Energy Efficient Scotland development: consultation analysis

Heat Networks

The consultation paper notes that the Scottish Government wants to see the growth of heat networks in Scotland continue and accelerate and recognises that there may be further ways it can assist with this. The introduction of a regulatory framework and licensing system are proposed to in order to provide certainty to the sector and investors as well as raising consumer acceptance and awareness. Evidence is sought form the sector on whether further incentives or on the-ground assistance could be made available to support the deployment of heat networks – or whether there are specific mitigations to the risks that may be considered. Pages 24-27 of the consultation paper (as referred to in the question, below), set out a range of issues for respondents to consider, including in relation to current incentives for market growth.

Question 13 - (Taking the above into account), what further incentives could drive further heat demand onto networks?

A total of 65 respondents provided a comment at Question 13, Question 14 or at both questions.

A small number of respondents submitted very detailed and extensive comments in relation to low carbon heat and heat networks. 

The analysis presented below gives an overview across all responses submitted. All responses are available in their entirety to the Energy Efficient Scotland policy team at the Scottish Government

With regard to the current situation, views were that:

• The development and set-up of heat networks is costly and time-consuming.
• This can be a particular issue for off grid, low density housing in rural areas. Incentives are of no value if there is no local heat network, and rural Scotland is particularly likely to miss out.
• The cost of supplying renewable heat to individual homes is high compared with that of a communal supply and heat network.
• An unfair business rates regime needs to be addressed to put heat networks on an equal footing with independent gas networks.

In terms of driving further heat demand, there was a view that:

Ultimately it will come down to cost. If domestic and commercial consumers alike can be guaranteed reliable, cost-effective heat over the long term they will be keen.
Energy-related private sector respondent

A number of respondents, including several ‘local authority or interagency partnership’ respondents, commented on the importance of funding and incentives continuing to be in place going forward, an example being that the granting of District Heating (DH) concessions remains one of the most effective means of driving demand onto networks. An ‘academic respondent commented that heat networks do not currently appear to be economically viable without significant external funding. Viability, risk and regulation are discussed further at Question 14.

A small number of respondents reported that current funding streams are not sufficient to support heat network development in Scotland or that new/additional support will be needed.

Conditions for, or features of, an incentives approach

In terms of the conditions or arrangements that need to be in place to make a programme of incentives effective, it was suggested that:

Local authorities typically will work on short term financial planning of less than ten years, yet a heat network is a long-term investment that may well pay for itself over a period of decades. Local authorities need to be enabled and directed to consider these investment time scales or, preferably, the Scottish Government could consider heat networks as a national infrastructure issue...
Academic respondent

Other views were that:

• Scotland should be moving to a principles-based framework which has customer outcomes at its heart, and which focuses on whole lifecycle carbon reduction.
• Recently developed Socio-Economic Analysis methodologies could support decision makers to base decisions on a variety of social, environmental and economic factors, rather than cost alone.
• There should be a robust cost benefit analysis demonstrating that heat networks are the most cost-effective way of decarbonising the heat supply.
• Funding should be focused on projects that aid in reducing fuel poverty and further delivery of Scotland’s decarbonisation targets.
• The approach needs to sufficiently de-risk investment in heat networks and other low carbon generation by helping to bring down the costs of funding.
• Heat tariff prices could be kept down if public funding avoids sole reliance on commercial finance.
• Regulation of heat networks would increase confidence and encourage investment. (This is discussed further at Question 14.)

Suggested features of any future/new funding streams included that they should remain focused on capital costs and avoid direct subsidies that prompt short-term demand and do not sustain the market beyond the life of the support mechanism. A different perspective was that incentives should be made available for ‘conventional’, well-performing heat networks rather than being contingent on innovation.

In terms of overall funding streams, it was argued there should be continued revenue support, through the RHI (or similar), to make low carbon heat competitive against natural gas where a (District Heating Network) DHN is serving existing buildings.

