Current new building regulations and sustainability standards can still be met by installing gas boilers. For a step change in LZCGT uptake in new builds by Councils, RSLs and the wider market, this would need to be addressed, especially in areas where a gas connection is more cost effective. The 2024 regulations for new builds will be a welcome change to help to push the use of LZCGTs and level the playing field between Councils and RSLs struggling to afford higher sustainability standards, and private developers with huge buying power. This could have knock-on effects to LZCGTs price reduction; customer awareness, acceptance and understanding of new heating systems; supply chain growth; and, more widely, boosting the green economy.
7.1. Summary of issues identified
The key findings from our project cost data analysis and stakeholder interviews are:
1. LZCGTs are £2,000 to £5,000 more expensive per unit than the default on-gas option of gas boilers with solar PV. For off-gas systems, there is no real default non-LZCGT option, so these projects are more likely to opt for LZCGTs than on-gas projects.
2. Default options are still being installed in new, on-gas affordable homes and can meet the highest sustainability standards (including Platinum and PassivHaus).
3. RSLs and Councils are leading the way in LZCGTs and sustainability standards compared with private developers, but there is a financial gap in meeting higher than Aspects 1 and 2 of Silver standard.
4. Rural and hard-to-reach areas are experiencing higher costs and a local skills gap, compared to urban and more accessible regions.
5. There is a gap in monitoring new LZCGTs, which could provide important evidence on real-world running costs.
7.2. Summary of recommendations
Based on our findings we recommend the following investigation, interventions and innovations to the Scottish Government to inform the development of the 2024 standards and ultimately increase the uptake of net zero affordable homes.
1. Consider the costs of higher building fabric specification for all sustainability standards.
2. Further investigate the cost difference between sustainable homes standards, comparing like-for-like projects and costing new future requirements.
3. Analyse real-world running cost data for LZCGTs and compare to SAP estimates and the carbon-intensive counterfactuals.
4. Survey tenants to determine their comfort levels and overall satisfaction associated with their LZCGT systems.
1. Continue affordable homes funding and greener standard premium and add a LZCGT premium to support additional cost.
2. Make cost breakdown reporting a standard requirement for affordable homes funding.
3. Facilitate best practice and knowledge sharing between LAs, RSLs and developers to support a higher penetration of LZCGTs.
4. Look into how to upgrade SAP to better specify LZCGT, predict running costs more accurately and include a wider variety of LZCGTs.
1. Create a rural skills consortium to support rural developments.
2. Support innovative business models that might lead to subsidy-free, affordable, sustainable and net zero homes in the future.
3. Create price transparency on LZCGTs capex and opex to drive market growth.
4. Encourage energy suppliers to offer more attractive electricity tariffs for LZCGTs.
7.3. Matching our recommendations to your objectives
The table below demonstrates how our recommendations from this research match the New Build Heat Standard Objectives, as provided in the Scottish Government's scoping consultation in December 2020.
|New Build Heat Standard: Key Outcomes||Locogen's Recommendations|
|Outcome 1: Our new buildings no longer contribute to climate change||1–3||1 & 3|
|Outcome 2: Reduced demand for heating and cooling||1 & 3||4|
|Outcome 3: The cost of heating our new homes and non-residential buildings is affordable||3||4||1 & 4|
|Outcome 4: The systems we use in new buildings provide us with a reliable supply of heat||1 & 3||4|
|Outcome 5: Opportunities for retraining and upskilling of workforce across Scotland||2–4|
|Outcome 6: Informed, educated consumers||4||1 & 3|
|Outcome 7: Our indoor and outdoor spaces are filled with cleaner air||1|
|Outcome 8: Our heating systems are smart, enabling the flexible and stable operation of our energy networks||3||1 & 4|
|Outcome 9: There is a continued supply of high-quality homes and non-residential buildings in line with identified requirements||4||3 & 4||4|
7.4. Detailed recommendations
Building fabric capex
The stakeholder interviews have indicated that the main cost of meeting the Affordable Housing Supply Programme's greener standard is the enhanced building fabric that facilitates the heat demand per unit area that the standard requires. Collecting information on these costs was outside the scope of this report, but one stakeholder advised that the additional capex required to meet the greener standard for a rural project was in the region of £6–7,000. This is significantly greater than the £2,000 premium currently awarded for meeting the greener standard.
