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Department for which the accounting officer who made the assessment is responsible:

Department for Business, Energy and Industrial Strategy

Project title:

Sustainable Warmth

Main scheme project stage:

Full Business Case approved by BEIS Project Investment Committee and Treasury Approvals Process in October 2021.

Introduction

It is normal practice for Accounting Officers to scrutinise significant policy proposals or plans to start or vary major projects, and then assess whether they measure up to the standards set out in Managing Public Money. From April 2017, the Government has committed to make a summary of the key points from these assessments available to Parliament when an Accounting Officer has agreed an assessment of projects within the Government鈥檚 Major Projects Portfolio.

This Accounting Officer Assessment was made of the Sustainable Warmth scheme, following its Full Business Case stage. I have made the assessment as the Accounting Officer for the Department for Business, Energy and Industrial Strategy (BEIS).

Background and Context

The Sustainable Warmth聽competition is comprised of the Home Upgrade Grant (HUG Phase 1) available for聽low-income聽households off the gas grid and the Local Authority Delivery (LAD Phase 3) scheme (third tranche) for households heated by mains gas.

HUG Phase 1 and LAD Phase 3 will have a transformative impact on the lives of thousands of low-income households living in fuel poverty.聽The聽2021聽Fuel Poverty Strategy聽鈥楽ustainable warmth: protecting vulnerable households in England鈥櫬燾onsiders a household to be fuel poor if it has a residual income below the poverty line, and lives in a home聽which聽has an energy efficiency rating below Band C.聽LAD Phase 3 and HUG Phase 1 form a coherent package of funding which complement each other, rather than compete.

HUG Phase 1 and LAD Phase 3 will upgrade homes so that they can be heated at reasonable cost, foster better health and wellbeing,聽and are fit for the UK鈥檚 low-carbon聽future through provision of grants to Local Authorities in England.

The HUG聽Phase 1聽and LAD Phase 3 schemes combined was estimated to support up to 40,000 low-income聽households, helping to alleviate聽fuel poverty, and cut聽annual聽energy bills. Decarbonising energy used in buildings is also a key part of the Clean Growth Strategy and underpins the Prime Minister鈥檚 10 Point Plan for a Green Industrial Revolution to 鈥渂uild back better and build back greener鈥澛燼nd meet net zero.

Taken together the combined impact of the two projects was estimated to reduce heating bills for up to 40,000 homes and contribute up to 0.175 MtCO2e of non-traded savings against Carbon Budget 5 and supporting 10,000 jobs.

Assessment against the Accounting Officer standards

Regularity

The Sustainable Warmth scheme is within the Department鈥檚 legal powers under section 31 of the Local Government Act (LGA) 2003. The focus has been on compliance with public law and procurement regulations. I have assessed the programme in view of relevant public law and procurement regulation and found it be compliant. The programme is supported by scrutiny from external and BEIS legal advisers to ensure best practice has been applied across the programme development. The Sustainable Warmth scheme has been on the Government鈥檚 Major Projects Portfolio since 2021.

Overall assessment: My assessment is that the regularity test is satisfied.

Propriety

The Sustainable Warmth scheme has been approved at Full Business Case stage by the BEIS Project Investment Committee, the Cabinet Office Commercial Spend Controls, and the Treasury Approval Point process in line with the high standards of public conduct and Parliamentary control procedures and expectations. The Local Authorities carry out fraud management activities, working with BEIS.

Overall assessment: My assessment is that the propriety test is satisfied.

Value for money

The government has set an objective to ensure that as many fuel poor homes as is reasonably practicable, achieve a minimum energy efficiency rating of EER Band C, by 2030. The Sustainable Warmth scheme aims to support low-income and fuel poor homes with energy efficiency and low-carbon heating upgrades to reduce the prevalence and depth of fuel poverty. In addition, the scheme supports the Government鈥檚 Net Zero targets through reducing emissions in homes both on and off the gas grid.