Other views were that incentives should:

• Be long-term, as energy infrastructure has a long pay-back period, and a long build-out period.
• Have a consideration of lifecycle costs embedded.
• Have the option of some form of balloon funding at the start and be designed as gap funding.
• Enable existing and new buildings to be future-proofed and suitable for low carbon heat options. The focus could be on the carbon intensity of the heat source, be technology-neutral and encourage the most energy efficient solution within an area.
• Be targeted at not-for-profit schemes. This could be instrumental in shifting energy from a commercial to a social/community basis.
• Cover the cost-effective local green production of electricity and then the use of that electricity locally. It was noted that many rural areas have no access to ‘heat networks’ or cheap rates for gas heating so otherwise rely on costly fossil fuels and electricity for heat demand.
• Provide more of a focus on the opportunities for small heat networks which can provide a low carbon, cost-effective solution in rural off-gas areas.

An alternative perspective was that a little-used incentive is to:

...build the societal case for DHNs in specific places, simultaneously contributing to a new heat policy narrative... At present, DH development is typically framed as economic or business opportunity for users and investors, rather than as a necessary or best value/optimal contribution to a societal project of heat decarbonisation.
Academic respondent

Specific incentives suggestions

General comments were that tax incentives, loans or interest free-loans, and grants should be considered. There was a view that grant-funding packages would allow local authorities to dedicate more time and resources to working with both the private rented and owner-occupied sector.

One proposal was that public funding could be structured as a form of bond issue (such as a low carbon heat bond). Another was that the Scottish Government could develop and deliver new heat networks through the Scottish National Energy Company and a Scottish Energy Development Agency, supported by financing from the Scottish National Investment Bank.

Suggestions included:

For heat network developer or suppliers

• Capital funding for the civil engineering (boreholes, water abstraction, energy centre construction) needed to make low carbon heat inputs competitive against gas where a DH network serves existing buildings.
• Grant assistance for local authorities to implement DH projects.
• An ongoing role for the District Heating Loan Fund run by the Energy Saving Trust; this type of support together with grant support for certain projects with a weaker business case remains important.
• For existing buildings where licenced operators have been granted a wayleave for a district heating connection, provide public funding to subsidise connection costs where these exceed the cost of the counterfactual boiler.
• Support for low density off-grid housing; the cost of pipework massively precludes heat networks in rural areas.
• A reduced or zero rate of VAT applying to DH networks and sale of energy.
• Funding for community schemes.

For property developers

• Grant assistance to implement DH projects.
• Providing incentives for new builds to be made ‘DH ready’.
• Reward housing developers that install district heating networks when developing new-build housing sites over a minimum number of units per site.

For the owner occupied sector

• 100% finance packages.
• Council Tax incentives.

For the PRS

• Loans, combined with other incentives.
• Grants for heating, solar panels and redecorations costs if required.
• Improved RHI funding.
• Financial support for capital investment and ongoing operation costs.

Customers/consumers

Respondents also provided possible options focused on the customer/consumer, including potentially as the owner or renter, as above. These were:

• A similar scheme to the RHI or Feed-in Tariff for customers.
• Reducing prices for those using heat networks to below the lowest available prices on the open market and tracking these prices for a fixed period.
• A boiler scrappage scheme if connecting to a DH network. Payments could be scaled depending on whether the customer is moving from gas, electricity, oil or LPG.

Development/set up stage

Some of the proposals focused on the set up or early stages of a heat network:

• Initial grants or kWh incentives to secure a base load to justify a new heat network, with falling costs as uptake increases reducing the need for subsidy.
• Providing connection fee subsidies- particularly for anchor loads. This would help reduce connection fees and encourage more demand onto networks.

Energy rating

Others focused specifically on incentives associated with energy ratings:

• An incentive for energy rating to ensure that the DH option is more beneficial than standard selections. Incentives associated with good EPC scores.
• A financial incentive equivalent to the Feed-in Tariff or RHI; this could be linked to the carbon intensity of the metered heat delivered to end users of a heat network.

