Heat Networks Delivery Plan: review report 2024

4 Progress in developing regulations to support heat network development

4.1 Driving growth through the Heat Networks (Scotland) Act 2021

4.1.1 The 2021 Act – the first of its kind in the UK – aims to accelerate the deployment of heat networks in Scotland through the introduction of a regulatory system that boosts confidence in the sector and provides greater certainty for investors.

4.1.2 We committed in the 2022 HNDP to working with the heat networks sector and local government in developing detailed regulations to put in place a functioning regulatory system. We are bringing forward regulation in four packages. The first package on building assessment reports and heat network zoning has been completed (see Section 4.2). The other packages to establish this regime have been impacted by changes in the wider context, including the Energy Act 2023 and regulations being developed to implement it.

4.1.3 The UK Energy Bill was introduced in the UK Parliament in July 2022 and received royal assent in October 2023. The Energy Act 2023 lays the foundations for the heat network market framework by introducing powers to:

• Regulate the market, including consumer protections for consumers in Scotland, which will be underpinned by an authorisation regime^[13].
• Appoint a regulator – Ofgem – for the GB-wide authorisation scheme.
• Introduce step-in arrangements in the event of heat network insolvency, ensuring consumers continue to receive supply of heat.
• In England and Wales introduce powers to create rights and powers for licensed heat network developers – the 2021 Act does this in Scotland.

4.1.4 Both the Scottish and UK governments have agreed that alignment between the two regulatory systems is desirable. Our aim is for GB-wide protections for heat network consumers and the authorisation regime that underpins these to work seamlessly with the Scottish regulatory system.

4.1.5 We have worked closely with the UK Government to ensure consumer protection (see Section 4.6) and licensing can both be dealt with by Ofgem in Scotland. The UK Government included powers in the Energy Act 2023 for Ofgem to be appointed as the Scottish licencing authority.

4.1.6 In order to achieve a seamless experience for both heat network operators and consumers, we have amended the timetable for the development of Scottish regulations to more closely align with UK regulations. In sections 4.2 – 4.5 we set out progress on the regulatory packages under the 2021 Act and, where possible, timetable adjustments for the remaining packages.

4.2 Building assessment & zoning

4.2.1 To be efficient, economically viable and deliver value for money, heat networks need to be well located. For district heat networks with a central heating source (such as fourth generation networks), this means being in areas with sufficient heat demand and density to enable optimal performance. It also means securing appropriate connections to “anchor” the network and provide a degree of demand certainty.

4.2.2 In order to identify appropriate anchor buildings (see Glossary) and inform heat network zoning, Part 5 of the 2021 Act places a requirement on relevant persons owning or having an interest in a non-domestic building to prepare a building assessment report (BAR), to consider the viability of connecting the building to a heat network and then assess the period for which any system providing thermal energy to the non-domestic building is expected to continue to operate effectively and efficiently.

4.2.3 In 2023, we introduced regulations^[14] further defining the duty on the public sector^[15]. From 30 May 2023, owners of non-domestic public sector buildings are required to produce^[16] a BAR as soon as reasonably practicable for each of their buildings, to check if they are suitable to connect to a heat network. The templates and guidance^[17] that we published to support these assessments limit the questions to be answered if the annual heat demand of the building is known to be less than 73 MWh per year.

4.2.4 We continue to encourage the Scottish public sector^[18] to complete their BARs. To date^[19] 144 BARs have been submitted. We are exploring with the Improvement Service development of an online platform to make it easier to submit BAR information, and for local authorities and the Scottish Government to analyse it.

4.2.5 The 2021 Act provides powers to extend the requirement to undertake a BAR to other relevant persons, such as those with an interest in commercial buildings as well as the public sector. Given commercial premises comprise the majority of non-domestic buildings, it is important that we do this.

4.2.6 Receiving more BARs from the public sector will allow us to learn more about the potential for heat networks to connect and the time required to complete the BAR in practice. We will consult on extending these requirements to businesses during the next reporting period. In doing so we will also consider the approach to third sector buildings, some of which have significant heat demands.

4.2.7 The regulations we introduced in 2023 further define the duty on local authorities to:

• review for heat network zones;
• consult on the review (where appropriate) and undertake wider stakeholder engagement; and
• make a decision whether to designate the area under review as a heat network zone.

4.2.8 In order to simplify the requirements on local authorities, the LHEES guidance^[20] enables them to undertake the heat network zoning review stage through their LHEES (see Section 6 for more on LHEES), and the heat network zoning proforma provides local authorities with a flow-through process from this stage onwards. The proforma covers the receipt and consideration of building assessment reports, assessment of whether an area is “particularly suitable”, consultation with area-specific statutory consultees and the final decision of whether or not to designate.

4.2.9 As set out in Section 6.2 we are looking at proposing regulatory measures that may be applied within heat network zones. As part of this work, we will also need to consider if the heat network zone process alone is enough to apply these proposed regulations or if additional considerations will be needed prior to use of these proposed powers by local authorities or Scottish Ministers.

