Heat Decarbonisation And The Scottish Budget

The UN Climate Summit, COP26, takes place in Glasgow this November, bringing worldwide attention to Scotland – and its climate policies. No wonder, then, that the publication of the Scottish Budget places climate change front and centre, with an ambitious £1.8 billion allocated for investment in low-carbon infrastructure in 2020-2021, an increase of £500 million over 2019-2020. A further £2 billion of new additional funding has been earmarked for low-carbon investments over the next parliamentary term. These measures are intended to ‘pivot’ the focus of all Scottish Government portfolios towards our 2045 net-zero emissions target. With the budget navigating the scrutiny process at Holyrood this week, we take our own look at what the budget means for climate change policy, with specific focus on the tricky matter of heat decarbonisation.

Turning up the dial on heat decarbonisation

The 2021 budget features a substantial £120 million ‘Heat Transition Deal’ which “recognises the need to boost the scale and pace of growth in decarbonising our homes and buildings”. This Heat Transition Deal includes a £50 million ‘Heat Networks Early Adopters Challenge Fund’ (for Local Authorities) and £10 million to support hydrogen heat demonstrator projects. The terms of the Non-Domestic Rates (District Heating Relief) (Scotland) Regulations 2017 are continued to 2032, giving a 50% rates reduction for that period. 

A focus on new homes

These new measures build on the announcement in March last year banning new homes from connection to the gas grid. This move was striking but some context is required. 

There are around 2.5 million existing homes In Scotland, of which 79% are heated by mains gas (Around 2 million homes). In 2018, Scotland built just 20,200 new homes, less than 1% of the total housing stock already heated by gas. Banning gas from these new-builds will not, therefore, have a huge effect on carbon emissions from our housing sector. This can only be achieved by tackling existing stock, for which there is no similar regulation.

The availability of public finance to support our move to net-zero is a clear limiting factor. The £120 million heat transition deal is welcome but, again, context is needed. This translates to around £48 per Scottish household, or the installation of approximately 12,000 domestic air-source heat pumps, slightly less than 0.5% of the housing stock. This can only be thought of as (heat) pump priming, rather than a transformative intervention.

How does this square with the ambitious trajectory outlined in the Scottish Government’s Climate Change Plan, to supply 35% of domestic heat and 70% of heat used by non-domestic properties from low carbon sources by 2032? It’s going to be tough to hit those heat decarbonisation numbers and focusing on new-build homes won’t take us anywhere close.

Further cooling factors

With these new budget measures, the Scottish Government is clearly attempting to accelerate the decarbonisation of heat, so why does the sector lag behind the electricity grid in this respect? 

There is a relatively low level of public awareness of low-carbon heat technologies and many scare stories in the press about district heating systems and air-source heat pump installations creating higher bills. It’s still a largely unregulated market and consumers are going to want, and deserve, the same level of protection enjoyed for traditional technologies.

The capital costs of installation also tend to be higher than for existing systems, even although this is currently offset by Renewable Heat Incentive (RHI) payments. These costs are exacerbated by the disruption and additional expense of measures to adapt to the new system (e.g. improved insulation and fitting over-sized radiators for lower temperature heat pumps) and, in some cases, increased ongoing operating and maintenance costs.

Further afield, limited grid capacity in some areas makes the widespread electrification of heat problematic (and more expensive) while the absence of any regulatory requirement to retrofit low carbon heating also limits uptake. 

RHI closure

At a UK level, the scheduled end of the Renewable Heat Incentive (RHI) in March 2021 is already problematic. Scotland has punched above its weight with the RHI, accounting for 20% of domestic and 19% non-domestic UK installations but certainty on support after March 2021 is required.

At a recent PMQs, Boris Johnson made reference to his government investigating a successor scheme to the RHI. This is positive but uncertainty is already impacting larger, longer term projects, which may not be commissioned in time for the deadline. These are exactly the scale of projects that can make a difference to heat decarbonisation. We must not go down the same road as the Feed-in Tariff, where years of uncertainty and promised reviews ended with the scheme closing without any alternative route to market being identified.

The unique difficulties of heat decarbonisation

When the Scottish Government said that the Heat Transition Deal “recognises the need to boost the scale and pace of growth in decarbonising our homes and buildings,” they were also recognising the unique difficulty of heat decarbonisation – and the resultant impact on progress.

The difficulty lies in the difference between renewable electricity generation and renewable heat generation. 

The electricity grid has been largely decarbonised without physically impacting consumers. No new kit needed installed in homes or businesses and no behaviours needed to change. This is because electricity is generated remotely. Whether this is achieved from gas, coal, nuclear, wind, hydro or solar or tidal sources does not directly impact the consumer. Switches are flipped and lights come on.

