Green Heat Finance Taskforce: report - part 2

3. Applying a Place-Based Lens

3.1 Overview and context

An effective place-based approach will comprise a programme of multiple projects and various technologies. Heat networks serve a particular area, while social housing provides affordable accommodation in a given location. Even for individual property owners, the surrounding circumstances will influence the choices they make. There could be considerable benefits from taking a holistic view which aligns and integrates the various technology or sectoral activities happening in an area.

When we talk about place-based models, we are talking about holistic programmes of activity that aggregate demand from individual projects to create a scale that makes them attractive investment opportunities. Our reasoning for focusing on place-based mechanisms as a key theme reflects our balanced view that retrofit can most effectively be delivered at scale by aggregating individual action and projects into coherent and coordinated place-based approaches. Such an approach can drive tangible, longer-term economic, regeneration and health benefits. Indeed, research suggests that adopting place-based decarbonisation approaches could deliver net zero goals at around a quarter of the cost of top-down approaches, with half of the energy demand and greater co-benefits^[9].

Solutions aimed at the individual households within an “able-to-pay” market are unlikely alone to lead to the mass action required. Developing an engagement and delivery approach to decarbonising many households concurrently within multiple neighbourhoods has the potential to change this economic balance by:

1. unlocking economies of scale in reducing the upfront cost;
2. enhancing and broadening the value and benefits created; and
3. aggregating demand to unlock cheaper forms of finance.

It has the additional potential to unlock a more attractive narrative for both citizens and wider communities, so as to help ensure that they buy-in to the need for transition. Without the desire of homeowners, the transition simply will not happen.

Part of this more attractive narrative is to make the transition financially beneficial for all. “Willing-to-pay” rather than “able-to-pay” is a more relevant term and is driven by whether the net impact on a households ongoing finances i.e. will finance repayment costs be larger or smaller than any reduction in ongoing bills?

Given high upfront costs and relatively small energy bill savings, typical consumer finance products may generate a negative net impact on the finances for those who choose to fund individually. Place-based approaches create the opportunity to build collective models that can change this balance and significantly improve the narrative of participation.

The key challenge for this approach is that cross-sector, place-based projects are complex to design and deliver, and have not yet been done at the scale required in a clean heat context. While there is clear engagement from local government, gaps in both capacity and capability is holding back development of proof of concept demonstrators. This, in turn, is hindering the creation of a pipeline of viable projects. Overcoming this will require provision of a significant increase in structured revenue funding to support local authorities to develop individual clean heat and energy efficiency projects, which can then be aggregated into investible programmes.

As we move to an electrified future for transport, the powering and heating of homes becomes more connected to the provision of electrified personal transportation, creating a single local energy system. While this creates opportunities for system efficiencies, it also adds complexity in a Scottish context as some policy areas are devolved and some are not. Coordinated and collaborative action between Scottish and UK Governments is therefore vital.

We are already seeing this place-based approach being embraced in certain English metropolitan areas, something that Scotland will also need to prioritise if it is to avoid falling further behind other parts of the UK. Crucially, committing to developing place-based projects and programmes will help ensure that Scotland is well-placed to secure at least its fair share of any UK-wide competitive funds that are launched. On a positive note, the development of Local Heat and Energy Efficiency Strategies (LHEES) should provide a solid basis from which to develop place-based projects, although mechanisms will be required to foster cross local authority collaboration where there are shared opportunities and potential for joint innovation in delivery.

3.2 Current place-based heat approaches in Scotland

Local Heat and Energy Efficiency Strategies (LHEES)

LHEES provide a framework for locally-led and tailored clean heat solutions. Scotland’s 32 local authorities have a statutory duty to develop these strategies and delivery plans and to update them every five years. They create a strategic, long-term plan for an entire local authority area to decarbonise heat, including:

• identifying strategic zones suitable for heat networks;
• setting out how each segment of the building stock needs to change;
• identifying strategic heat decarbonisation zones, and setting out the principal measures for reducing buildings emissions within each zone;
• prioritising areas for delivery of heat decarbonisation action; and
• providing a strategic plan that can help target funding and investment.

The development of LHEES has also provided insights for other place-based approaches. Firstly, place-based approaches will need to reflect a need for methodological approaches that are sufficiently harmonised to allow coordination across councils, given that similar approaches to data and analysis are needed to facilitate the involvement of third-party partners. However, ‘one-size-fits-all’ approaches will also need to be avoided, so as to ensure that solutions fit local conditions.

