Towards an Industry for Green Heat: heat in buildings supply chains delivery plan

Chapter 1: Policy Context

Overview

• We are bringing forward new regulations for heat and energy efficiency and it is essential that the Green Heat supply chain is prepared to support the pace and scale of consumer demand this will drive in the future.

Our Heat in Buildings Strategy, published in October 2021, commits to bring forward a legislative framework to drive zero emissions heating and energy efficiency deployment.

Furthermore, the Bute House Agreement[ii] commits the Scottish Government to delivering a shared policy programme with the Scottish Green Party. This includes phasing out the need to install new or replacement fossil fuel boilers, in off gas areas from 2025 and in on gas areas from 2030, subject to technological developments and decisions by the UK Government in reserved areas.

The policy programme also commits to considering home and building upgrades at the point of sale, change of tenancy, and refurbishment to meet a standard equivalent to EPC C, on a mandatory basis from 2025 onwards, requiring all homes to be upgraded by 2033.

Our commitment to such regulation means that in the near future, many property owners will be required by law to change the way they heat their buildings and improve energy efficiency. Recent years have seen around 3,000 renewable heating systems installed in Scotland’s homes annually. It is estimated that this will need to increase to around 124,000 systems installed between 2021 and 2026, and need to peak at over 200,000 new systems per annum in the late-2020s. It is therefore essential that the supply chain is capable of delivering at the pace and scale required in all areas across Scotland.

• There is a forecast gap in a number of specific Green Heat skillsets, but many of the core trades and professions needed to support this already exist across the Scottish Economy

We estimate that the Green Heat supply chain is largely balanced at existing levels of demand, albeit with some constraints reported in remote and rural areas, and in response to current global supply chain challenges affecting the construction sector and other industries across the economy at large. In these circumstances we are working with stakeholders to find resolutions to such specific challenges as they emerge.

Our recently completed Heat in Buildings Workforce Assessment Project[iii] provides an overview of the forecast demand for skilled workers to support future deployment rates of heat pumps, heat networks, thermal insulation and direct electric heating systems. Additional demand for skills is also forecast in project management and design roles, as well as in professional consultancy services and manufacturing sectors.

Fortunately, many of the core skillsets needed to support supply chain growth already exist within Scotland’s economy, and upskilling can be supported through relatively short training courses. For example, plumbing and heating engineers already possess the fundamental knowledge required to install zero emissions heating systems, but may require upskilling to enable specification and installation of less familiar technologies such as heat pumps.

Whilst there are no specific statutory minimum qualifications required to install zero direct emissions heating systems, or carry out energy efficiency works, we have worked with industry to define a set of recommended minimum skillsets and qualifications and have published this as part of an Installer Skill Matrix[iv].

This matrix has been integrated into the certification schemes that underpin quality assurance in a number of our funding programmes, and we encourage the private sector to also use this in any non-public funded works.

• Beyond a need for workforce growth, many businesses will also need to undergo a cultural and business model change, adapting to develop new, compelling, consumer offers in order to compete in the Green Heat market.

Fossil fuel heating technologies such as gas boilers can generally be replaced quickly, with a small number of trained installers. Conversely, zero emissions heating technologies are more complex, requiring the coordinated input of a number of different trades and professions, often alongside associated works to improve the thermal performance of buildings or upgrades to pipework and utilities.

Businesses in Scotland’s plumbing and heating sector will likely need to adapt their business models to accommodate longer, more complex heating system installations and integration with wider works as part of a whole building approach to decarbonisation.

Central to this will be the need for the public to be assured of the quality of work that is being carried out. A transformation of the way building fabric retrofit works are carried out is underway following the implementation of the ‘Each Home Counts’ review in 2015. The PAS2030/35 British Standard sets out the process for domestic retrofit and defines the specialist roles required to deliver this. This includes a ‘Retrofit Coordinator’, effectively a technically skilled ‘account manager’, taking on responsibility for the customer at all stages of a retrofit project.

The Scottish Government believes that quality assurance is critical for achieving our climate change and fuel poverty goals; without it, there is no assurance that the products and systems being installed are appropriate for consumers and buildings, that they are installed to a high standard and that they will achieve the carbon and cost performance that is expected. Therefore, as set out in our recently published Heat in Buildings Quality Assurance Policy Statement, we are adopting the principles of this standard for works funded under a number of Scottish Government schemes, including our loan and cashback scheme for homeowners and our fuel poverty support programmes. We also anticipate further voluntary uptake of this standard from privately funded works in the consumer market.

Over time, training provision will need to adapt to provide for the multi-disciplinary skillsets required to undertake retrofit projects and green heat installation. Additional provision will also be required to ensure that those with a responsibility for advising consumers, and overseeing the delivery of work, are competently trained to a high standard.

With the need for increased coordination across trades in the installation of zero emissions heating technologies, and the introduction of the retrofit coordinator role for energy efficiency retrofit works, the largely fragmented supply chain of existing contractors in the heat and building improvement sector will need to adapt to new business models and ways of working. In doing so, it is essential that businesses in the sector are supported as part of Just Transition which also supports fair work practices and leaves no one behind.

There are already a limited number of companies actively offering an integrated service for Green Heat in the market. This includes companies delivering programmes of work as part of larger contracts for portfolio property owners in the social rented sector, as well as an emergence of Community Interest Companies building co-operatives to offer a community based approach to home energy decarbonisation.

Ultimately, there is a need to grow the number of businesses offering attractive and compelling consumer propositions within the market for Green Heat, ensuring that in the future, the market supports consumers triggered by regulation and that the consumer journey for such work becomes as streamlined as possible.

