HM Insights

Will the District Heat Networks Bill herald a change in the way Scotland heats its buildings?

By David Bone and Josh Hale.

In March 2020 the Heat Networks (Scotland) Bill was introduced to the Scottish Parliament, making provision for the construction and operation of Heat Networks in Scotland.

Heat Networks (or District Heating) - whereby heat is distributed from a central, local source directly to a network of homes and/or non-domestic buildings - are nothing new in Scotland. However, unlike in countries such as Denmark, Norway and the Netherlands, deployment of these networks to date has been typified by ad hoc projects, often to meet the needs of single organisations such as universities.

In light of the Climate Change (Emissions Reduction Targets) (Scotland) Act 2019, the Scottish Government is keen to accelerate the deployment of Heat Network schemes; they are generally more efficient than individual heating systems, can be run from renewable sources and often result in lower energy bills for customers.

The principal challenges to wide-spread adoption to date have been consumer confidence in what is still an emerging energy solution in the UK, and assuaging related demand-risk concerns among investors.

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Heat Networks (Scotland) Bill

The Heat Networks Bill seeks to address these challenges by increasing consumer confidence in Heat Networks, while also creating conditions to de-risk investment. Here we take a look at some of the headline provisions in the Bill.

1. Heat Network Licences

Currently, there are no set technical requirements for Heat Networks, nor any sector regulator. Accordingly, Heat Networks may be developed to varying standards.

The Bill provides that all Heat Network operators must hold a Heat Network Licence. This will require operators to be solvent, competent and able to provide their service in line with standards set by a separate Licensing Authority to be appointed under secondary legislation. The Bill empowers Scottish Ministers to make exemptions through secondary legislation to the requirement to hold a licence (or from specific licence conditions) to ensure "proportionality", but no set of criteria for assessing proportionality has yet been identified.

The Bill sets a further layer of regulation, as licence holders will then be required to obtain project-specific consents from Scottish Ministers, similar to the process for other energy utilities.

2. Licensee Powers

Utility providers such as gas and electricity companies have special legal powers that enable them to carry out their statutory duties, such as wayleaves to run pipes and cables, and access to land for repairs and maintenance. On the other hand, Heat Network operators do not have such powers, impacting their ability to install critical infrastructure.

The Bill seeks to give Heat Network Licence holders the same powers as other utility providers, by providing them with new rights in relation to the acquisition of land, wayleaves and access to land, subject to compensation for property owners for damage caused.

Network Wayleave Right

Heat Networks present demand risk. While gas and electricity networks have large customer bases, Heat Networks couple local demand with local supply. To offset this, Heat Networks must be used for many years and investors need to forecast the level of demand over that period of time, which can be challenging. Investors will therefore look for a long-term agreement to supply a building or group of buildings with significant heat demand (an "anchor load") so as to ensure a return on investment.

The Bill seeks to increase certainty and improve investor confidence by providing a "Network Wayleave Right", which will enable operators to request consent from Scottish Ministers to install pipe works and apparatus up to the curtilage of a building within a prospective network (i.e. across the legal boundary up to the edge of the building itself) at the outset of a project. While the building owner would be under no obligation to use the system, it is thought that having a "ready-made" connection available will improve the likelihood of building owners choosing to connect to the Network at some point in time.

3. Heat Network Zones

The Bill provides a power to designate Heat Network Zones. A duty will be placed on local authorities to undertake zoning themselves in the first instance, but the local authority can also request that Scottish Ministers designate a Heat Network Zone on their behalf. This flexible approach is taken to ensure zoning can continue in any given local authority area even at a time when the local authority might not have the capacity or resources to do so themselves.

The policy memorandum accompanying the Bill notes that a key consideration in designating Heat Network Zones could be the availability of surplus heat (e.g. heat recovered from industrial or commercial processes or sewers) as these sources can provide some of the most cost-effective and low carbon heat sources for the network.

4. Heat Network Zone Permits

Another provision in the Bill intended to de-risk investment in Heat Network projects is the introduction of a Permits regime. In effect, a Permit holder will be the monopoly provider within a Heat Network Zone. While prospective customers within a Zone will not be obliged to connect to the Network, it is hoped the creation of exclusive zones and natural monopolies, following a competitive process, coupled with the Network Wayleave noted above, will provide assurances around demand and increase investor confidence.

A Patchwork of Financial Support

The Heat Networks Bill is a UK-first in providing a wide-reaching regulatory framework for the development of Heat Networks and is a welcome first step. Once this framework is established, the focus might then turn to whether sufficient financial support exists to encourage the deployment of Heat Networks in any meaningful way.

Direct financial support for Heat Network projects in Scotland to date are best described as "patchwork":

  • Support can be found through the District Heating Loan Fund, which provides low interest, unsecured loans of up to £1,000,000.
  • Another scheme, the Scottish Low Carbon Heat Fund, provided financial support for 50% of total eligible costs of a capital project up to £10m, but is now closed to new applications.
  • Heat Network projects could apply for funding from the Energy Investment Fund run by Scottish Enterprise, but would be competing with other projects and technologies.
  • The Scottish Government's draft Budget for 2020/2021 announced a £120m "Heat Transition Deal", including a £50m "Heat Networks Early Adopter Challenge Fund" for local authorities. In May the launch of this scheme was postponed due to the Covid-19 lockdown, and will now be recast as part of a broader "green recovery" from the pandemic in the coming months.

At a UK level, Government subsidy for the renewable heat industry has been delivered through the Renewable Heat Incentive (RHI), which provides payments for individuals or organisations for the generation of heat from eligible energy sources. District heat network projects can take advantage of the RHI scheme provided the heat source is otherwise eligible. However, there is no uplift for district heating installations, meaning if a district heating system was served by a 600kWth biomass boiler, it would receive no more support than if that 600kWth boiler was used to serve a single building, potentially making larger Heat Network projects unattractive.

The RHI scheme is due to close to new applications in March 2021 (for non-domestic RHI) and March 2022 (for Domestic RHI). The proposed successor schemes do not provide support for district Heat Networks - the "Green Gas Support Scheme" is focused on the injection of biomethane produced through anaerobic digestion (AD) onto the grid, while the "Clean Heat Grant Scheme", which aims to provide demand-side support for the upfront installation costs, will not apply to district Heat Networks as currently proposed.

While these proposals are outwith the scope of this article, it is fair to conclude stakeholders may be disappointed to see the already modest support for Heat Networks in the RHI coming to an end.

Conclusion

The question of funding aside, the Heat Networks Bill is an important step forward in encouraging the deployment of Heat Networks in Scotland. While much of the detail will be provided in secondary legislation after the Bill is passed, it represents a significant step towards replicating some of the successes that have been enjoyed elsewhere in Europe, contributing to the government's plans to reduce carbon emissions and consumers' heating bills. If government commitments to a "green recovery" from the Covid-19 pandemic are acted upon, perhaps framework legislation will be followed by greater financial support in the coming years.

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Harper Macleod's Energy & Natural Resources team provides advice on all aspects of energy projects. To find out how we could help you, please get in touch with a member of our team.

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