Secondly, access to sufficient resources and capacity within councils during both the development and implementation of LHEES has been a significant issue. Due to constraints within some councils, the development of LHEES were outsourced to consultancies, rather than building internal capacity, constraining the ability to move from long-term strategy development to delivery. Furthermore, many councils do not have the resources to develop full investment plans to support LHEES implementation, although this is a challenge reflected across the UK, as noted by the 2024 UKERC UK-Wide Local Energy Planning Review^[10].

Scottish Area Based Schemes

The Scottish Government funds local authorities to develop and deliver energy efficiency programmes in areas with high levels of fuel poverty. This funding is blended with owners' contributions and funding from Registered Social Landlords (RSLs) that may choose to insulate their properties at the same time.

These Area Based Schemes (ABS) are designed and delivered by councils, together with local delivery partners. They target fuel-poor areas to provide energy efficiency measures to a large number of Scottish homes, while delivering emission savings and helping reduce fuel poverty. ABS provides a good example of place-based delivery, albeit one which largely utilises grant funding. Building on this experience to develop commercially viable models (which are less reliant on grant funding) offers one route to establishing a more comprehensive structure for place-based clean heat delivery.

3.3 Key principles underpinning place-based retrofit approaches

Place-based approaches tend to be local authority-led, as they are the bodies most likely to have a coordinated understanding of local circumstances and will be responsible for a number of properties that could provide anchor demand for schemes, as well as connecting to wider policy initiatives such as heat network zoning. At a smaller scale community organisations may take on a leadership role, while social landlords also deliver a targeted place-based approach through their retrofit programmes. However, local authorities remain key, as delivery of retrofit at scale will involve using other statutory functions such as the planning system.

Some overarching principles to guide place-based delivery include:

• community involvement is essential and fosters greater acceptance and understanding so projects much be co-developed with communities;
• ensure local resources, assets and geography shape project development;
• consider the social and economic context of a place to ensure solutions are fair and just, whilst enhancing local economies and jobs;
• apply a multi systems lens and seek to integrate clean heat projects with other systems to create a more efficient and integrated approach to sustainability;
• design in resilience to how local climates might change due to global warming.

Annex 2 provides some summaries of place-based activities which are tailored to the needs and strengths of different locations.

We would like the Scottish Government to create demonstrators for comprehensive place-based approaches to test:

• harnessing synergies and efficiencies across the different sectors;
• aggregating projects up to an investible scale;
• avoiding issues caused by taking a more siloed approach; and
• testing approaches to managing risks around the costs involved and management uncertainties at the planning stage around ultimate success.

Testing a programmatic approach could offer costed net zero transition plans for a location that builds upon the process started through LHEES. Potential linkages could also be made to other existing work strands, such as Ofgem’s proposal for Regional Energy Strategic Plans, which will be taken forward by the National Energy System Operator (NESO) and will interact with the Strategic Spatial Energy Plan (SSEP) for energy systems across Britain^[11].

3.4 Barriers and challenges

Place-based solutions seek to benefit whole communities socially, economically and environmentally. However, the case for investment is primarily based on the financial return (principally from reduced energy costs) and often largely ignores the wider socio-economic benefits. At current capital costs and energy pricing, the financial returns are insufficient to mobilise enough return-seeking debt capital, so as to fully cover the upfront capital costs. This means that a market-led solution is unlikely to occur without significant intervention.

Focusing on an individual property approach requires using a combination of subsidy (to cover the remaining cost gap) and policy to compel households to act. In the absence of a rebalancing of the relative gas and electricity prices at a UK level, an individual property approach is unlikely to lead to the change required without significant additional demand levers.

A core principle of place-based approaches is the ability to aggregate interventions into a local project vehicle and then apply blended finance to fund this vehicle, effectively providing retrofit as a prefunded service to households in that area.

This avoids the requirement for individual households to take on debt or make any upfront financial contribution and instead ‘pay’ for the transition through an ongoing service, or comfort fee, which would be covered by the reduction in their original energy bill. Work is required on the mechanism for this payment, including what levers sit at Scottish Government level and what options require UK Government action.

