Heat Networks: are things hotting up for housebuilders?
Heat networks have not been widely adopted in the UK due to a lack of regulation and resulting lack of consumer confidence. They also require significant upfront capital costs. As Scotland is the first nation within the UK to bring out legislation in this area, Sarah-Jane McArthur and Sarah Stewart outline the issues which need to be addressed.
The Heat Networks (Scotland) Act 2021 sets out requirements for operators to have licences, for heat networks to have specific consents and makes provision for potential heat network zones. There are no significant changes from the original Bill and our article Regulating Heat Networks in Scotland sets out more detail on the provisions. Since our article was published, the Scottish Government has addressed the previous omission to include road work rights for licence holders.
The Act provides a framework so, as always, the devil will be in the detail and much of that is still to come as the Act is brought into force by regulations over the next couple of years. The 2 year period for introducing the heat network regulations arguably threatens the twin targets of ensuring that all new-build homes are to have zero direct emission heating and having over 650,000 homes connected to heat networks by 2030.
Delivery of heat networks
Heat networks can be delivered in a variety of ways, but for housebuilders it very much depends on the scale of development, the location of the development and whether it forms part of a larger local authority scheme. In a large residential or mixed-use development often a private Energy Service Company (ESCO) is involved, however traditionally an ESCO is looking for a development of 500 units or more in order to secure the appropriate return. Smaller developments are brought forward on a much more fragmented basis and securing the appropriate expertise has been an issue. There is also the option for local authorities to lead a scheme and they will either engage a private ESCO or deliver the infrastructure via a local authority-owned ESCO but securing a threshold level of return has always been a problem.
What is clear is that unless it is a very large development, housing alone will not secure the necessary investment. What the housebuilding industry needs is a degree of certainty in relation to funding and how investment can be secured, assistance in improving consumer confidence to ensure uptake to secure the required returns and guidance in relation to where heat networks should be located. To be fair, the Scottish Government is working hard on this. Their Draft Heat in Buildings Strategy consultation provides some of the answers.
Funding and Investment
Although the Low Carbon Infrastructure Transition Programme which provides technical expertise and financial support for innovative infrastructure projects is coming to an end this year, a successor programme is planned. The District Heating Loan Fund provides assistance to local authorities, social landlords and SMEs with fewer than 250 employees. Holyrood plans to provide £1.6 billion of capital funding over the next 5 years to start the transformation in decarbonisation and will consult on how best to maximise the benefits of this investment.
Further assistance in relation to funding comes from the relief from non-domestic rates. However, although the 90% relief from non-domestic rates until 2024 for networks run from renewable sources is welcome, this may well be too short a relief period. Although there is likely to be ongoing relief at 50% until 2032 the number of heat networks becoming operational by 2024 to take advantage of the higher percentage is likely to be relatively small.
Whilst the funding and relief available, together with the proposed licensing scheme, may be welcome support, it is clear that more is needed to achieve any significant deployment of heat networks.
Fundamentally what a larger development needs is an anchor load. An anchor load is a large building with a large heat demand which can provide a long-term secure customer for the network operator. The Draft Heat in Buildings Strategy consultation raises the possibility of using provisions in the Climate Change (Scotland) Act 2009 to require mandatory connections for large and publicly owned buildings. There may also be a possibility, through the 2024 New Build Heat Standard, to require buildings constructed within a Heat Network Zone to connect to the network. There is also a consideration in respect of requiring other anchor buildings to be ‘heat network ready’.
Building consumer confidence
As our previous article highlighted, the Act doesn’t provide for consumer protection. However, the UK Government intends to legislate this year to provide for minimum consumer standards across the UK with Ofgem identified as the regulator. The intention is that Ofgem would also be the licensing authority for Scotland. The sooner this can be done the better as consumers will be more likely to buy a home connected to a heat network if they know their heat supply will be properly regulated in the same way as electricity and gas.
Other initiatives such as linking attractive mortgage products to high energy efficiency homes should be welcomed to improve consumer uptake and confidence.
Choosing the right locations
Strategic planning for heat networks is going to be fundamental to ensure the most is made of opportunities and collaboration is secured. The Scottish Government intends to develop a Heat Network Investment Prospectus later this year which would identify key strategic opportunities for heat network developments. This in turn would feed into Local Heat & Energy Efficiency Strategies (LHEES). LHEES are to provide long term frameworks and each local authority should have one in place by the end of 2023 to provide an area-based approach to the planning and delivery of heat and energy efficiency. The intention is that these will provide a basis for planning for all stakeholders in the area and heat network zones would be allocated within a LHEES.
Achieving these goals requires collaboration and it is pleasing to see the Scottish Government intends to re-establish the Heat Network Partnership to bring together expertise in this area and to provide support for heat network developments across the country.
Have your say
Consultation on the Draft Heat in Buildings Strategy is open until the end of April with the final strategy expected later this year.
As David Attenborough said on climate change “Real success can only come if there is a change in our societies and in our economics and in our politics” and it is clear that significant progress is needed in all three areas to get heat networks on the map and doing what they can to help tackle the climate change crisis.