Public Audit Committee [Draft]

Meeting date: Thursday, February 29, 2024

Official Report 798KB pdf

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“Decarbonising heat in homes”

The second half of our agenda today is an examination of a briefing paper that was prepared by the Auditor General for Scotland, “Decarbonising heat in homes”. I welcome our witnesses, all of whom are from Audit Scotland. We have the Auditor General, Stephen Boyle; Cornilius Chikwama, an audit director; and Derek Hoy, an audit manager.

We have a number of questions. Before we get to those, I invite the auditor general to make an opening statement.

I am pleased to bring to the committee my report on the Scottish Government’s plans to decarbonise heating in homes. Around 15 per cent of Scotland’s overall greenhouse gas emissions come from 2.5 million occupied homes. Reducing emissions from heating our homes will make a significant contribution to meeting Scotland’s 2045 net zero target.

My report considers the actions that relate to housing in the Scottish Government’s “Heat in Buildings Strategy: Achieving Net Zero Emissions in Scotland’s Buildings”. My report looks at the scale of challenge that the Scottish Government faces in reducing emissions from heating homes, what steps it has taken so far and what is still to be done.

The Scottish Government’s approach focuses on two things. First, it intends to scale up its long-standing work to improve the energy efficiency of Scotland’s homes. Secondly, by 2045, it is targeting the mass switch away from carbon-emitting systems, such as gas boilers, to cleaner heating systems, such as heat pumps. However, the scale and pace of activity must increase significantly if the Scottish Government is to realise its ambitions.

The Scottish Government is working to create the right conditions now to enable households to make the changes that are needed, but it faces significant risks. It is a complex process that relies on several stakeholders, including the public, private sector investors, industry and the UK Government. Interrelated factors, such as new legislation, public and private investment, supply chain growth and infrastructure development are all key to its future success.

The Scottish Government has laid some of the foundations to enable it to move forward with its plans, such as developing governance arrangements and increasing the capacity of its heat in buildings programme team. It now needs a clear plan of action to take forward the delivery of its heat in buildings strategy.

The Scottish Government has estimated the total cost of decarbonising heating in Scotland’s buildings to be around £33 billion across the public and private sectors and households. Some £1.8 billion of public money has been committed over this parliamentary session. The Scottish Government must ensure that it achieves value for money from its investment, and it must work effectively with the private sector to ensure that funding and finance are available for home owners and industry to support a large-scale change in how we heat our homes.

Cornilius Chikwama, Derek Hoy and I look forward to answering your questions.

I will pick up straight away on governance arrangements, which was one of the themes in that introduction. In the report, you say:

“The Scottish Government should: finalise governance arrangements for the Heat in Buildings Strategy programme as soon as possible”.

That is the expression that you use—there is a degree of urgency. That seems to be instructive, when we look at some of the dates in the report and the scale of the challenge that is to be met by those dates. Can you tell us what governance arrangements the Scottish Government needs to finalise at this stage?

Yes, I am happy to do that. I will pass to Derek Hoy in a moment to take the committee through some of the history of the governance around net zero in the Scottish Government and some of the emerging plans in Government.

There is some recent history. If you will allow it, I will reflect on our report from the summer, in which Audit Scotland reviewed the overall governance arrangements with regard to the Scottish Government’s net zero ambitions. I am paraphrasing slightly, but I noted that the Scottish Government’s net zero department was relatively slow to have clear structures for how it wished to deliver its ambitions.

There has been progress since then, but I agree with your assessment that there is a degree of urgency, given the scale of change that is required. Having effective governance arrangements, alongside a clear and tangible plan, is one of our central recommendations in today’s report. The strategy is there. We are aware that there is complexity and uncertainty with regard to the current consultation on a future bill, which might change some of the targets and how the Government will deliver its ambitions. However, that needs to be rooted in a clear set of governance arrangements. Derek Hoy can say more about where the Government is going next.

A lot of progress has been made since late 2022, when a new programme director joined the Scottish Government’s heat in buildings team. Filling that role has allowed the team to make good progress in deciding what the governance arrangements will be.

I would not want to go into too much detail about the actual arrangements, because they were very much a work in progress when we spoke to the Scottish Government; it might be best to speak to the Scottish Government to get more details on how they are taking shape now. An overarching programme board and an independent strategic advisory group were ideas that were being discussed or set up at the time, but it might be best for the committee to speak to the Scottish Government to get an update on the arrangements.

We took assurance from the pace of work since the programme director came into post. A lot of work had been done in the interim period, and I do not expect that it will take much longer for the arrangements to be finalised.

Okay, but a recurring theme has come out in the report. The third recommendation in the report talks about the need to

“identify the staff numbers and skills”

required. It sounds as if a good old-fashioned workforce plan—which we speak about a lot at the Public Audit Committee—is needed. Is that in place? If it is not yet in place, what arrangements are under way to ensure that it is? Where are we on progress with that?