Additionally, stakeholders from a small, remote rural project in the north of Scotland advised that the project initially aimed to meet the greener standard but did not manage to do so within their project budget. As the greener standard relates to heat demand outputs from SAP (which assumes varying external temperatures across 21 regions in the UK, the lowest of which are in the Highland region), projects in the Highlands and Islands have a locational disadvantage, although the extent of this is not known to us. Given the additional supply chain costs for remote and rural regions widely noted from the stakeholder interviews, it is possible that projects in the Highlands and Islands (particularly small projects that benefit less from economies of scale) would have to specify higher performance building fabric and pay more to do so – essentially experiencing a double premium – in order to meet the greener standard.
Therefore, it is strongly recommended to investigate the costs that affordable housing projects incur in meeting the greener standard (based on Silver Aspect 2), and also Gold Aspect 2, compared with meeting the minimum requirements of current building regulations. Various project sizes, housing mixes and locations (including urban, costal, rural and remote) should be represented in order to determine whether or not there is a level playing field across Scotland in terms of these costs. Whilst information from real projects is always valuable, based on the stakeholder interviews and heating system cost data received, we would not expect all projects to have this information (mostly due to how architects and contractors are briefed and how they share information with RSLs and Councils). Therefore, we would recommend that the Scottish Government commission a desktop study, as this would allow for SAP outputs and building fabric requirements and costs to be compared with identical units across various project scales and locations.
Further investigate LZCGT capex variations
The cost data received for this study, as well as anecdotal evidence from the stakeholder interviews, suggest that there is a difference in LZCGT installation capex (and other housing development costs) between rural and urban locations. This was particularly true for ASHPs, although only because most participating projects used these and most stakeholders had more experience with ASHPs than other technologies. Economies of scale in larger projects were also observed. However, given the range of LZCGTs, project sizes, locations and sustainability standards, there is not sufficient data across the projects to confirm these trends.
In order to validate these suspected trends, it would be necessary to compare capex from projects of the same size, sustainability standard and housing mix in various locations, and ensure a like-for-like comparison between LZCGT specification (for example, the costs of high performance and/or high-temperature heat pumps should not be compared against basic models). This investigation would provide further evidence as to whether the higher grant subsidy benchmark for rural and remote projects under the Affordable Housing Supply Programme is proportionate. It would also provide evidence as to whether the grants should be based on project size as well as location and sustainability standard.
This evaluation could be supported by the disclosure of the costs and exact specification of heating systems as a condition for future Affordable Housing Supply Programme grant awards (as per our second Intervention recommendation). Additionally, or alternatively, a desktop investigation could be carried out through a hypothetical procurement exercise undertaken by an appointed consultant or quantity surveyor, in which installation quotations could be sought for small and large developments in urban, rural, remote and costal locations in order to allow like-for-like comparisons. Of course, this approach would not accurately represent the realities of installation costs and locational variations.
Monitoring real-world LZCGT running-cost data
As discussed in Section 5.6, energy data monitoring is not commonplace, unless third-party metering is needed because there is a communal heating system, or if it is required as a condition of additional innovation funding or a wider research programme. However, all stakeholders plan to carry out some form of post-occupancy survey. There is an appetite for further monitoring beyond surveys among all of the stakeholders we spoke to, as they are keen to understand the true running costs of LZCGTs for internal purposes. This itself highlights the need for more real-world data to become publicly available.