There are several market failures that necessitate government intervention to meet these targets:

• low-income and fuel poor homeowners cannot afford or finance the interventions required to improve the energy efficiency and decarbonise their homes.
• in the Private Rented and Social Rented sectors there are misaligned incentives for landlords to invest in energy efficiency measures where their tenants are main beneficiaries through lower fuel bills. There are existing and proposed regulations in place to address this in the private rented sector, in the form of the Minimum Energy Efficiency Standards (MEES).
• there are significant positive externalities associated with improving the energy efficiency and reducing the carbon footprint of homes. The social benefits include reduced energy demand, carbon emissions and air pollution, along with reduced strain on the NHS.
• without intervention, the supply chain will not develop the capacity to deliver the quantity of energy efficiency improvements and low carbon heat installation to meet the Government鈥檚 targets.

The scheme has been appraised using HMT Green Book guidance. An options appraisal has been made against a counterfactual 鈥楧o Nothing鈥� option in which no Government intervention occurs. The options appraisal has considered the trade-offs of different policy designs, including cost caps on spend per property, the amount of homes treated that are EPC D. The lead option for the scheme balances numerous objectives around, for example, supporting energy bill reductions; reducing carbon emissions particularly in off-gas grid properties; and the breadth of homes treated relative to the depth of retrofit undertaken on each home treated. The costs of this programme fall to BEIS through provision of grants to Local Authorities in England. The programme delivers several benefits including making homes warmer, reducing carbon emissions and improving the comfort, health and well-being of homeowners and tenants. There are wider benefits with the schemes, including those that are not monetised in the NPV analysis, including the development of the supply chain for energy efficiency retrofitting. There has been significant inflationary impact over the year for low carbon heating and carbon reduction measures, for example with External Wall Insulation increasing from original estimates. These are offset by increases in energy prices that mean bill savings are increasing in real terms. Social net-present values (SNPVs) and Benefit Cost Ratios (BCRs) have been estimated for the scheme, with an estimated BCR of 1.02:1. Given the focus of the schemes on low-income households, equity-weighted SNPVs and BCRs are larger and reflect the distributional impact of the schemes; SW has an equity weighted BCR of 1.3:1. The equity-weighting has been undertaken consistent with HMT Green Book guidance. The strong strategic case for government intervention coupled with the cost-benefit analysis mean the scheme is likely to provide good value for money.

Overall assessment: My assessment is that the value for money test is satisfied.

Feasibility

Sustainable Warmth undertook an Infrastructure and Projects Authority (IPA) led gateway 2 review for HUG Phase 1 in April 2021, and the full scheme undertook an IPA led gateway 3 review in September 2021. The latest gateway review rating was Amber and all recommendations are being addressed. There is a significant risk around meeting the full aspiration for the number of homes that Ministers have asked to be reached (up to 30,000), especially given the inflationary costs and supply chain, including labour shortages. This is an ambitious aspiration, and whilst there is risk in whether this number is feasible to reach, I do not judge this a sufficient reason not to launch. This is because the overall scheme design is feasible to deliver, the programme will still deliver value for money even if the full targets are not met.

A gateway 5 review is planned for Autumn 2023 with a focus on the operational delivery phase of the programme. There will be a series of Infrastructure and Project Authority-led reviews that will take place over the life of the programme to provide ongoing assurance on the programme鈥檚 ability to deliver the intended benefits and outcomes.

Overall assessment: My assessment is that the feasibility test is satisfied, although I note the risk to achieving the full targets by the deadline.

Conclusion

As the BEIS Accounting Officer I have considered the assessment of Sustainable Warmth Scheme and approved it on 15 October 2021.

I have prepared this summary to set out the key points which informed my decision. If any of these factors change materially during the lifetime of this project, I undertake to prepare a revised summary, setting out my assessment of them.

The summary included in this letter will be published on the government鈥檚 website (188体育). Copies of this letter will be deposited in the Libraries of the House and sent to the Comptroller and Auditor General and Treasury Officer of Accounts.

Sarah Munby
Permanent Secretary, BEIS
15 October 2021