Consultation on Scotland's Energy Efficiency Programme

Building industry awareness of the key milestones of SEEP will be vital to achieving its vision and objectives in a socially and economically sustainable manner. By giving industry sight of the long-term vision for SEEP, and the interim milestones towards that vision, companies can more effectively plan for investment in new skills and capabilities. Allied to this is the requirement to build industry confidence in SEEP and mitigate negative perceptions of energy efficiency policy that have arisen from past short-lived and / or ineffective initiatives such as the Green Deal, which did not result in significant customer demand. Through creating clarity and confidence around SEEP via early and sustained dialogue, Scottish industry will be better placed to support the delivery of its vision and objectives in the most socioeconomically advantageous manner for Scotland.

There would appear to be scope to make the energy efficiency demand reduction targets (6% domestic and 10% non-domestic) more ambitious in light of the progress that has already been achieved in recent years (i.e. Scotland’s heat demand has already fallen 15% since 2005).

Optimising building standards in line with support will be critical to increasing the energy performance of new build and existing housing stock. Standards can and should continue to become more demanding, without loopholes like “allowable solutions” that enable the installation of renewable energy generation in place of insulation or heat recovery solutions. The focus must first be on energy minimisation, through the fabric of the building and the efficiency of the building’s systems, and then on renewable energy solutions.

Regulation and standards are critical to achieving the objectives; however, ramping up standards in the short term, without a clear line of sight to further increases in standards risks wasting money on upgrading buildings in the short term, only to have to upgrade again at a future date.

Builders of private housing build to meet a purchaser price point and to satisfy minimum building standards. As standards increase, rising costs must be mitigated via some form of market / government mechanism, or by motivating purchasers to pay more for highly energy efficient homes. Purchasers will be unwilling or will find it increasingly difficult to pay for these additional costs levied on new homes if they are not subsequently reflected in the resale value of the building.

The implementation of standards for existing housing stock will be even more challenging than for new build homes. Minimum energy performance requirements as a condition of property rental may be an option, but would face opposition. Achieving performance standards in many older rental properties may not be practically possible or financially viable, leading to the significant decline in value of properties that could no longer be let.

There are also serious cost and value challenges to imposing performance standards on homes sold for owner occupation. Key will be market value of renovated housing. For most private buyers the amount of lending (mortgages) obtainable for purchase is dependent on the market value of the property. If improvements do not result in uplift in market value, potential buyers may not be able to raise sufficient borrowing, resulting in a disincentive for the existing owner in undertaking the investment.

Public support would be required to provide practical assistance with capital costs, “certification” of appropriate/approved solutions, and also some form of performance guarantee for both the rental and owner occupation market.

The trigger points should be at the point of sale or lease, but for domestic buildings the implications for owners, market valuations, and necessary public support mechanisms must be clearly thought through, publicly debated, and accepted.

A key challenge in retrofit is where a building is currently in occupation. Often retrofit of insulation and other energy systems, particularly in older properties, will be intense and of significant disruption – particularly in domestic settings – and is therefore a significant disincentive. Retrofit whilst the building is empty is the ideal solution and can often be achieved with public housing. However in the private market it is unusual for the homeowner to be able to finance significant “bridging finance” costs as well as the retrofit costs.

Area based schemes to address properties that are not sold or leased on a regular basis, and/or to provide demonstrator locations may be appropriate.

It is crucial to SEEP success that businesses invest, therefore a well designed incentive schemes, including independent, practical advice and guidance are essential. The existing interest free loan for SMEs is ideal, but is not as effective as it could be due to a lack of industry awareness. The existing enhanced capital allowances scheme also suffers from a lack of awareness and could benefit from being made clearer, as some businesses may find it too difficult to understand. Fiscal incentives such as rates relief would also be attractive to owners of non-domestic properties.

A reduction in or exemption from Land and Buildings Transaction Tax might be a positive market incentive for owners of domestic properties.

