Opinion: Scotland failing to attract private finance for clean heat

As the Scottish Government’s Green Heat Finance Taskforce prepares its final recommendations, Josiah Lockhart, Changeworks’ Chief Executive and member of CERG shares his thoughts on what’s needed to attract private finance to decarbonise our buildings on a large scale.

The Scottish Government must stop wasting time and use all its powers to create the right environment for large-scale retrofit and heat decarbonisation programmes in every city across Scotland. The Climate Emergency Response Group (CERG) proposes seven steps the government must take to de-risk projects and make Scotland a place to invest.

Energy efficient, well-ventilated buildings and clean heat are key to tackling the climate emergency. ‘Green’ buildings are healthier, better adapted to climate risks such as overheating and increased storm events, and cheaper to run. However, there is no doubt the public purse cannot meet the estimated £33bn required to pay for the switch to clean heat – private investment must play a big role. The good news is that the private sector is keen to invest; the total Scottish heat network market size alone is an estimated £5.2 billion (Heat Pumps and Heat Networks Assemblies and Key Component Analysis, Scottish Enterprise, 2022), but it needs both certainty and scale to make the numbers stack up.

The Scottish Government announced its intention to set up the Green Heat Finance Task Force (GHFTF) in October 2021 to “develop a portfolio of innovative financial solutions.” We now expect their final report in the autumn – three years later. Because of this delay, it is imperative that we focus on ensuring the GHFTF makes a difference in 2024. We therefore welcome the First Minister’s recognition that action is needed, not more strategies:

“I want to assure you I am in the business of making things happen, of delivering swift and efficient decisions… We must search to remove obstacles. We must offer certainty to those prepared to make commitments to our economy… Rather more bluntly, I will demand from my government more concrete actions and fewer strategy documents.” (17 May 2024)

Attracting private investment for heat decarbonisation is certainly ripe for ‘action’. CERG has sent its proposals to the GHFTF and hopes to see them reflected in the final report, with a rapid response from the Scottish Government spelling out specific, timetabled actions. CERG’s seven proposals are:

1. Drive forward heat networks at scale: National coordination ensures networks are developed where needed (including cross boundary coordination), not just individual projects. Ramp up the ‘upstream coordination’ resource from the Heat Network Support Unit. Set a firm target for ‘ready for investment heat networks’ in every city region within three years.
2. Introduce the Heat in Buildings Bill in autumn 2024: Successful passage and implementation of this Bill are necessary to provide certainty for investors. The proposed requirement for buildings to connect to heat networks if they are in a heat network zone is a positive step to derisk projects and should be communicated more widely as an incentive for investment. Concerted engagement ahead of introduction on the regulatory proposals is needed to ensure they will work in practice for the non-domestic building sector.
3. Collaborate with private sector on pathfinder projects: Trial place-based financing solutions and delivery models across a range of building types for large scale retrofit and heat decarbonisation in Scotland. These pathfinders should be supported (financially and technically) to develop and test innovative solutions and to overcome any challenges around governance, procurement, technical design, financing, legal and commercial arrangements, and public engagement.
4. Engage with owners and tenants: There is low awareness in the non-domestic buildings sector of what the heat transition means for them, which in turn results in lack of certainty and ‘demand assurance’. More effort is needed to engage with owner occupiers, investors and tenants, including early pledges to ‘connect’ and to share heat demand data.
5. Make it affordable: Work with investors and developers to create incentives and/or industry-led efforts to drive down the cost of connections to low carbon heat networks. Without closing the ‘gap to gas’, buildings will not join up to more expensive low carbon heating until they absolutely have to.
6. Enable local authorities to play their part: The Local Heat and Energy Efficiency Strategy (LHEES) process is a good start but is becoming a blocker to investment. This is partly due to lack of resources, and because the project-by-project approach is time-consuming, costly and driving investment out of Scotland. LHEES also have to give more emphasis to cross-boundary / regional opportunities. Finally, the respective roles of local authorities and the private developers should be reviewed. Local authority priorities should be setting the strategy, achieving the public interest, attracting investment, facilitating and convening, and securing anchor loads through public sector building assets. Local authorities are not able to take on a lot of risk, and many don’t have the expertise/capacity to do the specialist technical work and manage huge infrastructure projects.
7. Retrofit for resilience: All retrofit and heat network programmes should include making buildings resilient to climate impacts, e.g. overheating, floods, increased intensity of storm events.

 

More information on CERG and the group’s most recent recommendations to the Scottish Government are available here. Please get in touch to find out more.