4.3 Licensing and powers of licence holders

4.3.1 The proposed heat network licensing regime is intended to ensure licensees are solvent, competent, fit and proper and provide their service in line with the conditions set by the licensing authority (Ofgem). There is clear overlap behind this intention and the aims of the proposed authorisations regime under the UK Energy Act.

4.3.2 It is our intention to develop a regulatory process which adds to, rather than duplicates the proposed UK authorisation system. To this end, we are developing proposals, which we will consult on during the next reporting period, to ensure that licensees are able to gain the additional powers they require for supporting works like roadworks and wayleaves.

4.3.3 The technical standards that heat network developers and operators will need to be meet will be handled by the UK regime, and so will be common across Great Britain. This will provide a simpler regulatory system for both heat network developers and operators to deal with, and for the regulator – Ofgem - which is ultimately responsible for licensing the technical standards body. This should reduce the regulatory burden and ultimately the cost to consumers.

4.4 Consenting, key heat network assets and transfer scheme

4.4.1 Heat network consents are a project specific approval process to scrutinise how new heat networks, as well as expansions to existing networks, meet local and national objectives. The consent application and determination process will allow the consents authority the opportunity to consider how the proposal will impact on the environment both generally as well as in particular on greenhouse gas emissions, and how it will contribute to meeting fuel poverty targets. In this way, it may be the tool which provides powers to ensure that the heat networks sector decarbonises in the way it must if we are to reach net-zero.

4.4.2 Given the Act specifically discusses greenhouse gas emissions, the intention is for consent only to be given to new networks which are low/zero emission (see Chapter 3 of the 2022 HNDP) and that existing networks will be required to develop and implement decarbonisation plans as part of their consent.

4.4.3 The consents process will also introduce a requirement for effective community engagement to ensure that members of a community, where a heat network is proposed, are kept informed about the proposals and what it means for them as well as providing a clear route for them to make suggestions and comment.

4.4.4 The Act also allows for the grant of Deemed Planning Permission to minimise the burden placed on heat network developers. We intend to consult on these proposals during the next reporting period.

4.4.5 Market-led step-in provisions being developed by the UK Government (see Consumer Protection section below) will apply in Scotland insofar as they relate to protecting consumers from a loss of supply of heat caused by insolvency, authorisation revocation, or technical failures. We are working with the UK Government to map the overlaps of these provisions and transfer of assets provisions in the 2021 Act.

4.5 Permitting

4.5.1 The proposed permitting regime could award a permit via competition to a single, winning bidder thereby providing exclusivity for a specified number of years. Stakeholder engagement carried out in 2023 has shown that the position of both local authorities and private developers on permitting has evolved since the passage of the 2021 Act. Concerns raised by these stakeholders include:

• fears of permitting under delivering, particularly until legislation is in place to provide greater demand assurance policy,
• concerns that the concession-style model that may accompany permitting would reduce competition and innovation in the market, and
• concerns around monitoring and maintenance, particularly in relation to heat network zone review, revocation and legal contract amendments.

4.5.2 Taking this into account we will be focusing on delivery of other parts of the regulatory regime, such as consenting and licensing, particularly until there is more clarity on the demand assurance measures being developed, including analysis of the responses to consultation on our Heat in Buildings Bill proposal (see Section 6.2).

4.6 Consumer protection

4.6.1 Robust consumer protection is needed to ensure that Scottish consumers experience an equitable energy system in which all consumers have clear access to redress. Regulation of consumer protection is reserved to the UK Government.

4.6.2 The UK Government and Ofgem jointly consulted in Autumn 2023 on regulations to protect heat network consumers under the Energy Act 2023 (see para 4.1.3). These proposals aim to provide domestic consumers with access to information about their heat network, a good quality of service, fair and transparently priced heat and a redress option should things go wrong. The UK Government has also agreed and is working with us to introduce GB-wide protections for microbusinesses and SMEs (small and medium sized enterprises) supplied by heat networks.

4.6.3 Following the Scottish Government’s recommendation to the UK Government, Consumer Scotland has been appointed to lead on consumer advocacy for heat networks in Scotland. Officials continue to work with the UK Government and Ofgem to develop the heat network consumer advocacy role as part of the heat network regulatory system in Scotland.

4.6.4 The UK Government has set out that the Energy Ombudsman should take the role of the independent ombudsman service across GB with responsibilities including investigating complaints, making judgements, requiring redress where necessary and reporting systemic issues to Ofgem.

4.6.5 In the meantime, we will continue to use our capital funding programmes to increase the number of heat networks in Scotland, and require as a condition of grant funding^[21] that schemes, where possible and appropriate, are registered under the Heat Trust - a stakeholder-led customer protection scheme.

4.6.6 We also worked with UK Government to ensure that the Heat network consumer and operator survey (2022), published in August 2023, for the first time includes the concerns and experiences of Scottish consumer and operators, as well as those of England and Wales.