As Derek Hoy mentioned, the Government has made progress, certainly since we produced our more overarching report in summer last year, on staffing up its net zero department. As the committee heard in evidence from the director general, the workforce plan is now in place and there is a clear direction of travel in the Scottish Government on how to get the right people in the right place to deliver on its ambitions.

Before I go back to a couple of specifics on governance, I note that there is a recognition in Government—quite rightly—that those aims cannot be achieved by one directorate and, more broadly, that the Scottish Government cannot deliver its net zero ambitions by itself. There is a complex chain within which it has to encourage individuals’ relationships with other parts of the public sector and with the private sector to get that right.

You mentioned one of the recommendations, convener, which is intrinsically connected to the other recommendation that I touched on briefly. The strategies are there, but those have to be underpinned by a clear delivery plan with regard to what actions will be taken to support the implementation of the strategies.

I will draw out one other point that we make in the report, on governance, at paragraph 33. Since November, the Government has put in place what it refers to as a monitoring and evaluation framework to support the implementation of aspects of public reporting on progress of the heat in buildings strategy. It will need to keep that under very close review, accompanied by a clearer and more overarching delivery plan.

Some progress has been made, and a workforce plan is part of that, but, given the scale and complexity of the programme, there are key steps to take over the next five, 10 or 20 years to deliver it successfully.

Have you had an opportunity to evaluate the evaluation framework? Do you have any sense of whether the monitoring and evaluation framework that was published back in November will be up to the job that has been set for it?

Given the short space of time between the publication of that framework and the publication of our report, we have not taken a view on its adequacy. Otherwise, it is fair to say that we will continue to engage clearly with that through our audit work, both in the audit of the Scottish Government and in further public reporting that we will undertake on progress towards net zero, and it will be part of our assessment in due course. However, we have not yet formed a view.

Ultimately, it is for the director general, together with Scottish Government colleagues and non-executives, to be satisfied that the framework is appropriate to assist their progress.

The other thing is a delivery plan, is it not? I think that there is talk of the production of a delivery plan by the end of this calendar year. Do you consider that to be a reasonable timescale, or is it coming too late, when you look at the timescale and targets that have been set? What is your opinion on that?

The end of 2024 is the date that we put in the report. Weighing up the number of variables that exist, and the complexity, there may be changes to some of the timescales following the conclusion of the consultation on the bill, so there has to be a degree of space—I think that we are talking about a number of months—to take stock and translate those findings into a clear delivery plan.

I do not think that that detracts from the overall sense that there is some urgency to this. You will see from other parts of the report that, despite the importance that the transition to clean heating systems will play in delivering net zero ambitions, that has not happened at pace thus far. That has included aspects of the establishment of the team and the governance arrangements. All those have to be pointing in the right direction and moving at the right pace. We feel that by the end of 2024 would be about the right timescale for producing the delivery plan. We would start to be more concerned if it were to drift beyond that.

10:30  

I do not know whether you have—or are willing to state on the record—a view on the dilution of targets in some cases and their abandonment in others. The original target was that, by 2030, 1 million homes out of the 2.5 million in Scotland would be converted, and that we would see a complete phasing out of all new gas boilers by around those target dates. We would also have 22 per cent of heat being generated by renewables; that percentage relates not to the number of households but to the measure of heat. All those targets seem to have been dropped.

You are right to say that. Our report makes similar reference to those changes and to amendments to aspects of the targets that have been indicated in the current consultation on the new bill.

Our report also draws on the views of subject experts who have assessed the Scottish Government’s likely progress in delivering its interim and eventual net zero targets by 2045. The most notable of those is the Climate Change Committee, which has expressed reservations about the pace of progress that the Scottish Government forecasts it will make. It is clear that delivering the interim targets by 2030 will be incredibly challenging. That is all the more reason for putting in place effective arrangements now if the overall target is to be delivered by 2045. That will be stretching, given the scale of change that will be required over the next 21 years. There is clearly work to do here.

Your report certainly indicates that you are calling into question some of those targets. There is also a credibility question, about whether the scale of change is sufficient. There are 2.5 million households in Scotland, but you refer to only 26,000 households having had heat pumps installed. That represents a completion rate of around 1 per cent, which, by my rough arithmetic, leaves more than 98 per cent of households having not had those conversions.

That is one of the most fundamental points in our report.

Please allow me to delve into history for a second, convener. It is probably fair to say that, in the 2010s, the Government’s focus was on improving the insulation quality and energy efficiency of Scotland’s homes. Our report says, fairly, that it made pretty reasonable progress in that environment.