In addition, the Scottish Government was encouraged to explore further ways in which funding from supplier obligations such as ECO could be better tailored to incentivise and fund new DH connections.

Although there was widespread support for the use of incentives, it was suggested that incentives need to be replaced by compulsion for new developments adjacent to existing heat sources.

Question 14 - (Taking the above into account,) what further assistance could support the growth of appropriately sited, low carbon heat networks?

A small number of respondents questioned whether the argument has been made in relation to heat networks:

There is no clear view or commitment that heat networks will sufficiently decarbonise to be a useful solution in 2050. We, along with many others, have little or no confidence that heat networks are an affordable solution for the longer-term future, other than in a few specific one-off locations. 
Building component manufacturer or services respondent

Further comments were that:

• In particular, the argument has not been made for existing housing stock.
• The decarbonisation benefits of DH may only be realised when the distribution system is combined with low carbon heat sources.
• Smaller community networks can be efficient and can be fully decarbonised today, so are fast becoming a solution that is easier to adopt, especially where fabric measures are limited by archetype and aesthetic restrictions.
• There is no guarantee that Heat Networks are cheaper than stand-alone systems, particularly with gas prices so low and organisations wanting reliance in case heat networks break down, or the price of heat from the network becomes even more expensive.

Strategic and operational context

A number of respondents commented on the importance of the Scottish Government giving a clear message about the future of heat networks, specifically in relation to:

• A more ambitious longer-term goal, based on what is needed, rather than what can be afforded today. This would help industry and clients move towards technologies that can deliver the performance required.
• Electricity or gas/hydrogen. This was seen as important in terms of encouraging both investors and members of the public to make investment decisions for their home and heating system.

A small number of respondents set out an overall approach they saw as best underpinning heat network policy:

• One approach placed networks policy within the context of a broader policy mechanism for decarbonising Scotland’s heating, applying heat zoning and energy master planning to the deployment of heat networks.
• It was proposed that the Scottish Government and industry should work together to develop a viable mechanism that can support strategic investment in heat networks such as ‘demand assurance’, heat zoning and concession schemes.
• It was suggested that local authorities should be empowered to implement Heat Transition Zoning, a whole-system approach which supports the deployment of all technology-types. It was reported that this approach will allow the Scottish Government and local authorities to tailor support to the appropriate solutions, through zoning.

Another respondent commented that there is a stronger requirement for heat networks to emerge through systematic development and implementation of heat strategy, policy, heat mapping and the planning system, leading to the creation of heat network Concession Zones. These Concession Zones would be those areas where heat mapping has proven that a heat network would be viable solution. The evidence would be adopted in local plans and policy to allow the planning system to require developments to prioritise connection to the network unless there was a strong case not to connect.

There was also a view that the focus should be more specifically on low carbon heat rather than just DH, including because the development of low carbon building-scale technologies is a more realistic prospect in a lot of cases and areas.

Viability, risk and regulation

A number of respondents made comments around viability and risk. For example, a ‘local authority or interagency partnership’ respondent reported:

There are a number of good case studies of the delivery of heat networks in Scotland (namely the big City authorities) but... many of the Councils in Scotland still struggle with the risks and potential lack of expertise of getting involved with, and/or delivering, heat network schemes, this is compounded by more rural or semi-rural areas with housing density below that which could support a financially viable district heat network.
Local authority or interagency partnership respondent

Other comments focused on the viability of schemes, for example:

• Local authorities, the NHS and other public bodies need to be able to commit anchor loads to help DH schemes to be viable and as an incentive for the critical loads to become available. There was also reference to universities, prisons and Defence Estates.
• Concession arrangements are a useful tool for addressing investment and demand risk. To have a substantial impact on investment they need to include some form of obligation to connect or need to cover a large enough area that network operators can make use of delivery at scale.
• Today’s low carbon heat market, including heat networks uptake, is primarily policy-led, therefore a regulatory framework will help to provide legal certainty to investors and reassurance to customers.

