Centre for Energy Policy response toScotland's Energy Efficiency Programme (SEEP)

	Christian Cavillo CXC fellow & Research Associate 		Ian Cochran Visiting Scholar (I4CE - Institute for Climate Economics, Paris)
	Fiona Riddoch Former Senior Knowledge Exchange Fellow		Karen Turner Director, Centre for Energy Policy

Please note: Some of the consultation questions are unanswered, as we considered they fall outside our area of expertise.

1. What currently works well, including aspects of existing schemes that should be retained?

At this point, we do not have any specific comments on the elements of the SEEP that are currently functioning well. This is partially because on some issues there is insufficient information to assess how SEEP is impacting the decisions made by individual actors (principally households). This is particularly the case in the area of assessing how SEEP incentivizes and makes economically viable energy efficiency investments by individuals.

It is thus recommended that the Scottish Government conduct an in-depth assessment of the current state of play of investment in energy efficiency (EE) – and how individuals are financing these projects. The impact of the SEEP program on leveraging both additional end-investment, as well as access to financial resource, could thus be better understood in context.

This exercise could be used to understand more broadly how the Scottish Government could build on what is working today – and identify potential additional pathways for ensuring an economic incentive and rational for households and corporate actors to invest in EE – as well as facilitate access to capital and other resources. The different types of financial resources, financing instruments and the role of financial intermediaries is further discussed below in relation to question 7.

Examples of this type of assessment have been conducted in a number of European Countries including France, Germany and Belgium. Furthermore, the Scottish Government recently participated in an expert workshop at the European Environment Agency in October 2016 on the topic[1]. See (I4CE, 2016) for an example of the French example of such a study.

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2. What are the main delivery challenges faced at present and how might these be overcome?

Issue: Policy complexity. In the consultation document, several programmes and schemes are mentioned as ongoing energy efficiency policies by the Scottish Government. So far, this has not been seen as a problem. However, if new programmes and policies are included to existing ones, stakeholders could see this large number of programmes as too complex to participate in (e.g. to which programme should I apply? Do I need to prepare multiple applications?).

Indeed, it is mentioned in (Scheffler, n.d.) that complex policies are inefficient: “For the government, more complexity means additional resources poured into drafting, proposing, rewriting, defending, and enforcing laws and regulations. (…) Complex laws also garner less popular support since they are harder to understand”.

Proposal: the Scottish government should make sure that it is easy for the stakeholders to know what the regulations they need to follow are, and where to go and how to apply for energy efficiency measures.

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Issue: Lack of confidence on energy efficiency ratings.

Proposal: This could be solved by certifying and regulating the companies that do energy efficiency assessments and the energy efficiency contractors (UK Government, 2016).

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Issue: Lack of acceptable solutions from the building industry for the challenges of the built environment.

Proposal: Extend the currently proposed “pilot projects “ for efficiency in the built environment as necessary to identify solutions and areas for further solution development in the most challenging existing building retrofit cases. Encourage private sector – public – university collaboration to ensure verifiably transferable results.

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Issue: Lack of skills and manpower in the building sector to deliver the modern EE approaches.

Proposal: Have Skills Development Scotland and the “developing the young workforce” initiative (Scottish Government, 2014) include sustainability and building skills as a priority in their programme. Work with Colleges and Universities to deliver the necessary training, education and research structure to bring the skills of the Scottish workforce up to advanced European standards in parallel with the Governments funding of energy efficiency programmes.

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Issue: Lack of evidence based improvements from renovation work already carried out.

Proposal: Make verification of the delivered energy efficiency improvements a contractual requirement of the pilot and publicly funded programmes. Develop a certification and regulation structure for energy efficiency improvements which ensures the sectors quality of service and delivery to customers.

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Issue: The very high estimated up front cost of driving de-carbonisation of domestic sector through energy efficiency improvements. Today, there appears to be a lack of clear visibility on how energy efficiency project developers can access capital to conduct projects at rates sufficiently attractive to incentivize action. This may be linked on one hand to a lack of a clear economic case for energy efficiency investments (returns too far in the future) or that costs of finance (whether in terms of interest rates, transaction costs, etc.) is too elevated.