The economics dictate that this payment would need to be maintained for several decades and so it would likely be attached to the property electricity meter rather than to the individual householder, i.e. it would remain in place for whoever lived in the property in the future and continued to benefit from the upgrade. Some households may still choose to self-fund and therefore receive the full energy bill reduction, but this can be an active choice and affordability no longer becomes a key barrier.

The UK’s legislative environment adds to challenges around this in relation to developing innovative models like Demand Aggregation Financing (DAF) which can refer customers to lenders as an alternative to financing through the project vehicle.

However, the key challenge is a capacity, capability and resource gap within the local public sector to develop projects. This constrains development of a pipeline that can be aggregated into an investible programme. However, public-private partnerships can overcome barriers to project development, mobilise investments, and ensure more effective delivery of large-scale energy efficiency programmes. For example, iChoosr is a private organisation who have collaborated with over 200 UK councils in delivering residential rooftop solar installations. These have successfully aggregated demand, brought down costs and delivered individual benefits.

The ‘capacities framework,’ developed through research on similar initiatives in England, provides six inter-linked and inter-dependent forms of capacity that are crucial for local authorities to deliver national energy policy. They are outlined below.

(Table 1) – Description of different types of capacity

Responsibility: Statutory duties; defined administrative authority; often assigned by central government and/or national constitution

Political authority: Policy discretion; ability to make policy decisions in relation to the locality, rather than contributing to national policy

Finance: Financial resources; local tax raising abilities; capital assigned from central government; land

Personnel: Personal capital; number and quality of staff capable of making and implementing energy policies

Knowledge: Experience; access to specific forms of knowledge; sustainable learning and innovation

Energy materialities: Proximity to energy resources; low carbon energy assets; local infrastructure

Source^[12]

Gaps or limitations around the above capacities adversely impact on the ability to deliver maximum value for money by constraining the optimisation of:

• project scale: capital to development funding ratio needed;
• operational scale: ability to scale in light of consumer finance challenges;
• leverage: private to public capital funding ratio; and
• impact: societal benefit – the scale of public benefit generated.

Measures to successfully address these in delivering place-based retrofit models fall under four broad categories, which we shall consider in turn:

• technical capability and resource to develop projects and programmes;
• generating interest amongst financers including achieving a critical mass of sign-up;
• brokering services matching investible projects to interested private finance;
• Securing demand with sufficient customer sign-up to ensure required returns

Technical capability

As revenue funding availability is limited, coordination of spend is important here – as a methodology for place-based decarbonisation is developed, projects can learn from each other and share input from third party expertise. This will require moving away from a simple competitive project-by-project grant funding approach to a programmatic approach which can more efficiently deploy limited revenue funding by:

• building up local authority in-house capacity and capability;
• building up centrally provided support for local authorities;
• coordinating between projects (fostering a programmatic approach); and
• aligning spend on external expertise between projects.

Indeed, this is the approach of the Local Net Zero Accelerator programme from the Department for Energy Security and Net Zero (DESNZ) and employed by the Local Net Zero Hubs in England. Potential practical solutions to the challenge of limited public sector budgets include giving consideration to leveraging public sector revenue funding to bring in philanthropic and/or commercial contributions to fund technical assistance. Another avenue might be to consider making project development grant funding repayable under certain conditions. The repayment requirement could fall on the project vehicle and therefore be paid out of project capital rather than from the local authority. If administered by an arm’s length body, repaid grants could then be recycled into further projects.

Another important factor influencing the value for money of public sector spend is the ability to reduce the capital requirement relative to the outcome. Increasing capital efficiency has a leveraged impact on reducing public sector contribution to the capital. If capital efficiency can be increased, that is, reducing the size of the cost without reducing the size of the value created, then the total public funding required will also reduce, even as the amount of return-seeking finance remains the same.

Optimising spend, including considering how generation, storage and energy efficiency investments interact and can mutually reinforce each other can reduce the capital required per unit of carbon. Including collective assets, such as heat networks or networked ground source arrays can improve capital efficiency.

Generating interest amongst financiers

A key attraction of place-based models is the potential to achieve a critical mass through procuring and installing measures in high volume and in an integrated way. Creating this aggregated demand can lower the element of risk and therefore the cost of available capital.

