Zero Emission Taskforce recommendation report: Scottish Government response

Chapter 3 Structuring and design of capital investment

Recommendation 2:

The Scottish Government should promote a Fabric First approach as an essential first step towards decarbonisation, prioritising investment accordingly, and ensure that the promotion of a Fabric First approach is reflected appropriately in its review of EESSH2.

Our response:

The Scottish Government supports the principles of a Fabric First approach to decarbonisation of social housing. We recognise the value of fabric upgrades in reducing energy demand, increasing the efficiency of zero emissions technology, and potentially making expensive fuel sources more affordable. However, energy efficiency standards, no matter how high, will not see a home fully decarbonised. In order to reach our climate changes targets, the majority of homes and buildings, including social housing, will require the replacement of fossil fuel heating systems with zero emissions solutions, such as connection to heat networks, the installation of heat pumps or the use of hydrogen where it is available in the future. The EESSH2 review will include the review of both energy efficiency measures and zero emissions heating systems.

Action 5.

As part of its overall aim to decarbonise housing, the Scottish Government should strengthen the commitment in its draft Heat in Buildings Strategy^[1] to promote a Fabric First approach, with a particular focus on further thermal upgrades and addressing airtightness and cold bridging. This would help to reduce overall energy demand and therefore help to make the installation of some zero emissions heating systems more technically viable and cost effective for tenants and landlords. Importantly, this will make significant progress in addressing the fuel poverty agenda and reduce demand on energy networks.

Scottish Government response

The Scottish Government remains committed to taking a Fabric First approach as this is critical to the transition, reducing demand for energy, making homes warmer and easier to heat and preparing them for zero emissions heating systems. Social Housing providers have led the way in investing to raise the energy efficiency standard of their stock – as of 2021 89% of social rented homes met the EESSH1 milestone, equivalent to EPC Band C or D. We want all homes to achieve a good level of energy performance of at least equivalent to EPC Band C by 2033, with the Private Rented Sector achieving this by 2028.

However, fabric alone will not get us close to our targets on net zero and we need to see the accelerated rollout of zero emissions heating systems, such as heat pumps and heat networks.

The EESSH2 review will consider both energy efficiency upgrades and the deployment of zero emissions heating systems together in order to build understanding of the impacts on outcomes for tenants. This will provide certainty to the sector to guide their retrofit and investment planning.

Action 6.

Building on the experiences of social landlords, the Scottish Government should continue to allocate specific funding and dedicated support for fabric improvement measures to reduce heat demand.

Scottish Government response

The Scottish Government continues to support the social housing sector deploy fabric improvement measures across their stock.

In August 2021, £20 million was made available through the Social Housing Net Zero Heat Fund for zero emissions heat and energy efficiency projects. The fund also allocated an additional £10 million for social landlords seeking to carry out energy efficiency only projects in response to the sector’s call for a “fabric-first” approach to decarbonisation. This funding was due to close in March 2022 but responding to sector feedback, the Scottish Government extended the offer of “Fabric First” funding through its Social Housing Net Zero Heat Fund to 30 March 2024.

During 2022/23 we will allocate a further £30 million to the Social Housing Net Zero Heat Fund. Unlike the previous year, the fund does not have a separate ring-fenced pot for “Fabric First” projects – both energy efficiency only and zero emissions heating projects will be supported, ensuring the fund is responsive to the requirements of the sector.

Case Study: Heat Pump Project with the Hebridean Housing Partnership, Comhairle nan Eilean Siar

The Hebridean Housing Partnership (HHP) received funding from the Social Housing Net Zero Heat Fund to replace storage heaters and electric boilers in 200 homes with new air source heat pump systems.

Inefficient storage heating systems and electric boilers were identified as a driver for fuel poverty in the Outer Hebrides, with 48% of HHP tenants indicating they were in fuel poverty. A lack of controllability meant that they could be warmest when tenants were not at home. Control is achieved remotely via a tele-switch and not by the tenant. Storage heaters could also be expensive to run, and tenants found it hard to change supplier and were locked into costly tariffs.

As well as delivering carbon savings, the new systems are expected to reduce fuel bills by up to 40% and give tenants greater control over their heating, making their homes warmer and more comfortable.

Scottish Government funding allowed HHP to install air source heat pumps in these homes, which in addition to improving tenants’ comfort levels, are delivering carbon savings and supporting their climate change and fuel poverty priorities.

Recommendation 3:

The Scottish Government should work with social landlords to ensure capital investment for social housing is adequate, structured and designed in line with the needs of the sector, and supports the social housing sector’s aim for a Fabric First approach.

