Heat networks delivery plan - draft: consultation

Executive Summary

Background and consultation

The Heat Networks (Scotland) Act 2021(the 2021 Act) commits the Scottish Government to publishing a heat networks delivery plan (HNDP) by 1 April 2022, and to consulting with necessary persons before doing so. This consultation document first outlines a draft HNDP, setting out how the provisions of the 2021 Act will contribute to increasing heat networks in Scotland. Following this, a range of proposals relating to a heat networks regulatory framework, to become operational by 2024, are set out. Feedback is sought on these to support the development of more detailed proposals for further consultation.

Part 1 – Draft heat networks delivery plan

Ambition and targets

The 2021 Act sets targets for the amount of heat to be supplied by heat networks, requiring this reaches 2.6 Terawatt hours (TWh) (3% of current heat demand) by 2027, and 6 TWh (8% of current heat demand) by 2030. Beyond this, Scottish Ministers are required to set a target for 2035. This target will be consulted on in early 2023, and confirmed by 1 October 2023. We are currently seeking views on what should be considered when setting this target.

Heat networks will form an important part of Scotland's overall heat decarbonisation programme, and to better understand how their development may contribute to our greenhouse gas targets, we will develop different scenarios around types of buildings and processes.

We are committed to ensuring that heat in buildings programmes align with our fuel poverty targets. As such, we will work with the Scottish Fuel Poverty Advisory Panel to ensure that the HNDP supports efforts to eradicate fuel poverty and does not adversely impact those in or at risk of fuel poverty.

Regulatory regime

Building assessment reports (BARs) will be required for public-sector non-domestic buildings, to assess their suitability for heat network connection. This will feed into the review and designation of heat network zones – which are areas particularly suitable for heat network development and operation.

The introduction of heat network licensing could potentially help to build trust in the market, and heat network consents will be introduced to ensure that heat networks meet local and national objectives. Additionally, the 2021 Act introduces heat network permits, building on the designation of heat network zones by providing the permit authority with the power to issue permits within these zones. We are proposing permits be awarded via competition to a single, winning bidder thereby providing exclusivity for a specified number of years.

The 2021 Act also introduces transfer schemes, ensuring continuity of supply for consumers and enabling a smooth transition between operators in the event that an operator ceases to trade. Development of transfer schemes will be dependent on consents and heat network permits, so we are proposing that detailed provisions be developed once other systems are operational.

We will publish a Local Authority Cost Strategy prior to the regulatory system becoming operational in 2024, and will work with local authorities and stakeholders to ensure the provision of relevant resources in order for local authorities to meet their duties under the 2021 Act.

From the time that the legislative framework is in place, new heat networks, and additional plants for extensions, will need to be powered using low and zero emissions heat sources. We are proposing that licence holders will have to prepare and implement a Heat Network Decarbonisation Plan between 1 and 3 years of a licence being granted. We will commission work to test and develop an approach to these plans in 2022.

Consumer protection remains reserved to the UK Government, who will appoint Ofgem as heat networks regulator under the Great Britain-wide Heat Network Market Framework. We continue to engage closely in discussions with the UK Government to identify the optimum legal mechanism to allow Scottish Ministers to appoint Ofgem as the regulator within Scotland, allowing consumer standards to be incorporated into the Scottish regulatory system seamlessly.

Guiding development

We are currently undertaking a First Nationwide Assessment to identify potential heat network zones across Scotland, where heat networks can be considered a suitable long-term solution. Outputs from this assessment will be published in early 2022. To guide the development of heat networks within zones, we are proposing a Building Hierarchy which prioritises the connection of existing buildings based on their size, heat demand and ownership.

Recognising that sufficient levels of demand assurance are a gap within the overall picture of heat networks, we are proposing several measures to support confidence in future revenues for investors. Specifically, we will introduce a new Build Heat Standard requiring new buildings consented from 2024 to install only zero direct emission heat sources, and, subject to devolved competence, bring forward regulatory proposals to require the installation of zero or very near zero emissions heating systems in existing buildings. In addition, we will consult in 2022 on a series of phased targets and new funding to support all publicly owned buildings meeting net zero heating requirements by 2038. We remain committed to consulting on proposals, subject to legal competence, to address the issue of demand assurance. In doing so, we will consider the UK Government's proposals to mandate connection to heat networks in England and Wales.