At present building performance / energy efficiency is not adequately evidenced to deliver a resale value differential for a highly efficient building. Current performance evidence available is patchy, and is generally “calculated” or “simulated” (i.e. like car manufacturer’s MPG figures) such that it is difficult for the public to understand or compare the energy efficiency performance of different houses. Consequently the market does not adequately recognise or value the increased efficiency of the building (i.e. as determined by lenders on the basis of the market value of the property), with the result being that purchasers are not be able to borrow the premium demanded for highly energy efficient homes, and either have to finance solutions themselves or opt for the lower efficiency options.

Comprehensive and trustworthy performance information is therefore required, particularly evidence derived from long term and widespread post-occupancy monitoring and evaluation which enables comparison between building construction types and renovated/un-renovated buildings. Recently implemented Home Reports appear to have had little discernible impact on purchaser choice or in property valuation, but could be enhanced through inclusion of actual energy consumption information (units of gas, electricity, solid fuels used etc).

While forecasting building energy performance is clearly important, control of energy is the key determining factor to reducing energy consumption from buildings, as owners / occupiers often lack the skill, experience and understanding to operate a building efficiently. Practical hands on support to understand building controls would be a good starting place.

Low interest loans might be needed to overcome cash flow issues if businesses or householders are being required to upgrade prior to sale or lease. Grants should be used selectively to achieve objectives that might be hard to achieve (e.g. to persuade replacement of a relatively new gas boiler with participation in a district heating scheme; or particularly intrusive/disruptive insulation installation in older/”hard to fit” properties, or properties with additional costs arising from protection or reinstatement architectural or conservation features.

There are clear lessons to be learnt from the failure of the Green Deal in designing the support mechanisms for SEEP. The sheer complexity of the Green Deal proved to be a major barrier for applicants, therefore SEEP should aim to make it as easy as possible for householders/businesses to invest in energy efficiency and heat decarbonisation via easy to complete loan forms, “certified” installers,” certified” solutions, clear cost certainty, practical help with procurement, accessible demonstration properties, case studies, etc.

There are a number of critical barriers to the greater adoption of energy efficiency and low carbon heating that could be addressed through improved advice and support for property owners / occupiers. The SEEP Pathfinder Pilots could present a good opportunity to assess the efficacy of different approaches to advice and support prior to Phase 2 of SEEP.

One of the principle barriers to the retrofit of existing properties is lack of knowledge / uncertainty of the benefits (Physical, Environmental & Return on Investment) amongst property owners, most of whom have little or no construction related knowledge or expertise. Decision makers frequently face issues such as the ‘uniqueness’ of their property, uncertainty about the range of solutions, uncertainty about issues that may arise during retrofit, limited visibility of the previous performance of contractors, and limited access to actual performance improvement evidence. For many private householders, energy efficiency retrofit is a “leap in the dark” with more reasons not to do it than to do it. Therefore, advice needs to be authoritative and made as easy as possible to access as many potential purchasers already perceive the process of installing energy efficiency measures as being simply too challenging for their property.

Another key barrier is the highly fragmented & diverse nature of home ownership, as well as the diverse nature and age of housing stock (i.e. thousands of individual owners of individual properties, each with different energy challenges, each with differing financial circumstances, and differing tenure/house move plans/intentions), which means that information, advice, and assistance/incentives have to be similarly differentiated.

It therefore follows that targeting decision makers controlling large portfolios of homes (e.g. private and public landlords, property investment organisations, etc) would deliver the largest energy and environmental impact over the short term. Targeting groups of owners / occupiers close to a “move” decision point with specific messaging is also likely to result in more positive retrofit decisions, provided “easy” mechanisms and credible benefits are also in place, and especially if improvements positively impact on the property value.

There is scope to improve the provision of advice, as outlined in response to question 11.

The range of energy efficiency initiatives across the UK may prove difficult and time consuming for potential participants to understand; therefore, anything that can be done to ensure clear and consistent messaging, and improving signposting across initiatives, or “one and done” applications(including the smart meter rollout) would be of benefit to end users.

There may also be synergies between SEEP and the smart meters rollout, as the new meters open opportunities to gather actual energy consumption information for inclusion in Home Reports, or to monitor before and after performance enhancements, or to maximise the economy and effectiveness of heat pumps and associated storage, for example, through arbitrage and demand response services.

