The potential of Heat as a Service as a route to decarbonisation for Scotland 

To reach the target set out in the Climate Change (Emissions Reduction Targets) (Scotland) Act 2019 of net-zero carbon emissions by 2045, Scotland needs to decarbonise heat and improve the energy efficiency of its buildings. This evidence review by Energy Systems Catapult for Climate Xchange (Scotland’s centre of expertise connecting climate change research and policy) examines the potential of Heat as a Service (HaaS) to support this aim by providing a route to the decarbonisation of heat in domestic properties in Scotland.

Heat as a Service is a term which covers a range of services that enable people to achieve a warm home in a variety of ways. These include services which provide or enable finance to purchase and install heating equipment; maintenance of heating equipment; energy efficiency upgrades of building fabric; paying for the amount of heat delivered to the home; paying for the temperature the home is  heated to; paying flat-rate tariffs for the home to be heated; or combinations of these. To date, there is not much evidence as to what has been tried in terms of HaaS or how effective it has been in delivering substantial emissions reductions. However, the limited evidence there is suggests that some HaaS offers have potential to:

  • Help get Scotland to net zero by accelerating the uptake of low-carbon heating systems and improving energy efficiency across the domestic energy market;
  • Improve outcomes for consumers, especially the more vulnerable, by helping target financial support and providing better cost certainty; and
  • Support businesses in developing new, sustainable, business models and creating new jobs.

This report: The potential of Heat as a Service as a route to decarbonisation for Scotland, outlines HaaS business models that have been tried across Europe, and categorises them in terms of the outcomes they offer consumers. We look into the potential benefits of HaaS for Scotland, and some of the current barriers which might prevent this potential being realised. Through a series of case studies, we explore in more detail how different business models might work and be adapted to Scotland.

Key points

The findings explain how HaaS could potentially help Scotland achieve its net zero aims, tackle fuel poverty and grow businesses in the energy sector. It introduces how HaaS could work for companies interested in exploring its potential and makes recommendations on how Scotland can discover the potential of HaaS to meet its policy goals.

Main findings include:

  • A number of different HaaS business models have been tried, but there is limited information available. We grouped existing  models in terms of what they offered consumers. From the simpler to the more complex services, we categorised them broadly as: providing heating breakdown protection, support to buy a new heating system, paying for heat and paying for comfort. It is important to note that there is limited information available about what companies have tried or are currently planning in this space, and they are unlikely to share commercially sensitive data about their learnings to date.
  • Case studies provide insights into how HaaS could help Scotland meet its policy aims, but none describe a comprehensive solution at this stage. The Danish Energy Agency, a government body, for example, successfully introduced a boiler scrappage scheme to encourage uptake of heat pumps via a Heat as a Service subscription business model. While Scotland can learn from Denmark’s approach to working with businesses and consumers to roll out this model, there are important differences between the two countries to consider. HaaS offers are beginning to emerge around storage heaters which are prevalent in Scotland: Connected Response is working with social housing providers to offer improved heat services which involves retrofitting storage heaters to make them smarter and cheaper to run. OVO’s Smart Heat Offer includes a discounted 12-month finance offer to purchase smart storage heaters coupled with a simple (Economy 7) time-of-use tariff and intelligent heat  optimisation/control. Finally, originating in the Netherlands, the Energiesprong model is an approach to enable deep retrofit in domestic properties, making them highly energy efficient, and which focuses on delivering a comfort outcome to residents. This model has been trialled in England, but only with social landlords so far.
  • Companies choose different ways to set their tariffs and finance their offers. HaaS offerings range considerably with different tariffs: rental fees for heating systems; rates for the heat energy delivered (e.g. in £ per MWh); rates for keeping a home warm for a time (e.g. in warm hours). Some district heat providers offer a fixed rate for unlimited consumption, while some landlords include “Heat with Rent”. Tariffs are set using simple  ssumptions (e.g. about a building or household), complex energy models, or historic data analytics. Offers are financed using consumer credit, equity release, government funding, private finance or private capital. There is potential for the finance industry to play a role in delivering HaaS going forward.
  • Different HaaS offerings must comply with different regulations sometimes from a range of different regulators. It would appear there are no distinct regulatory barriers that prevent companies offering HaaS. Providers would still, however, need to comply with existing regulations around supplying energy, protecting consumers and selling financial products. There are challenges to overcome, for instance, to spread equipment costs over long time periods without locking consumers in unfairly and to help  consumers compare HaaS deals with tariffs in the existing energy market.
  • HaaS could help overcome the two main barriers that put people off installing low-carbon heating systems: concerns about cost and comfort. People in Scotland are not switching to low-carbon heating systems fast enough to reach the net-zero target. Aside from a lack of awareness, two of the main reasons people do not switch are cost and concerns about comfort. Many homes will need preparing, for instance, with insulation and other energy efficiency measures, before low-carbon systems can deliver the comfort consumers want. Some households will need support to make sure they can afford their energy,
    particularly those in fuel poverty. A range of different HaaS approaches, some more complex than others, will be needed to overcome these different barriers and attract consumers to a low-carbon heating experience.
  • There is not yet much evidence about what consumers like or dislike about HaaS, but there are some likely drivers to HaaS uptake in the future. HaaS trials, like those from the Energy Systems Catapult, show that with experience, HaaS becomes easier to understand and can deliver the cost and comfort control consumers want. It can also help people be more open to new options, including low-carbon heating solutions. These options can be available to all consumers, as long as they are designed inclusively and for more vulnerable consumers. However, work is still required to develop business models with fair and
    transparent payment mechanisms, and a market where consumers are able to compare and contrast HaaS models and other options to give them confidence they are paying the right price for the service they want. Features of HaaS that could appeal to consumers include: offering certainty over costs, spreading costs over time, improved control over heating and costs, tailored offers, improved comfort, being greener, and – with the right support – becoming easy to understand.
  • The main challenges facing businesses with an interest in innovating in this space are understanding regulations, and learning to deliver HaaS in a commercially viable way. Ofgem’s Innovation Link service offers support on energy regulation to innovators looking to trial or launch new products and services. To date, very few innovators have approached the service with business models relating to HaaS, and no substantive regulatory barriers have been flagged to the team. However, businesses have so far been reluctant to launch the more complex HaaS offers with most potential to meet Scotland’s broader policy aims of improving energy efficiency and reducing fuel poverty as well as decarbonising heat. They are put off by the increased challenge of pricing
    these types of offer. Billing regulations, the assignment of rights and the consumers’ right to switch supplier could also pose problems for business wishing to sell HaaS. Businesses may need support and encouragement if they are to: learn how to mitigate the commercial risks of installing equipment, maintaining equipment and recovering the costs of equipment over long periods
    of time; attract consumers with fair tariffs; and build new partnerships to deliver services that meet consumers’ expectations cost-effectively. There is currently very little evidence business can draw on to design and deliver successful HaaS offers in Scotland. Building this evidence base is expensive for any single business, even though it has the potential to pay a large dividend to the energy sector, including consumers, in future.

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The potential of Heat as a Service as a route to decarbonisation for Scotland 

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