Among the projects that involve some degree of data monitoring, there was general interest in being contacted by and collaborating on monitoring with the Scottish Government. The main issue raised was that any additional monitoring carries a cost and resourcing requirement, as it is unlikely to be factored into each projects' plans. Regardless of whether a project has an existing or intended data monitoring programme, there are opportunities for the Scottish Government to intervene, as summarised in Table 19. Table 20 shows the breakdown of monitoring plans and intervention priority by project.
Locogen would recommend that a minimum of one full year's data be collected, but ideally three years' worth. That said, if time and cost resources are limited, it would be most useful to capture data from winter, as heating demands would be highest over this period. The first insight that should be captured from data monitoring is a comparison of external temperatures against actual and modelled heat demands (from SAP outputs and/or a consultant's domestic energy model). This would demonstrate the impacts of user interaction and in-situ performance against expectations. Secondly, the LZCGT opex should be compared to SAP and other opex estimates made, in order to highlight the true costs to tenants to operate the systems. This is a particularly important insight for affordable housing, as fuel poverty was raised as a key concern amongst the stakeholders interviewed.
For PV and heat pump-based systems, data monitoring (heat metering in particular) would be strongly recommended over analysing heating system costs from electricity bills, in order to avoid having to estimate the contribution of other domestic loads to total electricity demands. The results from this exercise should be shared in the public domain, as they will be of great benefit to all RSLs and Councils as they will clarify which technologies are most cost-effective for their tenants. The results will also benefit private developers, tenants and homeowners and the SAP and wider heating policy community.
Finally, for any energy data monitoring process, it is strongly recommended that this is carried out alongside an understanding of the occupancy and usage of the buildings, as this will allow much more accurate clustering and analysis of the data to explain how the homes are used in reality.
|Intervention priority||Construction phase||Monitoring||Intervention strategy and rationale|
|1||Pre-construction||Extensive Monitoring||Connect with projects pre-construction that are planning extensive monitoring to find out more about their plans, feed into existing plans and ask for the results. There is potential to provide further support to meet the Scottish Government's own objectives with already energised RSLs/ Councils and pre-occupancy projects.|
|2||Complete||Monitoring or tenant agreement to monitor||
Intervention with these RSLs/ Councils is time critical given sites are complete. Two projects have tenants' agreement to monitor but are at an early stage of what this should include and how they should do this. This provides an opportunity for the Scottish Government.
This project had intentions for extensive monitoring with a university, but lost this funding. They are intending to monitor properties to identify the differences between homes with bronze–platinum standards. Given the variety of standards met at this site, this presents an interesting learning opportunity for the Scottish Government to intervene.
|3||On-site / pre-construction||No monitoring plans but open to consider||
There is an appetite to undertake monitoring to find out the 'real' running costs of LZCGTs. However, these RSLs currently have no plans and have not costed for monitoring equipment in their projects.
Given the early stage of these projects, we see this as an opportuntiy for the Socttish Government to provide additional funding and guidance on monitoring to these RSLs/Councils. We suggest that the Government would likely need to define the objectives of monitoring, specify equipment, provide data analysis support and other relevant tasks.