A key characteristic behind the lack of traction with Green Deal was its complexity, which was evident at each stage of the incentive. SEEP must avoid these characteristics, and in particular needs to provide a transparent mechanism through which decision makers are able to understand clear and definitive solutions, costs and benefits.

A key characteristic of the construction sector is the very high volume of very small local businesses spread across the country. Whilst this provides the opportunity for local delivery, in practice most of these businesses are not large enough to be able to afford the time and effort to learn about new energy efficiency and low carbon heating solutions Larger construction businesses are more likely to be able to develop and deploy the necessary competences to deliver new energy efficiency and low carbon heat solutions, but will only do so if they believe demand for those services will justify the investment. Those who did previously (e.g. under Green Deal) may be reluctant to do so again given the slow/small scale demand generated. Therefore, early and sustained dialogue with installer and solution provider businesses is critical to addressing some of the negative perceptions created by previous short-lived and / or ineffective policy initiatives.

Recent research by the Energy Savings Trust and Scottish Enterprise has suggested that there is a potential barrier to opportunities for a substantial proportion of the Scottish supply chain that aren’t already on existing procurement frameworks, or feel able to meaningfully engage with buyers via Public Contracts Scotland (PCS). More should be done to educate the supply chain about the role and use of PCS and ensure that they are fully aware about the requirement to be on frameworks. Also public sector buyers should be encouraged to periodically refresh their frameworks to provide new opportunities to the broader supply chain.

Procurement decisions made by local authorities and other public sector buyers tend to be predominantly focused on price, and on-line procurement systems do not always enable the assessment of innovative solutions that may deliver energy performance improvements. This may limit the opportunity for more innovative Scottish suppliers to win business and grow their companies. The role of sub-contracting is important in enabling smaller suppliers to fully engage with the opportunities presented in the current market. Buyers increasingly look for holistic programmes of works where they can package a number of different measures. To leverage these opportunities therefore, smaller suppliers need to be encouraged and facilitated to work in collaboration with others.

Awareness raising, access to market intelligence and other forms of supply chain development support will be important for ensuring businesses are able to benefit from the growth of Scotland’s energy efficiency and low carbon heat sector. Scottish Enterprise’s Offshore Wind and Marine ‘Expert Support’ programmes have sought to address some of the barriers to entry to the offshore renewables supply chain through awareness raising events, market intelligence, and one-to-one consultancy support for qualifying businesses. An Expert Support service is currently being piloted for the low carbon heat sector and a similar service could be developed for energy efficiency. SE could work with Scottish Government and industry to develop a SEEP supplier development programme which could include a range of mechanisms, market intelligence, consultancy provision, support for innovation and skills development.

In general, certainty of future demand will be vital for businesses of all sizes to plan ahead and invest with confidence in the necessary skills and capabilities to service Scotland energy efficiency and low carbon heat sectors.

Clauses in contracts can encourage use of local companies and training of local people, but need to take into account the fact that many smaller businesses may not be able to afford the time and effort of learning about new energy efficiency and low carbon heating solutions, nor be willing to take the risk of investing in new skills and capabilities without sight of sufficient volumes of additional contracts. There is also often limited opportunity for smaller businesses to gain sufficient, and ongoing practical experience to master the new technologies and solutions to install them correctly to delivery the full theoretical benefits.

As outlined in response to question 17 above, awareness raising and access to supply chain development support can help address some of the barriers to local businesses entering the energy efficiency and low carbon heat supply chains. Skills Development Scotland may also have a role to play in helping to address some of skills challenges faced by potential supply chain entrants.

Our research indicates that most insulation products are relatively low value, and many are already manufactured in the UK. However, older properties will require new, more sophisticated, often non -intrusive insulation solutions – many of which require further development. Most heating equipment is imported from Europe, with Scottish companies largely focussed on resale, design and installation activities. There may be potential to increase Scottish content in the low carbon heat and energy efficiency sectors, but this is predicated on greater demand certainty in the future, stimulating investment by existing Scottish companies, diversification from other sectors, or inward investment. Industry needs visibility of a pipeline of projects, or it will not respond to the degree and timescale required. Clearer line of sight of the different phases and milestones of SEEP would make it easier for Scottish companies to plan for investment, so they are in a position to respond to the market as it develops.

