Scottish energy strategy: Scotland's Energy Efficiency Programme (SEEP)

4. Scenarios

Scenarios for policy objectives and how to deliver them

31. The Scottish Government recognises that in designing a programme of this scale and nature, there are many different routes to achieving our vision and underpinning objectives. We have already worked with stakeholders and partners through workshops to scope out a series of initial potential policy and delivery scenarios for the Programme. During workshops, participants were asked to consider a range of issues relating to the different aspects of the Programme and particularly how these may operate differently across a spectrum of choice (freedom of choice vs. mandatory action) and balance between local and central delivery and governance, as shown in the diagram below.

32. We do not have a preferred option at this stage and the approach will likely vary across elements of the Programme - and we now invite stakeholders to advise on how we might design the detail of the policy and delivery framework for the Programme. The material presented below simply gives an overview of some of the key issues that have been raised during this policy scoping, as well as in the related work on developing pilot projects for delivery, including:

• the role of regulation, standards and financial incentives;
• what the appropriate levels and sources of funding should be;
• the provision of advice, information and consumer protection;
• how to establish and sustain local supply chains and trusted delivery agents;
• the nature of programme delivery;
• the balance between local and national responsibilities; and
• monitoring and review processes.

The role of regulation, standards and financial incentives

33. The energy efficiency and heat decarbonisation of Scotland's building stock continue to improve. In part these improvements have been driven by voluntary action, but also through increasing regulatory standards over time. Alongside increasing standards for new buildings and heating systems, we have also introduced minimum standards in the social rented sector through the Scottish Housing Quality Standard and the Energy Efficiency Standard for Social Housing, and also for non-domestic premises greater than 1,000 m ².

34. However, if SEEP is to achieve its objectives of significantly reducing energy demand and decarbonising heat supply, evidence from energy efficiency and lower carbon heat programmes operated by the Scottish Government and other partners suggests that further intervention is needed to stimulate market demand for energy efficiency improvements and low carbon heat.

35. During the pre-consultation scoping discussions, stakeholders told us that standards, regulatory frameworks and financial incentives are needed to give clarity to consumers about what is expected, and to make it as easy as possible and the norm to invest in energy efficiency and heat.

36. There are processes in place for increasing the energy efficiency standards in new build properties over time, but with the majority of the buildings that will be here in 2050 already having been built, we need to consider how to build on our existing standards to improve the energy efficiency of existing buildings. Future standards under SEEP could be set for existing buildings in all sectors and for all tenures. Stakeholders suggested that there were a variety of approaches that could be adopted, singularly or in combination, for example:

a) Standards could be set at minimum levels initially targeting the worst-performing properties, but increased over time toward the scale of improvement required to meet the long-term aim of the Programme with this trajectory signalled in advance to avoid needing to 'undo' previous work. Alternatively, a long-term standard consistent with the Programme vision and objectives could be set with a long-period for compliance.

b) Standards could be applied at different trigger points, such as the point of sale or rental, the commencement of an area-based SEEP delivery scheme, or building improvements. This would ensure that all buildings are covered by SEEP standards, including those which would not be sold or rented.

c) Financial and fiscal incentives, such as cashback and tax-based alternatives ( e.g. council tax, non-domestic rates and land and building transaction tax and extension of reliefs for business energy efficiency), complementing standards and helping to further drive action. One example could be offering lower council tax rates for households willing to meet higher energy efficiency standards.

37. In the scoping discussions stakeholders also indicated that regulation of different forms of heat supply would be necessary to support decarbonisation. Regulation of heat is a devolved matter and this could include regulation of district heating (on which we are consulting separately), however regulation of the gas supply (currently our primary heating fuel) is reserved to the UK Government. As set out in the Climate Change Plan we will work with our partners, including UK Government, local authorities and utility providers to determine the best approach to heat decarbonisation for buildings currently heated by natural gas which are not in areas of sufficient heat demand where district heating is appropriate. This will include consideration of technological solutions, including district heating, electric heat pumps, repurposing of the gas network for use of biogas and/or hydrogen, etc. We will look to put forward a more detailed proposal on how we will realise this potential in subsequent Climate Change Plans as our understanding of the best approach develops.

38. The way we set targets and standards is important and we want to ensure that we have the best approach. Consideration therefore needs to be given to the methodologies we use to assess units and buildings and at what level and scale. During scoping workshops, stakeholders noted that existing frameworks such as Energy Performance Certificates are reasonably well-understood and known by consumers through the Home Report mechanism at point of sale, and new regulations for non-domestic buildings now require energy assessment for buildings over 1,000m ². Many businesses have also now been assessed by independent energy auditors under the Energy Savings Opportunities Scheme. Stakeholders highlighted the importance of SEEP adopting well-understood and consistent means of assessing the potential for improvement and decarbonisation of buildings to meet the Programme's vision and underpinning objectives. However, many also questioned the fitness for purpose of existing methodologies, for example highlighting challenges of basing assessments on modelled energy use, noting the potential for tailored building-level assessment (rather than assessment at individual unit basis) and for area-wide assessment (particularly to consider future heat supply options).