Our response:

The Scottish Government will continue dialogue with the social housing sector to ensure funding programmes are in line with the sector’s needs, whilst recognising the constraints on public finances and need to identify new routes to securing private investment in retrofit.

In response to sector feedback, the Scottish Government has extended its Social Housing Net Zero Heat Fund until 2026 and increased its value to £200 million over this parliamentary session. It has also extended the offer of funding for Fabric First Funding projects until March 2024.

This will help provide certainly to the social housing sector that capital support will be available over the longer-term, encouraging organisations to commit to rolling out energy efficiency and zero emissions heat projects across their housing stock.

Action 7.

Social landlords should work with the Scottish Government to commission a sector capacity assessment to determine the net cost increase of the transition above current investment cost profile. This would support social landlords to progress more accurate plans for the transition, offer a baseline for levels of investment required to support consistency across Scotland (while recognising regional variation), and inform ongoing grant and loan funding investment from national government and other sources in annual budgetary processes.

Scottish Government response

The Scottish Government agrees that it is important to determine the actual costs of retrofitting social housing.

In February 2022 we launched the Social Housing Net Zero Heat Development Fund. This £500,000 funding programme was available to support social housing providers produce business plans, which review the organisation’s existing housing stock and sets out a decarbonisation strategy. Grant support was available for development activities such as specialist advice, including the preparation of feasibility studies, detailed cost analysis and technical surveys as well as towards tenant engagement. Applications closed in May 2022 but we will continue to review the requirement for resource funding.

The Development Fund was a first step in building understanding and capacity. We commit to continuing to work with the sector to develop a more thorough understanding of capacity and to plan for transition to net zero, including considering new ways to achieve economies of scale. The new National Public Energy Agency will have a key role in co-ordinating action on the ground and will work collaboratively with the sector to consider what needs to happen to bring about the transformational change required.

Action 8.

Following the completion of the proposed sector capacity assessment, the Scottish Government and partners should explore options for a long-term, non-competitive grant fund for social landlords which can be distributed fairly across the sector based on need. Any grant funds should incorporate realistic timescales for design and delivery, so that proper planning and alignment with social landlords’ confirmed capital programmes, or other local opportunities (e.g. area based schemes and LHEES), can take place. Grant funds should ensure social landlords are able to carry out works to mixed tenure blocks in which owners may be unable to fund their share of the cost of works.

Scottish Government response

The Social Housing Net Zero Heat Fund continues to be demand led, with social housing providers submitting applications that are technically assessed and evaluated. This helps ensure value for money as well as enabling applications to be evaluated for impacts on fuel poverty and climate change.

We have acted upon feedback from the sector and extended the Social Housing Net Zero Heat Fund until at least 2025-26, to provide the sector suitable security for planning. The fund is a non-competitive, rolling fund, with no deadlines for submission. Applications are assessed quarterly, on a first-come-first-served basis.

We will continue to work with the sector on the design of new funding and financing arrangements, which will be a key function of the new National Public Energy Agency.

We recognise that mixed tenure blocks can present a barrier to installing energy efficiency and zero emissions heating measures, unless property owners act together. We will work with the sector to understand the scale of this problem and take steps to address this, where possible, through our funding programmes in order to ensure that they can help coordinate and support a whole-building or area-based retrofit.

Action 9.

The Scottish and UK Governments should consider new low-cost funding sources, e.g. European Investment Bank style funding for specific societal benefit projects (i.e. very low cost).

Scottish Government response

The Scottish Government agrees that financing of retrofit cannot be delivered by the public sector alone. We are currently exploring other funding mechanisms such as low interest loans, however we need to ensure that this type of funding adheres to subsidy controls both now and in the future. The Green Heat Finance Taskforce is working to explore and identify innovative financing mechanisms to maximise investments. We will also undertake a review of the District Heating Loan Fund, which social landlords can access to cover up to 30% of costs of retrofit projects to ensure that it fully supports our net zero ambitions.

Action 10.

A coalition formed across the social housing sector and local and national government should advance discussions with private sector funders and their regulators on core principles of lending to the social housing sector to identify where changes could be made to improve the cost efficiency of the funding while ensuring an appropriate risk profile and rate of return for the lenders.

Scottish Government response

Although the Scottish Government agrees that private sector investment is required in order to decarbonise our homes, we believe that the most appropriate route to identify and develop opportunities for future financing is part of the work of the Green Heat Finance Taskforce. Part of its remit is to act as a catalyst for long term relationships and partnering across the public sector, the heat sector industry, wider supply chain, building owners and investor/financial institutions. Engagement with the social housing sector will take place as part of this work. We will establish a dedicated social housing sub-group to look at and consider the best routes to financing and funding the retrofit of the existing social housing stock.