However, to deliver the Government’s net zero targets, decarbonising heating systems had to become the next phase. Our judgment was that the Government was slow to make a change in its focus on resources on that aspect. That is probably borne out by the statistics that you mentioned, convener. The rate of installation of heat pumps has been in very small numbers that pale in comparison with the overall target of 80 per cent-plus of existing gas boilers.

There is no doubt that this will be a really complex programme. Not all of Scotland’s housing stock will lend itself to the installation of heat pumps. There will have to be careful plans and transitions to review the range of heating systems that could make the difference in achieving low-carbon targets. As I am sure that the committee will want to explore further, it is also reasonable to draw out how that could be done in a just way—through a just transition—that would not exacerbate the existing levels of fuel poverty in Scotland.

All those factors are captured in the Government’s heat in buildings strategy. However, we are now talking about a step change, and about the Government navigating the current complexities to deliver all its aims. Derek Hoy and I will be happy to explore the various pillars of that approach and how they are being taken forward.

Right—that is very useful. Thank you.

Colin Beattie will now put some questions to you about funding and investment.

Good morning, Auditor General.

Nothing happens without money. The whole programme hangs on whether public and private investment can be obtained in very large quantities. The fourth recommendation in the report is that the Scottish Government should

“clarify how it will use public money in the short and long term to support the delivery of its Heat in Buildings Strategy objectives, while achieving value for money”.

When would you expect the Scottish Government to be able to do that? What evidence would you expect to see in order to demonstrate that value for money is being achieved?

You are quite right, Mr Beattie—the Scottish Government cannot achieve the strategy’s aims alone. Delivery will clearly rely on a combination of private sector investment; individual household investment, which will involve accessing grants and loans; and a variety of other factors. The introduction of private sector finance, together with creating a supply chain, will be a key component of that.

Again, I will turn to Derek Hoy to update the committee on the judgments of the green heat finance task force, which was one of the external reference bodies that the Government created, acknowledging all the complexity. Derek can explore that a bit further, but first I will say a word on the investment from the Scottish Government relative to its estimate of what delivery will take in totality.

As I mentioned in my introductory remarks, the Government estimates that it will take more than £30 billion—£33 billion, in fact—to deliver the change. It has set aside £1.8 billion of investment over the current session of Parliament to provide support through a variety of different measures. Some of that is in the form of grants, and some involves the continuation of existing funding arrangements—for example, for insulation.

It is inevitable that that will change, however. The work will not stop at the end of the current session of Parliament. We have no involvement in this work, but I listened to some information on the “No home left behind: Funding a just transition to clean heat in Scotland” report that the Institute for Public Policy Research published today, which explores the extent to which public investment in the strategy will help it to deliver the scale of change that is needed. Those policy decisions will be made over the current session of Parliament and into the future.

An assessment of value for money will be required. We will make such an assessment in due course, but public officials and parliamentarians will also want to do so with regard to whether £1.8 billion is enough and whether the programme is delivering effectively. That will be set out through a combination of different ways, and we will have a role to play in that. It is clear, however, that continued investment will be needed from both the public and private sectors for many years to come.

If you are content with that, Mr Beattie, I will pause and ask Derek Hoy to say a bit more about the Government’s engagement with private sector funders and where that might go next.

The Scottish Government set up the green heat finance task force, which involves a combination of individuals from across financial institutions and the public sector, and heat in buildings experts, to try to tease out the options that might be available to provide finance to households and businesses to make the necessary changes to how we heat our homes.

Much of the findings from the initial report of the task force—a second report is due out later this year—resonate with what we say in our report with regard to the huge scale of the risk and challenge in delivering the scheme. The market is currently very much in its infancy. That is not to say that funding and finance, and the mechanisms to deliver the programme, are not in place, but the market is not yet quite mature enough for those things to take off. The Scottish Government’s role is to try to create conditions whereby the market can grow, and private investors will then have more confidence to invest in funding schemes. That is the real catalyst that will, one would hope, drive large-scale change and start us moving towards achieving the Scottish Government’s aims and objectives.

The risks and challenges that the task force identified are very similar to what we found in our own report.

To me, there are two ways that the private sector can get involved. One is by directly financing discrete projects; the other is by providing finance to householders to carry out whatever works are needed in their homes. Has consideration been given to the balance between those? It seems problematic that the facility to go into debt to do that work will be particularly attractive to households. Has any analysis or work been done on that?

Not that I am aware of. We could certainly look into that, but we did not do that as part of the audit.

For example, to what extent is the private sector going to be involved in just transition? Just transition implies helping those who are less well off to make the transition without getting into financial difficulties or fuel poverty, for example. I am struggling to see a role for the private sector in that, because the private sector requires a return. How does that work with public sector funding?

