Matt Caville, Senior Advisor for the Decarbonisation of Complex Sites at Energy Systems Catapult
On 17 June 2025, the UK government’s Spending Review confirmed that no further funding will flow through the Public Sector Decarbonisation Scheme (PSDS). Since its launch in 2020, the Department for Energy Security and Net Zero (DESNZ) has distributed £3.5 billion via PSDS grants, paving the way for heat decarbonisation across schools, hospitals, libraries and other public buildings. Yet, as the UK strives to cut public building emissions by 50% by March 2032 and 75% by 2037 (against a 2017 baseline), the funding shortfall has never been clearer.
The true cost of Net Zero for public estates
Our latest analysis puts the total investment needed to fully decarbonise the UK’s public estate at around £57 billion. This figure reflects the high capital expenditure of heat pump installations, fabric improvements, building energy management systems and emerging technologies such as thermal storage and demand flexibility. It also recognises that many technologies see cost reductions only after widespread deployment, as witnessed with solar PV under Feed‑in Tariffs and LED lighting.
Estimating these costs remains challenging. Inconsistent data on building floor areas, energy consumption profiles and system specifications can lead to wide variances in budget forecasts. To overcome these gaps, innovative data platforms such as InSite are aggregating and interpreting large‑scale smart energy data, delivering insights into real‑world performance and helping to refine cost projections.
Beyond grant funding: bridging the investment gap
Government grants were never going to cover the full bill. With PSDS funding now stopped, private capital must shoulder a greater share of public sector decarbonisation. Fortunately, institutional investors and impact funds possess significant resources ready for deployment in sustainable infrastructure.
The challenge lies in structuring decarbonisation projects to meet investor requirements for clear returns and manageable risks. Energy efficiency upgrades and heat electrification often yield predictable energy cost savings and avoided carbon levies, yet these benefits need robust financial models and data‑driven evidence to attract finance.
One pioneering approach has been the West of England Combined Authority’s Green Growth Impact Fund. By blending public grants with loans and equity, the fund offers a diversified risk‑return profile that appeals to both local authorities and private investors. This model demonstrates how jurisdictions can scale up investments through tailored financial products, matching finance to specific building archetypes and technology mixes.
Data‑driven decision making
Credible data is the bedrock of successful blended finance. Public bodies can build investor confidence by capturing energy consumption patterns, heat demand profiles and project performance metrics from early pilot installations. Aggregating this data across portfolios helps to smooth risk and to quantify savings at scale.
Tools like the Smart Energy Data Service (SENSE) aim to broaden access to high‑quality datasets for researchers, project developers and policy makers. By enhancing transparency, these platforms enable lenders to assess project viability more rigorously and support the development of standardised contract terms and performance guarantees.
Practical steps for energy managers
Energy managers should start by conducting thorough energy audits to establish accurate baseline data on how each building performs. With this information in hand, small-scale pilots of emerging technologies, such as hybrid heat pumps or thermal batteries, can help validate both cost and performance assumptions before committing to wider roll-out.
Once baseline performance and pilot outcomes are clear, exploring blended finance options becomes crucial. By leveraging local authority devolution deals or tapping into regional finance vehicles, organisations can structure projects that meet both public-sector needs and investor return expectations. Alongside finance considerations, collaboration with data-platform providers ensures that real-time consumption data feeds into central repositories, strengthening the evidence base for future investments. Finally, early stakeholder engagement aligns project goals with the priorities of both public and private partners, smoothing the path towards successful implementation.
Looking ahead
The stopping of the PSDS grants signals a shift towards market‑driven decarbonisation of public buildings. While government support will remain crucial for early‑stage risk reduction, energy managers must now lead the charge in designing investable projects and harnessing private capital.
Successful decarbonisation will depend on a combination of rigorous data analysis, innovative financing structures and cross‑sector collaboration. By adopting these principles, public sector organisations can transform their estates, deliver substantial carbon reductions and secure long‑term operational savings.
For more information, please visit: https://es.catapult.org.uk/tools-and-labs/public-sector-decarbonisation-guidance/
This article appeared in the July/August 2025 issue of Energy Manager magazine. Subscribe here.