Annex 2 – Detailed analysis of business need
Business need by sector
The EES target for domestic buildings is for all Scottish homes to reach EPC C or above by 2040. 61% (1.58 million) of homes did not meet this standard in 2016. This means that 1.58 million domestic buildings need to be improved. This equates to c.66,000 buildings per year, sustained over a 24-year period. Of the buildings that do not reach the target, 72% are currently EPC D, with 38% EPC E or below14. This illustrates the significant challenge in the number of homes and the scale of improvements required to meet the EES targets for this sector.
Furthermore, the rate of progress required to meet the new EES targets may be difficult to prolong for the duration of the EES programme. This is particularly the case given that those households more willing to make improvements are likely to have already taken-up existing offers, with other households being increasingly hard to engage. As a result, a change in existing delivery strategies may be needed to ensure a sustained rate of progress.
However, both the current condition of the building stock (Figure 3) and EES targets (Table 2: Sector-specific EES targets and the proposals for achieving these targets) differ between tenures. As such, the scale of change required, and the strategic areas for change, differs between social rented, private rented and owner-occupied sectors. These are discussed in the subsequent sections.
Social rented sector
The social rented sector is subject to EES’ most ambitious target, which is to maximise the number of socially rented homes at EPC B by 2032. This is because the current standard of socially rented homes, with 92% of buildings EPC D or above and 52% EPC C or above, far exceeds the current standard in the other domestic sectors (as shown in Figure 3). This suggests that existing levers and delivery strategies for social rented tenures have successfully engaged landlords and tenants to make improvements.
Progress within this sector has been driven by the SHQS (2004-2015) and EESSH (2014-2020) and will continue to be driven by EESSH2 from 2020 to 2032. These levers have set out progressively rigorous minimum energy efficiency standards for social housing landlords to meet by given dates.
Progress towards these targets is monitored by the Social Housing Regulator (SHR), and social landlords are expected to submit data on compliance on an annual basis. The EES route map suggests that homes with an EPC rating lower than EPC D should not be let from 2025.
To achieve EPC B, houses are likely to require installation of renewable, low-carbon energy systems in addition to energy efficiency improvements. Whilst 52% of social rented buildings were EPC C+ in 2016, only 2% were EPC B+14. This indicates that the uptake of decarbonisation technologies needs to be increased through the EES Programme. Currently, most improvements under EESSH are funded by the social landlord’s own resources. Additional incentives are likely to be needed to encourage landlords to go above and beyond the minimum required standards.
Owner-occupied and private rented sectors
In contrast to social rented homes, the owner occupied and private rented sectors are further behind, with 34% and 37% rated EPC C+ in 2016, respectively. This implies that current delivery strategies for energy efficiency in these sectors have not stimulated sufficient action within these tenures.
Unlike the social rented sector, no minimum energy efficiency standards have been introduced to date and nothing is proposed until April 2020, when a minimum standard for private rented landlords will be introduced. For owner-occupied tenures, progress will be monitored and the Government has proposed that mandatory action will be introduced if progress has been insufficient by 2030. For both of these sectors, a mechanism for monitoring, regulating and enforcing these minimum standards will need to be established.
Two-thirds of the domestic buildings that need to be improved are owner-occupied, and engaging owner occupiers to install energy efficiency measures will be vital to achieving the domestic EES target given that they account for 61% of the domestic building stock.
Owner-occupied homes are unique in that the people initiating building works and the people living in the house before, during and after the retrofitting process takes place are the same. A 2014 study on what motivates owner occupiers to initiate retrofit works suggests that, in most instances, owner-occupiers do not have the specific technical knowledge or an interest in retrofitting. The study suggests that policy makers often view the problem as one of information deficit, and oversimplify the problem to address only technical and economic concerns.
The study argues, however, that to increase engagement there also needs to be an active participation of homeowners in the process and an understanding of what retrofit options are suitable on a unit-by-unit basis. This suggests there is a need to further align policy, strategies and support with an understanding of owner-occupier behaviours and provide bespoke advice that takes into account specific building and user characteristics.
The targets for private rented buildings are phased in line with the minimum standards that will be introduced from 2020. The first target is for all buildings to be EPC E+ by 2022. In 2016, this applied to 7% of private rented buildings. An increase in the minimum standard to EPC D+ by 2025 will apply to a further 19% of buildings, with a total of 62% of private rented buildings needing to be improved to EPC C+ by 2030. This equates to an average of c.17,500 buildings per year.
To do this, targeted marketing and communication may be required to raise awareness of available schemes and incentivise landlords to implement home improvements to meet the standards ahead of the deadline. This is particularly important in rented housing as the effects of poor energy efficiency (e.g. higher energy bills) are more detrimental to tenants than landlords.