Consultation questions

• How might regulation and standards be used most effectively across the different sectors and when should they be applied across the lifetime of the programme?
• What should be the trigger points for buildings to meet standards? Should this differ between domestic and non-domestic buildings, and if so, how?
• What do you think are the benefits of using financial and fiscal incentives to support energy efficiency in domestic and non-domestic buildings? Please give examples, from Scotland or elsewhere, of where incentives have been used in this way to good effect.
• What is the best approach to assessing energy efficiency and heat decarbonisation improvements to buildings? How could existing approaches best be used or improved and at what level and scale ( e.g. unit, building or area) should assessment be carried out?

The appropriate levels and sources of funding

39. Our existing grant and loan schemes continue to provide support to building owners and occupiers helping them to improve the energy efficiency of their buildings and decarbonise its heat supply. These schemes have evolved over time and we continue to pilot new innovative approaches, including our Equity Loan Scheme pilot programme ^[9] launched in winter 2016 in Glasgow, Perthshire and Argyll & Bute. Furthermore, the Scottish Government's Programme for Government 2016-17 commits us to investing over £500 million on delivery of SEEP over the next four years.

40. SEEP presents a significant investment opportunity. Our initial estimate for the overall cost of delivering the full Programme over the next 20 years, is in excess of £10 billion. ^[10] This funding cannot be provided by public sector alone and it will be necessary to attract private sector investment and support.

41. In the scoping discussions, stakeholders reiterated the importance of continuing to ensure the Scottish Government's commitment to provide a core element of grant-funded provision for those households and small businesses who cannot afford to pay for energy efficiency and low carbon heat measures. At the same time, it was recognised that the state could not and should not pay for all improvements to buildings and that owner occupiers and landlords also have a responsibility. It is anticipated that financial support through other mechanisms will be required for a significant proportion of the Programme costs, for example for households which are able-to-pay, landlords and business sectors, in the form of loans, guarantees and wider financial or fiscal incentives.

42. In terms of who should receive grants, the definition of fuel poverty is being reviewed to ensure support is targeted at those in need and will inform the eligibility for any grant funding. For others, possible financing mechanisms which can be explored range from government-backed loan funds (potentially bringing in private capital) to more market-based alternatives such as extensions of private mortgage lending, or retail bank loan products, with or without some degree of government backing.

43. Initial engagement with private finance providers indicates that there is an appetite to invest in an energy efficiency programme of this scale within a long-term supporting framework of advice, standards and incentives. We are already seeing across Europe a number of financial institutions piloting 'green' finance for energy efficiency and heat decarbonisation where government and other partners have committed to a long-term and consistent programme. ^{[11], [12]}

Consultation questions

• How should the installation of energy efficiency improvements and lower carbon heat supply through SEEP be funded? In particular, where should the balance lie between grant funding and loans for homeowners, landlords and businesses?
• What is needed to encourage private investment in energy efficiency and heat decarbonisation, including the take-up of loans by a wider range of owners and occupiers?
• Of the current sources of finance which are currently available for energy efficiency and lower carbon heat supply, which are working well and which are not? Are there successful examples of attracting private sector finance to support energy efficiency improvements that could be explored? Are there any others which should be developed or made available?

The provision of advice, information and consumer protection

The Scottish Government currently has well-established national advice and support programmes through Home Energy Scotland ^[13] and Resource Efficient Scotland. ^[14] Both the Rural Fuel Poverty Task Force ^[15] and the Strategic Working Group on Fuel Poverty made recommendations around the scale and type of advice and support required to tackle fuel poverty and wider poverty issues. A number of these recommendations are being mainstreamed into the provision delivered by Home Energy Scotland.

44. We continually review the service provided by HES and RES to ensure they are providing effective support, which is targeted appropriately. In addition, local authorities and local groups may also run their own advice services.

45. During the scoping workshops, stakeholders reiterated strongly the need for effective advice and information mechanisms to enable individuals and businesses to make informed decisions about improvements to the energy efficiency and heat supply of their buildings (and processes for businesses and the industrial sector).

46. Stakeholders saw value in trusted sources of advice and information to raise awareness and share examples of early adoption and to help households and businesses to understand the impact that installation of new measures would have on how they live in their homes or use their workplaces. They also confirmed that it was important that building owners and tenants had an accurate and trusted assessment of the potential to improve the energy performance and decarbonisation of the heat supply of their buildings (and processes) and instruction on how to optimise the benefit of these measures, such as use of heating controls.

