 to develop and agree a series of phased targets with increased funding available to support delivery of these targets – starting in 2024, with the most difficult buildings like hospitals being decarbonised by 2038 – for all publicly owned buildings to meet net zero emission heating requirements by 2038. We will also introduce Fair Work standards as a condition to public sector heat and energy efficiency contracts.

Over the next Parliament, we will invest at least £200 million in the Scottish public sector estate to improve and reduce energy use and install zero emissions heating systems. We launched a new Scottish Green Public Sector Estate Scheme in June 2021, which brings together our existing Public Sector Energy Efficiency Loan Scheme, Public Sector Non-Domestic Energy Efficiency Frameworks and Project Support Unit, with new support for Central Government bodies to support leadership for energy efficiency and heat decarbonisation right across the public sector. So far in 2021, we have committed over £15 million of capital funds to public sector estate projects.

The Scottish Government Learning Estate Strategy

The Scottish Government Learning Estate Strategy^[lvi] 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 successful 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 are developing a successor programme as the primary mechanism for deploying zero emissions heat at scale, co-ordinating our support for the roll-out of heat networks and heat infrastructure. To achieve this, we 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 programme to the LCITP will maintain a focus on innovation and demonstration by creating a dedicated funding stream to allow us to more flexibly support further innovation in strategic areas such as large scale heat pumps, heat network development and electrification of heat and to tackle more challenging aspects of decarbonisation such as multi-tenure buildings and whole building retrofit.

We are working to design and develop the successor programme, offering a comprehensive package of financial and wider support across capital and development needs to large-scale heat decarbonisation projects which will be launched later this year.

Social Landlords

Twenty-four percent^[lvii] of Scotland’s domestic dwellings are social housing. The social housing sector has shown strong leadership on improving fabric energy efficiency, which has supported tenants to reduce their energy bills, and contributed carbon savings. This early leadership puts the sector in a position to champion zero emissions heat measures in the most efficient parts of its stock.

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. In August 2021, we launched the second £30 million call for this Fund, including an additional funding stream focused on energy efficiency as the first step in our commitment to help upgrade the most inefficient and expensive to heat social homes to the highest possible standard in one leap.

We will to continue to operate the Social Housing Net Zero Heat Fund until 2026, investing £200 million in a sector already leading the way in considering how it will change how it heats and use energy in its homes.

We are reviewing the recommendations from the Zero Emissions Social Housing Taskforce (ZEST) contained in its August report. The social housing sector has shown strong leadership on improving fabric energy efficiency, which has supported tenants to reduce their energy bills, and contributed carbon savings. This early leadership puts the sector in a position to champion zero emissions heat measures in the most efficient parts of its stock.

However, fabric improvement alone will not get us close to our targets for net zero and we need to develop a stronger focus on heating system change – as is the case for all other tenures where we propose to regulate to require installation of zero emissions heating systems as well as energy efficiency upgrades, where within our competence.

We remain committed to working with the social housing sector and encourage the sector to take full advantage of the support available including through our Social Housing Net Zero Fund, through which we are investing £200 million of capital funding to support decarbonisation of social housing over the course of this parliament.

We will also consider how this financial support for zero emissions heating will work in tandem with our other delivery programmes such as our Area Based Schemes.

In addition, we will invest £3.44 billion to deliver more social and affordable homes over the period 2021-2022 to 2025-2026. We will continue to support affordable housing providers who wish to install zero emissions heating systems in these homes 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 C for Summary of GB wide funding schemes.

The UK Government has consulted about changes to the Energy Company Obligation scheme from March 2022 onwards. The Scottish Government will continue to seek to maximise the impact of levy funding in reducing energy bills for fuel poor households and enabling increased progress with decarbonisation of heating systems.

Scottish Government delivery programmes and advice services will continue to align with UK Government funding as appropriate to ensure that this targets need in Scotland and is delivered more cost effectively. We continue to press the UK Government to provide more funding via GB-wide schemes, including working with UK Government to identify a more progressive way of funding these programmes.

Summary of action we are taking:

55. We will establish a single dedicated National Public Energy Agency by September 2025 to accelerate transformational change in how we heat and use energy in homes and buildings, aid public understanding and awareness, and coordinate delivery of investment.

56. We will 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.

57. 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 (or a grant replacement) until at least 2023 to help households overcome the upfront cost of taking early action.

58. We have increased the cashback available to home and building owners on measures to improve the efficiency of buildings and install zero emissions heating, and to replace in 2022/23 with a grant scheme to support energy efficiency and zero emissions heat improvements.

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

60. We are evaluating the area-based equity loans pilot and will consider any future equity scheme in light of this evaluation.

61. 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.

62. We will continue our investment in Area Based Schemes, extending their reach to support higher numbers of households in or at risk of fuel poverty. We will continue to develop ABS as a ‘whole house’ retrofit programme for fuel poor households based upon a ‘zero emissions first’ approach to improving heating and making more effective use of micro-generation.

63. We will procure a new, enhanced successor to Warmer Homes Scotland following expiry of the current contract in September 2022, which will provide support for fuel poor households at its heart, and embed increased support for zero emissions heating, adopting a zero emissions first approach.

64. We will support SME businesses via Business Energy Scotland (BES) (from April 2022 – currently Energy Efficiency Business Support (EEBS)) advice service and SME Loans to take action to reduce their energy use and cut emissions.

65. We will continue to run our SME loan cashback schemes (or grant replacement) 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.

66. We will expand our Green Homes and Business Networks, so that SMEs can learn from people, businesses and organisations who have already made the transition to warmer, greener and more efficient buildings.

67. Throughout the next 4 years, we will continue to 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, delivered by Local Energy Scotland.

68. We will set out further detail on how we will support island communities in our forthcoming Islands Energy Strategy.

69. We will invest at least £200 million in the new Scottish Green Public Sector Estate Scheme launched in June 2021 – drawing together capital grants, loans, and other support mechanisms – as the main government-led capital funding mechanism to support leadership for energy efficiency and heat decarbonisation right across the public sector.

70. We are developing a successor programme to LCITP as 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 will invest £400 million over the next five years in large-scale heat decarbonisation infrastructure.

71. We commit to extending the Social Housing Net Zero Heat Fund until 2026 and investing £200 million of support to further accelerate the decarbonisation of our social housing stock, and considering how this financial support will work in tandem with our other programmes, such as ABS, to deliver a comprehensive approach to decarbonising our social housing stock.

72. We continue to 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.

73. We will continue to align Scottish Government delivery programmes and advice services with UK Government funding to ensure these target need and are cost-effective.

74. We 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.