As a means to foster greater aggregation under the place-based ‘umbrella’, we would advocate specific activities such as:

• detailed consideration and design of ‘the pipeline process’, encompassing all its component parts, including origination, project development, procurement and then aggregation;
• exploring regulatory reform which simplifies requirements around getting credit brokering licences while addressing other barriers which encourage increased private sector participation including around effectively managing lender risk exposure. The role of a Hubs Model of Procurement in fostering longer-term partnerships with the private sector should also be considered;
• testing the 3Ci/Living Places Net Zero Neighbourhood delivery model;
• utilising LHEES to develop an investible pipeline, one with the opportunity to innovate blended finance structures to fund that pipeline at scale;
• creating finance pathfinders which utilise existing resources to support experimentation in testing place-based models; and
• partnering with the finance community to develop aggregation models that can be applied in a clean heat context within Scotland.

Importantly, financial institutions look for simplicity, so when a mix of assets is being aggregated it is important to have clear synergies between them. Lessons on how to leverage private finance to help deliver at scale can be learned from elsewhere, for example, around offshore wind or the Power Networks Distribution Centre. We would also wish to highlight the appetite that already exists amongst some private sector employers for secondments into the public sector to help build capacity. This is an avenue that we would see as being beneficial to explore further.

While blended finance will be required to deliver these place-based models – and it is essential that the public sector provides some of the funding as a sign of its commitment – there is also the need to maximise the private sector component. A financial return for capital funders is essential, and typically consists of a contribution from energy bill savings. This can be achieved in different ways:

a. Patient finance – by extending the settlement period, the repayment of the capital component is spread over a longer timeframe, making the amount repaid each year smaller. This supports developing approaches that are suitable for private finance looking for long-term investment, for example, pension funds, life assurance and other annuity products^[13]. In relation to pension funds specifically, it is understood that this would entail the adaptation of certain fiscal rules for calculating public sector net debt to account for investment in productive assets by the National Wealth Fund and Great British Energy^[14]. Typically, these sources of funds need to invest at scale, meaning that aggregation becomes key, and can be delivered in a place-based scheme by planning for multiple properties within a neighbourhood.

b. Lower cost finance – fund design and the application of de-risking instruments can reduce risk, thereby reducing the required rate of return for investors. A lower interest rate means that the annual interest payment is smaller, and so more of the financial return can be used to repay capital. By aggregating investment demand to a fund structure, de-risking can be applied at a portfolio rather than project level, which is likely to be more efficient.

c. Commercial alignment – in addition to the financial return and the benefit to society, other commercial interests may benefit from the decarbonisation of place being considered. Co-investment from these interests could be negotiated into the funding, alongside traditional funds, and used to support:

• reducing long-term energy grid demands, benefiting network operators through reduced network upgrade requirements;
• reducing rainwater run-off to the sewage network through the inclusion of sustainable urban drainage components to the design, thereby reducing operational costs and reputational risks for water companies; and
• increasing built environment measures that improve properties EPC ratings, delivering mortgage book decarbonisation for mortgage providers within the scheme area, and enabling them to meet their regulatory requirements.

Brokering services

There are two broad approaches to matching projects with funding:

i. a financial brokering phase, to match individual projects with funders; and

ii. a fund development approach, to aggregate funding into a single vehicle, which then funds multiple projects.

i.) Financial Brokerage

The financial brokerage phase involves translating technical projects into investment prospectuses, socialising the project opportunities with the relevant finance community, and arranging the legal, financial and due diligence support required to execute the deal. Developing such a service is something that the Local Authority Advisory Service is exploring in England as part of Local Partnerships^[15].

The financial brokerage strand of the Local Authority Advisory Service seeks to bridge the final gap between the finance community and investible projects. It recognises that private financiers will be more likely to engage if they are presented with clear investment prospectuses that are accompanied with a level of due diligence (on the detail of individual strands of a project or aggregated programme).

The financial brokerage service would therefore seek to act as an intermediary and translator between private finance and public sector-led projects, so that relevant financial details were presented in a standardised way, making it easier for investors to assess and support public sector sponsors to secure other sources of funding such as grants. Building on this, the brokerage service could negotiate and execute deals on behalf of public sector sponsors.

Developing a credible brokerage service could also prove beneficial in terms of smoothing the journey for future projects, as private financiers come to trust the analysis from the brokerage service, making them more open to early engagement and negotiation around investible projects within a credible pipeline.

ii.) Fund Development

A fund development approach involves creating a single aggregated blended finance fund designed specifically to invest in multi-asset, place-based projects.

