Energy Efficient Scotland (EES) is a large scale energy efficiency improvement programme to be implemented in Scotland. Over a 20-year period, currently scheduled to start in 2020, an amount in excess of £10billion is planned to be directed to the improvement of the energy efficiency in domestic and non-domestic buildings.
Funding for energy efficiency projects will come not only from the Scottish Government but also private interest-free and low interest loans as well as the successor(s) to the Energy Company Obligation (ECO). Aside from directing investment funds to the Scottish economy, promotion and support of energy efficiency through programmes such as EES, is one of the few instruments at the Scottish Government’s disposal to conduct energy policy, especially on the energy demand side.
However, EES is considered to be more than an energy/climate change policy by the Scottish Government. For example, the stated goals of EES include the alleviation of fuel poverty among the lowest income Scottish households.
On this basis, funding mechanisms such as government issued grants, are exclusively available to the lowest income households. More generally, energy efficiency has been identified as a ‘national infrastructure priority’ in the EES Route Map document published in May 2018, and the Scottish Energy Strategy published in December 2017 considers how energy efficiency actions may impact upon key economic indicators such as GDP and employment across the wider economy.
EES was officially announced in May 2018 with the publication of the EES Route Map. At that time the UK was already in the process of leaving the European Union: commonly referred to as Brexit.
Brexit, regardless of its final shape (which is currently unknown), is expected to affect policies in multiple ways including limitations to EU funds, skilled labour movement restrictions and increased import prices to name a few examples (among the potential impacts highlighted by different studies, reported in a 2018 Institute for Government report ). The magnitude and the exact nature of any impacts will be affected by the exact form that Brexit will have. In this shifting socio-economic landscape, EES will undoubtedly be affected in a range of ways.
In this working paper, we explore the funding limitations that Brexit could introduce to EES. Specifically, we identify two EES funding mechanisms that are likely to be affected; government-issued grants and privately-provided loans. For different reasons, these mechanisms are of paramount importance in order to achieve the EES goals as specified in the EES Route Map.
Government issued grants
Government grants are key to delivering the fuel poverty alleviation goal as it is a way for the government to contribute towards energy efficiency improvement projects for the lowest income households without those households being required to repay the costs of those improvements in the years to come. Restricted access to EU funds, regardless of whether they come from the European Investment Bank (EIB) or the European Structural and Investment Funds (ESIF), could limit the Scottish Government’s ability to offer the originally planned amount of grants.
Private loans
Private loans, whether in interest-free or low-interest form, are in practice the main mechanism to fund EES projects, particularly for those households not eligible to receive grants. On this basis, the current plan is that private loans would constitute the largest source of contributions towards EES projects.
Uncertainty around Brexit and the future relationship between the UK and the EU has already begun to affect the availability of investment capital for loans, as highlighted by Froggat et al in a 2017 Chatham House report. Thus, it follows that reduced availability of loan finance could undermine the achievement of the energy/climate change goals as fewer households are likely to opt to implement energy efficiency improvement projects.
These arguments provide the basis for our development of a range of scenarios that look at the differences in the outcomes of EES in the event that funding availability is in fact restricted. We compare the results of simulating these scenarios against a central ‘No-Brexit’ case.
Our findings show that the impacts of Brexit need to be examined on a case by case basis. However, there are some general lessons from the research reported here:
Maintaining the originally-planned funding level is key
The level of funding determines the magnitude of the anticipated EES outcomes, especially the long-term ones that are driven by realising efficiency gains in energy use by Scottish households. For example, our ‘No-Brexit’ analysis for EES suggests that the lowest income households could ultimately achieve a 4.02% reduction in the energy required to run their homes. But a reduction of 10% in the amount offered as grants could reduce the extent of efficiency gains and energy savings to 3.74%, which may be further reduced to 1.21% if no grants are offered.
The options used to bridge any funding gaps need to be carefully considered
In particular, where a funding gap emerges in the provision of government grants, it is important to carefully design the mix of options used to raise the necessary funds and/or fill that gap. Otherwise, gains in the disposable income of the lowest income households could be eroded, from a potential 0.7% in the ‘No-Brexit’ case to 0.3% where no grants are provided. Moreover, it is likely to be at least 10 years after the beginning of EES before any positive effects can be observed, in contrast to the ‘No-Brexit’ case where positive effects are observed from the outset of EES.
The continued availability of private loans is crucial for the overall success of EES
Private loans are the dominant source of contributions towards EES projects. A 10% reduction in the availability of private loans will impact upon both employment gains and energy savings across the wider economy.
Our ‘No-Brexit’ analysis suggests that EES could generate sustained employment gains of almost 5,000 new FTE jobs across the economy and 1.07% reduction in total energy use by 2050. But a 10% reduction in the availability of private loans limits the jobs gains to approximately 4,700 and erodes energy savings to 1%. Of course, the availability of funds or the cost of the loans is outside the direct control of the Scottish Government. Nonetheless, it is crucial to use any available instruments to ensure that both the funding level and the cost of loans remains as close as possible to the originally-planned levels.
The key ‘take home’ messages emerging are, first that the Scottish Government should aim to keep EES funding as close to the original level, and, second it needs to carefully consider how this may be done in the context of an uncertain Brexit.