|4||Delayed||Unknown||Engaging now with these projects prior to commencement could provide a way to ensure monitoring occurs. However, no interviews were undertaken with these stakeholders, therefore willingness to engage, plans to monitor etc were not qualified.|
|5||Complete||No monitoring plans||There is only one project that is complete with no monitoring equipment. There could be an option to add questions into post-occupancy surveys. Installing monitoring equipment post-occupancy will likely be more difficult and costly to undertake. The RSL had not thought about monitoring for this project, but were prompted by our questions. They are likely to be open to a discussion with the Scottish Government for this or future projects.|
|#||Heating system||Progress||Monitoring planned||Priority|
|1||Solar PV & Electric boilers||On site||X||Tenant surveys||3|
|2||Solar PV & Electric boilers||On site||X||Tenant surveys||3|
|3||Solar PV & Heat battery||Complete||√||Have agreement from two tenants to return to monitor||2|
|4||Solar PV & Heat battery||Complete||√||Data loggers ordered. Two tenants agreed to monitoring||2|
|6||ASHP||On site||X||Tenant surveys and usage data for first 38 homes, via bills||3|
|8||ASHP||Pre-construction||√||Extensive monitoring, part of research project||1|
|9||ASHP||Pre-construction||X||Tenant surveys. Want to do more but cost issues||3|
|12||ASHP & MVHR||Delayed||X||N/A||4|
|13||ASHP, Solar PV & Heat battery||Pre-construction||√||IoT sensors in a small number of homes. Usage data from third- party metering and billing for flats with shared ASHPs||1|
|14||ASHP, MVHR & Heat battery||Complete||√||Extensive monitoring of ten homes built to different sustainability standards.||2|
|15||ASHP, MVHR & solar thermal||On site||X||No plans, but open to explore monitoring||3|
|16||Shared ASHP||Pre-construction||√||Heat metering and extensive monitoring, part of research project||1|
|17||Shared ASHP||Pre-construction||√||Extensive monitoring and surveys, part of research project||1|
|18||Shared GSHP||Pre-construction||√||Usage data from third-party metering and billing||1|
|19||Shared GSHP||On site||√||Usage data from third-party metering and billing||1|
|20||Shared Biomass||On site||√||Usage data from third-party metering and billing||1|
|21||Shared Biomass||On site||√||Usage data from third-party metering and billing||1|
Surveying tenants' satisfaction with LZCGT heating systems
All stakeholders indicated that they planned some form of interaction with their prospective tenants with regard to heating systems, including guidance on usage and energy tariffs, as well as surveys on their general impressions of the systems. Several stakeholders who were trailing new technologies were particularly relying on tenant feedback to determine whether they would include these in future projects. Clearly, there is much insight to be gained from surveying tenants. So we recommend that a standardised survey is issued to numerous, if not all, tenants across the projects participating in this study. This survey could later be issued as a template to all RSLs and Councils receiving Affordable Housing Supply Programme funding, so that further standardised information can be collected in the future. The survey should be designed to collect feedback from tenants across various themes, including general thermal comfort, ease of operation and perceptions of heating costs compared with traditional systems (most likely gas boilers). The responses could then be analysed by a consultant to determine the key areas of satisfaction and concern for tenants. The consultant could then provide suggestions to mitigate any common issues, provide additional support to tenants and potentially, depending on the strength of the findings, guide RSLs towards (or away from) certain technologies in future projects.
Continue affordable homes funding, providing a premium for LZCGTs
A key finding from our stakeholder interviews was that the current affordable homes funding was deemed necessary for RSLs to use LZCGTs in new homes. All stakeholders try to meet Silver standards and would like to meet higher standards, but often the cost is prohibitive. RSLs and Councils use the affordable home grants to cover the gap between their own funds and private finance, hence the funding does not fully cover the costs on its own. The grants are not a direct incentive for LZCGTs, as the greener sustainability standard can be met without LZCGTs as it is achieved primarily through the building fabric specification. It is also important to note that there are many aspects of the higher sustainability standards that add cost, but do not relate to energy, such as requirements for home offices and bike storage space. We found that often there is limited incentive to aim higher than Silver Aspect as the cost of the other sustainability measures increases project costs.
The Scottish Government should decide what they want RSLs to prioritise in affordable homes to make the funding as cost effective as possible to achieve these key goals. If the Scottish Government wants to increase LZCGT adoption in affordable homes, they might want to change the structure of the funding, or add a premium specifically for LZCGTs. For example:
- Allow higher grant awards for DHNs (including GSHPs, shared ASHPs, biomass) as these are more expensive. Particularly GSHPs and biomass, which have lower running costs to tenants.