I can offer a couple of points on that, and Cornilius Chikwama might want to come in. There is a huge opportunity for business here. If I can lay my hands on it, I will give Mr Beattie the right statistic to illustrate the changes. The number of accredited gas installers in Scotland dwarfs those who are currently able to install heat pumps or any other low-carbon heating system.

Inevitably, delivery of the programme will be done through regulation, investment, incentives and raising public awareness. Those aspects will all be parts of the strategy that the Government will want to use. The private sector needs the right conditions and market certainty. That means clear opportunities so that businesses feel confident to invest in the market, and businesses need to know the timescales so that they can plan and reskill their workforce; that will also attract new entrants to the market. Based on the estimates that I have mentioned—there is more than £30 billion at play in Scotland—that ought to be a very attractive market, but the right conditions have to be in place.

That is the early feedback that businesses and their representatives have given. They are looking for that level of certainty so that they can make the shift at the right point away from gas installations to low-carbon systems.

I will come to just transition in a moment, but it is worth acknowledging that that is part of the Government’s thinking. The consultation on the bill is already exploring how some of the incentives or arrangements could be put in place so that households make the transition and so that there is a knock-on effect for businesses.

There could be trigger points. For example, when people buy or sell a property, that could open a window within which a low-carbon system had to be installed. Inevitably, the process will have to be accompanied by a range of loans and grants. As you mentioned, loans will be one of the mechanisms by which the private sector can become involved in this new model of low-carbon systems.

I will pause there because I think that Cornilius wants to say more about that, and then I want to return to your point about just transition.

There are a number of issues to reflect on. There is an issue of affordability and loans being available to households so that they can afford to make the investments. However, with regard to value for money, there is a question of when it becomes worth while for households to decide that they want to make the switch. That will be the biggest test for value for money. If Government can get to the stage where households are deciding that it is worth while to switch from gas boilers to alternative technologies, we will have cracked the value for money challenge.

A second element of value for money is recognising that Government cannot reduce emissions from people’s homes, but it has other options to reduce emissions elsewhere. It has to look at the totality of the challenge that it faces.

10:45  

The key question in that regard is whether, if the Government is going to spend £1 on reducing emissions from homes, it could have achieved more emissions reductions had it chosen to reduce emissions elsewhere. The Scottish Government will have to grapple with the question of where it will get the best returns in emissions reductions.

You make an important point, Mr Beattie, about the role of the private sector in the just transition. There is a recognition that, although the private sector might not have a direct role to play, policy has a role to play in shaping what the private sector does in relation to a just transition.

A key point in that regard is how we regulate competition as the markets emerge, and what measures will be put in place for consumer protection. Those things may be important in thinking about a just transition. The question is whether the powers around those things lie with the Scottish Government, or whether some of that is for the UK Government. That then raises an important question with regard to how the Scottish Government and the UK Government are working on those issues.

Focusing on just transition, the Scottish Government already has some financial support schemes for individuals in place. Has the Government actually estimated how quickly those current schemes will become oversubscribed? It is clear that there is a limited amount of public funding available.

You are right. Cornilius Chikwama might know a wee bit more about the forecasting.

Effectively, the role of just transition in that area is about looking to insulate—if you will pardon the pun—households that are currently experiencing, or at risk of experiencing, fuel poverty from being forced to adopt a low-carbon heating system, which may thereby exacerbate their exposure to fuel poverty. The Government has currently put in place a range of measures, one of which is funding to social housing providers of £200 million over the current session of Parliament.

There is a very live risk in that regard. I draw the committee’s attention to exhibit 3 in our report, on the percentage of households that are experiencing fuel poverty. In 2019, that figure was 24 per cent, and it has now risen to 35 per cent, with the energy crisis and cost of living challenges. Those things will have to be factored in to ensure that, as we transition to low-carbon heating systems, which we must do, that does not draw new households into fuel poverty or result in a deterioration of circumstances for those who are already experiencing it.

The Government has set aside funding, but it is quite difficult to forecast the extent to which that will be eaten up by demand. Cornilius might have the most up-to-date figures, but the amount will be set on a rolling basis through each annual budget process.

The key thing to highlight is that the level of fuel poverty remains quite high. The latest figure that we have is that 35 per cent of households in Scotland are considered to be in fuel poverty.

If we consider what Government is currently investing, we see that it highlights that more is likely to be demanded in the future. As to the extent of that, we have not seen any assessments done by the Scottish Government, but I think that it is fair to say that more resources will be required around protecting households.

That figure—35 per cent in fuel poverty—is certainly very startling. The Scottish Government will obviously have to find more money to enable those individuals to make the transition, and that is a huge task.

How challenging is it going to be to actually achieve a just transition in decarbonising heat for homes? Thirty-five per cent is a huge amount of people in fuel poverty.

