Written evidence submitted by ScottishPower (DHH0136)
Introduction
1. ScottishPower is a major UK energy company with renewable generation, retail supply and networks businesses; we are a leading developer of wind power in the UK, and part of the Iberdrola Group, the world’s leading renewables developer. Iberdrola, is a global leader in tackling climate change, with a commitment to reaching carbon neutrality by 2050.
2. We are the UK’s first 100% Green vertically integrated energy utility, generating 100% renewable electricity from 40 operational windfarm sites with over 2.8 GW installed capacity throughout the UK. Building on our 714 MW East Anglia ONE offshore wind project (which we have recently completed), we have ambitious offshore wind development plans as well as a substantial development portfolio of onshore wind, solar and battery storage projects in the UK. In September 2020, we launched ‘Green Hydrogen for Scotland’ – a partnership between ScottishPower Renewables, BOC, and ITM Power, to offer an ‘end-to-end’ market solution for reducing emissions from heavy duty vehicles through the provision of green hydrogen. SP Energy Networks, part of the ScottishPower Group, owns and operates the electricity distribution networks in the Central Belt and South of Scotland (SP Distribution), Merseyside and North Wales (SP Manweb), as well as the electricity transmission network in the Central Belt and South of Scotland (SP Transmission).
3. As an industrial engineering company with deep roots in the UK, ScottishPower is well-placed to help deliver on the Government’s aims and ambition for a Green Recovery. We welcome the opportunity to submit evidence and share our perspective on issues raised by this Inquiry, having been strongly supportive of the Government taking ambitious steps towards ensuring a sustained Green Recovery from the COVID-19 pandemic. Earlier this year, we published a report ‘Unlocking Net Zero’,[1] which sets out ten practical steps that the Government and Ofgem could take now – many of which are at zero or minimal cost to the public finances – to catalyse private investment in the job-creating infrastructure assets needed for delivering cost-effective progress in the 2020s towards the UK’s Net Zero target.
4. With less than 5% of homes in the UK currently using low carbon sources for heating, the decarbonisation of heat is one of the biggest challenges the UK faces as part of the transition to a Net Zero economy by 2050. In terms of meeting this challenge, we agree with the analysis from the Climate Change Committee (CCC) that “Electrification of heating remains the main route for decarbonising buildings, whether through heat networks or at a household level” (as highlighted in this year’s Annual Progress Report to Parliament published in June).[2] More specifically, we consider that homes will to a large extent need to be heated by electric ground or air source heat pumps (including ground source heat pumps with a shared ground array), powered by a decarbonised electricity system based on a high volume of renewable generation.
5. We also agree with the CCC that this needs to go hand-in-hand with a programme for improving the energy efficiency of the UK housing stock so as to ensure the efficient operation of low carbon heating options and to save on energy use and costs. We set out further perspectives on how to make progress with this in both the near term and through the 2020s, in the sections below.
(1) The scale of the challenge with heat and buildings to meet Net Zero
6. The UK has made significant progress in decarbonising the power sector in recent years, in large part due to the high deployment of low cost renewable generation. Similarly, the decarbonisation of transport is accelerating at pace with the increasing roll-out of electric vehicles. However, the challenges ahead in respect of heat decarbonisation are of a much greater scale with much less progress to date.
7. We have seen progress in delivering energy efficiency to households over the last few years with obligated energy suppliers such as ScottishPower delivering energy efficiency improvements at scale to households across the country under supplier obligation schemes such as the Energy Company Obligation (ECO). Thus, under the current ECO3 obligation we have delivered over 50,600 measures to nearly 35,500 low income or vulnerable households since the obligation commenced in October 2018, helping them to improve the comfort of their homes whilst saving on energy bills. Making domestic energy efficiency improvements has the significant benefit of being an enduring solution which can help consumers both to reduce their energy consumption and improve the comfort of their homes. It also facilitates the optimal use in homes of low carbon heating options such as heat pumps.
8. It follows that delivering further energy efficiency improvements will need to play a central role in helping to meet the decarbonisation challenge, whilst also facilitating progress towards meeting the Government’s 2030 fuel poverty target. The scale of this future challenge remains huge with, for example, an estimated 88% of fuel poor homes in England still needing to be improved to an EPC Band C rating (where practicable) and a similar scale of challenge in Scotland and Wales.[3]
9. Whilst improving the UK’s relatively old housing stock is vital, it is also important that the overall regulatory framework governing the building of new homes is designed with the UK’s long-term decarbonisation goals in mind. New homes constructed in the next five to ten years, for example, are homes that will exist in 2050 and it is vital to make sure that the standards set for these homes put us on the right pathway to meeting the UK’s Net Zero target. This means ensuring that new dwellings are built to very high standards of energy efficiency whilst also ensuring that new properties either have a low carbon heat supply (such as a heat pump) installed when they are built, or that they are designed so that one can easily be retrofitted at some point in the future.
10. As with promoting energy efficiency improvements to the existing housing stock, the scale of the challenge ahead in promoting low carbon heating is huge with the CCC estimating in its Net Zero advice in 2019 that around 19 million heat pumps will be needed by 2050 to meet the decarbonisation challenge.[4] For our part, we recently commissioned some indicative analysis from Capital Economics on the challenge ahead which estimated that over 22 million homes in the UK would need to have heat pumps installed by 2050.[5]
11. In light of these significant challenges ahead, we agree with the CCC on the importance of the UK Government (working with the Devolved Administrations) in setting out in its planned Heat and Buildings Strategy a clear pathway for delivering ‘no regrets’ decarbonisation options in the near term up to 2025 and a programme for further steps in the later 2020s to get on track with meeting the Net Zero target.
