Heat networks delivery plan

Chapter 3: Regulatory regime: Heat Networks (Scotland) Act 2021

In February 2021, the Scottish Parliament unanimously passed the 2021 Act which is a first of its kind in the United Kingdom. It aims to accelerate the deployment of heat networks in Scotland through the introduction of a regulatory system aimed at boosting confidence in the sector and providing greater certainty for investors.

The 2021 Act introduces:

• building assessment reports (BAR): a requirement relating to non-domestic buildings to assess their suitability to connect to heat networks. This applies to the public sector and may, with secondary legislation, extend to other non-domestic buildings
• heat network zones: requiring the review and designation of areas particularly suitable for heat network development and operation across Scotland
• heat network licences: regulating the market so that homes and businesses are supplied by solvent, fit and proper operators, while requiring networks to be developed and maintained to high standards
• heat network consents to build or operate heat networks: including creating a bespoke system of scrutiny for new networks, to ensure that they can contribute to climate change and fuel poverty targets, before they are consented for development
• heat network permits: attracting new, and lower cost investment in the sector by awarding these long-term permits to develop and operate in the most opportune areas. This will help provide some longer term assurance about the customer base available
• powers for licence holders: granting 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
• a heat networks assets schedule and transfer scheme: 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

The 2021 Act also includes a number of wider aspects, such as targets and reporting covered in other chapters.

We will work with the heat networks sector and local government as we develop detailed regulations and aim to put in place a functioning regulatory system, subject to public consultation, by early 2024.

Driving growth

Overall the 2021 Act provides a clear signal to the heat networks market, property developers and the wider heat supply industry that heat networks are set to become a core component of the nation's heat supply. It acts as a central point of focus.

Beyond that, each of the 2021 Act's provisions is a building block for growth. Licensing could help better govern and de-risk the sector as well as provide rights to heat network operators which would be similar to those of other utilities, thus helping to reduce costs; zoning and consenting will guide development to the most strategically viable locations; and permits will provide long-term certainty to operators. Table 4 over the page provides a summary of how each provision will support growth of the sector.

Implementing the 2021 Act

The 2021 Act is comprehensive in coverage and is intended to provide a flexible framework which can grow in line with the sector, being adapted over time as required. As such, on day one we do not envisage needing to switch on all provisions and expect the full regulatory regime to take time to fully establish as the sector grows.

Taking into account the feedback from the consultation, we plan to bring forward regulation in four packages to establish a functioning regulatory regime for heat networks in Scotland. Table 3 below sets out broad timelines for consultation.

Table 3: Packages of development of regulatory regime under the 2021 Act

Package	Aspects of act covered	Consulting in
1	building assessment reports & heat network zoning	Summer 2022
2	consenting and key heat network assets	Early 2023
3	permitting and local authority cost strategy	Early 2023
4	licencing and powers of licence holders[9]	Early Summer 2023

More detail on each of these aspects is set out below.

Table 4: How does the act support growth of the heat networks?

Building assessment reports

• Support growth by providing vital data for heat network zoning and initiate consideration for connection to a heat network by non-domestic buildings

Heat network zones

• Identify the opportunity areas to parties interested in developing a heat network
• Ensure that heat networks are developed in most appropriate areas to maximise benefit for investors but more importantly to drive the prices down for its users

Heat network licences

• Improve users’ trust in heat networks
• Ensure that existing heat networks move to zero carbon heat generation in a gradual and managed way so that they are part of our net zero future
• Provide certainty to investors that only fit and proper companies operate heat networks in Scotland

Heat network consents

• Through community engagement reports ensure local communities are aware of and influence any plans for heat network development which can support securing future users for heat networks
• With scrutiny of proposed projects ensure that they are in line with local and national objectives therefore flagging up any challenges in the process and supporting them to rectify any problems in the application process which should minimise costs of new developments in later stages 

Heat network zone permits

• Support growth by providing an exclusive access to consumer base within a heat network zone which will help with securing sufficient heat demand to use economies of scale and drive down the cost of investment
• Help in driving investment to high opportunity areas and increasing the speed of heat network deployment in Scotland

Powers for licence holders

• Level the playing field with other utilities, by ensuring heat networks have the same powers as other regulated entities

Assets schedule and transfer scheme

• Ensure transparency of responsibilities in an event of heat network ceasing to operate which should provide certainty to the potential customers who rely on security of heat supply

Building assessment & zoning

To be efficient, economically viable and deliver value for money, heat networks need to be well located. 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.