That is incredibly complicated. We mentioned some of the factors that will have to be overcome, and that includes tackling fuel poverty. The Government’s ambition is that, by 2040, no more than 5 per cent of people in Scotland will be fuel poor. We probably use the term “step change” too loosely, but that is a hugely significant challenge, given where we currently are.

We are approaching the middle of the 2020s. In 16 years’ time, we need to move from 35 per cent to 5 per cent of people in fuel poverty. That will require not simply a just transition, but a significant move from existing circumstances.

The heat in buildings strategy covers aspects of that, as we expect the delivery plan to do, too. That includes continuing to support effective insulation properties, which is easier said than done, because some of the more straightforward insulation work has already been done. In much of Scotland’s housing stock, it is not easy to deliver effective insulation. The age of some properties and their condition can present issues, and tenement buildings do not easily lend themselves to the installation of effective insulation. It will be harder to retrofit some of the housing stock with low-carbon systems. There is, therefore, a very significant challenge to be met.

Your assessment that more funding will be required is fair. The sources of that funding, whether it comes from the private sector or, as is probably more likely, from increases in public sector funding, will have to be part of the plan.

Okay—thank you. Graham Simpson wants to come in on some of those points, and then I will bring in Willie Coffey.

Auditor General, I have been reflecting on everything that has been said so far, and what strikes me is that we have very ambitious fuel poverty targets, as you have said. I wonder whether there is a bit of contradiction between having those targets, which Parliament set, and wanting to decarbonise. Right now, if you were to think of getting rid of your gas boiler, there is a very good chance that you could end up with having to install a very expensive heating system, and something that costs far more to run. Is there a risk that people would be plunged into fuel poverty if they were to make the move now?

If it were left to the market, that would be a clear risk. Before today’s session, I was reading, for example, that the price per unit for gas is currently lower than that for electricity. The decarbonisation process is about moving away from fossil fuel-based to renewables-based, electric-powered systems.

Those factors—decarbonisation and fuel poverty—will clearly have to be weighed up. They might or might not be competing demands, but both are very challenging. To deliver on the statutory target of no more than 5 per cent of people experiencing fuel poverty, and to deliver on the 2045 net zero targets to decarbonise Scotland’s heating systems, will require clear plans to navigate all the complexities that we touch on in the report. The targets are undoubtedly stretching.

I am simplifying this, but, in essence, people end up in fuel poverty because the cost of heating their home is too much for them. You rightly say that if people move to a fully electric system, that will, at present, cost far more than gas. That is correct, is it not? That balance has to change.

That will be one of the safeguards that will be a hallmark of the Government’s plans to ensure a just transition. Moving towards meeting fuel poverty targets and a just transition come under the same banner, and Cornilius Chikwama might want to say a bit more about the Government’s thinking in that area.

The complexity of these issues is hugely significant, as the Government recognises. It will be important, therefore, to see what comes out of the consultation, and what is in future legislation, governance monitoring arrangements and so forth, so that both aspects of decarbonising Scotland’s heating systems are treated with equal priority in the years to come.

The Auditor General is right. There is a risk in this transition. I do not want to talk about plunging people into fuel poverty, but there is a risk of increasing fuel poverty in this transition. If one looks at the two pillars of decarbonising—that is, improving energy efficiency and changing the technology—one would expect that, if we were able to make progress on improving energy efficiency, it would reduce the amount of energy needed by households, which could mitigate the impact of fuel poverty to an extent. As the Auditor General has said, the Scottish Government has made progress on improving energy efficiency, but there is still more to be done.

The second pillar is where the challenge lies, with the switch from gas to alternative technologies. At the moment, those technologies are much more expensive than gas, and that is where the risk is greatest. The issue is how to balance the energy efficiency side with the options for switching from gas to alternative sources.

Have you done any analysis of the difference in costs? What would it cost the average household to switch from gas to something else? I know that there are various alternatives. How much would it cost to maintain those systems?

That type of analysis of what it would mean for individual households was not part of the scope of this report. Derek Hoy might want to say a bit more about some of the insight that we have into where the Government intends to go, but we will probably have a greater feel for that following the conclusion of the consultation on the next bill.

At a high level, the price varies depending on the property, the type of system chosen and any groundwork that is necessary around the property. I know that this is a fairly broad scale—forgive me—but I think the anticipated cost of installing a heat pump was last estimated at between £7,000 and £15,000.

There are other options. For some properties, a heat pump will not be possible and you will then have to look at modern electric storage systems. Then there is the option of heat networks—that is, district heating systems. There are various such models, and it is not easy to say with any confidence what the average might be and how it will relate to individual properties. Nonetheless, you can say that, at a relatively high level, it will, for almost every household, be a significant investment that people will want to plan for. People will want to know what finance is available and what grants are at their disposal.

Derek Hoy might wish to add to that.