Proposal: Encourage innovative approaches and innovative business models for refurbishing existing buildings through the pilot energy efficiency projects funded by Scottish Government (Energiesprong (Energiesprong, n.d.)). Explore the transferability of European funding models such as KfW (Kreditanstalt für Wiederaufbau (KfW), n.d.) to encourage the widest participation in self-funded improvements to energy efficiency.

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3. How can Scotland best meet this vision and underpinning objectives in a way that is both socially and economically sustainable and supports long-term inclusive growth?

The objectives in the SEEP consultation document relate to decarbonisation of heat and energy efficiency improvements. Although this is set in the context of “continuing to help tackle fuel poverty and ensuring Scotland is a good place to do business”, there is no clear target on energy affordability, either specifically on tackling fuel poverty or extending to wider affordability issues for all Scottish households or for Scottish business/industry.

In terms of the former, requirements to demonstrate a reduction in fuel poverty through pursuit of the energy efficiency and decarbonisation programmes should be included in the final policy proposals. However, ideally SEEP should consider the issue of energy affordability on a wider scale, including linking to business and the competitiveness of the Scottish economy (a focus that is more prevalent in the UK Green Paper on Industrial Strategy).

In this respect, a recent EPSRC research project[2] led by the Centre for Energy Policy at the University of Strathclyde International Public Policy Institute, may provide valuable insight that may be of use in considering how energy efficiency in different sectors of the economy may impact the social and economic sustainability of plans under SEEP and ultimately support long-term inclusive growth. While much of this research has been UK focussed, the team has engaged (e.g. (Turner et al., 2016) and (Figus et al., 2017)) and is engaging[3] in Scottish focussed analysis. Generally, the work has so far delivered the following insights that are likely to be particularly relevant for SEEP:

• Supporting increased energy efficiency in low income households will not only reduce required spending on energy but boost the real purchasing power of these households. As the economy expands in response to improved energy efficiency (as more efficient households spend the savings on energy bills) this will also boost the level of real income of all households. However, where low income households have limited access to and/or reliance on the type of wage and/or capital incomes generated within the expanding economy, and/or household actors are on low wage rates, the gains to real household incomes will be limited.
• While, as argued by the International Energy Agency via their 2014 ‘Multiple Benefits’ project (IEA, 2014) energy efficiency will generally trigger a process of sustained economic expansion, there are a few key qualifications to note:

1. Where efficiency improves in low income households, the impact on consumer spending that drives expansion may be limited (because of their limited incomes/spending power);
2. Generally, any economic expansionary processes that is demand driven (in the current context, consumer spending enabled by increased household energy efficiency and lower energy bills) may put upward pressure on prices (over different time frames) and thus have implications for the wider competitiveness of the Scottish economy;
3. While energy efficiency gains on the production side of the economy have similar impacts to productivity gains via improved competitiveness, the gains realised depend on the nature of activity in the sector in question. Where efficiency improvements are focussed in public sector activities that have limited downstream and export interactions and thus impacts, the main gains in terms of sustainable economic growth may be in public budgets rather than GDP, employment and household incomes.

Finally, it is important to be aware that it is not clear that decarbonisation of heat will lead in the short and near term to lower fuel prices thus any strategy must consider support of fuel poor households. Any decarbonisation strategy must maintain public support and significant fuel price rises must be fairly distributed and must deliver clear customer benefits. For instance, the decarbonisation of heat. What happens if all that heat demand becomes electric as a way of decarbonising? Will that increase the price of electricity, making it less affordable? These potential conflicts should be discussed, and a mitigation plan should be included with the objectives.

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4. We would welcome stakeholders’ views on how to set appropriate milestones for energy efficiency improvement and heat decarbonisation of buildings to ensure that the level of emissions reduction ambition (i.e. near-zero carbon buildings) is achieved.

