Heat and energy efficiency strategies and district heating regulation: consultation

Introduction

1. This is a Scottish Government consultation paper on local heat & energy efficiency strategies, and regulation of district heating. It is one of a number of consultations on the draft Climate Change Plan, the draft Energy Strategy and related activity published in January 2017 ^[2] .

2. Your views are invited on the role that regulation could play in both:

• supporting the development of district heating in Scotland; and
• the planning at local level of heat decarbonisation and energy efficiency programmes within our new Scotland's Energy Efficiency Programme ( SEEP), which is due to begin from 2018 onwards.

3. We are interested to understand how you think that regulation could ensure that SEEP improves and enhances our existing programme to make our homes and places of work a more comfortable temperature; promote more affordable energy for consumers; help to tackle fuel poverty; improve competitiveness of the Scottish economy; create substantial market and supply chain opportunities; and contribute to meeting our climate change targets through the deployment of low carbon heat supply. This consultation will be considered alongside the parallel consultations on the Scottish Government's draft Energy Strategy and Climate Change Plan, which set out the wider strategic vision for reduction of energy demand and the decarbonisation of heat, alongside specific consultation on scenarios for delivering SEEP.

4. We would like to hear your views and give you an opportunity to inform our proposals. This paper covers a range of complex issues and we appreciate there is a lot to consider. This is why we wanted to set out these ideas in this policy scoping consultation at an early stage, to ensure we develop impactful regulation and potential future legislation, if needed to enable this. We will take the views and evidence provided in response to this scoping consultation and use it to inform the decisions that we take on the detail of how to deliver our policy objectives - and further detailed consultations will then follow on different aspects of our approach.

5. Background information is set out in each section with questions set out to assist you in framing your consultation response. However, in responding to this consultation paper, please do not feel constrained by the questions set. We would also like to hear your views on any potential impact of the proposals.

Policy Purpose

6. In June 2016, a special working group of the Scottish Government's Expert Commission on District Heating (from here on 'the Expert Commission's SWG') made recommendations on the role that regulation could play in supporting the Scottish Government's vision and ambition for district heating in Scotland. The report concluded that regulation could play an important role in providing confidence for the district heating supply chain to invest in Scotland.

7. As the Scottish Government's Heat Policy Statement published in 2015 set out, heat is at the core of Scotland's energy system. It is the biggest element of our energy use (over 55%), and the largest source of our emissions (47%). We spend £2.6 billion annually on heating and cooling our homes and businesses in Scotland ^[3] . The Scottish renewable heat sector is growing with an estimated turnover of £2.7 billion by 2020. The Scottish Government is committed to largely decarbonising our energy system by 2050, at an affordable price to consumers through maintaining and developing secure supplies of energy, and to reducing overall demand for energy in the energy system, by reducing demand for heat. Our broad approach to reducing energy demand is set out in our Energy Strategy, of which this consultation forms an annex.

8. We have done a lot already to reduce heat demand. We have invested and recycled over £45 million since 2007 to support Scottish households, businesses and organisations to finance the implementation of energy efficiency and renewable measures and the development of district heating schemes, generating loans in excess of £65 million to over 4,000 applicants. The Scottish Government has already allocated over half-a-billion pounds since 2009 on a raft of fuel poverty and energy efficiency programmes which has already made hundreds of thousands of homes, businesses and public buildings warmer and more affordable to heat. Nearly 1 in 3 of all households (over 700,000) have now received energy efficiency support.

9. Scottish Ministers announced in June 2015 that they would take long-term action to reduce the energy demand of our residential, services and industrial sectors through designating energy efficiency as a national infrastructure priority, as subsequently confirmed in the Scottish Government's Infrastructure Investment Plan 2015. Ministers announced that the cornerstone of this will be Scotland's Energy Efficiency Programme ( SEEP) which is under development prior to commencement from 2018. It will be a coordinated programme to improve the energy efficiency of homes and buildings in the commercial, public and industrial sectors.

