Heat networks delivery plan - draft: consultation

Part 2: Heat Network Regulatory Policy Options

Heat network regulation: initial policy options

The 2021 Act provides an initial, high level framework for regulating the heat networks sector in Scotland. To bring many of the provisions into force detailed regulatory provisions are now needed.

As noted in Part 1, we are committed to working jointly with the sector to establish this new regulatory system. Over the next two years we will publish a series of more detailed consultations seeking views on draft regulatory provisions under the 2021 Act.

Part 2 of this consultation paper is a first scoping consultation to gather initial input on the following key areas:

• building assessment reports
• heat network licensing
• heat networks consents
• heat network zone permits
• large scale thermal storage

Your responses will help us frame and shape proposals in these keys areas, which will be subject to more detailed consultations in due course.

Building assessment reports

As noted in Part 1 of this consultation document, securing appropriate connections from non-domestic buildings is key to a successful project as they form a key customer base upon which a heat network can be "anchored".

Part 5 of the 2021 Act requires persons either owning or with interest in non-domestic building to prepare a building assessment report. The 2021 Act places this requirement on the Scottish public sector, as defined by section 3(1)(a) of the Freedom of Information (Scotland) Act 2002, as publicly owned buildings are often suitable anchor buildings.

However, in some strategic heat network zones – particularly those in city or town centre locations – there may be other non-domestic buildings that would be suitable anchor buildings and may be needed to enable the development of a heat network.

We therefore propose that the requirement to undertake a building assessment report is extended to other non-public sector non-domestic building owners. We estimate that this will affect the owners of up to an additional 197,000 non-domestic properties^[13].

Not all non-domestic buildings will be suitable to act as anchor buildings, particularly those which have a relatively low heat demand, inconsistent use pattern or are unheated. As such, it may be appropriate to exempt certain buildings as well as introduce a phased requirement for others based on these characteristics. A phased approach would support the development of heat networks over time and could be developed in line with the Building Hierarchy set out in Part 1, Chapter 4. We would welcome views on whether a phased approach should be adopted and whether the proposed hierarchy or other criteria are appropriate for this.

Q13: What are your views on other owners (or persons with interest) of non-domestic buildings - beyond Scottish public bodies - being required to produce a building assessment report for their buildings?

Q14: What are your views on whether there should be prioritisation of building assessment reports based on certain building attributes in order to expedite data on potential anchor loads?

Heat network licensing

Through the introduction of a heat network licensing system, the Scottish Government will introduce requirements in relation to quality of service, transparency of information and minimum technical standards, as well as establish a mechanism to identify, monitor and enforce any requirements.

The heat networks market in Scotland consists of various types of organisation serving different numbers and types of sites. As such, it is imperative that we develop a licensing system that is fair and proportionate.

Proportionality in the licensing system may be addressed through fees (for applications and maintaining licences), exemptions or the conditions attached to such licences. Some conditions may be:

• common regardless of the licence (for example complying with technical standards)
• attached due to the type of organisation wishing to obtain the licence (such as those operating a large number of heat networks, or as a total across their heat networks serving a large number of users or supplying large amounts of heat)
• attached due to the types of benefits they wish to enjoy (such as accessing the road work rights provided for in the 2021 Act)

Q15: How can we ensure proportionality in a licensing system, in particular in the application and determination processes, licence conditions and fees? Please be as specific as possible.

Licensing authority

The licensing authority will act as a regulator for the sector. The Scottish Parliament indicated that Ofgem, would be well placed to take on those functions which is in line with recommendations from the CMA. Ofgem is a body created in statute by the UK Government and as such cannot be appointed by Scottish Ministers without UK legislative change.

Ofgem has been recently confirmed by the UK Government as the body that will take on the role of regulator under the Heat Network Market Framework which includes GB-wide consumer protection standards.

As set out in more detail in Chapter 3 (Consumer protection and alignment with UK legislation), 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.

Heat network consent

Part 2 of the 2021 Act introduces a project-specific approval process – heat network consents - to scrutinise how both new and existing heat networks meet local and national objectives, for example on emission reduction or fuel poverty.

Consent authority

The 2021 Act creates a new consent authority responsible for awarding and enforcing heat network consent. Under the 2021 Act the Scottish Ministers automatically become the consent authority. However, local authorities can request to become the consent authority for their own area.