(2) Learning lessons on how best to deliver energy efficiency improvements to existing housing in the 2020s
12. As noted above, as an obligated supplier under ECO3 we have worked closely with our delivery partners to provide basic insulation measures, replacement gas boilers and first time central heating to those in or at risk of fuel poverty. However, looking ahead to beyond the current end of the existing ECO3 scheme in March 2022, the delivery landscape in this area will become much more complicated with a greater need to move delivery towards more challenging measures such as solid wall insulation, as well as promoting a more complicated whole house approach, including the installation of low carbon heating options alongside a range of energy efficiency improvements. In this context, it will be important to consider whether the traditional supplier obligation model (such as ECO) which delivers basic energy efficiency improvements to households in a limited and tightly defined eligibility group should be a central delivery model for the more complex landscape that will prevail in the later 2020s.
13. In this context, we note that as part of the recent joint Government/Ofgem consultation on the Future Energy Retail Market Review[6] the potential merits of moving to an auctioning model to support the delivery of energy efficiency improvements to households was highlighted. We agree that this merits further consideration as a future delivery model which could facilitate cost-effective delivery and innovation through a competitive auctioning process that would bring in new entrants into the market. A key additional benefit of any such delivery model is that it would enable a shift away from consumer bill funding towards funding from general government spending in a way that would be less regressive and accordingly complement steps to address fuel poverty. We consider that BEIS should consider this further as it engages with the Treasury through next year’s multi-year Spending Review process on future plans around the new publicly funded Green Homes Grant scheme which has currently been put in place until 31 March 2022.
14. Thus, whilst we have welcomed the establishment of the new Green Homes Grant scheme (running until 31 March 2022) as being a positive step forward, we consider that it is vital to look at providing longer-term support by way of public funding for energy efficiency improvements as has been envisaged with plans for a new Homes Upgrade Grant scheme and the Social Housing Decarbonisation Fund (as set out in the Government’s recently published ‘Ten Point Plan for a Green Industrial Revolution’[7]). It will also be important to consider how low carbon heating options such as heat pumps might be supported (alongside energy efficiency measures) as part of these long-term schemes.
(3) Promoting low carbon heating options such as heat pumps
15. We strongly agree with the CCC that the Government should focus on taking ‘no regrets’ steps in the immediate years ahead on promoting and supporting the uptake of heat pumps in the domestic sector and especially in off-gas-grid homes and new build homes. The technology exists now and, when combined with energy efficiency measures, electric heat pumps offer a cost-effective route to the decarbonisation of heat. In this context, we welcome the Government’s new commitment in the ‘Ten Point Plan for a Green Industrial Revolution’ to targeting 600,000 heat pump installations per year by 2028, creating a market-led incentive framework to drive this growth.
16. Given the scale of the challenge in this area, we consider that the Government will need to increase significantly the limited funding commitment under the planned Clean Heat Grant scheme to be introduced in 2022 (i.e. £100 million over two years). Moreover, there is a need for a more holistic approach to policy-making in this area, ensuring that low carbon heating and energy efficiency are approached in an integrated manner when it comes to designing future proposals.
17. In this context, it will also be important for Ofgem to put in place the right networks incentive framework to ensure that distribution network companies are able to make the necessary anticipatory investments in the electricity grid needed to support the roll-out of electric heat pump options across communities, ensuring the network is available to meet consumer demand.
(4) The role of heat networks
18. The contribution from Heat Networks is another area that is highlighted by the CCC as providing an important contribution towards meeting the heat decarbonisation challenge. For our part, we agree that heat networks have the potential to play a useful role in addressing the challenge of decarbonising heat and in helping to meet the UK Government’s Net Zero target by 2050.
19. We also agree that a robust regulatory framework for heat networks is needed to ensure that consumers are well-protected and to build trust in this option. So, we welcome the Government’s work on developing a new regulatory framework for heat networks and the associated BEIS consultation process around this. In this context, we would highlight the importance of ground source heat pumps (‘GSHPs’) with a shared ground array being included within the scope of the ‘heat networks’ concept underpinning the new regulatory framework which is being considered by BEIS. We consider that GSHPs with a shared ground array are likely to be the most efficient and cost-effective solution for decarbonising heat in many areas.
(5) The role of regulation
20. Regulation more generally has an important role to play in the context of decarbonising heating in homes. In this regard, we would note that some progress has been made under the energy efficiency regulations in the private rented sector and we welcome the fact that the Government is looking at how these be might be strengthened and improved.
21. We are also strongly supportive of the commitment of the UK Government to introducing the new Future Homes Standard to ensure that with effect from at least 2025 new homes are constructed under ambitious energy efficiency standards and are future-proofed with low carbon heating options. Indeed, we consider that the Government should look at introducing this new standard earlier in the 2020s and accordingly we welcome the Government’s commitment in the ‘Ten Point Plan for a Green Industrial Revolution’ to implementing the Future Homes Standard in the shortest possible timeline.
(6) The importance of local delivery
22. Whilst getting the national policy and regulatory framework right is vital, another important aspect will be around empowering regional and local levels of government to work with their local communities on promoting heat decarbonisation solutions that are right for their locality. As we highlighted in our recent Zero Carbon Communities report[8], the nature of the decarbonisation challenge in terms of heating is such that it will be important to engage effectively at the local community level, recognising that there might be varying solutions for different areas of local housing.
Conclusion
23. In light of this range of challenges ahead, we would reiterate the importance of the Government bringing forward an ambitious Heat and Buildings Decarbonisation Strategy that sets out a credible pathway for making timely progress in the 2020s. For our part, we remain committed to playing a leading role in facilitating and supporting the transition towards being a low carbon country with a decarbonised domestic housing sector that works for households and their local communities.
ScottishPower
December 2020