This could build on existing fund structures such as the Scottish Partnership for Regeneration in Urban Centres (SPRUCE), the Mayor of London's Energy Efficiency Fund (MEEF), and Efficient Decentralised Generation of Energy (EDGE) funds, blending a range of public and private sources of capital (both grant and repayable).

A key advantage of this approach is that it would provide project sponsors with a single point of funding and allow for greater standardisation of approach (business case templates, reporting structures, etc.) while also allowing de-risking approaches to be applied more efficiently at the fund rather than the project level.

It may well be the case that a financial brokerage approach is more appropriate to drive learnings for initial demonstrators (with a likely greater reliance on public funding) with funds making more sense as approaches start to scale. Again, a fund approach would likely benefit from collaboration with other UK regions to facilitate larger investors being able to invest at a national scale.

Securing demand

A key challenge that must be overcome to affect the huge transition required to meet net zero targets is to find a narrative and funding models that drives mass take-up of change. Simplistically, the behavioural change challenge can be broken into two key components: the motivation to participate; and the ability to afford to participate.

Both are necessary to drive mass take-up, although, as our Part 1 report discussed, there is a range of inter-linked factors that will influence consumer confidence to install clean heat or energy efficiency measures. These include factors such as, providing trusted advice and information to enable people to make informed decisions, having routes to redress which protect consumers if something does go wrong, and delivering the general marketing activity that increases individuals understanding of what the heat transition means for them and how to act.

The ability to fund the transition is often thought about in terms of the individual’s ability to borrow. The reality is that many households do not have the credit capacity to borrow the sums required to fund a whole-house retrofit in one go, even if they wanted to. Scotland has an ageing homeowner population, and, after the age of 55 years, access to longer-term borrowing products such as 25 year mortgages or retrofit equity release products for mortgage-free homeowners, is limited. First-time buyers continue to be severely impacted by the housing affordability crisis, and typically do not have further borrowing capacity after buying a first home. Financial solutions and subsidies therefore need to be tailored to the diverse needs of different demographics.

Furthermore motivation to borrow through a compelling narrative for property owners is currently lacking. Evidence suggests that the goal of reaching net zero is not yet a compelling enough narrative in and of itself. The Scottish Government’s Public Engagement Strategy (PES) published shortly after our Part 1 report, set out commitments that would help to develop and promote a consistent narrative on heat transition benefits. Disappointingly, very little progress seems to have been made to date with delivering the PES, a situation we hope the Scottish Government will address quickly.

Linking the changing of heating systems to outcomes that are meaningful to daily lives is likely to be more successful in gaining broad buy-in to act. For example, lower electricity bills as a direct result of more efficient heating systems, reduced energy usage though installation of energy efficiency measures, and improved health outcomes.

3.5 Taskforce insights from potential models considered

The cross-sector decarbonisation of a local area, encompassing multiple households, requires the installation of the physical and operational infrastructure to deliver a range of initiatives including, renewable heat provision, renewable power generation, and active and / or electrified travel options.

Investments will include elements with area-wide scale, such as heat networks and EV (electric vehicle) charging infrastructure, through to individual building scale, such as insulation and rooftop solar, which could be aggregated on a street-by-street or neighbourhood scale, with co-design input from the community.

This capital investment can deliver a range of inter-related benefits by driving:

• reduced emissions;
• reduced costs through the avoidance of energy curtailment, or need for energy grid upgrades through the inclusion of energy generation and storage;
• creating a financial return that can be captured from avoided energy costs, lower cost transport options, and, potentially, service fees around aspects such as mobility services; and
• additional value for society through physical and mental healthcare cost reductions, fostering local economic growth and productivity.

The Net Zero Neighbourhood (NZN) model was originally developed by the partners now at Living Places in 2021^[16] and set out with 3Ci in its published business case in 2023^[17]. It has generated substantial interest by those looking at place-based models. The concept takes a multi-asset approach to neighbourhood decarbonisation across domestic and commercial property retrofit, renewable energy, transport and waste. A key aim for this model is to reduce the scale of public subsidy required, whilst delivering interventions at no additional upfront cost to the homeowner.

In summary, this place-based model:

• delivers multiple interventions at a neighbourhood level to achieve scale;
• provides a blended funding model combining public and private investment;
• generates revenues by capturing part of the energy savings that result from the retrofit work; and
• links to local regeneration plans to maximise socio-economic co-benefits.

