This report investigates the potential for demand-side policy interventions to incentivise the decarbonisation of Scotland’s energy-intensive industries (EIIs). EIIs are a significant contributor to both Scotland’s economy and its environmental footprint, accounting for approximately 4% of economic output and 15% of greenhouse gas (GHG) emissions. Reducing emissions from these sectors will be a necessary condition for Scotland to meet its decarbonisation objectives.

The report provides an overview of the evidence relating to the design of demand-side policies to influence EII emissions – measures that influence the purchasing decisions of public sector organisations, private businesses and consumers to reduce their demand for emissions-intensive products. It includes two in-depth case studies of emissions measurement and benchmarking – the cement and whisky sectors.

The research aims to:

• identify and categorise the products currently manufactured by Scottish EIIs;
• understand the size and nature of these markets;
• summarise the main influences governing buyer decision-making in these markets; and
• identify relevant and impactful demand-side policy interventions for Scotland.

In doing so, it addresses four broad policy questions:

• What demand-side policies do other jurisdictions use to decarbonise EIIs?
• Which of these types of policies could be implemented in Scotland?
• How effectively could these policies influence purchasing decisions?
• Which EII sectors and products should demand-side policies prioritise?

It finds that:

• Two constraints affect the ability of the Scottish Government to implement such demand-side policy interventions: reserved matters which the UK Government has not devolved to the Scottish Government and international trade law. 
• The drivers of purchasing decisions vary by buyer type. 
• Demand-side policies are more likely to be effective if they target those EII sectors with the largest emissions-reduction potential and the largest share of domestic consumption as these policies primarily target domestic buyers. 
• Policymakers should account for a range of considerations when determining which policies to prioritise in the Scottish context. 
• Evidencing lower-carbon production is important regardless of the demand-side policy.  

Reducing emissions from our homes and buildings is one of the most important things we can do to help end Scotland’s contribution to climate change. Over the next 24 years Scotland’s homes and workplaces must transform, so they are warmer, greener and more efficient. This Heat in Buildings Strategy, which updates both the Energy Efficient Scotland Route Map and the Heat Policy Statement, sets out how we will achieve that ambition.

Ministerial foreword, Heat in Buildings Strategy, October 2021

Over a two-year period, ClimateXChange commissioned and coordinated a substantial body of research in heat decarbonisation, one of the most challenging areas for achieving net zero.

• Our research directly contributed to, and provided a solid evidence base for, the Scottish Government’s Heat in Buildings Strategy.
• The research was wide-ranging and accessible, highlighting ClimateXChange’s ability to access a breadth of expertise and our skill in communicating complex issues simply.
• As part of the research, we facilitated valuable knowledge exchange between academic researchers and policymakers.

Transforming every property

Decarbonising the heating of homes and non-domestic buildings is among the most significant challenges Scotland faces to achieve net-zero emissions by 2045. Homes accounted for 13% of Scotland’s greenhouse gas emissions with non-domestic buildings contributing a further 7%, according to 2019 Scottish Government figures used in the Heat in Buildings Strategy. As set out in the 2020 Climate Change Plan update, these emissions will have to fall by 68% by 2030, compared to 2020 levels – a substantial undertaking from both the technological and policy perspectives. By 2045, virtually every property will need to have a low-carbon heating system, together with considerable energy efficiency improvements.

The options for decarbonisation

The challenge of decarbonising heat requires changes across the sector – from replacing natural gas with hydrogen and re-using waste heat to installing heat pumps and stimulating the market for low-carbon heating. In all, in 2020 and 2021, ClimateXChange produced 13 pieces of heat-related research exploring the many different aspects of, and options for, decarbonisation. These fed into – and provided a solid evidence base for – the Heat in Buildings Strategy, released in October 2021. Six of our reports were published at the same time.

As a basis for the individual projects, we facilitated knowledge exchange between academic researchers and policymakers, including organising a Scottish and Danish Government workshop, over two half-days, to consider policy-relevant lessons from research on heat decarbonisation for off-gas grid residential buildings.