47. The UK Government's smart meter rollout will mean that all households and businesses will be offered a smart meter by 2020. This will open up significant opportunities to engage consumers more productively in their energy use and we are already looking to take advantage of the rollout, e.g. Home Energy Scotland's Smart Meter Champions provide advice on energy use for people that have had a new meter installed. Through SEEP we will look for further synergies to make connections between our action to tackle fuel poverty and with the smart meter rollout wherever possible.

48. On 16 December 2016 the UK Government published the findings from the Each Home Counts Review ^[16] , an independent review of consumer advice, protection, standards and enforcement for the installation of energy efficiency and renewable energy measures. The review findings are in the form of recommendations for action and, at its core, proposes the creation of a Quality Mark against which all those engaged in the design and installation of measures will be assessed and certified. It also recommends the establishment of a Consumer Charter to ensure consumers receive excellent customer service and access to redress procedures when things go wrong and a Code of Conduct for companies operating in the home renewable energy and energy efficiency sector. Finally it recommends the creation of technical Codes of Practice and standards for the installation of home renewable energy and energy efficiency measures. All of this would be underpinned by provision of advice and guidance to the consumer and a system of monitoring and enforcement.

Consultation questions

Advice and information

• How do we ensure that householders and owners are well advised and supported in making decisions on how to improve the energy efficiency of their building and install lower carbon heat supply through SEEP?
• Are the current mechanisms for providing advice sufficient? What changes, if any, do you think are required?
• What are the opportunities to link SEEP delivery with other initiatives, including the UK Government's smart meter rollout, so that we maximise the benefits for the people of Scotland?

Consumer protection

• How can SEEP be designed and promoted to build consumer confidence (as a trusted 'brand')? What are the risks and opportunities associated with particular approaches?
• Is there a tried and trusted form of consumer redress that should be adopted or, if not, what should such a mechanism look like?
• How should SEEP look to integrate the findings of the Each Home Counts Review - e.g. could it be used a basis for developing a consumer protection framework for SEEP?

The establishment and sustainability of local supply chains and trusted delivery agents

49. There are potentially significant economic opportunities for local businesses and the supply chain over the duration of SEEP. Stakeholders pointed to the benefits of existing area-based energy efficiency programmes such as Home Energy Efficiency Programme: Area-Based Schemes ( HEEPS: ABS) in allowing local authorities to engage with the local supply chain in delivery.

50. The scale of the ambition of SEEP, and the level of ambition of our climate change targets, present both opportunities and challenges for the supply chain to scale up to meet the level of demand. In particular there are opportunities to realise economies of scale through large-scale public sector led procurement and contracting, and also to ensure that contractors are locally-managed. Stakeholders in the scoping workshops pointed to the importance of ensuring trusted delivery agents are involved in the process, learning from the negative experience of the Green Deal, and the need to ensure that contractors were accountable and that consumers have a redress mechanism where work is not delivered to the necessary standard.

51. As highlighted by the Rural Fuel Poverty Task Force, there is a particular issue in rural and island areas where local contractors have a key role to play but may struggle, due to their size and the costs involved, to justify the investment needed to become properly accredited for energy efficiency measures.

Consultation questions

• How can local supply chains be expanded and up-skilled to ensure that maximum economic benefit and job creation is secured across all of Scotland?
• How can communities best benefit from the expected job creation?
• What provision could be made at a national level to ensure companies increase the capacity of the supply chain across all of Scotland to support local delivery of SEEP, particularly in the rural and remote areas?
• What do companies need to do to increase their skills base to deliver a programme of this nature?

The nature of programme delivery

52. The Scottish Government, and its partners in local government, already manage a range of delivery programmes to support building owners and tenants to improve the energy efficiency and decarbonise the heat supply of their buildings. Some of these programmes, such as Warmer Homes Scotland, operate on a national basis, whilst others, such as HEEPS: ABS, are supported by national funding, but designed and delivered locally with our partners in local government. In the development of SEEP we will build on the success of Scotland's existing area based and national programmes, whilst looking to improve the design and delivery working closely with local government and other partners.

53. During the pre-scoping consultation, stakeholders liked the existing area-based approach delivered by local authorities as an effective mechanism for delivery across large numbers of buildings over a relatively short timeframe, which over time can secure improvements across a wide area. Many saw benefits to extending these area-based schemes to include additional building types, tenures and sectors, such as:

• able-to-pay home owners and landlords;
• business and industrial buildings; and
• public and third sector buildings.

54. Bringing in larger numbers of buildings would also support planning for the delivery of district heating infrastructure, connecting buildings with larger demand for heat, such as public or industrial buildings, to other heat users. Stakeholders indicated that this could be co-ordinated by local authorities and usefully set out in a local strategy. A delivery programme of time-limited area-based schemes, phased across the lifetime of SEEP, would offer long-term certainty to local supply chains and help realise economies of scale to reduce the cost of measures for building owners and tenants.