Following on from the latter point, other respondents also made the connection between risk, regulation and consumer protection (discussed further below). It was recommended that a statutory framework should be established that underpins regulation of all heat networks and that:

This regulatory framework should be designed to ensure that all heat network customers are adequately protected. At a minimum, they should be given a comparable level of protection to customers of gas and electricity in the regulated energy sector... The sector regulator should be given formal powers to introduce regulation in these areas, and to monitor and enforce compliance with regulations.
Public sector or body - other respondent

It was also noted that there needs to be confidence in the market for households to accept the proposition of one provider having a monopoly on a DH network.

Role of LHEES

A number of respondents commented on the role of LHEES, including that their strengthening will be important:

….as a mechanism for driving investment by introducing a statutory duty on Local Authorities to deliver against the zones identified for heat networks.
Energy-related private sector respondent

Specifically, the need to have teeth in order to address a central issue for heat policy - demand risk - was highlighted, (see below) along with arguments that:

• The LHEES process should be a useful tool that will enable local authorities to take action on enforcing planning and air quality requirements, in turn driving more demand onto networks.
• To be effective LHEES will need to consider impacts of energy price, energy availability, and how actions are enabling the delivery of carbon reduction targets.
• LHEES should be integrated into Local Development Plans (LDPs) and Scottish Planning Policy (SPP) should state clearly that LHEES DHN zones and the new-build developments flagged within them (as well as potential sources of heat) are to be integrated into the LDP at the outset and when allocating land.

That the proposals include the ability for local authorities to discharge jointly their duty to produce a LHEES was welcomed; it was noted that the practical realities of heat networks and other energy efficiency measures and strategies will mean that some degree of cooperation between local authorities will be necessary.

In terms of building the societal cases for DH (as discussed at Question 13), it was suggested that a first step is to use the LHEES process for heat planning and building cross-sector consensus on the best available area-based solutions. It was noted that participatory mechanisms can give local people a voice and can help in building a local commitment to change.

Consumer protection

Although the Scottish Government does not have the power to legislate for consumer protection, stakeholders made several suggestions on how this should be provided.

Some respondents commented on the importance of ensuring consumers are adequately protected, including thereby giving them an incentive to join a heat network. It was suggested that the regulations should cover:

• Price: with ‘principles-based’ rules or guidance on pricing, requiring heat networks to give due consideration to whole-life costs during the design and build phases, and how this is likely to impact prices for consumers.
• Quality of service: with customers given similar protections to gas and electricity customers, particularly in relation to the quality of service and protections for vulnerable customers.
• Transparency: with rules or guidance as to the level of information that is necessary, and to allow customers to make appropriate decisions when considering whether to live in a property with a heat network.
• Minimum technical standards: with all heat networks complying with a new set of minimum technical standards, focusing on measurable performance outcomes, such as operational efficiency.

It was also proposed that the sector regulator should be given formal powers to introduce regulation in these areas, and to monitor and enforce compliance with regulations. Either OfGEM, or the new Consumer Scotland body where cited as possible regulatory bodies.

Other consumer-related points raised:

• Prior to occupying a property supplied by district heating, prospective purchasers or tenants should always be provided with clear information telling them that the property is connected to DH. This should include illustrative tariffs that might apply. One suggestion was that face-to-face energy advice in the home will be critical.
• Heat suppliers should ensure that their bills are clear and that the charges are transparent and readily understandable. This is in line with the requirements of the Heat Trust scheme and the Heat Network (Metering and Billing) Regulations 2014.
• For domestic consumers, there should be guarantees that the fuel cost price will not exceed the cost of buying fuel on an individual basis. A further comment was that stronger price protection should be provided based, for example, on the Danish practice of publishing heat tariffs online so that customers can compare prices.
• It will be important to ensure that vulnerable customers are not unfairly disadvantaged by predatory seasonal pricing from an unregulated fuel supply market.
• The Norwegian regulatory framework gives an option for collective switching and a provider of last resort, if the service is deemed unsatisfactory.
• There should be Government-backed procurement and warrantees.
• Repair costs need to be proportionate for householders; a financial cap on repairs for domestic users may be necessary.