HES provides advice on how to improve the energy efficiency of buildings and it is important that there is clear communication with private rented landlords, including bespoke advice to make them aware of how to meet the long-term standard, not only the next standard. A holistic long-term approach will prevent the need for added disruption through multiple household visits and increase the likelihood of homes achieving the ultimate EES energy efficiency target. This will require successful coordination between landlords, organisations administering schemes and the supply chain.
Fuel poor households
The EES objective to remove energy efficiency as a driver of fuel poverty by improving all fuel poor households to EPC C by 2030 and EPC B by 2040 will help support the delivery of the statutory Fuel Poverty Bill target to reduce the number of households in fuel poverty to less than 5%. However, as discussed in section 4.1.2, there are other factors that will contribute to the overall prevalence of fuel poverty. As a result, it is important that an EES monitoring framework is established which takes this into account, with a methodology capable of separating the driving factors from the numbers of fuel poor households. As such, there is a need for change in the current data collection and monitoring process.
In 2016, 649,000 households, split across all tenures, were in fuel poverty. Warmer Homes Scotland (WHS) is the Scottish Government’s flagship scheme for addressing fuel poverty. It provides measures including insulation, heating and micro-generation systems to eligible households that are in or are at risk of fuel poverty. The Warmer Homes Scotland 2017 annual review provides an insight into the progress made by the scheme in 2016/17. This shows that on average, 0.99 installations were made per 1,000 people nationally, equating to a total of c.5,350 installations made throughout the year. If this level of progress is maintained throughout the 20-year EES Programme, c.107,000 fuel-poor households will be engaged through this scheme, representing only 16% of fuel poor households. This suggests that there is a critical need for a significant escalation in the current scheme to meet the EES targets for fuel poor households.
In addition, the annual review provides a breakdown of the measures installed. Comparing the energy efficiency and micro-generation installations to the typical measures outlined in Figure 1, 95% of measures installed as part of the Warmer Homes Scotland scheme in 2016/17 correspond to the lowest two levels. In other words, most of the measures installed are those that are lower cost and create less disruption. Whilst this increases the SAP points, the improvements are often not sufficient to achieve the EES EPC targets.
Although WHS is a trusted service with high customer satisfaction that is making an important contribution in tackling fuel poverty, its impact is limited by the following constraints:
- One third of customers pull-out during the process, limiting the reach of the scheme;
- Budget constraints prevent the implementation of best practice solutions and result in incremental improvements. Whilst this increases SAP points, the improvements are often not sufficient to achieve EES targets; and
- Whilst an advertising campaign was implemented at the start of the scheme, new customers come largely from referrals and word of mouth. Whilst this proves that a successful customer service is provided it limits the outreach of the scheme and is a barrier to expansion.
HEEPS:ABS have also been successful in identifying those in fuel poverty and targeting resources at priority areas. This is largely a result of being delivered at local authority level. This delivery method will be further informed through LHEES and expanded to incorporate self-funded households and businesses.
Therefore, whilst progress is being made to combat fuel poverty, an escalation in existing levers is required to overcome challenges and meet EES targets. Delivery and identification of households through Local Authorities has been successful but this may need to be supported by a national level marketing campaign to raise awareness of available funds for eligible households, alongside more flexible funding allocations to remove constraints and allow holistic household improvements to reach EPC targets.
Without an understanding of the baseline condition of the non-domestic building stock and clear, SMART objectives, it is difficult to understand and appreciate fully the scale of change that is required within the non-domestic sector. EPC data is available for only 15% of non-domestic buildings, and this shows that 73% of the non-domestic building stock are EPC E or below. If this is representative of Scotland’s non-domestic building estate then huge improvements are required across the sector.
The EES route map sets out the target for the public sector to continue to be at the vanguard of energy efficiency in Scotland. This is in line with the public sector’s duty, under the Climate Change (Scotland) Act 2009, to contribute to meeting Scotland’s climate change targets5.
To help public sector bodies achieve this there are several funding programmes available. Whilst uptake of funding and progress in energy efficiency improvements in Local Authorities and higher education institutions has been good, Scottish Government delegates at a workshop supporting this strategic outline business case for an NDM commented that other parts of the public sector such as the emergency services and NHS are lagging behind. In fact, within the phase 2 SEEP pilot programmes, North Lanarkshire were the only council to undertake an energy efficiency project in NHS buildings. Uptake of these energy efficiency programmes needs to be rolled out across all areas of the public sector to ensure it achieves the EES targets in advance of the 2040 deadline.
