Financing and Funding the Decarbonisation of Scotland’s Social Housing

Decarbonising Scotland’s social housing is a critical component of the Scottish Government's goal to achieve net zero emissions by 2045 but is also a key part of delivering warmer, more comfortable homes to improve health, support longer living, enhance life chances, and strengthen communities.

However, the elephant in the room has long been where the money is to come from to fund decarbonisation – the Scottish Housing Regulator estimates the cost to be £9 billion.

It’s good news therefore that the Scottish Futures Trust has prepared a comprehensive report detailing potential financing and funding mechanisms which could assist, namely:

Revenue-Focused Models

1. Sale of Carbon Credits: Social landlords can generate revenue by selling carbon credits resulting from energy efficiency and clean heat work.
2. Social Housing Accelerator: This model involves agreeing on a set of outcomes with the Scottish Government, which makes payments based on the achievement of these outcomes. This mechanism leverages capital from private lenders and aims to meet various policy aspirations.
3. Heat with Rent: Landlords assume responsibility for tenants' heat and power bills, capturing the benefits of energy cost savings. This model requires significant changes to business models and risk management.
4. Third Party Takes Energy Savings Risk: A third party assumes the risk of achieving energy cost savings for tenants and raises non-recourse financing to carry out the work. This model is complex and requires robust data on housing stock and tenant behaviour.
5. Area-Based Approach: This model integrates local net zero projects into attractive investment propositions by creating scale and long-term certainty for investors. It involves multiple stakeholders and requires robust mechanisms to capture energy cost savings.

Capital Financing Models

1. Modified Charitable Bond Programme for Retrofit: This model builds on the existing Charitable Bond Programme, allowing funds to be used for retrofit measures. It offers lower-cost funding for RSLs but is constrained by the availability of Financial Transactions (FTs).
2. Financial-Aggregator/Super-Aggregator: An SPV funded by Scottish Government capital and private loans makes loans available to landlords at a blended rate of interest.
3. Combined Grant: This model combines grant pools from the Affordable Housing Supply Programme (AHSP) and the Social Housing Net Zero Heat Fund (SHNZHF) to purchase existing private property and undertake net zero conversions.
4. Quasi-Equity Options: The Scottish Government subscribes for "equity" in RSLs, creating an avenue of funding that is not classified as debt. This model is not considered viable due to its complexity and limited applicability.
5. Loan Guarantee Scheme: The Scottish Government guarantees loans made by private finance providers to social landlords. This model leverages private sector capital and offers longer-term, lower-cost finance.
6. Enhanced SHNZHF: This envisages expanding and further developing SHNZHF to incorporate a centre of excellence/ project support unit, which would assist landlords with technology selection, retrofit strategy, business case analysis and share data on the outcome of other projects.
7. Rental Premium for Retrofit: Social landlords increase rents and cash generated repays the funding required to implement the measures or alternatively introduce a premium on rents for retrofitted property to reflect the fact that tenants’ combined energy and rent costs will have reduced as a result of the energy efficiency work.

Conclusions and Recommendations

The report developed and assessed the models against five evaluation criteria: additionality, applicability, sufficiency, skills and capacity, and tenant impact, and notes that many models are complementary and can be pursued in parallel. The report prioritises models that can be actioned and developed now, including enhanced SHNZHF, financial-aggregator models, and loan guarantees.

Overarching Recommendations

In the meantime, the report proposes three short-term activities to be implemented now and led by the Scottish Government working in collaboration with other sector stakeholders:

1. Strengthen Multidisciplinary Support Offering: Enhance the SHNZHF with additional technical, financial, quality assurance, and commercial expertise.
2. Improve Clean Heat and Energy Efficiency Data Collection: Centrally gather and share data on installation and materials costs, as well as performance and net savings.
3. Work with the Sector to Explore and Implement New Approaches to Delivery: Collaborate with social landlords to develop and implement solutions, providing clarity on net zero requirements and priorities.

Conclusion

The decarbonisation of Scotland’s social housing is a complex but essential undertaking which will deliver multiple benefits. The Scottish Futures Trust’s report provides valuable insights into the challenges, potential models, and recommendations for financing and funding this transition. By implementing one or more of the proposed models and recommendations, significant strides towards achieving its net zero targets and improving the quality of social housing can be achieved.