Other ways for SG to support growth

In terms of further measures that the Scottish Government could put in place, or changes it could make, to further accelerate the pace of growth, proposals were:

Nationally driven structures/support

• Creating a forum where public, private and community sectors can discuss potential heat network projects and gain further education on heat networks and their benefits.
• Providing local authorities with in-house support personnel with specialised knowledge in legal/finance, procurement and design, build, manage contracts for specific technology. This could be as a pooled resource for short term project management assistance.
• Considering whether the Scottish Government’s Energy Company has a potential coordinating role or as a centralised manager of risk. Otherwise, creating an agency that will take over cost and ownership of the infrastructure during and subsequent to completion of the development.
• Considering a Scotland-wide resource, targeted quickly if a scheme suffered from loss of heat, as is currently practiced with the utility networks such as electricity transmission.
• Requiring potential anchor loads to release relevant data to the regulating or licensing body.
• Procuring a heat network company framework that would allow local authorities to run mini competitions to appoint a heat network company to design, build, finance and operate the DH network. It was reported that some Scandinavian countries use a centralised procurement framework to embed expertise and reduce cost of heat networks in particular.
• Providing central support for local authorities in the vetting and negotiation of planning applications and the setting up of DHN obligations.

Development of networks

• Enhancing the information available about the state of the existing energy networks to help local areas target investment appropriately. Whether this information is only made available to local planning authorities or is made publicly available could be a matter for further discussion.
• Directing local authorities to form joint vehicles or partnerships with private sector firms to develop and deliver projects within all or part of an LHEES identified DHN zone/concession.
• Creating a standardised approach to direct local authorities to work in partnership with private sector partners to jointly deliver heat network opportunities identified within an LHEES zone. These agreements should also include a procurement framework to facilitate other public bodies contracting with the concession-holding organisation.
• Granting concession exclusivity to a holder to operate new heat network projects within a zone. For example, projects coming forward from new-build developments or individual building owners.
• Providing further encouragement to, or assistance with, the setup of local utility providers such as Shetland Heat Energy and Power Ltd.
• Giving heat network developers the same statutory rights as gas, electricity, and water network developers to construct networks in a logical way, avoiding costly and inefficient detours around parcels of land. This could help address construction risk and improve operating costs.
• Removing the requirement to pay rates on infrastructure.
• Stopping industry responsibility for DH at the boundary of each industrial site. Developers and other potential users should bear the full cost of obtaining rejected heat from potential industrial sources.
• Promoting the untransferable share ownership of schemes/systems for private housing development, whereby all owner-occupiers collectively own a share in the scheme to which they are attached.

Existing buildings

• Making it mandatory for public sector buildings to connect to existing or planned district heat networks when replacing the heating system of existing buildings.
• Addressing the key challenges of connecting existing buildings to new DH heating schemes. These challenges include the cost of the retrofit connection and the technical challenges around making such retrofit connections.
• Granting licensed operators a right to install equipment on private land to connect a designated building (within an LHEES DHN zone) to a specified heat network. 

New build

• Through the next version of the SPP, directing planning authorities3 to use planning obligations to require connections to DHN networks for suitable new developments located within LHEES DHN zones.
• Requiring justification as to why heat networks are not being installed for a new development should be mandatory, with fully costed, practical and technical reasons.
• Phasing out gas in new builds and requiring all buildings to be heat network ready (e.g. low-temperature heating, plant room space).
• Supporting local authorities in the vetting and negotiation of planning applications and the setting of DHN obligations through the Scottish Government’s Energy Efficient Scotland delivery mechanism.
• Requiring new developments to have a sufficiently high level of insulation so that low carbon heat networks will be cost effective.

