Scottish Government

Executive Summary

Introduction

The Loan Action Scotland programme has been running since 1999, offering interest-free loans to small and medium sized businesses in Scotland for work to improve energy efficiency.

The Scottish Executive commissioned Hall Aitken to evaluate its Loan Action Scotland programme with specific objectives to examine:

• Marketing and awareness;
• Management and process;
• Programme activity;
• Impacts and issues; and
• Future direction.

Background

Loan Action Scotland offers unsecured interest free loans of between £5,000 and £50,000 to SMEs. These loans are to help businesses to save energy - through paying for energy efficiency improvements such as more efficient plant and controls, heat recovery, insulation and lighting. The loan limit will shortly rise to £100,000.

The programme calculates loan amounts based on the potential financial savings over a maximum of five years. An independent energy audit highlights the areas for the business to address.

Key features of the programme include:

• Promotion by regional business advisors, with advice and support to applicants;
• A free energy audit of the business; and
• A review of the financial strength of the business by an accountant.

The scheme began in 1999 although it has undergone significant changes since then. In 2004, the Wise Group, the then administrator of the scheme, also took on the role of managing agent from the Energy Saving Trust. By the end of August 2006, there had been 199 loan applications since the programme started. The rate of applications has increased significantly in 2006.

Programme activity

Loan amounts

The total amount of loan funding approved has increased from just over £250,000 in 2004 to around £675,000 in 2005. Assuming the approval rates and average loan amounts remain the same, we estimate the total loan amount approved during the 2006 calendar year will be almost £1M.

The average amount of loan approved has shown a steadily increasing trend from just over £16,000 in 1999 to a peak of £24,000 in 2005. So far in 2006, the average loan amount is around £21,000 an application.

Geographical take-up

Loan Action Scotland is marketed through a network of business advisors with six covering Scotland. However geographical take-up of the loans is very uneven. There is a higher level of uptake in some rural areas while in many urban parts of Scotland take-up is very low compared with the overall business base. For example, the number of businesses in the 1-199 size band in Glasgow City is six times that of Argyll. But there have been an equal number of applications from both areas. Indeed there have been no applications from either Dundee or Inverclyde since the LAS programme began.

Business sectors

Hotels, restaurants, other manufacturing and textiles make up a greater proportion of participant business than in the Scottish business base. However Business services, a rapidly growing sector, is underrepresented in loan applications.

Funded measures

Around two thirds of the measures funded through LAS were in the space heating category (67%).

Marketing and awareness

Six regional business advisors, based in the Energy Saving Trust, are responsible for promoting the scheme. But our survey found that local enterprise companies were a slightly more important as a source of referrals. The real strengths of the advisor network are in guiding businesses through the application process.

The programme has not marketed itself as well as it could have. Stakeholders, business advisors and other parties agree that greater marketing activity could have been undertaken.

The way the programme is designed does not lead to a strong marketing drive. There is a low target for loan applications and business advisors are not aware of how much money is left in the LAS pot. Also, while business advisors undertake promotional events, their marketing and sales skills vary widely.

To achieve more applications, the programme needs firstly to either increase the loan fund or at least regularly communicate the total loan fund amount that is available. Linking with sector-specific business development organisations was successful, for example in the Green Tourism sector. But the programme needs to be more proactive in targeting these bodies, and integrating more with their existing work.

Business advisors developing links with these business organisations could result in greater numbers of loans and carbon saved. Targeting representative organisations for energy intensive sectors like food and drink, chemicals, engineering and paper manufacturing could maximise the programme's impact. These would also reap greatest rewards in carbon reduction.

Management and process

Satisfaction with the managing agent is high among loan recipients with three-quarters open to the idea of applying again. The programme improved significantly since 1999 in the number of days it takes to approve or reject an application. Business survey and interviews indicate that Loan Action Scotland is an easier fund to apply for than other public funds.

The programme's attitude to risk has changed since 1999. Loan defaults led to tighter criteria in 2002/3 but these were relaxed in 2004/5.

The loan limit was not a significant factor for most businesses. Some recent applicants highlighted that they had been constrained by it. Several would consider a second loan but they wrongly considered themselves as ineligible to apply again. The programme should stress to businesses when they receive their first loan that a second loan is a possibility.