As outlined in response to question 17 above, awareness raising and access to supply chain development support can help address some of the barriers to local businesses entering the energy efficiency and low carbon heat supply chains.

As outlined in response to question 17 above, awareness raising and access to supply chain development support can help address some of the barriers to local businesses entering the energy efficiency and low carbon heat supply chains.

Generally speaking most technical solutions to achieve increased energy efficiency in new build and retrofit already exist in the market, however, there are some gaps to be addressed (e.g. aesthetic / difficult buildings / prohibitive costs) that could be overcome with larger scale manufacturing efficiencies and focused innovation investment. The generally small scale and fragmented nature of past energy efficiency initiatives have militated against investment to reduce solution costs, resulting in a market with many competing solutions but few economies of scale. Therefore, the provision of innovation support through SEEP could help to address these challenge areas.

As outlined in response to questions 17 – 21, Scottish Enterprise has a role to play in supporting the development of the Scottish energy efficiency and low carbon heat supply chains and in partnership with the Construction Scotland Innovation Centre the development of new construction products and solutions.

Area based projects could have a role in tackling energy efficiency and heating challenges specific to some parts of the country and not others (i.e. largely rural areas will face different challenges to largely urban areas). They could also potentially provide demonstration test beds or “marketing lighthouses” (e.g. X the Energy Efficient Town/Community). Further research into identifying and characterising different area typologies may help as a first step to developing area specific solutions.

Nationally based targets are important, but need to be aligned with what is possible at a local area so guidance support (e.g. case studies) will be essential.

Targets need to be set centrally, but allow sufficient flexibility for differential levels of local delivery – however focus will need to be given to ensuring consistency and adoption across local planning / building control functions to optimise adoption (e.g. nationally recognised and approved solutions fast-tracking/obviating local planning application processes).

It is suggested that a governance structure should include industry participation, both to aid design and implementation, but also to encourage industry recognition and confidence.

Actual energy performance improvement information will be key to encouraging take up. It is therefore crucial that the Framework gathers and publishes both installation cost, performance improvement information, at installation solution/material type, and property category. Ideally this should be via an open source database.

Energy efficiency and heat must be considered together in the context of the building type, tenure, and location (urban/rural). For example, it may be equally beneficial to focus energy efficiency measures on homes that are considered suitable for heat pumps in rural (farm/estate cottages) or urban locations (public housing estates) whether this is heat pumps to individual properties or for district heating.

It is not clear whether SEEP applies only to heat and energy efficiency of buildings, or whether its scope also covers energy efficiency from industrial processes. If it is the latter then more consideration is needed to the governance and delivery arrangements for promoting industrial energy efficiency.

Public customers (e.g. local authorities, registered social landlords, then NHS, etc) could play an important role in achieving the aims and objectives of SEEP and catalysing the construction industry by influencing change. Public customers have significant leverage and buying power, and concentrated decision making control over many more properties than individual householders.

The public customer has the potential to make consistent, joined up, and innovative public procurement decisions for new build (and retrofit), and as a result has the potential to provide long term “line of sight” for industry via larger scale (multi annual, multi client, multi site) public contracts, and as a result provide industry confidence to invest capital in better, more efficient and effective, better priced solutions for both new build and retrofit. This includes:
• “Standardised” universal building type designs (aesthetically customisable)
• Offsite manufacturing facilities/capacity
• Standardised / compatible construction systems.
• Improved building design/actual performance
• Standardised (and certificated) insulation retrofit “building type” (e.g. 4 in a block, multi-story, stone built etc) solution systems
• Recognised standardised retrofit “implementation” type performance improvements & costs

Such policy commitments will result in:
• Increased Industry commitment to innovation and improvement
• Increased consumer/market confidence in SEEP
• Increasing “solution” performance
• Reducing “solution” costs, and
• Increasing take-up/implementation of energy efficiency / low carbon solutions