10. The overarching vision set out in the draft Energy Strategy and Climate Change Plan is to go beyond our existing commitments to deliver a system-wide decarbonisation of heat supply and reduction of energy demand across all our buildings (Residential, Services, and Industry) through SEEP.

11. The Programme for Government also commits the Scottish Government to bring forward consultations to inform the development of SEEP, including:

• the regulation of private rented sector housing to increase efficiency standards;
• heat regulations commensurate with the scale of the heat market; and
• phased regulation of other existing buildings to bring them up to higher energy efficiency standards as well as look at financial incentives.

12. A Short Life Working Group on Heat Regulation (referred to from here on as 'the Working Group') was established by the Minister for Business, Innovation & Energy in September 2016, to advise on regulatory scenarios. The outcomes of this group have informed this consultation on district heating and local strategy development of heat and energy efficiency.

Consultation On Heat And Energy Efficiency Strategies, And Regulation Of District Heating: Proposals

District Heating

13. District heating is a mature technology used in many cities across Europe which is not yet common in the United Kingdom in spite of attempts in the past to develop it. The differences between heat and other regulated sectors mean that power and gas models cannot just be transposed and also that economies of scale - such as ensuring that there is a viable infrastructure to bear costs - will be crucial alongside long-term commitment to continue using that infrastructure. District heating could make an important contribution to meeting Scotland's future heat demand in areas where heat density is sufficiently high to develop networks that can provide heat at an affordable cost. Where allied to a low carbon heat source, it also offers the potential to meet our heat decarbonisation objectives.

14. The United Kingdom ( UK) National Comprehensive Assessment of District Heating and Cooling (2015), required by the European Union ( EU) Energy Directive 2012, estimated that 4TWh p.a. (7%) of Scotland's total heat demand in 2025 could be met by district heating and cooling on a socially cost-effective basis ^[4] . The UK Committee on Climate Change estimates that by 2050, district heating could supply up to 20% of the UK's total building heat demand ^[5] .

15. The Scottish Government and its partners have already done a significant amount to support the development of district heating in Scotland. We have:

• established the Heat Network Partnership to coordinate support identifying and developing district heating projects and a strategic approach by local authorities, to build capacity, and to share best practice;
• created, regularly updated and improved Scotland's Heat Map, with versions available to the public ^[6] and to local authorities and other key public sector partners;
• worked with the UK Government to submit results of the National Comprehensive Assessment to the EU;
• established the District Heating Loan Fund, offering low rate, unsecured capital loans to overcome a range of technical and financial barriers, with a budget of £7 million in 2016/17;
• launched the Low Carbon Infrastructure Transition Programme ( LCITP) to support the acceleration of low carbon infrastructure projects across the public, private and community sectors. LCITP can support the development of investment grade business cases to help projects secure public and private capital finance and can provide financial support for capital ^[7] ;
• partnered with the Danish Government and other EU countries on the Stratego project, drawing on international best practice to support the development of effective national and local heating and cooling plans;
• worked with the UK Government, industry and consumer groups on development and implementation of both statutory and voluntary regulation of district heating, such as the Heat Networks (Metering and Billing) Regulations 2016 ^[8] , the Heat Trust ^[9] and the Heat Networks: Code of Practice for the UK ^[10] ; and
• set out national planning policy encouraging the development of district heating through local development plans.

16. In developing SEEP, we are also now funding a range of pilot projects to test different approaches to the local planning of integrated energy efficiency and heat decarbonisation programmes across residential, commercial and public buildings, including through the development of district heating.

The role that regulation could play in supporting this work

17. To realise our ambition for a substantial increase in district heating in Scotland we want to ensure that SEEP is planned and programmed to achieve its broad objectives to reduce energy demand and decarbonise heat supply in our buildings. This will involve a close relationship between the Scottish Government's national objectives and local planning and delivery of programmes by local authorities and their partners. An agreed framework for regulation of district heating, and mechanisms to achieve coordination across the various stakeholders, will help to give certainty for the development of district heating networks. Currently, many of the existing heat networks in this country often consist of groups of buildings under single ownership; for example, campuses and blocks of flats owned by one local authority or housing association.