While not a place-based retrofit financing model, the UKGBC Retrofit Playbook is also worth highlighting as a tool to help local authority sponsors to develop projects and programmes. It provides a comprehensive resource to support local and combined authorities in the development of retrofit policies and initiatives, through sharing best practice and guidance. The Playbook forms part of the Accelerator Cities Programme, a project designed to support and enable local and combined authorities to take action on home retrofit. It is run by UKGBC and partners, with co-funding from EIT Climate-KIC. The Playbook is a guide, designed so that local authorities can ‘dip into’ those sections that are most relevant and useful to them.

Following on from the first phase of its work on a coordinated, area-based transition to low carbon heating^[18] – using open collaboration to create a blueprint for an ambitious, coordinated approach to decarbonising homes – Nesta has announced plans for a dedicated webpage that will include updates on new projects, case studies on existing heating projects, and insights into Nesta’s research.

Heat as a Service (HaaS) is another model that could facilitate widespread adoption of low carbon heating systems. By offering heating services rather than the upfront sale of equipment, it makes transitioning to renewable heat more accessible to households. This model ensures that the ongoing cost of heating is tied to performance and energy savings, which can drive adoption of energy efficient technologies. Challenges in developing HaaS models at scale tend to be due to complications around the ownership, and no commercial offering is currently available across the UK as there is currently insufficient market demand^[19].

3.6 Route to unlocking opportunity – Programme Development Unit

In articulating a clear approach to place-based delivery, we would look to the Scottish Government to take a leadership role in coordinating activity to –

(a.) develop new commercial models that begin to catalyse the development of a strong project pipeline of clean heat initiatives; and

(b.) facilitate the steps to de-risk large-scale investment, along with mechanisms that balance investor returns with community benefits.

While we have focused specifically on clean heat projects, we note that the need for a “real” project pipeline was among the recommendations of the First Minister’s Net Zero Investor Panel, which highlighted that projects forming the pipeline needed to be properly costed, shaped and prioritised^[20]. We fully concur with this reasoning.

The question is how to develop that pipeline for clean heat? We have concluded that a critical gap still exists. That is around the capacity and capability of project sponsors – often local authorities, although it can also be social landlords, third sector or community organisations – to develop projects in detail to an investment-ready stage. We do, though, recognise that comprehensive project development along these lines is an onerous and detailed undertaking, one that will require technical, legal and financial input.

Further, the methodologies to create the complex, place-based projects are not yet well established. We both need to innovate and design methodologies, while delivering the projects to test and iterate them. This suggests that simply plugging individual local authority capacity and capability gaps will not be sufficient. For a period at least, we think this means working with a smaller cohort of local authorities to develop approaches that can then be scaled across Scotland.

It is on this basis that we believe the Scottish Government can play a key role through the establishment of a Place-Based Programme driven by a new Programme Development Unit – somewhere that can provide a coordinated source of advice and specialist input, as well as helping to aggregate individual projects into scaled programmes and introducing sources of private capital.

A Programme Development Unit would need three core areas of funding:

• An initial cohort of local authorities would be given ring-fenced revenue funding for three years to ensure sufficient capacity to drive programmes forward in each location, and to support specific input to their demonstrator (for example, in relation to data acquisition, or partnership development for resident engagement).
• A central coordinating Unit to manage the programme, ensure learnings between demonstrators and with other national programmes are maximised; and to coordinate access to any required third-party expertise around engagement, governance, supply chain activation, business case development and securing funding.
• A budget to access third party expertise. A specific mechanism could be established for this procurement, or the Scottish Government could choose to leverage the dynamic procurement system (DPS) set up by DESNZ for its Local Net Zero Accelerator programme for exactly this purpose.

This structure would create a portfolio of Full Business Case (FBC) demonstrators that could be aggregated into an appropriate programme structure and collectively seek capital funding for implementation (through a brokerage service and/or establishment of a dedicated fund structure). Testing this could provide a template for roll-out of the approach more widely across Scotland.

Structures from existing blended finance funds could be modified to bring together central government de-risking instruments, such as guarantees or first loss capital, with grant capital and a range of private long-term debt instruments from both development banks and the commercial sector. This approach is demonstrated through the Greater London Authority’s (GLA) Green Finance Fund, which was launched in 2023 with aggregate funding of £500 million and has since allocated almost £220 million to eight eligible projects. The Green Finance Institute (GFI), a member of this Taskforce, were engaged to design and launch the GLA’s Green Finance Fund, including assessing financial models, project identification, corporate governance, and staffing requirements.

