Heat in buildings strategy - achieving net zero emissions: consultation

Chapter 5 Preparing our Energy Networks

Decarbonising heat will substantially change the way we use our existing energy infrastructure and influence where we may need to develop new infrastructure such as heat networks and additional generation capacity. Our energy networks will need to have the capacity to transport and distribute increasingly low carbon energy – electricity or green gases - for heat from where it is produced to where it is needed. We will be transforming the way we heat our homes and non-domestic buildings at the same time as we decarbonise transport and industry. It will be important that we can consider and manage these impacts in the round. We will update the Scottish Energy Strategy this year, taking into account the whole system issues raised by our net zero climate targets.

The Electricity System

It is likely that the majority of heat demand that will need to convert to low and zero emissions heating by 2030 will switch to electric systems. As set out in Chapter 2 these systems will likely be either individual heat pumps or green heat networks, some of which will be powered using large-scale heat pumps. Transitioning this number of properties to electric heating systems will substantially increase the demand on our electricity system.

It will be critical to ensure that sufficient renewable electricity generation is available, at the right times and in the right places. Wider policy initiatives to decarbonise other sectors, including transport and industry, will increase electricity demand still further. Although Scotland’s electricity generation is already largely decarbonised, we need to understand the generation capacity necessary to meet future demand, as well as an indication of where in Scotland renewable generation will be located and how it will be delivered to consumers. We will undertake this analysis during the first half of 2021 and set out further details in our refreshed Energy Strategy to be published later this year.

As electricity policy and regulation is a reserved area, action from the UK Government to ensure that renewable electricity generation is properly supported and enabled will be crucial. We will continue to seek assurances from the UK Government and energy regulator on the measures that they will take to ensure that this need is met.

Electrifying a significant proportion of our heat over the course of this decade will substantially increase the amount of energy that our local electricity distribution networks need to deliver to buildings. There will be places right across Scotland where network owners will need to reinforce cables and upgrade the substations that serve our neighbourhoods and buildings, and do so in a way that coordinates with plans for conversion to electric heating. As set out in our networks vision statement^[xxxvii], an integrated approach to future systems planning will be crucial.

We understand that the cost of this investment could be significant, especially when coupled with the impact on electricity networks of increased electrification of transport. At present, there is a great deal of uncertainty on these costs and more work is needed to reduce that uncertainty. It is also important to understand how these costs will be met, who will pay and what the impact may be on consumer bills. We will undertake work in 2021 - 2022 to explore the potential network investment costs of the heat transition for Scotland, to provide greater clarity on the likely range of costs, and likely impacts on consumers, to help inform further decision-making.

There will also be increasing value in energy storage. This includes large scale energy storage such as hydro systems and large-scale battery storage but also heat storage in heat networks, building-scale batteries and thermal storage. These tools could help balance the use of electricity for heat in buildings ensuring that networks are not overloaded and help to keep consumer bills affordable. During 2021 we will undertake research into the role of energy storage in supporting the electrification of heat. In particular we will undertake work to look at the role of energy storage in buildings and heat networks.

We are working closely with the Distribution Network Operators (DNOs) on the issues above. We have engaged the Energy Networks Strategic Leadership Group on the challenges we face in terms of securing network investment. However, in order to take our collaboration with the DNOs further we are setting up a new Heat Electrification Partnership with them to work together to understand the scale, pace and location of network investment needed, build the evidence for the right investment decisions for Scotland and ensure compatibility with delivery and deployment plans.

As well as gathering evidence on areas such as storage, through this new partnership we will investigate and invite demonstration projects which allow us to model the real time network impact of heat pump deployment, energy storage and demand management.

We are also working closely with Ofgem to better understand how the electricity networks will be affected by our policy and statutory targets, and the changes that will be needed as a result of these impacts. The evidence gathered through our collaboration as part of the Heat Electrification Partnership will inform DNO’s business planning in the run up to the next price control, RIIO-ED2, which covers the period 2023 - 2028.