As noted in Part 1, Chapter 3 it is proposed that the Scottish Government's Energy Consents Unit take on this role in the first instance. Creating a central consent authority will maximise economies of scale and reduce the resource needed to fulfil the consenting function, as well as drawing on already established expertise in relation to consents for renewable energy generation. A more centralised approach also recognises that the growth of the sector is likely to be uneven across Scotland and avoids the need to establish a consenting function in each local authority. Furthermore, it will also allow a consistent approach to be established across Scotland, helping to smooth the process for the heat networks sector.

Once established it may be appropriate for local authorities to take over as consent authority. Local authorities can request at any time to become consent authority.

Exemptions

The consent process is an additional step for the heat network sector in Scotland. As such, it will be important that the burden on heat network projects is proportionate as increasing development costs could adversely affect our ability to deliver the heat networks targets.

We recognise that not all of the heat network projects in Scotland will require the same level of scrutiny. Our intention is that some heat networks:

• may be entirely exempt from the consent process
• would only have to provide more limited information with a consent application^[14]
• would have to provide the full information with a consent application

We will work closely with the sector to identify the most appropriate thresholds that would ensure that local and national objectives are still met while limiting the burden, particularly for those who may be getting an appropriate level of scrutiny through other systems such as the planning regime. Exemptions from consent application or limitations on the information to be provided, may take account of different types of operations, including whether it is for operation of an existing network, extension of an existing network or a new network entirely. It should be noted, however, that provision of information on key assets which will be required if a network were to transfer between operators, is provided as part of the consenting process.

Q16: Which heat network projects should be exempt from the requirement to hold heat network consent? Please provide evidence alongside your answer.

Q17: Are there particular types of heat network for which only limited information should be required in the consent application? If so, please set out your views on what types of heat network and why?

Community engagement

Heat networks are local assets and will change the way people heat their homes and buildings. As such, it is imperative that communities are involved in the design and have the ability to inform decision making.

Effective public engagement can lead to better plans, better decisions and more satisfactory outcomes, while also improving confidence and fairness. Engagement needs to be meaningful and to occur from the earliest stages in the process to enable community views to be reflected in plans and project proposals.

Part 2 of the 2021 Act requires community engagement reports to accompany applications for heat network consent. We intend to publish guidance to support community engagement in the heat networks sector. There are a number of existing community engagement models, including the model used in the Planning System, as well as best practice guides such as the Citizens Advice Scotland's "Engaging Heat and Minds"^[xix] report.

Community engagement should not just be linked to the consenting process. We believe it has a strong role to play in decisions to designate heat network zones. As set out in the Heat in Buildings Strategy, LHEES will form a basis for local public engagement, awareness raising and involvement in decision making at the local level, and will facilitate extensive engagement with local communities. As noted in Part 1, Chapter 3, the heat networks aspects of LHEES will be the first phase in heat network zoning, as such we propose that we embed community engagement into the heat network zoning process as we develop a more detailed methodology.

We are seeking views on how best to ensure effective and meaningful community engagement and are interested in what models could be adopted for heat networks.

Q18: The Heat Networks (Scotland) Act 2021 makes provision for community engagement, and we intend to publish guidance in relation to this. What, in your view, would constitute effective and meaningful community engagement?

Heat network zone permits

Certainty of demand is a key requirement for heat network development and is needed to de-risk investment. The main measure introduced by the 2021 Act that aims to de-risk heat demand are heat network zone permits. These build on the designation of heat network zones and effectively provide long term certainty to a single operator. Where a heat zone permit is issued it would prohibit anyone other than the permit holder from operating or constructing a heat network in a designated zone.

We will develop the detailed regulation and procedures of heat network zone permits in due course, but we are now seeking views on a range of aspects of the permitting system to help shape future development.

Permit authority

The permit authority would be responsible for issuing heat network zone permits for specified heat network zones. The authority would also be responsible for ensuring:

• the terms and conditions of the permit are adhered to
• heat network opportunities are being realised in line with original proposals
• the needs of consumers are being met, within the limits of its powers

A preferred permitting authority has not yet been identified. As the award of a heat network zone permit creates a monopoly supplier in one it will be imperative that the permitting authority has sufficient latitude to place conditions on heat network permits to ensure that users of such services have sufficient rights. It will also be important that the heat network zone permit system works in tandem with the UK's GB wide Market Framework to ensure consumers are protected.