There are other areas for the programme to improve on, such as finding out eligibility as quickly as is possible. Failure to do this leads to wasted effort and negative attitudes to the programme. The LAS helpline has a role to play here when it deals with new enquiries.

Some opportunities also exist to streamline the application process, such as reviewing the role of the accountant for lower value loans and possibly relying on using a credit check approach.

The energy audit is a central feature of the loan scheme. While there are plenty of examples of its added value (see impacts), our technical examination of the audits shows that their quality varies widely. While the programme managers have worked to improve the energy auditors' reports (who work under an agreement outside the programme's direct control), they need to ensure:

• The auditor has any necessary specialist skills that are required to carry out the audit;
• The energy audit report accurately records necessary information like the baseline energy use, likely carbon production of new technologies and improvements; and
• The energy auditor spends some time explaining to businesses the implications of audit and any scientific/technical phrases.

Benchmarking with the Carbon Trust

The LAS process cannot be directly compared to the Carbon Trust process. The Carbon Trust scheme is a different scheme with a greater loan volume (266 in 2005/6):

• Average loan sizes in 2005/6 were £34,600; 24% higher than the LAS average of around £28,000 ¹: and
• Compared to their respective business bases, LAS had greater coverage in 2006 with 1 in 4,800 businesses benefiting compared to the Carbon Trust's rate of 1 in 7,772 businesses. Although both could clearly improve.

The Carbon Trust targets larger businesses (where savings are likely to be greatest). Their pilot approach of using installers to sell energy efficiency improvements has the potential to increase loan volume and coverage. Also, some business advisors and businesses see its credit checking approach (rather than an accountant referral) as useful.

However the Carbon Trust scheme offers no energy audit for businesses with energy spend of less than £50,000. While the energy audit has its weaknesses, it is an independent assessment that can work with the loan to maximise impacts on the business.

A significant issue with the Carbon Trust scheme is that it has a carbon threshold for each pound of loan. Under this criterion, around a quarter of businesses approved in 2005/6 would have had a reduced loan offering. Under the new Carbon Trust threshold (requiring 0.7 tonnes of carbon saved each year for each £1000 of loan), 61% of all businesses (approved and pending) would have had a reduced loan offering.

There is no comparable data available for the Carbon Trust scheme's costs or savings. This does not allow us to compare value for money. Excluding this, Loan Action Scotland appears more effective in its:

• Take-up - More applications in proportion to its (Scotland's) business base;
• Coverage - More businesses are eligible for support;
• Breadth of technical advice to businesses - each business receives a free independent on-site energy audit. (Only those with an energy spend of more than £50,000 get a free audit with the Carbon Trust)
• Support to applicants - businesses benefit from a locally based advisor who can visit and support the business in its application. The Carbon Trust provide support through a website and a telephone helpline based in Leeds.

Impacts

The scheme aims to help meet the government's emissions reduction target ². Our review of the Loan Action Scotland management database allows us to estimate ³ that:

• the annual reduction in Carbon is 2,652 Tonnes per year.
• Carbon saved to date is 3,939 Tonnes.
• the total Carbon savings over the lifetime of the measures implemented will be 36,951 Tonnes.

The financial savings are also significant with the programme having made lifetime savings of £6.97m (gross) in energy efficiency measures already implemented. Discounting the cost of projects, the programme has made net lifetime savings of around £3.68m for Scottish businesses. As at August 2006, we conservatively estimate that the programme was in line to deliver around £10m in net lifetime savings for Scottish business.

The energy audit appears to have had a significant impact on how businesses think about energy use. Half the businesses we surveyed gave examples of making changes that both reduced costs and carbon output because of the audit. The energy audit provides an action plan for energy for many businesses. Businesses highlighted how the audit provided simple action points they had not thought of or had provided action points for a later time when they could afford to implement them. Six in ten businesses changed their ways of working to improve energy efficiency because of the energy audit process.

Overall, 96% of businesses felt that the impacts were as expected or greater with a third of these feeling they were greater than expected. Carbon savings are probably significantly greater than what the database reports based on two factors:

• Business feedback indicates a wide range of non-capital energy saving measures as a result of the energy audit; and
• Businesses report greater impacts than they expected.

Many impacts are not being reported. For example, improvements can lead to unmetered water savings. Heat recovery devices can reduce cycle times and increase output. Businesses consider the whole-life costs of new technology and changes. Reliability (and quick access to servicing support) is a significant factor for businesses and this has also generated improvements for them.