As Local Heat & Energy Efficiency Strategies (LHEES) are rolled out for all local authority areas in Scotland, they will provide a long-term platform for considering local circumstances in developing electricity network business plans, and support this necessary co-ordination of resources and development.

A graphic of the interaction between the electricity transmission and distribution networks showing where upgrades will be necessary to accommodate increased demand of renewable electricity for use with electric heating.

Summary of action we will take:

26. We will update the Scottish Energy Strategy this year taking into account the whole system issues raised by our net zero climate targets.

27. We will carry out analysis during 2021 to understand generation and network requirements, in terms of the scale and location of the demand that heat electrification could bring.

28. We will ask the UK Government to continue to provide the support needed to develop Scotland’s renewable electricity pipeline needed to meet a decarbonised future for heat.

29. We will undertake work in 2021 - 2022 to explore the potential network investment costs of the heat transition for Scotland, to provide greater clarity on the likely range of costs, and likely impacts on consumers, including those in, or at risk of, fuel poverty and help inform further decision-making.

30. During 2021, we will conduct research into the role of energy storage in heat networks and buildings in reducing consumer costs, and minimising network impact.

31. In 2021 we will set up a Heat Electrification Partnership with Scotland’s electricity network operators to ensure that the upgrades required are delivered when and where they are needed and ensure that the LHEES framework informs this.

32. We will investigate demonstration projects through our delivery programmes strategic priorities to allow us to model real time network impact of heat pump deployment, smart-enablement, energy storage and demand management.

33. Throughout 2021, and beyond, we will continue to engage Ofgem to ensure that there is a framework to support the energy network companies – both gas and electricity – in reflecting the Scottish Government targets and ambitions as set out in this draft Strategy.

Questions

28. In your view, is there further action that can be taken to ensure that our electricity systems are ready for heat decarbonisation? If yes, please provide further information.

29. What are your views on the changes set out above for the electricity networks and are there further actions that could be taken by government, the regulator or industry that would make these more cost effective? Please provide evidence to support any suggestions.

30. In your view, what changes are needed to ensure that those least able to pay, including those in fuel poverty, are not unfairly impacted by the transition in our electricity and gas networks?

Gas networks

Scotland’s mains gas network currently delivers a secure supply of energy to domestic consumers and businesses. Around 81%^[xxxviii] of homes and approximately 30%^[8] of non-domestic buildings use mains gas for heating. Non-domestic buildings using mains gas tend to be larger and therefore mains gas accounts for a greater proportion of energy use in this sector. Currently, the gas supplied via the mains gas network is predominantly natural gas, a fossil fuel composed mainly of methane.

To meet our emissions targets, we will need to reduce significantly and eventually phase out our use of natural gas, and by 2030 at least 1 million domestic and non-domestic properties will have to have switched to zero emissions sources of heating. away from high carbon heating such as gas.

Alongside implementing energy efficiency measures, there are two main ways to achieving this reduction: replacing the natural gas provided in the network with decarbonised alternatives and switching to alternative heating systems in buildings, such as heat pumps and heat networks.

Green Gas Support Scheme

The UK Government is consulting on a new Green Gas Support Scheme, which it proposes to run for 4 years from autumn 2021. Under UK Government proposals, the scheme will:

• Use an adapted version of the tariff mechanism employed on the Non-Domestic Renewable Heat Incentive. The tariff lifetime for successful applicants is proposed to be 15 years.
• Support biomethane injection in to the gas grids, which is expected to contribute 21.6MtCO2e of carbon savings over its lifetime.
• Be funded via a Green Gas Levy on suppliers, which we anticipate will be passed on in full to consumers.