I do not have much to add, but on your question whether we have looked at an average cost, Mr Simpson, the answer is no. The main reason for that is that I am not sure how valid such an average calculation would be. There will be so much variation due to a whole range of factors—the type of property, its age, building fabric and so on—that we did not see much value in trying to carry out that exercise. However, as the Auditor General has pointed out, it will be a significant investment for any household.

The other thing to mention is how it all looks over the long term. It is a significant investment just now; the cost of a clean heating system is, on average, more expensive than replacing a gas boiler, like for like. However, as technology develops and economies of scale are achieved in the industry, you would over time expect those costs to come down. We need to bear in mind that we are looking at a 21-year timescale from now; the situation at the moment is that things might be more expensive, but that could change over the course of the next few years. There are a lot of different factors and a lot of unknowns.

I will make a final observation. If we are talking only about housing, I think that we can deal with new housing relatively easily, and the Government is looking at improving the standards of such housing. I was at an event last night about passive housing. Serious consideration is being given to introducing new building standards so that new homes meet those very high energy efficiency standards, and that could deal with the fuel poverty issue almost overnight, which would be very positive. However, given that the challenge is the existing housing, do you agree that that is probably where the money has to go?

11:00  

I recognise the scale of the challenge, which will require effective engagement with many different stakeholders. We have already mentioned explaining the options to individuals, bringing private finance into the system and engaging with the UK Government on the capacity of the energy grid.

Mr Simpson, you mentioned passive housing. The approach should therefore involve clear and effective engagement with social housing providers and their representatives in Scotland, given that many people who currently live in fuel poverty live in social housing. There should be a clear explanation of what is expected of them and the funding that is available, so that we can support increased confidence with regard to insulation and the transition arrangements that are in place for low-carbon systems.

I call Willie Coffey.

Auditor General, the public perception of all this is not great. I do not think that we should still be hearing that lot of work needs to be done. We have heard that said before, and we are still hearing it now.

Constituents who talk to me about the transition say, “What are the solutions on offer? I do not know where to find them or who to talk to about them.” They ask whether there will be subsidy or other help to install whichever devices will be used. However, their main question is, “How much is this thing going to cost me to run?”

In your view, what will be the key sea-change element that will accelerate the transition? I think that I know what it will be: the cost of electricity, which is currently four times higher than that of gas. Even if an army of heat-pump engineers were to appear from somewhere, and even if we had great subsidy schemes on offer, people will still vote with their wallets and say, “No thanks—it’s too expensive.” If someone were to switch just now from consuming gas to consuming electricity to heat their house, their electricity charge ratio would be four times higher than it is at the minute. Is that not the key challenge that we face in effecting at pace the transition that we need?

That will be one of the key challenges to overcome, Mr Coffey. There is no question but that it will require the public to engage with, and have confidence in, transitioning from a fossil fuel-based system to a low-carbon one. People will make environmental decisions, but fundamentally they will make economic decisions for them and their families. That might be at the expense of fuel poverty or other aspects of how they lead their lives.

There are others who will do this voluntarily. Indeed, our report mentions that some people—and I am going back nearly 10 years now—were early adopters of such heating systems. However, we are still talking about the low numbers of those people—5,000 or so—compared with the more than 1.8 million households that still have gas boilers that will have to be targeted, so the scale of change that will have to take place is enormous.

Derek Hoy might want to say a bit more about this, but I just want to put on record that the Government recognises that that is one of its key challenges. It is badging it as part of its public awareness strategy, the detail of which we set out in paragraph 72 of our report. The public might be well aware of what is on offer and the grants that are available, but I accept your premise that they will make economic decisions. They will want to be satisfied about what they are signing up for in the longer term and what the costs might be. Together with its partners, the Government will have to overcome that challenge and others—for example, the issues of its relationship with the UK Government with regard to grid capacity and the underlying cost drivers of the disparity in price.

Again, Derek Hoy might wish to add to that.

From the evidence that we have gathered, the Scottish Government clearly accepts that public engagement is an important part of its approach, and it has put an awful lot of effort into getting that right. It is all at an early stage, so it is hard to see how effective it will be. It is good that the Government has put a strategy in place, along with indicators to monitor its effectiveness, and it is also planning to come back and evaluate the public engagement strategy in, I think, 2026.

A lot of other work is going on aside from that. Indeed, you will see in appendix 1 of the report a list of the various consultations on heat decarbonisation and energy efficiency improvements. The Scottish Government is very much aware of the issue, and it is certainly under no illusions about the scale of the task to sway public opinion and get it onside.

On the original point, I would say that cost will be a major factor, and there is a role for the Scottish Government to provide clarity on how much the systems will cost and what the best system will be for particular houses. There is a lot of work that the Scottish Government can do to provide people with a bit more assurance and confidence, but there are also factors outwith the Scottish Government’s control, such as the cost of electricity, that will undoubtedly play a part.