In the Energy Conversations event: “Effective but not investible - there is no market for energy efficiency” (Centre for Energy Policy, 2017), the following problems regarding the stated targets were mentioned:

• SEEP targets seem to be too ambitious and probably not fully achievable.
• The main challenge for the targets is that the delivery measures are not available (lack of qualified work force, lack of supply chain and other related industries, etc.). In the same discussion, it was also recognised that even if the targets are not fully reached, they show the direction to go and hence a target of some kind is needed. The general perception of the exchange was that the target as stated is overly ambitious (in the discussion in (Centre for Energy Policy, 2017), it was remarked that considering the building stock of Scotland, you need to renovate and change a household’s energy supply to a low carbon one every 90 seconds for the next 15 Years) and risks undermining its own aim by being clearly unachievable when you take into account the skills and capacity which are available in the market today.
• From the perspective of public acceptance it may be better to set an ambitious target based on a forecast of what is possible in the near years rather than to accept a target set on back casting from 2050. Moreover, there is motivational advantage in establishing reasonable near-term expectations; a strategy built on forward looking milestones (ambitious but realistic) are likely to encourage the public in the potential for success and also provide invaluable learning on what measures work.
• However, concern was also expressed that the wider public may not accept the ambitious carbon targets set by the Scottish governments. This may restrict individual investment in EE, that is where the private return is limited and long term and the social return is not recognised. In this basis, motivation for EE via a wider range of private and social returns (e.g. health, economic, etc.) Is recommended.

In SEEP consultation document, there is an indicative route map in page 5. However, it does not include any intermediate targets. Considering the ambitious goals of SEEP (and even if they are not totally achieved), we believe it is important to have reasonable intermediate targets to assess the efficacy of the programmes and amend them if necessary.

Alternatively, intermediate assessment points could be placed. Then, if a certain level has not been achieved, it would be possible to revisit the plans and the actions underway and foreseen.

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5. How might regulation and standards be used most effectively across the different sectors and when should they be applied across the lifetime of the programme?

It has been remarked in (Centre for Energy Policy, 2017) that currently, there is no market for energy efficiency (no supply, no demand, no financial mechanisms), which could be considered a market failure. In the same discussion, it was recognised that education programmes could be a solution for this, as it is an important tool to influence people to take action. However, that will not deliver the required outcomes in the scale or speed required. Therefore, regulation is possibly the only real solution to create a market, making EE improvements investible.

Certainly, standards and regulation are a widely accepted approach in policy making to achieve energy efficiency actions. However, these regulations and standards need to be clear, transparent and easy to apply to improve its efficacy (see the comments on question 2 and below).

It is important to remark that, it is likely that incentive-based instruments have a higher acceptance probability than “bans and rules” (Pleger, 2017). Therefore, and as remarked in (Centre for Energy Policy, 2017), regulation should create the market, and if possible, the Scottish government should try that the regulation is accompanied with incentives for stakeholders (e.g. tax reductions or rebates), or at least provide fiscal mechanisms to facilitate the implementation (e.g. very low interest loans).

However, concerned was expressed in (Centre for Energy Policy, 2017) that regulation must be approached with caution. In contrast to other areas of regulation (e.g. smoking ban) EE requires private investment expenditure where private return are not clear and societal returns may not be widely accepted.

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6. What should be the trigger points for buildings to meet standards? Should this differ between domestic and non-domestic buildings, and if so, how?

Looking into examples from other countries, it seems that reasonable trigger points could be at selling properties. However, when starting a leasing could also be a good trigger point. Some related policy examples are:  

• The Residential Energy Conservation Ordinance[4] in San Francisco, US (San Francisco Department of the Environment, 2011). Under this ordinance, when preparing to sell a property, the homeowners are obliged to: a) Obtain a valid inspection, b) Install basic energy and water conservation devices or materials, and c) obtain a certificate of compliance.
• The SmartRegs[4] in Boulder, Colorado, US (The City of Boulder, n.d.). The regulations ensure a basic standard of energy efficiency in all rental units within the City of Boulder by January 2019.

Moreover, information should be provided so that stakeholders understand that energy efficiency measures give value to their buildings (if that can be shown). For instance, a study in Ireland showed that “energy efficiency has a positive effect on both the sales and rental prices of properties, and that the effect is significantly stronger in the sales segment of the property market” (Lyons and Hyland, 2012). 

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7. What do you think are the benefits of using financial and fiscal incentives to support energy efficiency in domestic and non-domestic buildings? Please give examples, from Scotland or elsewhere, of where incentives have been used in this way to good effect.

A strong case can be made for Scottish Government to implement financial and fiscal incentive programs to support energy efficiency action. Depending on the approaches and the instruments used, this can have either a high or low direct impact on the public budget and use of public funds.