“The portfolio of commissioned research through CXC has been a valuable resource to draw on in developing the Heat in Buildings Strategy. We have been able to access a wealth of evidence and research insight across a range of technology, economic and social issues – from questions on the potential use of hydrogen for heating to lessons from transition policy approaches in other countries. It would be very difficult to get this solid and accessible evidence base to inform heat in buildings policy without support from a centre like CXC.“

– Ragne Low, Head of Heat Strategy, Scottish Government

There are a number of environmental and social policies in the GB energy market. Some of these are funded through commitments placed on energy companies. As part of their bills, domestic and non-domestic energy consumers face a number of levies intended to support measures such as the deployment of low-carbon and/or renewable sources and the installation of energy efficiency measures.

This review seeks to understand whether rebalancing of levies and charges between electricity and gas supplies might impact the deployment of low-carbon and renewable heat in both domestic and non-domestic settings.

Findings

• Evidence suggests that energy pricing is not the main consideration in the use of heating technologies by domestic or non-domestic consumers; other considerations including upfront costs are significant.
• Under current energy tariff structures, heat pumps are unlikely to offer running cost savings compared to gas boilers as a result of the electricity demand associated with running a heat pump. Indicative analysis highlights that the removal of levies in the current energy tariff structure would bring the running costs of heat pumps and gas boilers considerably closer together in a typical domestic situation.

There are a number of different potential options for reform that could potentially address this issue, subject to further consideration of their wider impacts. These include:

• Moving levy cost recovery to a non-energy volumetric basis. This could include a flat per household charge, or linkage to specific metrics such as location, income, or heating fuel.
• Splitting the recovery of levy costs between gas and electricity tariffs.
• Introduction of a ‘heating allowance’ to remove the levying of policy costs on energy used for heating purposes.
• Encouraging voluntary actions by suppliers to rebalance levy cost recovery away from electricity.
• Moving levy costs from energy bills to general taxation.

Please note that this research was conducted before gas prices increased at the end of 2021.The analysis is based on energy prices and installation costs at the time the research was undertaken, in late 2020.

The Scottish Government intends to develop new building standards to ensure all new homes use zero emissions heating at the point of use from 2024. Similar requirements are also due to be phased in for non-domestic buildings.  

This report looks at the costs of delivering zero emissions heating in domestic and (as far as possible) non-domestic new buildings. It identifies the factors that influence these costs and how they are split between different actors, including building developers, building owners and building users over the lifetime of a technology. 

We used a literature review and stakeholder interviews to inform a cost analysis model, which was used to analyse six new build scenarios: Scenario 1: Private housing development; Scenario 2: Mixed-use build-to-rent development; Scenario 3: Social housing development; Scenario 4: Small-scale rural development; Scenario 5: Student accommodation; Scenario 6: Primary school.

The cost analysis considered six zero emissions heating technology options within the cost analysis: air source heat pumps (ASHPs); ground source heat pumps (GSHPs); on-demand direct electric heating (dry system); direct electric heating (wet radiator system); new district heating network; and connection to an existing district heating network. It also considered building-level solar PV as an additional electricity source to feed into the selected electric heating system.

Key findings

Cost analysis

• In all six scenarios, the use of zero emissions heating technology options represented lifetime cost increases ranging from 25%-231% compared to the equivalent lifetime cost of heat supply using gas boilers.
• There is a significant difference in the cost optimum zero emissions heating solution, depending on whether it is considered in terms of capital expenditure (CAPEX), electricity running costs or lifetime costs.  
• Individual ASHPs appeared cost optimum on a lifetime cost basis in the scenarios with less dense developments. Lifetime costs were significantly lower in the scenarios where it was assumed that new developments could connect to an existing district heating network. A new district heating network also appeared cost optimum in the high-density mixed-use development.
• Since grid constraint costs were excluded from the analysis, wet and dry electric heating options offered a significantly lower capital cost, but with higher electricity running costs. 

Stakeholder analysis

• The stakeholder interviews highlighted how the choice of which zero emissions heating technology to use in developments was driven by more than just cost considerations. Commercial delivery models and the role that a developer played in a development after construction  were also key factors.
• Delivering zero emissions heating was perceived as a significant change in existing development processes for some interviewees; design and delivery processes were still being optimised and refined. There was greater evidence of innovation in the social housing sector. 
• This study highlights a potential gap in the sector for energy service organisations to deliver technology options with higher capital costs but lower running costs (i.e. optimising use of lowest lifetime cost).  