We acknowledge the potential risk of a Development Unit being overwhelmed by the sheer number of projects it is asked to support. Careful consideration will therefore be essential in determining when to offer detailed project support. One potential approach could be to offer a form of ‘triaging’ service as a gateway to receiving fuller assistance. This could offer an initial high-level assessment of a project’s investment readiness and sign-posting those at an earlier stage of development to existing guidance that is appropriate to their current needs.

This would allow the Development Unit to focus its technical and professional expertise on the more developed projects selected to be part of the Place-based Programme. Such an approach would mean providing overarching guidance to all projects in the development of the Business Case (Strategic Outline Case (SOC)) and then working more extensively with projects at the Outline Business Case (OBC) stage. With support of a brokerage service, projects could then move to the Full Business Case (FBC) development and implementation phases. This is likely a simplification of the actual pipeline maturity process with a number of phases of FBC delivery for each OBC project area as groups of residents form who are willing to move together within specific defined time periods.

(Table 2) – Programme Development Unit ‘triaging’ service

Idea

Strategic Outline Case

Business partners

Gateway (strategic)

Outline Business Case

Project Development Unit input

Delivery

Full Business Case

Brokerage advice

Procurement frameworks (materials, installation, etc.)

Framework contracts

We would see the Scottish Government as being best placed to lead on the creation of the Demonstrator Programme and the associated Development Unit, particularly to ensure that the existing public landscape is fully integrated into the programme. However, the Unit must draw on the financial expertise available through the Scottish National Investment Bank, Scottish Futures Trust (SFT) and the Economic Development Agencies, along with the knowledge and experience gained by a range of NGO/third sector organisations such as Living Places and GFI^[21]. Subject to procurement, these organisations could work together, drawing in others like 3Ci as helpful, to ensure that the programme will be able to balance project development with investor readiness and appetite.

Direct, Indirect and Community Benefits of place-based retrofit

3.7 Direct and indirect benefits

Clearly articulating the direct benefits (economic and employment) as well as indirect benefits (health and communities) should form a key part of the engagement and communications activity that is required to secure buy-in. Our considered view is that the transition to clean heat can and should be viewed as an opportunity for Scotland to capitalise on these benefits, rather than being seen as merely a cost.

The Government of Ireland summarised the multiple benefits of retrofit well in its National Retrofit Plan^[22] –

As recognised by the International Energy Agency, the traditional focus on energy savings as the main goal of energy efficiency policy has, at times, led to an underestimation of the full value of energy upgrades. Retrofit [and] home energy upgrades can bring multiple benefits, such as enhancing the sustainability of the energy system, supporting strategic objectives for economic and social development, promoting environmental goals and increasing prosperity.

Direct benefits relate to GVA and jobs impact. Most obviously, there is the work for businesses advising on or installing retrofit measures, with these businesses then creating and/or maintaining jobs. As many of the firms involved are SMEs, and because action is needed for properties right across Scotland, these direct benefits will tend to be distributed at a local level. There are also export opportunities for manufacturers in the clean heat and energy efficiency supply chain.

Additionally, more energy efficient properties use less energy and therefore (all else being equal) mean lower energy bills. By means of example, Citizens Advice has highlighted that homes that upgrade their energy efficiency to EPC band C could save up to £951 per year per household^[23]. For these households it can mean more disposable income which can be spent on clean heating systems, as well as in the local economy, where it will deliver multiplier impacts by supporting other service jobs and activities.

Direct benefits from heat transition

(Table 3) – Direct benefits from heat transition

Improved outcome

• Supporting benefits

Less spend on energy

• More resilient business / household budget
• Increased local capital circularity
• Increased opportunity for growth and renewal

Increase in GVA

• Increased job opportunities
• Locally distributed jobs
• Increased growth increases tax income
• Growth (including export) opportunities for supply chain e.g. heat pump manufacturers

Indirect benefits include warmer, safer homes, leading to healthier people, a corresponding reduction in healthcare spending, and increased productivity. This can happen by virtue of homes experiencing fewer conditions such as damp, resulting in people becoming sick less often, or chronic conditions like asthma having fewer flare-ups.