- To accelerate the uptake of LZCGTs prior to introduction of the 2024 regulations, the Scottish Government should amend the greener standard so that projects with gas or other fossil fuel boilers cannot qualify (i.e. meeting Bronze Active and Silver Aspect 2 standards).
Changing and new regulations can increase costs of new builds too, such as improved fire sprinkler systems, and this will have an impact on future projects, which needs to be considered alongside this recommendation.
Enforcing LZCGTs cost breakdowns as a requirement of funding
To improve the Scottish Government's own cost efficiencies when continuing to investigate LZCGTs, we recommend updating the guidelines and requirements of the funding applications. This would effectively remove the need for future studies on the same topic and instead allow the Scottish Government to collect the data and insight you need to make decisions on LZCGTs directly. This could provide benefits to not only new build regulations and affordable homes grants, but also other net zero related policy decisions. It also ties into some of our other recommendations, e.g. on facilitating best practice and creating price transparency to help boost the market.
A key finding from the interviews was that cost data was collected in many ways, across different stakeholders, with a variety of assumptions etc, indicating that there is no normalised way of collecting, consolidating, or communicating this type of information back to the Scottish Government. We recommend that the Scottish Government standardises this with the following considerations:
- Provide a concise, standard and easy to understand cost template for RSLs/Councils to complete as a requirement for funding. This increases the data the Scottish Government has access to without the need for additional consultancy projects to collect data retrospectively. It also allows more accurate and direct cost comparison across projects.
- It is important to consider the administration time and cost of additional administration tasks and keep any additional prerequisites to a minimum, e.g. consider replacing requirements rather than creating additional ones.
- We recommend working with RSLs/Councils to design the template to ensure it also provides benefits to them, whether that is easy and less timely to fill in, helps them justify to contractors what data they require, or helps provide greater transparency in procurement.
Engage more with RSLs and facilitate best practice
Most of the RSLs and Councils we spoke to were happy to be contacted by the Scottish Government and were eager to provide feedback to us for them, to help highlight the issues associated with LZCGTs. Given their vast, first-hand experience beyond the projects we interviewed them about, we would recommend communicating directly with RSLs and asking for continuous feedback to support future policy decisions.
There is a potential role the Scottish Government could play in facilitating best practice, which could include:
- Facilitate knowledge sharing between RSLs and Councils to help save time, use more cost-effective approaches, and increase the use of LZCGTs in new builds. For example, two stakeholders discussed their first biomass DHN project and independently reached the same conclusion on benchmarking gas fuel costs to biomass fuel costs. This could have been shortcut if they had spoken to each other, and it could accelerate other stakeholders to engage in more uncertain technology options. A second example is sharing learnings from an RSL that is exploring becoming an energy services company (see Figure 15).
- Publish best practice and knowledge-sharing findings to support RSLs and increase the use of LZCGTs as a default.
- Facilitate knowledge sharing and best practice between RSLs and private developers to help developers get onboard with LZCGTs. Private developers were noted by several stakeholders to be behind in terms of LZCGT uptake and meeting higher sustainability standards.
SAP requires a long overdue upgrade
From our stakeholder conversations, and from our own knowledge, SAP has been a long-term issue for the housing industry and specifically LZCGTs. SAP is owned by BRE (Building Research Establishment), so the Scottish Government has limited control over direct intervention. However, this research (and perhaps other Scottish Government or publicly available research) could be shared with BRE as an evidence basis for improving the software.
Given BRE is a charity, they may be limited by funding. It might be worth considering if the UK Governments can collaborate and combine funding to support BRE to upgrade SAP, which is a fundamental tool for the housing industry and could be used more effectively to drive net zero ambitions.
Improvements to SAP, with reference to this study, could include, for example:
- A review of operational cost assumptions to bring these in line with real-world costs.
- Updated emissions ratings to avoid penalisation of electric vs gas, especially on-gas.
- Ensuring that new LZCGT types and models can easily be incorporated.