It was also noted by delegates that there may be challenges and barriers for some public-sector buildings to act as anchor loads to district heating networks owing to rules based on preconceptions that need to be challenged. A review of existing regulations that create barriers to progress would be useful to understand what ideally would and can be changed.
There is a wide range of financial incentives targeted at SMEs and communities. Delegates outlined, however, that uptake of these incentives is poor and more action needs to be stimulated. For larger commercial and industrial buildings, which may have the resources to self-fund improvements, levers are more focussed around encouraging innovation in low-carbon technology. The Energy Savings Opportunity Scheme (ESOS) does require larger commercial companies to understand and report on their energy consumption but there is no regulation to enforce action on the back of this. Moreover, industrial companies are subject to numerous energy and emissions related regulations but these focus on process related carbon emissions rather the efficiency of the buildings themselves.
As a result, enforcement across the non-domestic sector is required to stimulate action and ensure progress. A plan to introduce regulation for all non-domestic buildings has been proposed by Scottish Government and is currently being consulted on. Whilst this will address the need to stimulate action, there is also a requirement for effective enforcement of this regulation with penalties for non-compliance. This will be important in reaching the EES target for improving all non-domestic buildings to the ‘greatest extent possible’.
There is a large number of organisations involved in administering levers and mechanisms supporting energy efficiency in the non-domestic sector (Figure 6). A central focal point and advisory service for consumers and the supply chain, with an overview of and signposting to all relevant schemes, could help increase uptake and awareness. This could expand on the service currently provided through Resource Efficient Scotland (RES), which focuses more towards SMEs.
Creating a substantial and diverse market and supply chain for energy efficiency technologies and services, as well as creating ‘up-skilling’ opportunities and jobs for the Scottish workforce, is central to achieving the wider EES objective of maximising economic and societal benefits. These opportunities can only be fully exploited if there is enough capacity within the supply chain to meet the demand that will be created through EES.
There is currently a perception amongst some suppliers that the low carbon market in Scotland is stagnating or declining. Without confidence in future demand, the supply chain is unlikely expand its capacity to meet the demand envisaged and required to deliver the EES Programme. Market uncertainty and flat demand for engineering SMEs in the UK has resulted in an increasing tendency for companies to operate within their own cash flows rather than expand their capacity.
This suggests that there is a need for greater coordination between the supply chain and consumers to improve the understanding of future demand. This could be done through facilitating more interaction and dialogue between consumers and suppliers, and by instilling greater confidence in the longevity of the EES programme itself, to provide a clear signal about its intent and durability, and the long-term commitment to funding, outside political cycles.
In addition, time-constrained funding, in which money needs to be spent during the same financial year it is allocated, reduces the potential scale of the works, discourages innovation and results in piecemeal improvements rather than holistic, strategic investment. For example, the Heat Network Investment Project (HNIP) pilots identified challenging timescales as a key constraint affecting the quality of applications. There is therefore a need, where possible, to change the structure of funding allocations, to support and encourage more innovative solutions over realistic timescales.
Through EES and LHEES, it is likely that most opportunities for the supply chain will be in the form of public sector contracts. In order to grow the supply chain and encourage competition in the market it is important that these opportunities are accessible to SMEs as well as larger suppliers.
As noted in section 4.5.1, there has been a perception amongst some of the supply chain that it is a waste of time for SMEs to apply for public procurement opportunities as they are only awarded to larger organisations. This is despite services offering advice and support to SMEs during the application process. In addition, a lack of awareness of public sector opportunities can exclude some of the supply chain, particularly smaller suppliers who have limited resource to actively search for new opportunities. In fact, less than half of suppliers surveyed had applied for publicly advertised opportunities during the previous 12 months.
However this perception might be changing, over 60% of responders to a recent Prior Information Notice (PIN) were SME’s. Domestic small scale projects are likely to have the capacity to deliver which would therefore encourage them to apply, the installation of a heat network for example is not a project which many smaller SME’s would be able to deliver and therefore applications are reduced.
To build on this progress will require additional support for SMEs to encourage a cultural shift and increase SME applications for public sector contracts. This could be achieved with a coordinated overview of supply and demand in the market, alongside the use of PCS for advertising opportunities and a consistent procurement route to encourage smaller suppliers to apply. These initiatives would come alongside the existing initiatives already in place to support and encourage SMEs, Micro businesses and the 3rd sector to become active members of the supply chain, such as the ongoing work with the Carbon Trust
Furthermore, to enhance the position of the Scottish supply chain as market leaders it is critical that innovation is encouraged. However, there is also a perception amongst suppliers that, within competitive tenders, value for money is associated with lowest price. This results in a prevalence of standard, established measures and discourages innovation, with research suggesting that a firm facing financial constraints is 30% less likely to undertake innovation. As a result, there is a need to educate and advise consumers on what constitutes value for money and how to evaluate tenders using an appropriate price-quality ratio. Transparency and communication on how tenders will be evaluated will encourage an appropriate level of innovation in the supply chain.