The role of "permit authority" could be undertaken by Scottish Ministers directly, for example by the Energy Consents Unit. Alternatively a third party, such as the proposed Public Energy Agency could be designated or it may be preferable for role of "permit authority" to be undertaken by the same authority responsible for upholding consumer standards.

We would welcome views on which national body may be appropriate for this role.

Length of a heat network zone permit

Heat network zone permits are intended to provide certainty over the long term to enable the network owner sufficient time to recoup the cost of investment or make a reasonable return. Given that heat networks are long lived assets that have a significant upfront capital cost, it is anticipated that permits will be awarded for between 25 and 40 years.

We would welcome your views on the key factors which should determine the duration of the heat network zone permit.

Heat network permitting process

It is proposed that heat network zone permits are awarded via a competitive process. As a permit confers an effective monopoly, it is clearly a high value market opportunity. As such, and in order to ensure the best possible outcomes, we propose that the process used to award a permit should use similar systems and mechanisms to those typically seen in public procurement^[15] such as the Competitive Dialogue Public Procurement Process^[16].

The Competitive Dialogue process is typically used where greater flexibility is needed. For example, there are many types of heat network technologies and ways of funding and delivering them, so we would not want to risk stifling innovation by being too specific or prescriptive. This type of process allows initial bids to be clarified, specified or optimised via dialogue and negotiation. In this way, an optimum solution is arguably more likely to be found and agreed. The stages of the Competitive Dialogue process are:

1. publish minimum requirements, award criteria and their weightings

2. from initial proposals, invite selected candidates to participate

3. negotiations/dialogue

4. conclusion of dialogue

5. deadline for receipt of final tenders

6. contract award.

Given the complexity and uncertainty of developing heat network projects, it will be important that the heat network zone permit process provides a degree of flexibility and is able to encourage innovation – not only technical innovation, but innovation around the commercial and financial elements of bidders' proposals. We consider that the model of a Competitive Dialogue procurement process^[i] would enable this and would be appropriate due to the likely long duration of the permits awarded.

Additionally, since the award of a permit has some characteristics of the award of a commercial concession, for example involving the transfer of an operating risk of economic nature, it may be appropriate that we draw on the model provided by the Concessions Contracts (Scotland) Regulations 2016.^[xx]

We are seeking feedback on whether there are elements of these existing processes that might be particularly valuable or detrimental in the design of heat network zone permits, and whether there are key aspects missing which you may expect.

Q19: What key factors should determine the duration of the heat network zone permit?

Q20: How can the interests of both the customer and the network operator best be balanced in heat network zones with heat network zone permits?

Large scale thermal storage

As highlighted in our Heat in Buildings Strategy, thermal storage, be it in individual properties or larger scale connected to a heat network, can enable the decoupling of heat production and heat use. It may also support a more cost effective decarbonisation of the wider energy system, for example by reducing the need for electricity network upgrades and additional generation capacity. National Grid in its Leading the Way scenario included over 12 GW of load shifting from thermal storage from homes and heat networks in 2050.

We are undertaking research into the role of energy storage in supporting the electrification of heat. In particular we will consider the role of energy storage in buildings and heat networks, with an initial focus on in building storage.

The Heat Networks Code of Practice for the UK^[xxi] sets out a number of minimum requirements for thermal storage, including that the economic benefit and additional emissions savings resulting from thermal storage be assessed. It also highlights inter-seasonal storage for some heat sources such as solar thermal or ground source heat pumps as best practice and recommends planning for additional storage to be added in the future to capture expected future benefits.

There are examples of significant size stores in Scotland, though none as yet that deliver inter-seasonal storage, examples of which are available internationally^[17]. Research suggests^[xxii] that there are potential opportunities for low temperature inter-seasonal thermal storage within our green spaces and flooded coal mines, including in urban areas of Scotland.

National technical standards, yet to be produced (see Chapter 3) may include requirements for heat storage. However, any minimum requirements that may be included in these standards may focus on the benefits to the heat network customer and may not go as far as would be needed to achieve maximum societal benefit. Wider benefits may include:

• greater society wide resilience against any unexpected fuel import constraints and energy cost increases
• reduced constraint on wider local energy systems, such as by allowing the use of what would otherwise be constrained wind generation.

Q21: What measures, if any, should regulatory or support systems take to encourage inter-seasonal thermal storage to achieve wider societal benefits? Please explain.

Q22: Do you have views you would like to express relating to parts of this consultation which do not have a specific questions? If so, please elaborate.