That is the fundamental, bottom-line question for me. Consumers do not control the price of electricity or gas, nor does the Scottish Government. We rely on co-operation from our partners in Government. Electricity prices in the UK are among the highest in the world, and that is the bottom line here. If we tell people that they should make the transition to help with progress towards net zero, they will reply, “How much is it going to cost me?” In my view, some work needs to be done to reduce the cost of electricity.

People to whom I talk ask why, when we are producing more than 100 per cent of our electricity needs in Scotland from renewable sources, it is still costing them a fortune to use that electricity. Why is that? Energy companies are still generating and creating profits from that, but the public arenae getting the benefit. For me, doing something about the price is the key to getting the transition rolling faster. All the rest of the factors are important, but they willnae chip away at the 1.8 million houses wi gas central heating boilers if people think that the cost to replace them is going to be excessively high.

We recognise in our report that engagement between the Scottish and UK Governments is one of the fundamental pillars of delivering a successful transition, recognising the distinction between the devolved and reserved powers held by the two Governments.

The Scottish Government’s strategy involves regulatory intent, with plans around different dates that will fundamentally force consumers to make the change. As you would expect, that is far more likely to succeed, and people will be willing to comply, if they recognise the environmental benefits but do not feel that they will be hit by what it will cost them, compared with where they were. There is no doubt that there is work to be done, and that engagement and regulatory clarity will help that transition.

One of the factors at play relates to the on-going consultation on the proposed legislation, which I understand will come before the Parliament before the end of the year, and concerns the housing market. There is an expectation that, if someone buys a property, a condition will be put on the purchase such that, within a certain timeframe, the new owner will convert. That could have some interesting consequences, could it not?

Like you, convener, I was aware of that aspect of the consultation. As parliamentarians, you will expect to have the opportunity to scrutinise the proposals, explore how they might be implemented and, indeed, consider the intended and unintended consequences. There is no doubt that regulation will play a key part in driving the level of change required, especially given the many variables that Mr Coffey has touched on and which include the price of electricity, supply-chain factors and the availability of private finance. We await the next stage of the legislation with interest.

A lot of very good ground has already been covered, and I have been listening intently. I want to mop up a few other areas where you might share your wisdom.

First, there is an overarching discussion about how we define fuel poverty in the modern world. The technical definition is that a household is in fuel poverty if it spends more than 10 per cent of its net household income on fuel/energy consumption. As we know, if that figure reaches 20 per cent, a household is defined as being in extreme fuel poverty. It does not take very much to fall into that category. Even someone on a fairly substantial income who might be in a higher tax bracket could quickly find themselves in a position in which their annual fuel bill was £2,500 or £3,000, which would very easily take them into that situation. Are you worried that there is an assumption that people on very low incomes or people on various benefits are the sole victims of the current fuel poverty situation?

Cornilius Chikwama might want to say more about the definition. I refer back to exhibit 3 in the report, where we look at the step change in the number of households in Scotland that have been classed as experiencing fuel poverty. I agree with your assessment that some people will have experienced extreme fuel poverty in the circumstances that we have seen over the past few years, which have included energy price shocks.

How that is distributed across different socioeconomic groups across the country is relevant. Depending on the choices that individual households make and what their housing costs are, we expect that that will be a key part of the Government’s thinking.

I want to step back for a second. In order to ensure that it delivers on the challenging statutory targets of reaching net zero by 2045 and achieving a significant reduction to only 5 per cent of people in Scotland being fuel poor by 2040, the Government will require to have focused plans, as well as all the various pillars around regulation and awareness.

We did not examine the definition much in the report, partly because I am sure that the Scottish Government follows the statistical standards around fuel poverty. As Stephen said, if you were to look at the distribution of the people who are counted as being in fuel poverty, you would find that they are likely to be distributed across different socioeconomic groups, but it is fair to say that a lot of them will probably be in the low-income categories. There are a lot of standards that guide how the Scottish Government applies the definition.

Appendix 2 of the report is on the delivery schemes. It seems to be a complicated and complex subsidy environment. There are a number of schemes. We have warmer homes Scotland, which is delivered by Warmworks. We have area-based schemes, which are delivered by local councils. We have Home Energy Scotland grants, which are delivered by the Energy Savings Trust, and so on. The number of households that are getting proper conversion of heating systems out of that is in the tens of thousands, as opposed to the hundreds of thousands or millions.

It seems to be quite a complex landscape, as other members have mentioned. Could it be simplified? The risk is that if you leave things to the market alone and people’s only exposure to accessing improvements is via the private sector advertising those schemes with a view to making profit in their own way, it becomes quite a dangerous environment for the consumer.