Blending decarbonised gases with natural gas delivers near-term emissions reductions and helps to build supply systems that over time may be able to fully displace natural gas. In 2019, an estimated 1.5% of Scottish gas consumption is accounted for by biomethane blended into the gas grid^[xxxix], up from 0.3% in 2015. Over this decade we need to see an increasing blend of biomethane used in our gas networks. We will work with the UK Government and project partners in Scotland to maximise investment under the UK’s Green Gas Support Scheme.

Hydrogen is capable of being blended with methane as a fuel for heating. To be low or zero carbon, hydrogen needs to be produced either from the reformation of methane (with CO₂ emissions captured), or from renewable electricity, via electrolysis. The gas industry is currently testing options for blending hydrogen into the gas network up to a limit that can be safely used in existing appliances. Using an increased blend of hydrogen (up to 20% by volume) has the potential to reduce carbon emissions from gas use by up to 8%. We will work with the Gas Network Operators and the UK Government to explore opportunities for increasing the blend of hydrogen in the gas network. We will continue to keep under review the benefits and cost-effectiveness of increased blending of hydrogen into the gas network, including in terms of the wider energy system. The Scottish Government Hydrogen Policy Statement sets out our wider vision for the role of hydrogen in Scotland.^[xl]

Longer term, should demonstration and safety case trials prove successful, conversion of parts of the network to carry 100% hydrogen could play an important role in reducing emissions from buildings to very near zero. Hydrogen may be particularly appropriate in certain locations, where there is local supply (for example from abundant renewable electricity) or where industrial demand creates economies of scale.

Regulation of the gas network is a matter for the UK Government and as such the Scottish Government is unable alone to drive decision-making at the pace required to meet targets in Scotland. We are working with Scottish Gas Networks (SGN) and National Grid Gas Transmission on a project to understand the scope for accelerated gas decarbonisation in Scotland, and the timeline over which evidence will be available to resolve uncertainties. This work will be published later in 2021 and will inform the final version of this strategy.

Case Study: H100 Fife 100% Hydrogen Project

Scottish Gas Networks (SGN) is partnering with other UK gas operators on a world-first demonstration of a 100% hydrogen energy system, to evidence the role that hydrogen can play in decarbonising heat. The project will construct and operate a hydrogen network in Fife able to service around 300 houses. This will be of UK-wide significance, offering validation of the evidence base carried out by the UKG in their Hy4Heat Programme.^[9]

The project will connect with the existing 7MW wind turbine situated off the coast of Leven in Fife to directly supply power to the electrolyser for hydrogen production, evaluating the opportunity for grid integration systems between renewables and hydrogen production, and demonstrating the business case that offshore wind can offer for production of hydrogen at scale.

The Scottish Government provided £6.9 million support towards the cost of this £27.7 million project. The bulk of remaining funding has been awarded by Ofgem with other funders including, SGN, Cadent, Northern Gas Networks, and Wales and West Utilities. H100 Fife is recognised as a key building block in the strategic ‘Gas Quality Decarbonisation Pathway’ set out by UK gas distribution network operators and adopted by the Energy Networks Association.

Over the next decade we need to see increased demonstration of hydrogen for heat including the testing of appliances in homes and businesses, and trials of increased blends of hydrogen in the existing gas distribution network (through recently upgraded polyethylene pipes). We welcome the UK Government’s commitment to trialling hydrogen for heat and its support for industry to begin a Neighbourhood trial by 2023 and a large Hydrogen Village trial by 2025, as well as its longer-term ambition to see a Hydrogen Town before the end of the decade. However, to unlock delivery at scale and to meet our climate targets, key strategic decisions on the gas network are required by 2025 to drive planning for delivery beyond 2030. It is essential that UK Government accelerate decisions on the future of the gas network and if relevant, develop regulations and product standards to support these (see Chapter 10 for details).