55. Stakeholders suggested that an area-based approach could be co-ordinated by local authorities, who could act as, or appoint, a managing agent to undertake the works to help building owners meet the long-term aims of the programme. This could include building assessment, provision of advice, arranging and managing required works, facilitating access to grants and low-cost loans from national grant and loan schemes and leverage funding from other sources e.g. the Energy Company Obligation ( ECO). Where district heating is to be installed, energy efficiency improvement works could be undertaken at the same time. A rolling programme of centrally-managed area-based schemes could operate across Scotland to the same criteria, standards and conditions.

56. During the pre-scoping discussions, stakeholders recognised the challenges of integration across the domestic and non-domestic sectors, including raising the question of whether certain sectors/building types, etc. should be exempt from an area-based scheme and treated on a sector/building basis. This may be particularly true for non-domestic buildings, for example hospitals or distilleries, as they may require quite tailored or extensive interventions for that sector. It may therefore be easier to achieve economies of scale across a sector rather than an area.

Consultation questions

• What roles should national and local bodies play respectively in delivering SEEP and how can national and local schemes best be designed to work together towards meeting the Programme's objectives?
• What are your views on the relative benefits of area-based schemes as against those targeted at particular sectors or tenures in delivering SEEP? What other targeting approaches might be effective?
• How best can we align nationally set standards with local, area-based delivery?

The balance between local and national responsibilities

57. The Scottish Government has set a clear vision for SEEP and will through the development of the Programme set out the trajectory for improvements in energy efficiency and the decarbonisation of heat.

58. In order to meet the vision and programme objectives, it will be necessary to put in place a clear framework for SEEP, making clear who is responsible for setting the policy and targets, and who is responsible for delivering the Programme, at both the national and local levels. We are therefore asking for views more widely on the overall balance of responsibilities between central and local level across SEEP, and how that might be designed.

59. During the pre-consultation scoping events many stakeholders noted the successes of current programmes, including the Home Energy Efficiency Programmes for Scotland, which are funded by the Scottish Government and delivered by local authorities. Stakeholders were generally supportive of an approach that included a framework set out and led by the Scottish Government. But they also suggested that it would be important to ensure there is effective governance and accountability at the local government level.

60. The Programme could be focused on achieving targets set at a national level, but organised around local strategies reflecting area-specific circumstances and the need for a degree of flexibility in meeting the targets. These strategies could assess and determine the actions to achieve the level of improvement required to contribute to any nationally set target(s). The local strategies could set out the zoning and phasing of delivery, giving a clear indication to building owners when their buildings would be improved. Local strategies would need to be reviewed at regular periods to determine progress towards meeting both local and national targets.

61. These strategies should be developed by the local authority in consultation with local delivery agents, such as local businesses, community organisations and groups, housing associations and utility providers.

62. The strategies would need to be well-communicated to the public so that building owners and tenants would know what a good level of energy efficiency is and what the most appropriate forms of low carbon heat are for their building. A separate consultation on district heating regulation, which includes more detail on the role of local heat and energy efficiency strategies, accompanies the draft Energy Strategy. However, here we are asking for views more widely on the overall balance of responsibility between central and local levels across SEEP, and how that might be designed. In particular, we would welcome views on how any national targets should be met at a local level, to what extent the Scottish Government should set the criteria for delivery, what kind of governance arrangements should be in place to oversee any framework.

Consultation questions

• What should the overall balance be between national and local target setting? Should local authorities set local targets with the flexibility to determine whatever methods they want to meet the Programme vision? Or should there be a greater degree of setting the target(s) and delivery methods by national government?
• What would a good governance structure to oversee any framework of responsibilities between national and local government look like? What examples are you aware of within the UK or elsewhere?

Monitoring and review

63. To measure progress against our climate change targets, to chart progress in tackling fuel poverty and to more widely track the benefits of delivery, we recognise that we need to put in place a framework for measuring improvement across the building stock. We already have some understanding of the energy performance of the building stock across Scotland, but it is not comprehensive, particularly in relation to non-domestic buildings. Our understanding of the baseline information and condition of the building stock will improve over time. It will be important to update that information to inform regular reviews of progress in delivering against our vision and objectives, and also to enable the programme to take account of technological innovations that can support it. We will establish a monitoring and review framework to enable us to assess progress. Such a framework will also enable us to set out a route map for achieving the Programme's vision and objectives, taking a longer-term view of high level milestones for when they will be delivered.

Consultation questions

• What should be included in a monitoring framework to ensure that the Programme is effectively monitored and evaluated?

Overall

We would welcome feedback and expertise on any other issues in relation to SEEP that aren't covered by the questions above.