In order to achieve Scotland’s net-zero target, a low-carbon heating system will be required in virtually every property in Scotland by 2045. This is a significant policy and technological challenge.

This report seeks to inform the design of policy for the phase-out of fossil fuel heating by reviewing relevant historical and ongoing experiences of technology phase-out policy, and, by extension, phase-in, in the energy sector.

The case studies reviewed include natural gas grids, personal transport, electricity supply, electricity metering, transport biofuels and condensing boilers. 

 Key findings

• Major infrastructure transitions, such as gas grid repurposing, necessarily rely on an area-based approach rather than individual decision-making. Transitions in off-grid heating, by contrast, may involve individual household decision-making at the point of replacement.
• As is being seen in the transport sector, some phase-outs are driven by proactive supply side policies and international market competition. Close collaboration between government and businesses were also seen.
• Hybrid technologies, such as hybrid gas and electric heat pumps, are appealing ways of ameliorating the effects of phase-out because they offer less disruptive and perhaps more affordable solutions.
• A number of cases reviewed highlight the importance of how policy decisions are justified and communicated, suggesting careful attention as to how heat decarbonisation policy is developed and presented.

To achieve net-zero carbon emissions by 2045, Scotland needs to decarbonise heat and improve the energy efficiency of its buildings. This evidence review examines the potential of Heat as a Service (HaaS) to support this aim by providing a route to decarbonising heat in domestic properties in Scotland.

Heat as a Service is a term which covers a range of services that enable people to achieve a warm home in a variety of ways. These include services which provide or enable finance to purchase and install heating equipment; maintenance of heating equipment; energy efficiency upgrades of building fabric; paying for the amount of heat delivered to the home; paying for the temperature the home is heated to; paying flat-rate tariffs for the home to be heated; or combinations of these.

The report outlines HaaS business models that have been tried across Europe. We look into the potential benefits of HaaS for Scotland, and some of the barriers. Through case studies, we explore in more detail how different business models might work and be adapted to Scotland.

Key findings

To date, there is not much evidence as to what has been tried in terms of HaaS or how effective it has been in delivering substantial emissions reductions. However, the limited evidence suggests that some HaaS offers have potential to help get Scotland to net zero by accelerating uptake of low-carbon heating systems and improving energy efficiency. This would also improve outcomes for consumers, especially the more vulnerable, and support businesses in developing new, sustainable business models:

• Companies choose different ways to set their tariffs and finance their offers. 

• Different Haas offering must comply with different regulations, sometimes from a range of different regulators.

• Haas could help overcome the two main barriers that put people off installing low-carbon heating systems: concerns about cost and comfort. 

• There is not yet much evidence about what consumers like or dislike about Haas, but there are some likely drivers to Haas uptake. 

• Case studies provide insights into how HaaS could help Scotland meet its policy aims, but none describe a comprehensive solution at this stage. 

• The main challenges facing interested businesses are understanding regulations and learning to deliver HaaS in a commercially viable way. 

Hydrogen is one of only a handful potential heat decarbonisation routes which offer a mass-market solution.

This project was commissioned to help build a clear evidence base, using existing literature relating to all aspects of the use of hydrogen to heat buildings, including supporting infrastructure and costs. Lessons gained thus far from key projects have been synthesised along with a wide range of evidence sources on aspects such as technical feasibility, safety and costs.