The trialling of ‘hydrogen-ready’ boilers and appliances that are readily convertible to hydrogen is underway through the Hy4Heat programme, and a number of boiler manufacturers have developed prototype boilers that are hydrogen-ready and are designed to be able to run on the current gas system yet also be quickly configured to run on 100% hydrogen. We welcome the recent UK Government commitment to consult this year on the case for encouraging or mandating hydrogen-ready boilers, as announced in the Energy White Paper. We look forward to working with the UK Government to ensure the boiler market can develop rapidly in readiness for a future decarbonised gas grid.

Constraints in the near-term availability of both hydrogen and biomethane, coupled with a need to establish the standards and safe systems for hydrogen gas use, repurpose the gas network and replace household appliances, means that decarbonised gas is unlikely to play a large part in meeting our emissions reduction before 2030.

It will be important that this transition happens in a planned way so that piecemeal deployment of heat pumps and heat networks does not undermine the socio-economic case for converting parts of the gas network to 100% hydrogen in the future. To better understand these issues and to identify strategic areas most and least likely to have access to low carbon or green hydrogen in the future, we will work with a range of stakeholders including network companies, local authorities and delivery partners, as well as drawing on our energy systems modelling capacity and geospatial data. This evidence will support the development of LHEES Strategies, which in themselves will help to provide clear strategic direction for local authority areas. We will begin this analysis in 2021, which will be updated as further evidence becomes available during the first half of the decade.

Summary of action we will take:

34. Throughout 2021 build on our work with SGN and National Grid Gas Transmission to provide evidence on the role gas decarbonisation can play in meeting our targets, and a timeline for resolving uncertainties.

35. Working with stakeholders, including network companies, local authority and delivery partners, we will undertake analysis in 2021 - 2022 to identify strategic areas most and least likely to have access to low carbon or green hydrogen in the future.

36. Work with the UK Government to ensure that the Green Gas Support Scheme meets the needs of Scotland, and minimises the impact of the Green Gas Support Scheme Levy on end user costs, especially in relation to fuel poverty levels.

37. We will work with the Gas Network Operators and the UK Government to explore opportunities for increasing the blend of low carbon or green hydrogen in the gas network.

Questions

31. What are your views on the changes set out above for the gas networks?

32. Are there further actions that could be taken by government or industry that you think would make the changes set out more cost effective? Please provide evidence to support any suggestions.

Creating the conditions to secure growth of Heat Networks in Scotland

Heat networks are a tried and tested technology used extensively in across Europe. Currently heat networks supply only 1.5% of heat in Scotland^[10], but are a key strategic technology for reducing emissions from heating our homes and buildings. Heat networks are a low regret option as they are agnostic of fuel sources and are capable of being changed over time. For example, some heat networks are powered by high emissions Combined Heat and Power (CHP) systems but in the future could be switched to water source or ground source heat pumps should this prove cost effective.

Currently we estimate that heat networks have the potential to supply between 7 - 12% of Scotland’s heat demand. However, working with the UK Government, we are currently refreshing the National Comprehensive Assessment of the potential for combined heat and power and district heating and cooling in the UK (NCA), which is due to be published in the first quarter of 2021. Once the NCA is published, and the data for Scotland is available, we will set a new ambition for heat network deployment in Scotland, aligned with our new low carbon and zero emission heat target, which will be adopted in the final version of this Strategy. Development of credible, deliverable targets will be of great value to efforts to build and support a Scottish supply chain to support the growth of heat networks.

We continue to support the deployment of heat networks in Scotland. The centrepiece of our efforts is our Heat Networks (Scotland) Bill which we introduced to the Scottish Parliament last year. The Bill, if passed by the Scottish Parliament in Spring 2021^[xli], will:

• regulate the market through a licensing system so that homes and businesses are supplied by solvent, fit and proper operators, while requiring networks to be developed and maintained to high standards,
• create a bespoke system of scrutiny for new networks, to ensure that they can contribute to climate change and fuel poverty objectives, before they are consented for development,
• require heat networks to have a scheme in place to transfer operational rights to a third party to ensure sustained supply, if and when needed,
• require the identification of optimal areas for heat network development across Scotland – Heat Network Zones – including by drawing on information obtained through a new requirement on the public sector to assess the suitability of its own estate to connect to heat networks,
• attract new, and lower cost investment in the sector by awarding long-term Heat Network Permits to develop and operate in the most opportune areas. This will provide assurances over the customer base available, and enable borrowing to be repaid in line with the long-lived nature of the heat networks infrastructure, and
• grant new rights for heat network operators – such as wayleaves, compulsory purchase, road works and surveying rights – to reduce the costs and time involved in construction and maintenance.

We are already preparing the regulations that will result from the Bill, so that, subject to Parliament passing the Bill, the new regulatory regime will be operational by the end of 2023. As with the Bill, we will work with our Heat Networks Working Group in preparing the Regulations. The working group’s membership may be refreshed to ensure we have the necessary skills and expertise to inform what will be detailed secondary legislation.

In addition, we are committed to working with the UK Government to develop technical standards for the heat networks sector that build on existing good practice and apply across the UK. We jointly commissioned the British Standards Institute (BSI) to undertake a pre-standardisation project in order to identify whether new technical standards are needed, and if so, where gaps exist. The recommendations from the BSI’s Report will form a foundation for future decisions to develop robust technical standards for the heat networks sector.

We will continue to support the development of heat networks in communities across Scotland through our funding and delivery programmes such as the Low Carbon Infrastructure Transition Programme (LCITP), the District Heating Loan Fund (DHLF) and the Local Energy Challenge Fund (LECF) (see Chapter 6).

Case study: Glenrothes Energy Network

Fife Council and RWE received financial support of £8.6 million through the Scottish Government’s Low Carbon Infrastructure Transition Programme (LCITP) to develop and deploy a low carbon heat network in Glenrothes. The project uses heat produced from the RWE-owned Markinch biomass combined heat and power plant and comprises an energy centre, thermal storage and a distribution network.

The award-winning project, which officially opened on 24 April 2019, is supplying reliable, low carbon heat to a range of customers in Glenrothes town centre including the Fife House Complex, Rothes Halls and the sheltered housing accommodation at Jubilee Grove. The £24 million scheme is an exemplar of partnership working to achieve emissions reductions and has potential for expansion in the future.

To help create the right financial conditions for green heat networks to succeed we will shortly lay Regulations to create a 90% relief from non-domestic rates until 2024 for networks run from renewable sources. This goes beyond the existing 50% rate-relief that is already in place for heat networks, which we will shortly introduce Regulations to guarantee until 2032. These rate reliefs help to support the business case for new networks by reducing their operational costs at the same time that revenue support for new schemes under the UK Government’s Renewable Heat Incentive (RHI) comes to an end.

We cannot rely on public investment alone to fund the development of heat networks in Scotland. It is imperative that we create a sustainable and investible market for heat networks. The Heat Networks (Scotland) Bill, along with our proposed 2024 New Build Heat Standard, already includes many of the key ingredients to make heat networks an attractive proposition for investors. We know that investors need confidence in future revenues and in order to create this demand assurance securing key anchor buildings^[11] is vital. Later this year we will consult on detailed proposals to:

• require anchor buildings in the non-domestic sector to make adaptations to become ‘heat network ready’ to connect, and
• use the non-domestic rates system to encourage such buildings to go on to use a local heat network.

These changes would provide the substantial, long-term and secure customer bases needed, and along with wider sector regulation will enable commercially viable heat networks to develop at the scale needed to meaningfully contribute to Scotland’s climate change targets.