Heat is entirely different. It is, for the most part, generated at the home. This means installing a domestic heating system, such as a gas boiler, oil boiler, direct electric heating, LPG or coal-fired system. Homes have been designed around these systems.

Swapping to a low-carbon alternative means installing new equipment in the home or business. This is expensive and time-consuming. Existing gas central heating is cheap, (relatively) clean and effective. Moving consumers away from this fuel source is, therefore, much more difficult. 

Behavioural change is also sometimes needed. If installing heat pumps, for example, they work best when left to deliver a constant, comfortable temperature. People are used to turning off their boiler when they’re at work and dialling up the heat when they return in the evening. This causes a heat pump to use far more electricity, greatly increasing bills. Biomass boilers, meanwhile, need more frequent fuel deliveries, more feeding and more cleaning.

Heat networks require little behavioural change but incur huge capital costs (and disruption) during the installation phase. There is also the cultural change of not owning your own heat generating system, instead taking heat as a service and, potentially, being tied to that supplier for many years.

No wonder, then, that heat decarbonisation is proving so much tougher than decarbonising the electricity grid.

A hydrogen gas grid?

With the issues above in mind, it’s easy to see the attraction of a hydrogen gas network and the Scottish Government has committed £10 million to support hydrogen heat demonstrator projects. Hydrogen doesn’t require any (or very little) new kit to be installed at the consumer end. It doesn’t require any behavioural change. A hydrogen solution would therefore match the successful process of electricity grid decarbonisation, where change in generation is remote from the consumer and disruption, and cost, to the consumer is negligible.

Producing ‘green’ hydrogen, without the use of fossil fuels, uses electrolysis to split water into hydrogen and oxygen atoms. This is energy intensive, therefore expensive, but the use of ‘spare’ energy from curtailed renewable energy assets could change these economics. 

Hydrolysis, though, accounts for only 4% (approx.) of the world’s hydrogen production. The other 96% of production involves the use of fossil fuels: 48% natural gas, 30% oil and 18% coal. This is called ‘blue’ hydrogen.

Steam reforming of natural gas is the cheapest and most common production method but produces CO, CO2 and other greenhouse gases. In fact, it produces approximately 10 tonnes of CO2 for every tonne of hydrogen produced.

Although there is an argument for combining this method of hydrogen production with carbon capture and storage (CCS) to achieve decarbonisation, it’s not as good an argument as leaving the hydrocarbons in the ground in the first place. CCS, too, is in its infancy as a technology and will add cost to the process. It’s difficult, then, to see blue hydrogen as a credible solution to decarbonising heat.

Although green hydrogen is more expensive, the cost trajectory is downwards and the Hydrogen Council estimates that production costs will halve in the next decade.

The cost decrease is due to the falling price of electrolysers, reduced cost of renewable electricity generation and savings generated by substantial economies of scale as the industry grows. The report goes on to suggest that hydrogen will, by 2030, be “a competitive low-carbon building heating alternative, especially for existing buildings currently served by natural gas networks,” and “the only viable option to decarbonise (industrial process heating) in some cases”. Hydrogen could also play an increasingly important role in balancing the power grid, as more renewables come on stream and increase variability in generation.

This is all positive but for these cost projections to become reality, steps need to be taken now to achieve the rate of transition required. The £10 million earmarked to support hydrogen heat demonstrator projects is certainly a step, but it is a big enough one to help turn the long-term potential of hydrogen into an ‘in-time’ option to meet our net-zero carbon goals?

Key heat decarbonisation takeaways from the Scottish budget

Looking at the budget as a whole, David Linsley-Hood, Consultancy Director for Locogen, commented: “These announcements show that the Scottish Government has the willingness to implement steps to push our country forward to meet its net-zero carbon ambitions. However, these are clearly just the first stages of what will be required. What is needed now is clarity on the mechanisms proposed so they can be reviewed and projects developed to understand how far this support can take us, and what else will be required.”

In summary

  • The £120 million Heat Transition Deal is welcome but it does not provide the transformational support needed to seriously affect our trajectory towards decarbonising heat
  • Legislative focus on new-build homes ignores 99% of domestic housing stock
  • The behavioural and cultural change needed for many aspects of heat decarbonisation presents a serious challenge
  • Replacing cheap gas heating to 79% of existing Scottish households is not tackled
  • Hydrogen presents a possible route towards a decarbonised gas grid and industrial heat
  • Successor scheme for RHI needs to be announced as soon as possible
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