HM Insights

Scottish Heat in Buildings Strategy: Ambition and Opportunity

By 2045 Our Homes and Buildings are Warmer, Greener and More Efficient”.

That is the policy ambition of the Scottish Government’s long-awaited draft Heat in Buildings Strategy, which sets out interim proposals for transforming heating systems in the 2020s en-route to net-zero in 2045. Published in February, the draft Strategy falls into a wider framework of recent legislative activity in this area; Holyrood recently passed the Heat Networks (Scotland) Bill, which will establish a new licensing system aimed at promoting and de-risking investment in district heating, with a new regulatory framework promised by the end of 2023.

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Heat decarbonisation is a multi-faceted issue which requires a "whole system" approach - from buildings standards, planning, fuel poverty and regulation, to up-skilling supply chains and beyond, and the draft Strategy can be welcomed for tackling a broad range of disparate sector-specific challenges. While containing some important announcements, it is acknowledged that Government policy will need to adapt as an increasingly sophisticated heat market evolves over the 2045 pathway. The purpose of the strategy is therefore chiefly to consult on the Government’s broader priorities.

The consultation is open until 30th April, with a final set of proposals to be announced once the incoming administration has settled post-May elections. Here, we cover some of the key points of interest.

Domestic buildings

To meet Scotland’s net zero target by 2045, 50% of homes, or over a million households, will need to convert to a zero or low emissions heating system by the end of the decade.

The scale of that challenge is clear. Today there are around 2.5 million occupied residential properties in Scotland, and the vast majority of these use mains gas as their primary heating fuel. Some 170,000 still use high emission fuels such as heating oil, LPG or high carbon solid mineral fuels such as coal, while only around 11% (approx. 278,000) of households have a renewable or very low emissions heating system, such as a heat pump, biomass boiler or electric storage heating.

Proposals

The Scottish Government plans to double the current number of renewable heating systems being installed in Scotland’s homes annually from the approximately 3000 this year. This will mean at least 64,000 per year by around 2025, with annual installations peaking in 2030 at over 200,000.

House builders will also need to adapt; while new-builds represent only a small part of the decarbonisation challenge, the Strategy says all new homes consented from 2024 will be required to use zero direct emissions heating systems, and a separate consultation on a New Built Heat Standard is currently underway.

To achieve these targets, the Scottish Government has promised an initial stimulus of £1.6 billion capital funding during the next five years through a number of delivery schemes, with an emphasis on helping lower income households as part of a "Just Transition" to a greener economy. Besides the clear emissions-saving benefits, this represents a significant economic opportunity for the wider supply chain; the Government expects that every £100 million invested in decarbonising building stock could support up to 1200 jobs, and the Government is working with industry on a Heat Pump Sector Deal, to be announced later this year. The Government wants Scotland to establish itself as a "centre of technical expertise" in the sector, with Scottish supply chains competing in markets in the rest of the UK and beyond. Longer term, it estimates the total investment required by 2045 to be in the region of £33 billion, although it notes that overall costs may fall as heat markets develop and technology becomes more affordable.

First and foremost, the Government wants to hear from industry if they think this pathway is achievable and plans to carry out further consultations later this year. The Strategy proposes the introduction of a new ‘Heat Target’, to help monitor and track progress and provide some clarity for businesses, communities and the wider supply chain as the pathway evolves.

Non-domestic buildings

There are approximately 220,000 non-domestic buildings in Scotland, accounting for 6% of Scotland’s total greenhouse gas emissions. By 2030, the Government wants 50,000 of these buildings to convert to zero emissions sources of heat.

Proposals

The requirement for all new-builds to use zero emissions heating systems by 2024 will also be phased-in for non-domestic buildings over a longer period.

For existing buildings, the Strategy repeats previously announced plans to extend Non-Domestic Energy Efficiency (NDEE) regulations, which require building owners to reduce heat demand through energy efficiency improvements, to cover all non-domestic buildings by 2045, starting with buildings with larger footprints.