Create a rural skills consortium
It is well established and confirmed through our stakeholder interviews that there is a rural skills gap in the Highlands and Islands for LZCGTs, which impacts the cost of new affordable homes. The Scottish Government could spearhead a rural skills consortium which could:
- Make visible the skills gap by creating a map and listing for all relevant companies and services offered, including new build developers, LZCGTs installers as well as maintenance professionals.
- Celebrate and support local businesses offering building services and LZCGTs.
- Make the skills gap more visible to help attract new businesses to specific areas, which could provide more competition and hence price-competitive services to these areas.
- Identify areas that are particularly difficult to reach but require new homes, and incentivise new businesses to establish there.
- Upskill local residents who are interested in becoming e.g. installers and provide funding to help them secure the necessary training.
Business model innovation support
Examine, promote and support innovative business models that might lead to more cost-effective (or even subsidy-free) affordable homes in the future. It is important to stipulate that all stakeholders interviewed were clear that the current Government funding does not cover the additional cost of current sustainability levels for affordable homes. There are also market and regulatory barriers to some innovative business models, e.g. to peer-to-peer trading of excess generation. However, there are numerous innovations in approaches and business models that could apply to RSLs/Councils and new affordable homes that could drive cost efficiencies and increased penetration of LZCGTs, such as:
- Local energy system models that can optimise renewable generation, heating and storage assets on a site-wide basis. This could lead to lower network connection charges for new build sites that are managed locally to mitigate constraints.
- RSLs adapting their business model to the energy services model. This would incentivise RSLs to operate LZCGTs in the most cost-effective manner to create a return on their investment. This would include monitoring, metering, billing and maintaining LZCGTs. This would in turn ensure tenant comfort and affordability. (See Figure 15 below.)
- Encouraging energy suppliers to offer 'heat-as-a-service' models that could help tenants optimise their heating for comfort and make it more cost effective.
Create price transparency for LZCGTs
We identified a potential issue in the price points set by installers from both RSL and industry-supplier interviews. Publishing data on low carbon technology costs to manage expectations and provide more bargaining power to RSLs and end users could facilitate a faster adoption of LZCGTs as well as build customer confidence and trust. A secondary benefit is that the Scottish Government would also see price development and be able to update the right funding available without the need for external support.
Linking to our recommendation on facilitating best practice and standardising costs from affordable homes projects, the Scottish Government would have enough data and insight to publish this themselves. They could also engage with the Energy Saving Trust, Which, the Money Saving Expert or other consumer-facing channels to facilitate or publish this.
Encourage market development of smarter electricity tariffs for electric heating technologies
During our stakeholder interviews, we found that there were experienced and perceived issues with electricity tariffs for heat pumps. This included the concern over high electricity prices (compared to gas), tenants operating heat pumps incorrectly, and the lack of tariffs designed for heat pumps. As well as functioning in a different way to gas boilers, the cost of electricity is higher than gas and so using the heat pump in the correct way is important to ensure that affordable homes are in fact affordable to heat. Knowing which tariffs are available and having the right heat pump controls therefore becomes vital.
There are very few examples of dynamic Time-of-Use (ToU) tariffs in the UK, and even fewer specific heat pump tariffs. A couple of examples include Good Energy heat pump tariff and Octopus Energy ToU tariff. The majority of mainstream energy suppliers do not yet offer these types of tariffs, and the few tariffs that are available are not well known to RSLs or tenants. In addition to availability of tariffs, having the right heat pump controllers that can automatically respond to energy price signals is also required.
The Scottish Government could support the market development of new and smarter electricity tariffs by encouraging Scottish energy suppliers to offer dynamic ToU tariffs or heat pump-specific tariffs, and inputting into OFGEM discussions on energy retail tariffs and energy market reforms. Any tariff created for tenants (or the wider market) needs to be automated, attractive, easier to understand and suitable for the given technology.
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