New heat networks will need to be powered using low and zero emissions sources of heat, for example from heat pumps or surplus or waste heat. When regulation of the heat network sector is implemented (from 2023) we will only consent heat networks with low and zero emission heat sources when regulation of the heat networks sector begins. This will mean that gas CHP may not be used in new heat networks in Scotland, unless new, credible evidence emerges that such systems can provide the needed emissions savings beyond 2023^[xlii]. From that time, existing, fossil fuel powered heat networks will be required to decarbonise upon replacing their heat generation assets. The remainder of our fossil fuel based existing networks will be required to decarbonise by 2045 at the latest as required by our climate change targets.

We will provide support to existing schemes by working in partnership with the sector to develop Decarbonisation Plans and to trial their implementation, subject to Scottish Government budgets.

There are two significant examples in Scotland of heat being used from energy from waste (EfW) plants, with Shetland Heat Energy & Power being one of the largest networks in Scotland and a new network being developed to provide heat to Shawfair Town from Millerhill in Midlothian.^[xliii]

Such projects have been instrumental in the growth of heat networks in Norway. It is important that we learn from this, given the scale of the challenge in Scotland’s buildings sector. We have already set out in Scotland’s Fourth National Planning Framework: Position Statement^[xliv] that a potential change to planning policy will be to encourage applications for energy from waste facilities to provide a connection to a heat network. Alongside this, we will consult in 2021-2022 on whether there is need for further regulatory measures or support measures to increase the utilisation of waste or surplus heat, for example from Energy from Waste plants, to be supplied and/or used through heat networks.

To help identify and build a pipeline of heat network projects we will develop a Heat Network Investment Prospectus in 2021, which builds on the NCA, to identify key strategic opportunities for heat network development in the 2020s. This investment prospectus will help to guide our capital investment and will underpin the development of LHEES.

Heat networks are technically complex infrastructure projects requiring a range of specialist expertise. In order to drive projects forward, this year we will re-establish the Heat Networks Partnership to act as a key mechanism for supporting the development of a pipeline of projects across Scotland, co-ordinating support across the public sector, identifying and nurturing opportunities for new heat networks and considering the options for decarbonising existing fossil fuel powered networks.

Summary of action we will take:

38. Consult on the use of sections 44 and 63 of the Climate Change (Scotland) Act 2009 to introduce mandatory connections for large and publicly-owned buildings in next Parliament.

39. Introduce a requirement through the 2024 New Build Heat Standard for new buildings being constructed to connect to existing heat networks, when they are located within a Heat Network Zone.

40. Consult on how new powers under section 15 of the Non-Domestic Rates (Scotland) Act 2020^[xlv] could be used to de-risk investment and drive net zero behaviour, including connections to heat networks.

41. Develop a set of common technical standards for development and operation of heat networks across Great Britain which will help support the development of skills and the sector’s supply chain.

42. Create a new District Heating Relief of 90% to 2023/24 for new District Heating networks powered by renewable sources, waste heat or energy from waste.

43. Include heat networks in our ongoing programme of reviewing Permitted Development Rights (PDR) and, subject to the findings, lay Regulations.

44. We will consult in 2021-2022 on whether the need for further regulatory measures or support measures to increase the utilisation of waste or surplus heat, for example from Energy from Waste plants, to be supplied and/or used through heat networks.

45. Publish a Heat Network Investment Prospectus during the next financial year that will demonstrate the size and location of heat network opportunities across Scotland, as well as information on the decarbonisation requirements of existing networks in Scotland.

46. Repurpose the Heat Network Partnership in 2021 with a refreshed membership and remit focussed on pipeline development and subsequent delivery.

Questions

33. What evidence can you provide on the potential for heat networks in Scotland that can help inform a new ambition for deployment within the final Heat in Buildings Strategy?

34. What evidence can you provide on the potential for heat derived from energy from waste to qualify as low or zero emissions?

35. What views do you have on mechanisms to support this and the use of wider sources of waste heat?

36. With the sustainable market for heat networks described above in place by the early-2020s, are there any further gaps that must be filled to support subsequent delivery of heat networks? If so, what are these and are there particular types of organisation that would be key in filling these?