18. The Scottish Government vision is to achieve a significant change in deployment of affordable low carbon district heating as part of the route to a largely decarbonised heat system, moving from the current approach to a more strategically planned, integrated and comprehensive system that is attractive for investors and that takes into account heat user's needs. As the capital investment is the largest investment in any heat network, and finding low cost capital is currently a major hurdle for any new project, reducing the cost of capital to something akin to that seen in other regulated utilities could support the development of more networks. District heating which costs less to build should also result in cheaper prices for heat users. The Scottish Government is seeking views on whether a regulatory framework can be established in support of this vision in which heat network development can be coordinated, risks can be managed to reduce the cost of capital and heat users and other relevant parties are satisfied with the system.

19. This is an opportunity to reduce, and not just redistribute, the risks associated with district heating development in terms of cost, reliability and augmentation with other technologies and innovation, (such as the use of surplus industrial heat in suitable cases to provide a low cost, low carbon source for district heating).

Considerations

20. There are many challenges. For example, while the Scottish Government would not want to stifle innovation by restricting district heating development to a single model, it is also extremely important that district heating develops in a way that ensures there is a wider strategic perspective attached to every project. The Expert Commission's SWG and the Working Group have recommended that district heating requires a clear and consistent regulatory framework that allows heat networks to develop on a greater scale than at present, and to see existing and future networks become progressively more interlinked.

21. Given that the majority of our heat infrastructure is delivered locally, this regulatory framework should include provisions to ensure that local strategies for heat and energy efficiency are developed to integrate programmes for heat supply decarbonisation with energy efficiency programmes. It is important that infrastructure does not become needlessly oversized in areas where energy efficiency measures will reduce the heat demand. This will ensure a coordinated approach to energy demand reduction and heat decarbonisation through SEEP.

22. This is also an opportunity to explore how as a Government, we ensure that in future, district heating networks become a more attractive proposition for homes, businesses and public sector buildings. While introducing a requirement to connect mitigates risk, which would thereby make prices lower and the offer of connection more attractive, this requirement also brings issues for consideration around consumer choice and consumer protection.

We would ask you to consider these issues within your response.

Approach

23. We are looking for further evidence and stakeholder views on the recommendations of the Expert Commission's SWG, plus wider evidence, in order to scope our policy for regulation of heat and energy efficiency strategies, and regulation of district heating and also support wider regulation on energy efficiency planned under SEEP (and in related consultations).

24. We propose that a new regulatory framework for heat and energy efficiency strategies, and for regulation of district heating, should focus on two key areas. These are:

A. that local authorities are required to create Local Heat & Energy Efficiency Strategies ( LHEES) to support the delivery of heat decarbonisation and energy efficiency objectives of Scotland's Energy Efficiency Programme ( SEEP); and

B. that regulation be put in place to specifically support the development of district heating, including provisions for zoning of areas for heat networks, connecting users and surplus heat loads, technical standards and consumer protection.

25. These areas are discussed in Sections A and B.

FURTHER POLICY DEVELOPMENT AND CONSULTATION TO INFORM REGULATION

26. The evidence received in response to this consultation document will enable us to scope out the broad policy needed to enable regulation of district heating. This evidence will then be used to allow Ministers to take decisions during 2017, on the extent of district heating regulation required. We would then propose to follow up with a more detailed consultation, or consultations, setting out our preferred approach to regulation and on LHEES, for further comment and testing with stakeholders in late 2017. Evidence from this second round of consultation would be used to inform Ministers' final decisions on whether any legislation (primary and/or secondary) would be needed for district heating regulation and LHEES. Where new legislation is required, further consultation on a draft Bill or draft Scottish Statutory Instruments would take place prior to introduction in the Scottish Parliament.