Key lessons 

Across the literature, we identified some Scotland specific strengths and challenges at the system level value chain. These relate to Scotland’s unique position regarding natural resources, skills, and existing infrastructure. They are highlighted in more detail below:

• Scotland’s strengths include:
  • Good access to large volumes of natural gas, which is required for large-scale production of ‘blue’ hydrogen (methane reformation with carbon capture)
  • Strategic CO₂ storage capacity offshore to support carbon capture efforts (depleted hydrocarbon storage sites and aquifers)
  • St Fergus is a key delivery point for gas to the National Transmission System (NTS), which offers country-wide hydrogen-blending opportunities
  • North East Scotland has a wealth of skills, capabilities and infrastructure from the oil and gas sector that can be leveraged to support hydrogen and renewables development
  • High levels of wind curtailment resource for renewable electricity generation, which in turn can be used for ‘green’ zero-carbon hydrogen production via electrolysis
• Scotland’s challenges:
  • Scotland has limited existing centralised hydrogen storage ‘resources’ (e.g. salt caverns) for intersessional storage. Investments in new infrastructure (above-ground storage facilities) or new solutions (converting hydrogen into ammonia) would be required.

The Scottish TIMES energy system model is built using the TIMES platform, a modelling tool which is developed by an International Energy Agency (IEA) technology collaboration programme and used in 63 countries. It contains a detailed and up-to-date depiction of all Scottish energy flows and greenhouse gas (GHG) emissions, and explores the potential future benefits of a wide range of low-carbon fuels and technologies.

The Scottish TIMES model has provided evidence to inform Scottish Government climate policy in recent years. This report presents the findings of a technical review of the Scottish TIMES model. This involved considering model inputs and a number of diagnostic tests based on running the model with a test scenario. The review does not extend to considering whether the model has been used appropriately to support Scottish Government climate policy.

Summary conclusions

Review of model inputs

• The Scottish TIMES team has put considerable time into developing the model and keeping the data up-to-date.
• The team operates good quality assurance processes..
• A number of issues should be investigated further. These include the need for a reassessment of model boundary conditions, particularly for the GB electricity system, and some technology assumptions could be updated.

Outcome of the diagnostic tests

• The diagnostic tests identified a number of minor model data issues to investigate. 
• The GHG emission accounting system (i.e. how GHGs are counted across the economy) could be more robust.
• Overall, it is clear Scottish TIMES is a solid, well-designed model suitable for informing Scottish climate policy if used appropriately.

Potential model development

The model could:

• Have improved GHG emissions accounting.
• Provide more value through a wider range of uses, for example by exploring future uncertainty.
• Be used more efficiently if a system were developed to produce the output data and analyses that stakeholders require.
• For the model to continue contributing high-quality evidence to inform Scottish policy, there is a need to ensure that there is sufficient technical modelling capacity within the Scottish Government.

European countries vary greatly in terms of how residential buildings are heated. These differences, built up over decades, reflect national resource endowments, economic resources and technical infrastructures. They also reflect different governance approaches and policy choices. 

In this report, we review the heating technologies and heat policies of nine European countries: the UK (with a focus on Scotland), the Netherlands, Norway, Sweden, Finland, Denmark, France, Germany and Ireland). We assess how government policy has been used to change the way heat has been delivered, and current approaches to policy-driven heat decarbonisation. We set out in detail the policy instruments – financial incentives, regulations and tax structures – that are used to drive countries toward zero-carbon heating. Where available, we also present information on how each country is developing policies and targets for the decarbonisation of heating.

The implementation of the Climate Change (Emissions Reduction Targets) (Scotland) Act 2019 has set a new climate change target for reducing emissions that aims to bring Scotland’s emissions to net-zero by 2045. Achieving this target will require a sound understanding of likely greenhouse gas (GHG) emissions (or reductions) arising from national, strategic and project level decision-making.

The requirement to consider the impacts of a plan, programme or strategy (PPS) or proposed development on GHG emissions is captured as part of a wider assessment under the Strategic Environmental Assessment (SEA) and Environmental Impact Assessment (EIA) regimes where relevant. This research seeks to review current practice in considering greenhouse gas (GHG) emissions as part of these processes, focusing in particular on:

• methodologies used to assess GHG emissions impacts
• the level of detail included in these assessments
• how these emissions are reported and communicated

The project also records observations on the effectiveness of the approaches taken to reporting and communicating these findings.