A potential growth area for the supply chain is district heating. The development and implementation of district heating systems requires agreement and collaboration between multiple stakeholders including Local Authorities, anchor loads, developers and suppliers. As such, there is also a need to facilitate this opportunity by promoting opportunities for collaboration, and enabling and mediating conversations between stakeholders. The Scottish Government are currently working on a project (Energy policy team and Procurement Scotland) to identify and implement collaborative procurement interventions for heat networks. Universities, colleges and NHSS all have an important role to play as well as Local Authorities, and this is where Scottish Government can support with flexible contract structures to allow and promote innovation.
Business need by policy area
Increasing consumer engagement and customer ‘pull’ will be critical to success for EES and policy and delivery must be designed with home owners, private landlords and other building owners in mind: the customer journey is paramount.
A key task for any new delivery mechanism will be to identify and coordinate actions to encourage domestic and non-domestic building owners to choose to upgrade their homes and buildings, and to find it easy to do so in ways that deliver substantial improvements in EPC targets and significant reductions in greenhouse gas emissions. For domestic and non-domestic building owners to change their behaviours, it will be necessary for architects, engineers, builders, suppliers of construction materials, financial institutions, estate agents, Local Authorities, regional and national government and others to change theirs as well.
Homeowners, landlords and building owners do not form homogeneous groups. One size does not fit all. It will be necessary to develop specific actions appropriate to different ‘archetypes’, each of which has its own attitudes, motivations and behaviours, leading to different opportunities and barriers to retrofit. The challenges of energy efficient retrofit are often imperfectly understood and it is important that they are widely discussed by all relevant stakeholders in order to ensure a full understanding of their complexity and interconnections. If the resolution of a wicked issue requires changes in the way people behave, these changes cannot readily be imposed on people. Behaviours are more conducive to change if issues are widely understood, discussed and owned by the people whose behaviour is being targeted for change.
Protection and quality assurance
To support this customer pull, EES must be a trusted and well-respected brand, to boost confidence in the programme and increase investment. An important aspect of this is the delivery of high quality products and services, and ensuring that the quantity of improvements required are not achieved at the expense of customer protection and quality standards.
A review of consumer advice, protection, standards and enforcement in the UK energy efficiency and renewable energy market suggests that the numerous schemes, brands and certification bodies operating in the sector give a confusing picture for both consumers and suppliers. It also highlights the serious consequences for consumers when the quality of work falls short and the variations in redress processes which, in some cases, are unclear and slow, and ultimately may not resolve the consumer’s complaint.
In addition, whilst the majority of installations are carried out to a high quality and in a professional manner, with Warmworks, though Warmer Homes Scotland, achieving customer satisfaction scores of 98.5%. A proportion of retrofit improvements are inappropriate or of a poor quality. Under the ECO Programme, 1.5 million measures were installed between January 2013 and March 2015. 6.9% of installations were inspected and 9.9% of these did not meet installation standards and required additional work. This may be caused by the lack of agreed standards and guidance on the impacts of retrofitting buildings, a disconnect between delivery teams and omissions in standards around quality levels for installation. Ultimately, this reduces consumer and market confidence.
The Hab-Lab project by John Gilbert Architects has identified large discrepancies between modelled and observed performance improvements following energy efficiency installations using the ECO scheme. Installation criteria focus on how cheaply the insulation value of the building fabric can be increased to a default standard, with no designer involvement or consideration for whole-house performance. As a result, more difficult areas such as thermal bridges and existing pipework are being left uninsulated, creating pathways for heat loss. In addition, there is generally no allowance made for fresh-air ventilation improvements which is increasing the potential for unintended consequences such as mould growth, asthma and other health issues.
A further issue highlighted by the Hab-Lab project is that funding is allocated based on the theoretical carbon offset rather than the actual cost of the works leading to difficult-to-treat building types being either ineligible for funding or receiving inappropriate interventions. A particular example is the use of cheap, plastic-based internal insulation in traditional buildings, which alters the moisture gradient in walls and floors, leading to a high risk of accelerated rot and decay and causing building deterioration.
