Heat Networks Delivery Models

2. Overview of policy & regulatory landscape

Scotland’s climate change legislation sets statutory targets for emissions reductions: 75% reduction by 2030, 90% reduction by 2040, and net zero by 2045^[9]. Meeting these targets requires action across all sectors of the economy.

In relation to the built environment, the interim targets require approximately 1 million homes and the equivalent of 50,000 non-domestic buildings to be converted to zero emissions heating systems by 2030^[10]. The Heat in Buildings Strategy identifies heat networks as one of a number of no/low regret strategic technologies for meeting this goal (alongside energy efficiency and individual building heat pumps).

There are an estimated 1,080 heat networks in Scotland, which account for approximately 1.4TWh of output and 1.8% of current non-electrical heat consumption by buildings^[11]. Although more recent projects (supported by subsidy from Scottish Government via grant funding and/or the Non-Domestic Renewable Heat Incentive) have introduced low carbon heat sources, most heat networks in Scotland still rely on gas as their primary heat source.

Existing networks have been developed by a combination of public and private sector initiatives. In the public sector, local authorities have led on many schemes to serve their own buildings and in some cases to address local fuel poverty. Other public sector initiatives tend to be site-specific, e.g., to serve university campuses or hospital sites. Most public sector networks are essentially self-supply arrangements, though some local authority-led schemes involve an element of supply to third-parties. Local authorities have the necessary statutory powers to develop and operate heat networks. Other public bodies are more limited in this regard, for example due to inability to borrow, or to trade. All public bodies are subject to public procurement law, which constrains how they develop their own schemes, partner with the private sector, or take supplies from third-party networks. Subsidy control and competition law are also relevant legal considerations.

Private sector development of heat networks to date has largely been driven by planning policy – for example in London where new developments are required to install heat networks or connect to existing networks – or resulting from a public procurement, for example where a private sector ESCo operates a heat network on a concession basis.

Until recently, the heat networks market has been largely unregulated, compared with other utility-type infrastructure such as electricity, gas, water and sewerage. Market growth has been slow, characterised by relatively small projects linked to ad-hoc development opportunities, and with very limited expansion of networks beyond their initial phase. Despite good examples of heat networks reducing energy costs to building owners (including in areas of fuel poverty), and carbon savings, progress has generally been ad-hoc and opportunistic, rather than based on long-term strategic planning.

Scottish Government has recently introduced a regulatory framework via the Heat Networks (Scotland) Act 2021 (“HNSA”). The HNSA includes statutory targets for deployment of heat networks: 2.6TWh of output by 2027 and 6TWh of output by 2030 – 3% and 8% respectively of current heat demand – and has recently consulted on a 2035 target (7TWh, equivalent to 9% of current heat demand). The statutory targets are informed by a range of evidence, including the UK Climate Change Committee^[12], the Scottish Government’s First National Assessment of Potential Heat Network Zones^[13] and work to date by local authorities on the development of Local Heat and Energy Efficiency Strategies (LHEES)^[14].

As well as setting statutory deployment targets, the HNSA also makes provision for a range of measures to promote market development, including:

• a licensing system for heat network operators;
• a requirement for public sector and certain other non-domestic building owners to assess the suitability of their buildings for heat network connections;
• a requirement for local authorities to review their areas and consider designating heat network zones;
• a consenting process for the operation of heat networks and the construction of new ones;
• a permitting process, to allow for licensed heat network operators to have exclusive rights over certain heat network zones; and
• a process for identifying key heat network assets and to allow for an orderly transition of heat network operators if required.

These measures will be introduced by secondary legislation and are expected to be in place by 2024.

In addition to the introduction of regulation via the HNSA and LHEES, the Scottish Government has published a Heat Networks Delivery Plan, which brings together wider policy measures intended to support investment, including:

• First National Assessment of Potential Heat Network Zones;
• Heat Networks Support Unit – pre-capital development funding and support;
• Scottish Heat Networks Fund - £300m capital fund (available until May 2026);
• National Planning Framework (NPF4) – supportive policy related to new developments;
• Rates relief – 90% relief from non-domestic rates for new heat networks with renewable heat sources (until March 2024), and 50% relief for all heat networks until 2032;
• Heat in Buildings Bill – consultation in advance of the Bill to be introduced in Autumn 2023, and expected to set out timescales by which different tenures of buildings must meet minimum energy efficiency standards / install zero emissions heating systems. The consultation may propose additional measures to provide demand assurance for heat networks – we are not sighted on details; and
• Capital funding programmes – e.g., Green Public Sector Estate Decarbonisation Scheme and Social Housing Fund – which can support the cost of adapting buildings to enable connections.

In parallel to the above developments, a market framework is currently being introduced by UK legislation^[15], elements of which will apply in Scotland. This will provide additional measures to protect customers of heat networks in Scotland, where the Scottish Parliament does not have the required legislative powers.

The market of heat network installers/operators active in Scotland (together with the associated supply chain) is relatively small compared to heat network markets in other countries, particularly Nordic and Scandinavian nations, and when compared with other UK infrastructure markets. Policy, regulation and funding, both within Scotland and the UK, are supporting market growth. Given the mix of devolved and reserved powers, heat networks policy and regulation in Scotland shares some features in common with the wider UK (e.g., in relation to consumer protection and energy market regulation), but is generally being developed separately. In order to support investment in Scottish heat networks, it is critically important that policy and regulation are developed to support market growth, providing an investment environment in Scotland that is at least as attractive to the market as that in the wider UK. Given the relative sizes of the Scottish and wider UK markets, this is recognised as an ongoing challenge.