• Our £1.8 billion funding for Heat in Buildings in this Parliament is helping to prime the market, but we also need to build trust with suppliers and remove market friction.

Currently, consumer demand for Green Heat remains low^[1] and many businesses with the necessary core skillsets in the supply chain are small and micro scale suppliers with a low capacity for taking risk. Supplier confidence has also been weakened by a history of short term approaches to supporting the market, with stakeholders calling on both the Scottish and UK Government to implement a long term, strategic approach to allow the Green Heat market to develop.

In the development of this plan, we have engaged closely with industry to understand the barriers to supply chain growth. Responses to our consultation on the Draft Heat in Buildings Strategy[v], as well as feedback through our Heat Pump Sector Deal Expert Advisory Group[vi] have highlighted the lack of clear demand for Green Heat products and services as a major barrier to growth.

Conversely, key stakeholders on the demand side of the market have cited a lack of supply chain as a barrier to increased pace and scale of deployment. The Zero Emissions Social Housing Task Force[vii] raised concerns regarding access to suitably qualified and experienced contractors, whilst recognising the role of the social housing sector as an anchor for growth and investment in the supply chain.

Similarly, respondents to our Scoping Consultation on the New Build Heat Standard[viii] have highlighted concerns from housing developers regarding the need for investment in the infrastructure, workforce and supply chain across the sector.

Removing friction between supply and demand sides of the market is essential to build early momentum towards a Green Heat sector. Government has a key role to play here in working to build trust across stakeholders and ensuring that our financial support is deployed in a way that supports a visible pipeline of work for the supply chain.

• Building a new Green Heat industry presents an opportunity to retain spending in the Scottish economy as well as capture international export opportunities

The total cost of decarbonising Scotland’s buildings is estimated to be in the region of £33 billion between now and 2045^[2]. Maximising the retention of this spend within the Scottish economy is a priority for our programme.

We have a strong foundation on which to build, with the traditional heat and building improvement sectors in Scotland currently generating an annual turnover of £2 billion and supporting around 12,500 full-time equivalent jobs in servicing today’s demand[ix].

Overall, we estimate that an additional 16,400 jobs will be supported across the economy in 2030[x] as a result of investment in the deployment of zero emissions heat, with further jobs supported through retrofit energy efficiency works.

Building strong and competitive Scottish supply chains for Green Heat will be critical to unlocking the high-volume delivery required to support our Heat in Buildings Strategy, and also offers the potential to compete in markets outside of Scotland. For example, European Union’s Strategy for Energy System Integration[xi] suggested the need for electrifying heat of a large part of Europe's residential and commercial buildings, leading to a target of around 50 million heat pumps installed by 2030.

Our Heat Pump Sector Deal Expert Advisory Group have highlighted the opportunity for Scotland to be a centre for manufacturing of zero emissions heat and energy efficiency technologies, both in terms of supplying final products as well as component parts.

Scope of the Green Heat Supply Chain

The Green Heat supply chain can be roughly segmented into the Heating, Building Fabric, Energy Infrastructure and Enabling sectors, with upstream and downstream roles across each.

Rather than forming a single dedicated sector, the supply chain for Green Heat is currently best considered as several over lapping trades who also serve wider markets for construction and building improvement.

Delivering the Green Heat transition will likely require increased coordination, structuring and streamlining of supply chains into a dedicated ‘Green Heat Sector’.

Figure 1 presents a non-exhaustive overview of the key trades, professions and organisations aligned with the Green Heat supply chain.

Structure of the Green Heat Supply Chain

The current structure of the green heat supply chain, at least that which serves individual domestic properties and small scale non-domestic properties, is highly fragmented, with micro-businesses and SMEs providing installation services and acting as the main interface with customers. A 2022 NESTA report[xii] into the heat pump sector highlights that this structure will most likely need to evolve in order to promote a more streamlined service for property owners, and drive increased productivity across the sector.

a) Installer led – Customers contract work directly to installers, often sole traders or microbusinesses, who purchase equipment from merchants with manufacturers and energy suppliers playing a secondary role.

b) Energy Supplier Led – Energy suppliers offer Green Heat measures to their consumers, often as a financed package or through approaches such as ‘energy as a service’, installation works and equipment supply might be sub-contracted to third parties, or delivered by the energy supplier themselves.

c) Manufacturer Led – Manufacturers offer Green Heat measures directly to consumers, taking on more responsibility for design and coordination.

d) Large Scale Installer Led – Larger scale installation companies offer a more integrated service to consumers.

e) Area/community based coordination - Public/3rd Sector organisations play a role in coordinating the supply chain to deliver large scale, area based, programmes of work at a community or local authority level.

Building a Supportive Ecosystem

Building a Green Heat Sector will be a national endeavour requiring the support of organisations across our public sector, as well as commitment from key anchor segments of the market alongside the drive and dedication of industry. We commit to working in partnership with the sector to explore the potential for a mixed delivery economy involving both public and private sectors. Industry will of course play a key role in the development of the sector, using their knowledge and expertise to build compelling propositions in response to the needs of consumers. There may also be potential for public sector capacity to play a role and we are actively exploring this opportunity. Our plans to regulate the heat and energy efficiency market, which will deliver a forecast pipeline of work valued at over £33 billion between now and 2045, will provide a compelling opportunity for Scottish supply chains.

Given the prevailing market challenges as outlined in Chapter 1, we recognise that Government has a key role to play in creating a supportive ecosystem for supply chains to develop. Our supply chain support framework follows a push/pull model, creating a pathway that transitions Scotland’s conventional heating and energy efficiency industries into an aspirational sector for Green Heat. The actions in this framework, as presented in figure 3, are discussed in detail in the later sections of this document.