Consequently, to ensure installation performance is of a high quality, and to ensure consistency in the delivery of projects and positive customer experience, a clear and transparent quality assurance framework is needed for the EES programme. Within this, the following changes are required:
- Greater clarity and guidance around the requirements that suppliers need to meet to work under the EES brand;
- Clearer guidance for consumers on what they should expect from suppliers;
- A more consistent and fair redress process for consumers with a single point of contact;
- An overarching standards guidance for all installation types and technologies that is updated in line with best practice, with clearer information on potential unintended consequences; and
- Increased supplier accountability through greater oversight and increased technical monitoring and auditing of installations and sanctions for poor performance.
This can be supported by building on existing advice services to provide bespoke, property-specific advice to consumers. This is needed to ensure that installations are appropriate and incorporate more strategic plans for whole-house improvements that treat the building as an energy system, rather than considering each part in isolation, and takes the specific occupants, site and local climate into account. This would reduce the potential for unintended consequences.
Monitoring and data
The Scottish Housing Condition Survey provides a relevant baseline dataset for the domestic sector. There is currently no equivalent for the non-domestic sector and very little non-domestic energy data is available publicly. The Scottish Government has outlined proposals for a benchmarking system, although work is yet to be commissioned.
Progress in energy efficiency against energy consumption baselines will need to be monitored regularly throughout a programme energy efficiency to justify the spending of public money and to identify underperforming areas for prioritisation. Formal processes of monitoring and reporting would help targeted support and intervention, together with regulations enforcement where necessary.
EPCs provide an established mechanism for establishing energy efficiency in the domestic sector. There may be a need to increase the frequency of these assessments, however, to ensure an up-to-date, accurate dataset is available. This is particularly the case for owner occupied tenures where EPC assessments are only required at the point of construction or sale. As such, a monitoring and reporting framework is needed that is robust enough to assess progress across all tenures and is simple enough for reporting to happen on a regular basis. The responsibility for monitoring and reporting also needs to be designated.
Furthermore, the availability of relevant data for all stakeholders will be the foundation for delivery strategies, including LHEES and district heating systems. The resources available currently differs between Local Authorities. This is also important for advice services, where property-specific data can help provide bespoke suggestions which are appropriate to the individual consumer.
Consequently, a system or body charged with cleaning, validating, maintaining and signposting to data for relevant stakeholder and users may improve the coordination, consistency and availability of appropriate data and allow gaps and variances to be identified and overcome.
Local Authorities & LHEES
The primary delivery mechanism for the EES Programme will be LHEES, which it is proposed will be developed by Local Authorities and will lead to phased, costed delivery programmes. The Scottish Government has committed to funding pilot schemes in all Local Authorities by the end of the transition period in 2020. It has been proposed by Scottish Government that a statutory duty will then be introduced to require Local Authorities to develop an LHEES. The successful delivery of these strategies is central to achieving the EES targets.
Developing comprehensive, bespoke LHEES programmes within Local Authorities will require resources and expertise. However, resources in Local Authorities are already stretched and the availability of relevant technical expertise varies between Local Authorities.
Moreover, there are several additional roles that Local Authorities could play as part of the Programme. For instance, it is possible that Local Authorities may be required to monitor and report on progress, enforce penalties for non-compliance with regulation, award district heating consent and concessions to developers, and continue to work with the supply chain to deliver ABS on the ground.
As a result, there is a need to support Local Authorities and increase their capacity to enable them to carry out any added roles arising from EES and successfully deliver their LHEES and associated low carbon heat and energy efficiency projects effectively. This capacity building includes both added resource and increased technical support.
LHEES will result in 32 separate strategies, each specific to the respective local authority. It is inevitable, however, that there will be cross-boundary issues where, for example, a district heating network in one authority’s area could benefit from or be reliant upon being extended into the adjacent authority’s area. Moreover, beyond cross-boundary technical integration, in order to maximise the efficiency and effectiveness of LHEES delivery, it is important that there is a coordination between Local Authorities, so that best practices and lessons learned are shared and collaboration is the rule, not the exception. This is particularly the case where opportunities arise for large schemes that encompass multiple Local Authorities. Whilst COSLA provides an executive level coordination, there needs to be a central, EES-specific focal point to support Local Authorities. This may also help to streamline the approach to large scale multi-tenure improvements by facilitating a larger-scale pilot scheme to test this out.
There is also a critical role for Local Authorities and other organisations that have a statutory planning role. Given the need to reduce space heating in buildings within EES, retrofitting insulation and in many cases, some form of external wall insulation has the potential to change the distinctive character of Scottish villages, towns and cities. There is a need to investigate the implications and solutions for this, which could lead to published national guidance that can be interpreted locally.
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