The scheme also aims to reduce energy costs and improve competitiveness and profitability among Scotland's businesses. More than half of businesses feel that the loan has resulted in increased competitiveness (55%). A further 27% thought so, but felt it was 'hard to say'. One issue here is that many businesses are unable to see the difference in their energy bill because savings have been mitigated by energy price rises.

Additionality appears high. While one in six businesses would have got money from elsewhere to make the improvement; one in five felt they would never have made the changes. And almost half would have had to wait longer to make the changes.

Future direction

The LAS programme is highly rated by businesses and has a high degree of customer satisfaction. However it needs more effective marketing and to continue improving the quality of the energy audits taking place. Where quality energy audits are provided the programme is particularly successful. The LAS programme provides benefits over and above carbon and financial savings - such as increased competitiveness and productivity.

The potential market for such loans is around 81,000 businesses with about 1,900 of these in key sectors identified as energy intensive ⁴ in the Scottish Energy Review (2006). To target these businesses effectively will require working with sector and business development organisations - building on Loan Action Scotland's work with Green Tourism and the Local Enterprise Companies. The scheme could also learn lessons from the work of the Carbon Trust with private sector installers. Working with installer networks could help the programme to improve its reach and target particular sectors or technologies.

Energy costs have continued to rise and in the two years to July 2006 the cost of energy has risen by almost a third. Recent surveys highlight that energy is now a key concern for businesses.

The Stern Report only recommends direct financial support for business energy reduction in certain cases. Next generation technologies are, for example, preferred for direct financial support. Micro-generation would appear to fit with this and is also an area that businesses are considering in greater numbers. The report also favours direct financial support where it allows the delivery of wider policy objectives - a foot in the door of businesses to suggest other changes. A quality independent energy audit would seem an ideal way of meeting this objective and mitigating many of the issues (time, cost, knowledge) businesses face around decisions on energy.

Key recommendations

In recent years the scheme has had a considerable positive impact on energy efficiency and business competitiveness among small businesses. There is a clear need for the Loan scheme to continue in a broadly similar format to the current programme. However there are several areas for development that will improve the take-up and impact of the loans. Summarising the key messages from the evaluation; Loan Action Scotland needs to focus on:

• Improving marketing to increase take-up in urban areas;
• Targeting high energy using industry sectors through working with sectoral agencies and suppliers;
• Continuing to improve the quality of business energy audits and the reporting of carbon savings;
• Identifying synergy with the Carbon Trust scheme while ensuring that small businesses do not lose out; and
• Looking at ways of promoting greater use of micro-renewables by businesses in Scotland.

Improving marketing and awareness

Improving the way the loans are marketed is one area where there is clear scope for improving awareness and take-up. There should be particular focus on the target high energy sectors and areas where take-up is lower than would be expected. The Executive should work with Local Enterprise Companies and other sector-focused agencies to promote the scheme to businesses. And the name of the loan programme should be reviewed to make its purpose much more explicit.

Targeting high energy users

Given that the loan fund is finite there will be clear value in proactively targeting the sectors with the highest energy use ( i.e. paper manufacture, chemicals, distilling etc.). These sectors are likely to yield the biggest energy savings and will benefit most from the potential cost savings.

Improving energy audits

The free energy audits carried out for businesses provide wider benefits often at little or no extra cost. And our research identifies that the loans make the most impact where they are accompanied by a high quality energy audit. The Executive and its partners should therefore continue to drive up the quality of the audits provided to maximise the impacts of the scheme.

Links with the Carbon Trust loan scheme

The Carbon Trust currently operates a similar scheme for business in England and Wales and is keen to introduce a loan scheme in Scotland. There are clear advantages in coordinating the two loan funds in terms of marketing and management efficiency. However there is a risk that if the eligibility criteria for the Carbon Trust scheme are adopted in Scotland many small businesses would not receive full loans. The potential impacts of these criteria on Scottish businesses need to be identified and appraised before any final decision is made on this issue.

Considering micro-renewables

Several businesses who have benefited from Loan Action Scotland highlighted that their next stage of development would involve greater self-sufficiency in energy production. The Executive should consider how best to promote and support businesses in taking forward plans for micro-renewable projects.