A 90% relief from non-domestic rates will apply until 2024 for heat networks run from renewable sources. This may encourage non-domestic buildings to join their local networks, which will have a circular benefit where larger non-domestic buildings can provide a network ‘anchor load’. The Government will also consult on further tax changes to incentivise retrofits.

The Strategy highlights existing financial support schemes, such as the Energy Efficiency Business Support service and SME Loans. The Strategy says these loan schemes will continue until at least 2023. This comes as the UK Non-Domestic Renewable Heat Incentive closed at the end of March this year, with a new Clean Heat Grant Scheme and Green Gas Support Scheme currently in development.

A role for hydrogen?

Technologically, the Scottish Government wants to focus investment on so-called ‘No and Low Regrets’ systems; primary heating technologies already on the market which are known to be popular with consumers when switching from conventional systems. In other words, the emphasis will be on heat pumps and low-emission heat networks. That said, the paper also nods to the future role of green hydrogen. Hydrogen can be blended with natural gas into the mains gas network, and some parts of the gas network may see 100% hydrogen by 2030. 100% hydrogen may be particularly appropriate in areas where there is local supply (from surplus renewable electricity) or where industrial demand creates economies of scale.

However, the Strategy says that near-term technological constraints, coupled with a need to establish appropriate safety standards, means that decarbonised gas is unlikely to play a large part in reducing emissions from heating before the end of 2030. That may well be true, but there is increasing recognition in the market of the major role green hydrogen can play in decarbonisation and the Government may find consultees would like to see greater emphasis on hydrogen in the shorter term, given its diverse applications and the economic benefits investment in this sector could bring in the 2020s. The Scottish Government’s Hydrogen Policy Statement sets out their current thinking.

Regulation and Planning reform

The Scottish Government will introduce new regulations to set standards for heating and energy efficiency between 2023 and 2025, although the scope of these regulations will be constrained by Holyrood’s limited legislative competence in energy matters. These new regulations will cover domestic and non-domestic buildings and address both energy efficiency and their direct emissions from heating.

Proposals

The Strategy sets out plans for reforming the EPC rating system. Among other changes, it is proposed that future EPCs should detail measures needed to improve a building’s energy efficiency, recommend appropriate zero emissions heating supplies, and set out the cost of heating following these improvements. Having this information readily available may well encourage owners to invest.

The Government is considering extending existing ‘Permitted Development Rights’ in Planning law. Permitted Development Rights allow uncontroversial alterations to be carried out to buildings without specific planning permission. These can already extend to a range of technologies, including biomass heating, ground and water source air pumps and air source heat pumps. However, in some circumstances, planning permission may be required, so an extension to Permitted Development Rights to a wider range of technologies and buildings could encourage greater deployment.

Other regulatory proposals include a new Net Zero Carbon Public Buildings Standard, to be progressively applied to new build and major refurbishment projects across the public sector from early 2021, and a requirement for all properties in the private rented sector to reach a minimum EPC rating of D (although the rollout of this policy has been paused to reflect the impact of the Covid-19 pandemic on the sector). It is also suggested that owner occupied properties will need to meet an EPC C rating by 2035, where it is technically feasible or cost-effective to do so.

The Strategy also covers the new regulatory framework proposed in the Heat Networks Bill to promote district heating, which we have discussed in a previous article.

Conclusion

The decarbonisation of heat will play a pivotal role in meeting Scotland’s ambitious emissions reductions target, and the scale of the challenge is clear. Nothing short of a whole-system overhaul will suffice.

Government investment in the green heat sector will be critical, but public attitudes and private sector confidence will also be key to creating a robust market for energy efficiency and low/zero emissions heating that will be required over the long term. The draft Heat in Buildings Strategy seeks to address these challenges head on, and while the final details will not be available until the final Strategy is published and the results of ancillary consultations are known, the ambition in the draft Strategy will be welcomed for setting the agenda.

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As markets develop for low and zero emissions heat over the 2020s, we are likely to see an increasingly complex framework of regulation and statutory requirements. It will be important for builders and developers in particular to seek appropriate legal advice in this context. Harper Macleod is here to help.

 

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