Studies looking at how end investment in energy efficiency by households in a number of European countries (Belgium, Germany, France) consistently indicate that households in particular finance the majority of the necessary works through savings and the use of commercial debt products. However, to scale up investment levels to match the ambition of climate objectives internationally, it appears necessary to combine incentives for project developers to invest fund that they have access to readily (fiscal incentives) and improve access to, and the conditions of financing for, additional capital.

Fiscal incentives:

• It is recognised in the SEEP consultation document that energy efficiency not only contributes in tackling climate change but provides other benefits as well, such as improved health and productivity due to warmer houses and work places, and other wider economy benefits (see response to Q3, (Turner et al., 2016) and (IEA, 2014)).
• Therefore, if the home owner is going to do work for the public good, then offsetting the EE investments via tax deductions could be a sensible approach. The home owner is delivering the desired result and will have an interest in doing so at best value.
• Moreover, tax deductions are not the only option. For instance, the US offers tax credits, rebates and financing for residential energy efficiency and renewable energy sources (US Department of Energy, n.d.).

Financial Incentives:

In addition to fiscal incentives, a number of financial instruments are used to assist project developers to achieve their Energy Efficiency investments. These can include:

Direct subsidies issued by the government

• Performance bonus subsidies for surpassing EE regulatory standards
• Subsidies for low-income and fuel poverty housing (France (PrimesEnergie.fr, n.d.))

Tailored debt products

• Zero-interest loans (France (Ministère de l’Environnement, de l’Énergie et de la Mer, n.d.))
• Reduced VAT for certain products and works (France (Agence de l’Environnement et de la Maîtrise de l’Énergie, n.d.))
• Green credit or onlending approaches (Onlending program run by KfW in Germany (Kreditanstalt für Wiederaufbau (KfW), n.d.))

Often these programs require the involvement of a number of financial intermediaries with the technical capacity or training component to support the roll-out, including:

Public financial institutions. A case could be made to expand the role of the Scottish Investment Bank to play an active role in channelling financing to energy efficiency projects. For example, the Scottish Investment Bank could administer a credit line program using its credit rating to leverage capital at better conditions than currently available for small-scale project developers and on-lend these funds through a green credit line program through local commercial financial institutions. See (Cochran et al., 2014) for further details on the role these institutions play in different European contexts.

Local commercial financial institutions. Existing commercial banks and financial channels appear to play an essential role for connecting incentives and subsidies concessional funding to the large number of small-scale projects that must occur to meet the objectives laid out.

Institutional investors. While principally involved in secondary financial markets, pension funds, and the managers of assets held by investment funds and insurance companies can play a role if the suitable financial instruments and vehicles are developed (i.e. Investment funds targeting energy efficiency, securitisation of high-quality EE debt products from banks, etc.). 

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9. How should the installation of energy efficiency improvements and lower carbon heat supply through SEEP be funded? In particular, where should the balance lie between grant funding and loans for homeowners, landlords and businesses?

Considering that energy efficiency is part of the climate change and decarbonisation agenda, it requires that the government funds (at least partly) the action on behalf of the public good. However, and as previously mentioned, if there is not enough budget, the government may need to consider progressively introducing standards and regulations for private owners and industry, as well as developing and introducing (where it is possible to do so under devolved powers) financial and fiscal incentives.

The share between founding and grants depends heavily on the market (promoted with regulation) and the economic possibilities of each individual. How desirable is energy efficiency? How much can people afford to invest in energy efficiency?

In our perspective, establishing ex-ante the ‘correct’ balance between grant funding and loans is not necessarily the pertinent question. Rather, the Scottish Government should explore means of targeting the use of public funds (whether in the form of grant funding or otherwise) to improve and leverage the access to debt finance. This could be done through:

• Use of public funds to partially subsidise the interest rates of targeted loan products promoted by the commercial banking network (Green Credit Lines, for instance: (Agence Française de Développement, n.d.)).
• Pairing of targeted debt products with subsides to incentivize going beyond current energy efficiency regulations (performance bonuses).
• On-lending of public funds through credit lines – if properly structured, this can have little to no impact on the public budget (beyond counting against any Maastricht-style limits on public debt) if the government is able to access funds at conditions better than typical market actors conducting energy efficiency programs.