I agree with you. There will always be a fundamental role for Government alongside the market, especially if the Government’s statutory targets, which the Parliament signed up to, are to be delivered. There is a trick to pull off here. As I mentioned, the Government’s focus in the 2010s was on improving the energy efficiency of properties, and, as we reasonably say in the report, it did that well—properties have become better insulated. However, to ensure a just transition, we must not move the focus solely on to decarbonising heating systems; we should continue to support effective energy insulation and—to build on Mr Simpson’s example—to pursue passive house standards, effective retrofit and so forth. That should be a shared objective.

11:15  

On the specifics around the different schemes, it must be simple and easy for people to access the right schemes and to know where they can get grants and what loans are available. That all falls under the Government’s pillar of public awareness and giving confidence to individuals and the market. There are many moving parts to that work at the moment, but that is all the more reason—this was our overall conclusion in the report—to have a clear delivery plan that underpins the strategy.

It is interesting that you talked about the various incarnations of the work in this area. Following the days when solar panels on roofs were the big thing, people were told, “We’ll come and insulate your home. There are some grants available for that, and you can top it up yourself.” We are now talking about a root-and-branch approach, which involves people taking out their current heating system and replacing it with new technologies, yet most people probably do not understand what those technologies are. Does that open up any risk of increased exposure to rogue companies, scams, fake grant scenarios, misleading advice being given to consumers and so on? Should the Office of Gas and Electricity Markets pay attention to that?

Regrettably, there is a risk of that. There will be a fundamental change in market conditions; we are talking about the need for the development of a new supply chain with new providers, some of which will provide finance and some of which will provide insulation services. History is littered with examples of rogue operators that look to take advantage of ambiguity when there are such changes in market conditions.

It is not that the Government has not recognised that; there is an engagement strategy and an awareness strategy. However, effective safeguards must be put in place against the kind of scams that we have seen in the past. Ofgem will have a role, and Consumer Scotland—the new public agency—will want to give some consideration to what its role might be in that environment.

That is based on the assumption that we will have the people to do the work. As you said, there is a huge number of people out there who can install new gas boilers, but there will need to be a marked shift to installing new technologies and maintaining them on an on-going basis.

There has been a fair amount of pushback from the industry about what is on offer to incentivise it to retrain and reskill staff if the market does not exist. It is a bit of a chicken-and-egg situation, of course. Do you think that the Government is acutely aware of that? Do you think that the plans that it has produced to ensure that we have the people to carry out the transition are robust?

I will pass over to Cornilius Chikwama to say a bit more about the Government’s plans to create a supply chain and a workforce, but, first, I want to mention a statistic that illustrates the scale of the change, which I struggled to lay my hands on. In paragraph 76 of our report, we say:

“Scotland currently has only around 200 accredited air source heat pump installers compared to 8,700 gas installers.”

I expect that that is going to have to flip. Therefore, there will have to be effective engagement by Government, the enterprise and skills agencies, further education colleges and universities so that heat pump know-how becomes an integral skill.

We often phrase the workforce issue as being a risk to success and a challenge to overcome, but there is an enormous opportunity if the conditions are right and the Government is able to provide confidence to the market and to consumers. As I mentioned, there is potentially £30 billion-worth of economic growth and financial opportunities at play here.

This is an area in which the Government has been doing a lot of work through its supply chain development programmes.

In relation to skills specifically, we have the new mobile centre for heat pump training, which seeks to provide training opportunities in a flexible way. We have the climate change emergency skills action plan, which seeks to invest in skills. However, the real test is in the numbers. As the Auditor General said, there are only 200 certified installers. That suggests that, whatever investments are being made in skills development in that area, they will need to scale up, and to do so very quickly, potentially.

When we did the audit work, we identified a number of challenges, which are mentioned in our report. One of those is around the funding schemes that are available for retraining and upskilling. The key issue is about their being complex and challenging to access. That is what the people who have tried to access them have said.

In addition, some companies are still a bit reluctant to make those investments. The market is still growing, and there is a lot of uncertainty about the pace at which it will take off. Again, those things will impact on the choices that are made on skills investment.

Larger companies that are looking at the wider UK market will look at the pace of growth that they are likely to see in the rest of the UK vis-à-vis Scotland. They will take that into account when they make their investment decisions, given that the rest of the UK is on a much slower timeline.

Those are the key issues that have come out of the audit work that we have done.

Thank you. I appreciate that we are out of time, convener, so I will park my other questions.

Thank you, Jamie. I thank the Auditor General for his evidence and Derek Hoy and Cornilius Chikwama for their input. We now need to consider what our next steps will be and who we might need to invite to give us more evidence on what is a really important subject from the point of view of both public policy and consumer interests.

With that, I draw to a close the public part of this morning’s proceedings.

11:21 Meeting continued in private until 11:36.