Green Heat Finance Taskforce: report - part 2

8. Annex 1 - Summary of Part 1 Report

We published our Part 1 report in November 2023, highlighting barriers constraining private finance provision for installing clean heating systems, identifying opportunities to develop new products at scale and making nine recommendations to the Scottish Government intended to help increase the flow of private finance through products best suited to individual property owners’ circumstances.

We concluded that the market for financing retrofit is currently immature but expanding, and has substantial growth potential in the short, medium, and longer-term, provided demand for clean heating systems increases sufficiently. This includes through products such as additional secured borrowing, consumer finance solutions integrated into retrofit journeys, equity release specifically for retrofit, and property (as opposed to individual) linked finance.

We acknowledged that ensuring financing solutions are ready to deploy, and at scale, is just one aspect of creating a functioning market for green finance. Other key factors include, skills availability, supply chain capability, trusted customer advice and quality assurance procedures. All these factors need to be addressed alongside finance, and all require concerted and coordinated action across the short to medium-term if Scotland’s clean heat ambitions are to be realised.

Underpinning this, we highlighted the need to foster market confidence by providing clear signals around the direction of policy development. Engendering such confidence for lenders will allow them to continue to develop new finance products. This will also extend to businesses, encouraging them to invest in upskilling their workforces and building their supply chain capacity. The needs of consumers must also be considered and will necessitate the consistent provision of reliable and trusted advice on the best solutions for individual property owners, as well as quality assurance and routes to redress should anything go wrong. Our first report therefore recognised the role that effective regulation can provide in market making.

We also highlighted that individual property owners with the ability to self-fund at least part of the required works are most likely to be the early adopters, and that some individual finance products covering the upfront costs of work are the closest to being deployable at scale in the short-term. Our Part 1 recommendations were:

1. Scottish Government, from early 2024, should work with the Green Finance Institute, Scottish Financial Enterprise (SFE) and others to expand current market engagement with brokers, finance providers, distributors and quantity surveyors to generate greater public awareness of financing products like green mortgages and encourage their expansion;

2. Scottish Government should begin work, from early 2024, in partnership with the Equity Release Council, to develop an information framework and guidance for Green Retrofit Equity Release products;

3. Scottish Government should research co-investment vehicles – blended finance with public and private input – with the support of the Scottish National Investment Bank (SNIB), SFE and SFT, to identify by the end of 2024 where and how to test the approach in Scotland;

4. Scottish Government should collaborate with the Green Finance Institute to research the potential for Property Linked Financing in Scotland, with a view to establishing a scalable demonstrator by May 2025;

5. Scottish Government should review and publish, by the end of 2024, the potential of incentivising domestic property owners to increase levels of retrofit works through fiscal and taxation policy;

6. Scottish Government should review and publish, by the end of 2024, analysis of how non-domestic rates reliefs can better support and encourage investment in energy efficiency and zero direct emissions heating (ZDEH);

7. Scottish Government should seek to mitigate the split incentive issue by researching and piloting, by early 2025, the potential for green rental agreements, to encourage retrofitting in rented properties;

8. Scottish Government should immediately engage the UK Government and regulators to drive action on ZDEH and energy efficiency deployment, and support coordination of activities between parties; and

9. Scottish Government should, by mid-2024, map current heat in building data gaps and establish a framework to promote open data sharing to address these.