Key findings

Strategic Environmental Assessment (SEA)

We reviewed ten Environmental Reports prepared between 2015 and 2020 for the SEA case studies. The case studies included local development plans, local authority level plans and strategies for climate change, renewable energy, transport, woodland, a sub-local tourism strategy, and two national level case studies covering climate change and a circular economy. Based on this review we identified that:

• The environmental baseline information included a range of data relevant to GHG emissions.
• An overlap between topic areas as part of the SEA process often results in information relevant to GHG emissions being considered and reported under other SEA topic headings but not being explicitly used to inform the assessment of GHG emissions impact (and not captured under the associated SEA heading of ‘climatic factors’). As a result GHG emissions are not comprehensively reflected in a single specific area of the assessment process.
• Reporting under a single SEA heading of ‘climatic factors’ results in a lack of distinction between reporting of impacts on reducing GHG emissions (mitigation) and actions to adapt to the effects of climate change (adaptation).
• The majority of the Environmental Reports did not clearly set out the basis for considering the significance of the impact on climatic factors, for example whether significance was related to the baseline, local or national targets.
• The case studies did not use specific tools (for example carbon calculators) to assess GHG emissions; instead assessment approaches adopt a qualitative approach that use the SEA scoring system[1] and associated descriptive text, and indicate a direction of travel in GHG emissions (e.g. increase or decrease).

Environmental Impact Assessment (EIA)

We reviewed ten Environmental Impact Assessment Reports (EIA-R) or equivalent, prepared between 2009 and 2019. The case studies cover a wide range of projects across a number of different consenting regimes and include wind farm developments, road construction, mining, forestry, marine infrastructure, mixed use and a recreational development. Based on this review we identified that:

• Although the case studies were intentionally selected because they contained some level of assessment of GHG emissions, the majority (eight out of ten) did not provide baseline data on GHG emissions. In line with IEMA guidance, some case studies provided justification for this by stating that the baseline is considered to be ‘nil’ as the site is currently undeveloped, meaning that there are no associated emissions.
• Two of the case studies included GHG emissions data at a national level, reflecting the wider impacts of the developments beyond the site boundary.
• The majority of the case studies (seven out of ten) included quantified assessment information for the construction phase of the development, commonly covering direct, indirect and embodied emissions. These examples often include the quantification of emissions such as embodied carbon within construction materials, the associated transport emissions from construction material delivery and onsite plant fuel usage.
• Six of the ten case studies included some degree of quantification of operational GHG emissions. Only four of these fully covered direct, indirect and embodied emissions.
• Despite the guidance advocating a life-cycle approach, the assessment of GHG emissions at the decommissioning phase is the least well documented. This is often scoped out on the justification that the emissions cannot be accurately predicted due to the lifespan of the project.
• The majority of the case studies reviewed employed some form of tool as part of the assessment. Most commonly such an approach was used to record either embodied GHG emissions in the required construction materials or GHG emissions associated with transport movements.
• Inclusion of quantified GHG emissions data is more likely where relevant quantified information is already available for the project (e.g. material quantities or vehicle movements) that can be used to determine corresponding GHG emissions.
• The approach to determining the level of significance of the GHG emissions arising from a project varies. In eight of the case studies a lack of baseline data prevented this being used as the basis for determining impact significance. A lack of regional or local GHG emissions targets also means that there are no meaningful benchmarks against which to judge significance.
• Where GHG emissions data is provided this is often clearly communicated, with the ‘payback’ approach often adopted for wind farms as an example.

Future implications

The SEA case studies highlight that significant effort is put into the qualitative assessment of GHG emissions in SEA. However, there is scope for the various elements of the assessment process (baseline, assessment questions, definition of significance and monitoring) to be joined up more comprehensively.  The qualitative nature of the plans, policies and strategies being assessed defines the approach to the assessment of GHG emissions.

There is evidence of good practice with respect to the quantification of greenhouse gases in EIA from the case studies. Some of these examples have used supporting tools which could be more widely applied. The express consideration of greenhouse gases in EIA only became a formal requirement in 2017. EIA practitioners are also continuing to gain more experience in the assessment of GHG emissions impacts.

The declaration of a climate emergency, commitment to achieving net zero emissions and local authority level actions being taken to respond to this, is likely to lead to an increase in i) the collection of relevant data, ii) co-ordination of existing data, which could inform these assessment processes, and iii) expertise and engagement of decision makers and consultees in SEA and EIA scoping and development.