Productivity benefits from improved health will derive from fewer sick days, which, in turn, will enable firms to produce more from a given cost base. Individuals working in more comfortable and stable temperatures may also be better able to concentrate and therefore get through more work within a given time. Similarly, warmer, healthier homes are also more likely to lead to better educational outcomes for children.

There are also the resultant savings for the NHS. Cost-benefit analyses of the return on investment that could accrue from preventing fuel poverty amongst children and young people suggest that, for every £1 spent on reducing fuel poverty, a return in NHS savings of 12 pence can be expected from children’s health gains. When adults in the family are also included, this increases to 42 pence^[24]. Furthermore, common illnesses caused by cold homes during the winter currently cost the NHS around £1.4 billion every year^[25]. By improving energy efficiency in homes, not only can energy bills be reduced, but the financial strain on the NHS can also be alleviated by preventing cold-related health issues. Research by others, including by the London School of Hygiene and Tropical Medicine (LSHTM) echoes these health benefit conclusions^[26].

Indirect benefits from heat transition

(Table 4) – Indirect benefits from heat transition

Improved outcome

Supporting benefits

Healthier people

• Year-round more comfortable homes
• Less spend on healthcare
• Increased productivity

Avoided future costs of climate inaction

• More stable politics / society
• Increased energy security
• Reduced insurance and adaption costs
• Potential future government revenue stream from investment
• Action on heat needed to avoid catastrophic climate change

Community benefits

Alongside direct and indirect economic benefits, the potential community benefits should form part of the compelling narrative, which builds support for action at local, regional and national levels. In this respect, community is generally taken to comprise actors within a particular location that have a detailed knowledge of the local area, and that work together to deliver localised solutions to given challenges. However, much of the narrative around community benefits could also be applied to an interpretation of communities that focuses on a group of people that share a common identity, for example, religious affiliation^[27] or armed service veterans.

There are two aspects to community benefits worth considering. Firstly, there is the potential for place-based retrofitting projects to deliver wider community benefits and regeneration activities. Secondly, there is the opportunity, with agreement from the communities, to utilise community benefit funding from income streams available to a community, for example, from near-by wind turbines to fund retrofit projects.

A place-based model like the Net Zero Neighbourhood model proposes creating a not-for-profit Special Purpose Vehicle (SPV) to act as the entity responsible for delivering the place-based retrofit project and managing the blended finance stack. The SPV can also be responsible for a range of community investments that are co-designed with the local community. This will shift the narrative from a technical conversation about energy efficiency and carbon savings, to one about community regeneration and prosperity, whereby delivering coordinated retrofit activity can help unlock other enhancements valued by the community.

In relation to using funding available to a community to deliver retrofit projects, an example of a potential source is provided by the Good Practice Principles for Community Benefits from Onshore Renewable Energy Developments (first published in 2014^[28]) which encouraged the renewables industry to contribute towards community benefits funds. Such contributions provided a total of £15.7 million in 2019. They are voluntary arrangements, where the guideline for payments is £5,000, index linked, for each installed megawatt per annum^[29]. Such community benefits payments could, though, be made compulsory processes, thereby directing funds towards local communities^[30].

Substantial community benefit from energy related income is, furthermore, expected over next 30 plus years, with this growing markedly over time. It would therefore be helpful to have a strong pipeline of capital for projects and revenue funding for technical studies to inform spending by communities on solutions that could be replicated in other areas, whilst also providing visibility of supply chains for communities to utilise. By providing readily available and varied solutions, communities would be able to pick up a model that they are attracted to, tailor the business case and finetune the proposal, then replicate it across locations, perhaps with mentoring for inexperienced communities by more experienced communities.

While such benefits would need to be balanced against other priorities a community may wish to fund, such an approach does offer a potential route to helping finance local retrofit projects. However, as most communities are unlikely to possess the expertise and resources to develop coordinated retrofit installations for the whole community, it is more likely that the payments will need to be used alongside other funding sources, such as grants, to help people take individual action. Access to some central source of expertise and advice would help communities plan and deliver small-scale place-based projects.

A separate consideration relating to community benefits that needs to be taken into account during the project development phase is the question of who any longer-term benefits (beyond payback of the initial capital costs) should accrue to – commercial partners or to the community. A case can be made for either and it could be an important factor in securing buy-in from all parties involved. This is a question that should be addressed as part of the business case development process, supported by the advice that a Programme Development Unit could offer. Getting the initial governance design right will help ensure that a fixed portion of any revenues are funnelled directly back to the community at large.