Wider policy framework

Recognising that surplus or waste heat is not fully utilised in Scotland, by Winter 2022/23 we will make available to local authorities further information on the availability of surplus or waste heat, to support the identification of heat network zones and development of Local Heat and Energy Efficiency Strategies (LHEES). Additionally, in 2021-22 we will engage with stakeholders, consulting where relevant, on whether further measures are needed to increase the utilisation of surplus or waste heat via heat networks.

Unlocking investment in the supply chain must start with clear demand for its products and services. Heat networks will create new demands on supply chains in Scotland, and to better understand this challenge we commissioned research by the Energy Saving Trust to identify Scottish skills gaps and training needs. We have also partnered with Scottish Renewables and Skills Development Scotland to undertake an assessment of workforce growth and transitions.

The Non-Domestic Rates (District Heating Relief and Renewable Energy Generation Relief) (Scotland) Amendment Regulations 2021 introduced a 90% relief from non-domestic rates until 31 March 2024 for new networks run from renewable sources, helping to support the business case for new networks by reducing their operational costs. This is additional to the existing 50% relief for all heat networks, which is guaranteed to remain in place until 2032.

Capital programmes and delivery mechanisms

It is essential that we invest in the development of a project pipeline in order to accelerate the development and growth of heat networks in Scotland. We will publish a Heat Networks Investment Prospectus during the next financial year to demonstrate the size and location of heat network opportunities, along with information on decarbonisation of existing networks. We will also announce next steps to establish a Heat Network Pre-Capital Support Unit this year, initially building on our partners expertise to drive project development building to a new unit during 2022, expanding on the previous role of the Heat Network Partnership.

Over this parliamentary session, we will invest £400 million to support the development of large-scale heat infrastructure, such as heat networks, through the successor to the Low Carbon Infrastructure Transition Programme. We are seeking feedback on how financial mechanisms can help support the development of low and zero carbon heat networks.

The Green Growth Accelerator programme is a revenue financial model designed to encourage local authorities to drive transformation, which was launched in June 2021. It aims to unlock £200 million of low carbon capital investment to support the transition to net zero.

We are committed to establishing a National Public Energy Agency to accelerate the transformational change in how we heat and use energy in homes and buildings. To achieve this, the Agency will have a remit to raise public understanding and awareness, coordinate delivery of investment, and coordinate national, regional and local government delivery of heat decarbonisation and energy efficiency rollout. We will establish the Agency first as a virtual agency and transition to a dedicated body by September 2025. We will set out the role of the Agency in delivering support for heat networks in the coming months.

Monitoring and reporting

As required by the 2021 Act, the HNDP will be reviewed every 2 years, and we will report on the heat output of heat networks as well as emissions savings. To support this, data reporting requirements for heat networks will be developed as part of work on the regulatory regime. These will be consulted on in due course. We are also proposing that several other key parameters are monitored to further our understanding of the heat network sector as it develops.

Part 2 – Heat network regulatory policy options

Building assessment reports

We are proposing that the requirement to undertake building assessment reports is extended to other non-public sector non-domestic building owners, in order to assist in the identification of suitable anchor buildings. We also recognise, however, that not all non-domestic buildings will be suitable to act as anchor buildings, and are seeking views on exemptions for certain buildings and a phased requirement for others.

Licensing

Recognising the varied nature of the heat networks market across Scotland, we are asking for views on how we might ensure proportionality within a licensing system. We are proposing that this could be achieved through fees, exemptions, or conditions attached to licences.

Heat network consent

The 2021 Act creates the role of consent authority, responsible for awarding and enforcing heat network consents. Scottish Ministers automatically take on this role, however local authorities can request to become the consent authority for their own area. We are proposing that the Scottish Government's Energy Consents Unit take on the role in the first instance, and that once established it may be appropriate for local authorities to take over.

The 2021 Act provides flexibility to enable the consents system to account for varied operations, allowing Ministers to determine the form and manner in which relevant applications are to be made. In this vein, we are seeking views on whether certain heat network projects should be exempt from the requirement to hold a consent, or only be required to provide limited information in the consent application.

Heat network zone permits

We would welcome views on which national body may be suitable for the role of permit authority, which could be undertaken by Scottish Ministers directly or by a third party. We are also seeking views on the duration of permits, which we anticipate could be between 25 and 40 years. Finally, we are considering how the permitting process will operate, and consulting on how best to balance the interests of the customer and network operator.

Large scale thermal storage

We understand that thermal storage could potentially constitute an important part of our heat decarbonisation programmes, and are undertaking research into the role of energy storage in the electrification of heat, looking specifically at buildings and heat networks. We are seeking views on whether measures should be introduced as part of regulatory or support systems to encourage inter-seasonal thermal storage.