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10. What is needed to encourage private investment in energy efficiency and heat decarbonisation, including the take-up of loans by a wider range of owners and occupiers?

As remarked in (Turner et al., 2017), energy efficiency might not be a desired commodity, considering the long payback times and potential implementation inconveniences. It is thus apparent that in many instances, there is a lack of an economic case for an individual to initiate energy efficiency (EE) actions. A combination of approaches appears necessary to overcome this:

Create an incentive for action on energy efficiency:

• A regulatory requirement may be needed to drive EE actions at the level needed to reach ambitions. However, as argued above (in Q5) regulation should be approached with caution as it may ultimately lead to political rejection of climate related policy, if the public feels that particular financial responsibility for meeting societal goals (that they may or may not agree with) is inappropriately shifted to them.
• Different forms of regulation could be envisaged, focusing on different segments and aligned within the ‘natural’ cycle of the building sector: construction, renovation, sale, etc.  The timeframe (visibility) for the entering into force of the requirement could also be used to match the natural cycle of building renovation.
• However, a regulatory requirement alone is most likely insufficient as significant push-back can be expected if the requirement is not accompanied by measures that create a real economic case and improve access to funding, and by measures to check tha the requirements are being universally met.

Building a private individual economic case for energy efficiency:

• Gather evidence to demonstrate the financial and non-financial return (comfort, health, etc.) of energy efficiency. While difficult to calibrate, a cost-based incentive linked to a gradual increase in energy prices (particularly fossil-based sources) is most likely essential to incentive action. Societal and distributional effects must be taken into consideration for success.
• Reducing the cost (direct and indirect) for households. Improving access to financial resources and covering in some instance a significant portion of the costs relative to short- and medium-term returns is needed.

Similarly, Other suggestions taken from (Centre for Energy Policy, 2017) to encourage EE investments are:

• Provide a quality insurance mechanism (e.g. certification of contractors, materials, etc.)
• Provide adequate support and information to stakeholders, making sure that they understand all the benefits of carrying out EE measures (besides the economic ones).
• The creation of a building “passport”, so new tenants or buyers are aware of all renovations carried out in a building.

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11.  Of the current sources of finance which are currently available for energy efficiency and lower carbon heat supply, which are working well and which are not? Are there successful examples of attracting private sector finance to support energy efficiency improvements that could be explored? Are there any others which should be developed or made available?

A promising energy efficiency solution being currently used is Energiesprong (Energiesprong, n.d.), which is a Dutch Government-supported approach to delivering ‘whole house’ refurbishments in a modular way. The walls and roofs refurbishments are customised and off-site manufactured (pre-fitted with windows and doors). Then, the envelope and services modules are delivered to site to refurbish the existing house.

The building is not only insulated but also gains a modern, updated look. Another important benefits of this approach is that each refurbishment is completed within a week with no need for the occupants to move out during this time.

Alternatively, it might be a good idea to include in the energy efficiency loans, money allowed to general improvements. People is more likely to do energy efficiency measures in their homes, or changing their heating equipment, if they take advantage and do other required improvements as well.

In 2013, I4CE (ex-CDC Climate Research) conducted a study with the OECD looking at the different programs that public financial institutions were using to support climate action – including energy efficiency (Cochran et al., 2014). While not necessarily transposable to the Scottish context, a number of interesting examples were documented, most notably:

• German KfW’s On-Lending program for supporting household energy efficiency
• EBRD’s credit lines for corporate and private-sector energy efficiency measures
• France Caisse des Dépôts low-interest loans for EE renovations in council and social housing developments.
• The European Investment Bank’s EE lending program for SMEs.

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(Q12 – Q24 not responded to).

25. What should the overall balance be between national and local target setting? Should local authorities set local targets with the flexibility to determine whatever methods they want to meet the Programme vision? Or should there be a greater degree of setting the target(s) and delivery methods by national government?

Both general and local targets will be required. Different areas might have different energy efficiency potentials, so it will be required to tailor the targets to the real possibilities of the locality, while being consistent with the global target (make sure that the targets will be achieved).

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27. What should be included in a monitoring framework to ensure that the Programme is effectively monitored and evaluated?

Please see Question 1 for the need for a better system of tracking investment and finance flows. This would create the necessary dataset to track progress and identify areas to prioritize efforts to improve investment conditions and access to capital.

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