Green Heat Finance Taskforce: report - part 2

2. Introduction

Our homes are not fit for purpose. The United Kingdom's housing stock is among the worst in Europe, characterised by high costs, limited space, and aging infrastructure. The Resolution Foundation reported that UK households pay significantly more for housing compared to other advanced economies, with homes being smaller, older and more expensive to heat^[2].

Our homes and the way we heat them helps drive fuel poverty. Being unable to live in safe, warm homes leads to excess death^[3] and ill health. It was estimated the NHS spent at least £2.5 billion per year on treating illnesses directly linked to cold, damp and dangerous^[4] homes. These are preventable tragedies with great human suffering. Poor health caused by fuel poverty is also a brake on productivity in our economy. In the 21st Century we should not accept this. We need to tackle the root causes once and for all, and make the investments we need to bring our housing stock up to more acceptable standards. This will lead to better, healthier, more productive and joyful lives for all of us.

There is an urgent need for systemic investment in energy efficiency and heating solutions in Scotland.

Whilst individuals and communities are already impacted by our poor housing, it is also having a systemic effect on our climate, and residential heating is the UK’s second largest emitting sector. Solving fuel poverty and creating warmer homes goes hand-in-hand with meeting our net zero goals. The Climate Change Committee’s (CCC) Seventh Carbon Budget^[5] shows that on their balanced pathway they expect fuel poverty to fall 77% by 2050, with an 11% fall between 2025-2030 (driven by energy efficiency) and a further 66% between 2030-2050^[6]. The Scottish Government also has legislative fuel poverty targets in Scotland^[7].

The CCC states the following as being important in the costs of the transition:

• Efficiency gains versus retrofit costs:

Heat pumps are three to four times more efficient than gas boilers. This increased efficiency can lead to lower energy bills over time, as heat pumps use less energy to deliver the same heating output.

• Upfront retrofit costs:

Most UK homes are designed for gas heating. Transitioning to heat pumps therefore requires a one‐off retrofit or improvement in many cases – this includes modifying building infrastructure to accommodate the different system, such as updating radiators or improving insulation.

• Sizeable element of total net zero costs:

These one‐off retrofit costs for home heating are considered a significant part of the overall transition to net zero. While operational savings are expected later, the initial investment needed from households is substantial.

• Need for policy support:

To make the transition affordable and accessible, the report emphasises that government support (such as grants or low-interest loans) will be crucial. This policy intervention is needed to help households cover these upfront costs without causing undue financial burden.

Benefits of transition

While the costs and damage associated with climate change often tend to be a focus of debates, there are also substantial economic opportunities. This was recognised by a HM Treasury analysis of issues related to the net zero transition, which concluded that “an orderly transition for the economy could realise more benefits [....] than an economy based on fossil fuel consumption^[8].”

These benefits would be both direct, in terms of jobs and Gross Value Added (GVA) as well as indirect, through improved population health, something which would also boost productivity and the economy through reduced sick absence and less pressure on healthcare systems. Throughout this report we seek to set out the positive case for taking action to address one of the key sources of emissions – heating – by explaining where and how these benefits can be captured, noting that many will be distributed at a local level, for it will be small and medium-sized enterprises (SME) that install a significant proportion of the upgrades required. While this might not be headline grabbing, it will still play a vital part in supporting local communities, by creating and maintaining skilled local jobs.

Climate change is a vast topic. Our focus has been on one small but important part of the challenge – identifying the financing mechanisms and models that can help finance the upfront costs of converting all Scotland’s buildings to clean heating systems, a cost estimated in the Heat and Buildings Strategy (2021) as being £33 billion, though may in reality be significantly more.

Some of these costs will need to be paid for by the Scottish and UK Governments, and will be necessary to ensure a just transition, although it is clear that significant private sources of financing will also be required, as public budgets for Scotland will be unable to cover this overall cost alone. It is also apparent that a ‘one-size-fits-all’ solution will not work, and that it will therefore be necessary to foster a broad menu of options, one that will allow property owners to access the solutions that are best suited to their particular circumstances.

A summary of our Part 1 report (Nov. 2023) is attached at Annex 1. Building on the focus on financing solutions for individual property owners from our Part 1 report, this report will focus on mechanisms that might apply across properties collectively, through place-based solutions, heat network models, and social housing options.

There are an increasing number of reports looking at aspects of financing the transition to net zero in general, with several looking at parts of the heat transition specifically. We do not wish to duplicate work of other groups or repeat the analysis available elsewhere. Instead, as we discuss the themes covered in this report, we shall merely point towards good work that is already available.

Our recommendations focus on identifying the practical steps that we believe can - and must - be taken in the short and medium-term to drive progress towards the installation of clean heating systems at scale. Given our finance remit, we have limited our recommendations to areas that relate directly to the flow of finance towards retrofit.

However, we do wish to reiterate a point discussed in our Part 1 report, namely that the lack of consumer demand, rather than the lack of a supply of finance per se, is the greatest barrier to achieving the Scottish Government’s clean heat ambitions. In doing so, we also wish to underscore the direct correlation between lack of consumer demand and the cost of living challenges. This means people will want to be confident that the savings from clean heating and energy efficiency installations at least outweigh the costs of repaying any upfront financing used.

Steps to boost the demand for clean heat are therefore essential, and must be taken forward in parallel with the measures recommended in both our reports if the transition to clean heat at scale is to be successful in Scotland.

While much of this report is directed at the Scottish Government, it is an independent report, and, as such, we offer views that draw on members’ experiences to identify where blockages exist in the system and suggest how these might be addressed.

Moving on from talking to testing and demonstrating is now critical. It is only by doing, and not just discussing, that property owners in Scotland will manage to successfully install clean heating systems on the scale that is required. And it is only by removing emissions from heating properties that the potential economic, emissions reduction and health benefits of the transition can be realised.