Building Regulations and Standards 

• Better aligning Building Regulations to ensure that alternative heat networks are properly assessed, particularly in relation to the Target Energy Rating. Reviewing Section 6 of the Scottish Building Standards could ensure that the SAP and Simplified Building Energy Model (SBEM) calculation methodologies fully reflect the carbon benefits of connecting to DH schemes.
• Amending Section 6 of the Technical Standards to require any new gas-fuelled heating systems installed in urban areas to be designed to allow the retrofit of a suitably located heat exchanger and meter in the future.
• Providing planning guidance on heat networks for the Development Plan and Development Management systems through either a Circular or Planning Advice Note.

Areas of potential growth

It was noted that either existing utilities will diversify into low carbon heat networks or new utilities will have to be formed, and it was seen as preferable for these to be  community owned. Other areas of potential future change or development identified were:

• There is an appetite within industry to make use of waste heat. The Scottish Government could explore the use of mandatory waste or spare heat declarations for industrial and commercial users, to assist with heat mapping.
• Distilleries have the potential to supply surplus low-grade heat to other users. Heat recovery and reuse within processes on-site are standard practices at distilleries. However, finding users of the remaining low-grade heat has proved problematical and the provision of heat during planned maintenance shut-downs, needs to be addressed.

Finally, there was a proposal that the Scottish Government lead the way by establishing a district heating system based on the Parliament building and Holyrood Palace, which could extend to the Canongate. Such a system has already been considered by Historic Environment Scotland and the Edinburgh World Heritage Trust.

Compulsory connection

A small number of respondents commented on the potential need to go down the compulsory connection route, including to help address the connection risk associated with heat networks. Proposals as to how compulsory connection might be approached were that:

• It should depend on local authorities or private developers being able to demonstrate that a heat network is the most appropriate solution, and that customers interests will be appropriately protected.
• An obligation to connect should be implemented on new build, non-domestic and public sector buildings, with support for domestic consumers to retrofit connection if desired.
• A streamlined procurement/regulatory framework for the connection of public buildings would assist in maximising opportunities.

However, it was reported that there are likely to be significant resource implications for local authorities, particularly for privately owned buildings, and that they would need support.

There was a recommendation that the Scottish Government implement an obligation to connect across non-domestic buildings and public sector buildings within Heat Network Zones (as discussed above). In terms of timescales, it was suggested that the obligation:

• Should be placed on new build properties pre-planning with immediate effect.
• Could be placed on public sector buildings and larger non-domestic buildings to connect within 3-5 years, or at the point of heating system replacement or change of tenure.
• Could be extended, with the remaining non-domestic building stock required to connect within 5-7 years, or at the point of heating system replacement or change of tenure.

It was suggested that, in order to create a well-performing, decarbonised energy system, the energy system as a whole should be considered, using zoning to support the transition to a low carbon energy system. The approach would be based around:

• Local authorities being responsible for zoning for a representative sample of their authority; this would form part of broader energy master planning by local authorities. The zoning of an area would then unlock certain policy and funding support for the technology.
• Funding and incentives for industry and consumers would be different for different heating solutions, reflecting varying business models and different cost structures.

In terms of how incentives would play their part (as per Question 13), it was proposed that:

• They could operate within zones and would be designed to support uptake of the particular heating solution to be deployed in that zone.
• Each technology may require slightly different incentives. For example, the kind of incentive that will work best to encourage someone to install a heat pump in a heat pump zone is likely to be different to the kind that will encourage someone to connect to a heat network.
• In Heat Network Transition Zones, heat network developers could gain streamlined access to existing and enhanced funding structures such as the DH Loan Fund and the Low Carbon Infrastructure Transition Programme to help address the capital expenditure costs of heat network delivery.

Other respondents expressed their doubts or concerns in relation to compulsory connection. For example:

• It could remove customer choice, particularly in owner occupied homes, and possible consumer protection challenges were anticipated.
• There could be issues about ownership and maintenance of plant/equipment in the home which could also have mortgage valuation impacts.