Decarbonising Scotland's homes has to make financial sense - here is how it can be done

Direction is far more important than speed. So, for those of us who believe in making Scotland's homes more carbon efficient and cost efficient, the announcement by the Scottish Government last month that it is pausing its Heat in Buildings legislation was not exclusively bad news. Indeed, there is a silver lining to this cloud, because it gives the Government time to ensure that it is going in the right direction more slowly, rather than going in the wrong direction quickly.

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There are very good reasons to decarbonise Scotland’s housing stock. Firstly, we all have a part to play in arresting climate change. It’s easy for us, here in Scotland, to say that there is nothing we can do; that a country of five million people can’t make a difference in a world roughly 1500 times larger. But that’s wrong. Reducing emissions is a little like voting; everyone’s effort makes a difference. Every wave starts with a ripple, and we have the ability to show global leadership here in Scotland.

Nonetheless, as much as tackling the climate emergency is an imperative, we also know that the vast majority of people will not take the necessary steps to reduce their dependency on carbon to heat their homes unless it makes financial sense. Right now, people just can’t afford it. Adjusted for inflation, salaries are lower now than they were in 2008 before the financial crash, inflation is concerningly high once again, and confidence is low. Much as we might want the circumstances to be different, we must operate in the real world, and that means that if we cannot make decarbonisation worth their while, homeowners simply won’t bother. The pound in the pocket comes first.

It is for that reason that a short pause on legislating our decarbonisation strategy is sensible. We must get this right. I have been deeply concerned that, thus far, we have not been.

I am old enough to have been in the financial sector the last time there was a mass transition to a new form of heating. In the 1970s, the population quickly and efficiently moved to gas central heating, fuelled by word of mouth that spread like wildfire. The message was simple but extremely effective: gas central heating will save you money. Much of the funding for this endeavour came from mortgage lenders.

Looking back to this era gives us the roadmap for moving forward to the next one. Now, as then, we need to transition our heating. Now, as then, we want to achieve lower bills. Now, as then, we need to grow demand organically through word of mouth. Now, as then, we need to find a way to finance it.

There are two central questions we need to answer. The first is: what do we want to do? And the second is: how do we pay for it?

I confess to having observed with some concern the Scottish Government's apparent approach of putting all their eggs in the basket marked ‘heat pumps’. I am not a heating engineer and therefore I have no reason to doubt the quality of the systems on offer. I am, however, an expert in lending, value and risk, and this is the source of my concern.

Heat pumps are, as we know, three-or-four times more efficient than gas boilers. However they are powered by electricity, and the structure of our energy market therefore makes them up to five times more expensive to power. Add to that the upfront cost of installing them, and the financial calculation becomes problematic.

It is this calculation which makes solar panels, combined with storage batteries, a more attractive prospect. They cost less to install, and immediately offer a return in the form of cheaper electricity bills. They do not heat the home, of course, but they make the installation of a heat pump significantly more attractive, because they enable the heat pump to be powered by ‘free’ electricity rather than by power bought at peak time from the grid.

As a lender, this is a proposition we can put our arms around. Scottish Building Society has been funding home improvements for 175 years, from extensions to driveways to gas central heating and, now, to decarbonisation. When we offer to lend extra money, we want to make sure the calculation works for us, for our customer and for the asset - the home.

When we can help to (at least partially) offset an increased monthly mortgage payment with a decreased monthly energy payment, it works for us, for the customer and for the asset. It is nearly impossible to do this with a heat pump unless it is also accompanied by solar panels and batteries.

There is, of course, a combination of a grant and an interest-free loan available from the Scottish Government, and this unquestionably makes a large difference. However there are something like 2.7 million homes in Scotland. For the government to provide grants and loans for all of them to install a heat pump costing, say, £12,000, it would need more than £30 billion. Its total annual expenditure is less than double that. This is not a realistic option at scale.

It is also unrealistic to expect homeowners to green their homes from their own savings. Around one-third of Scots have no savings at all. Instead, it is the country’s mortgage lenders who can fund Scotland’s national decarbonisation. The government (and its voters) will inevitably be unwilling. Homeowners will inevitably be unable. But lenders are both willing and able to play our role in this national endeavour.

However, first, we have to be asked. And that is our current problem in a nutshell. We are funding very little in the way of decarbonisation, because we are not being asked. We are not being asked, because there is no 1970s-style word of mouth about the benefits of decarbonisation. There is no word of mouth because people who have already invested in a greener home are not seeing cheaper bills. And they are not seeing cheaper bills because they are either installing heat pumps without solar panels, or solar panels without batteries, or both.

We have taken a step backwards, in legislative terms. That is ok. We want to help the Scottish Government take two steps forward, in the right direction, so that we can achieve both of our imperatives; tackling the climate emergency, and reducing energy bills.

Paul Denton is Chief Executive of Scottish Building Society