In order to identify appropriate anchor buildings (see Chapter 2) and inform heat network zoning, Part 5 of the 2021 Act places a requirement on persons either owning or with interest in a non-domestic building to prepare a building assessment report, 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.

Part 3 of the 2021 Act requires the review and designation of areas particularly suitable for heat network development and operation across Scotland.

Together Parts 3 and 5 of the 2021 Act are a key first step in developing a long term project pipeline for heat network development in Scotland and as such we believe they should be introduced prior to other elements of the regulatory package in the 2021 Act.

There was an extremely high level of support from respondents to the consultation on the Draft HNDP to our proposal to extend building assessment reports to non-public sector non-domestic buildings.

We will bring forward detailed proposals for consultation on building assessment reports, including proposals for which buildings will require them, and heat network zoning by Summer 2022, for introduction in early 2023. This will include draft regulations if appropriate. We will also develop Guidance for building assessment reports and consult on this in 2022.

In addition, we have shared a technical methodology for developing LHEES with local authorities, which will be updated to ensure it includes relevant requirements from the 2021 Act for reviewing areas that may be suitable for heat network development. We have worked in partnership with COSLA to develop a statutory framework for LHEES that places a duty on local authorities to produce Strategies and Delivery Plans. We will publish guidance setting out how to produce an LHEES, which will be based on the technical methodology and developed in consultation with local authorities. During 2022 we will develop and consult on further guidance for the designation of heat network zones, building on any LHEES guidance.

Licensing, consenting and permitting

Licensing and consenting will be the mainstay of the regulatory system for heat networks in Scotland, helping to ensure a high quality and efficient service as well as ensuring that networks are well sighted and aligned with the delivery of both national and local objectives.

Licences will be required by companies wishing to develop and operate heat networks in Scotland. A single licence will be required per company operating in Scotland. Consents will be needed for each individual heat network. It is anticipated that both licences and consents will be required by both new and existing networks, with exemptions and abeyances in place to ensure the system is proportionate.

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 establishing a mechanism to identify, monitor and enforce any requirements.

We are currently working with the UK Government to agree common technical standards for development and operation of heat networks across Great Britain.

Heat network permits are intended to help de-risk investment by providing a degree of certainty with regards to the likely customer base. It is envisaged that permits would be awarded, following a competition, to a single, winning bidder providing exclusivity for a specified number of years.

We sought views on aspects of licensing, consenting and permitting during the consultation on the draft version of this Plan. Responses to that will contribute to the development of detailed proposals which we will bring forward for consultation by early 2023 (for consenting and permitting) and early Summer 2023 (for licencing). The aim is to have established these processes including a licensing authority by early 2024.

Transfer schemes

As heat networks grow, more customers will be reliant on them for their heat and, as such, an appropriate framework to ensure continuous service for users needs to be put in place.

The 2021 Act introduces a power for the Scottish Ministers to make a transfer scheme under certain circumstances. The transfer scheme would allow the specified third party (such as a local authority or person appointed by the Scottish Ministers) to operate a heat network following the former operator ceasing to do so. Transfer schemes will be crucial both in terms of ensuring continued supply in the event an operator ceases to operate but also to enable the smooth transition of networks between operators where the network is subject to a heat network zone permit.

Transfer scheme provisions can sometimes be referred to as "supplier of last resort" provisions. However, the 2021 Act would only cover certain circumstances and, therefore, is not comparable to powers available in other regulated sectors.

The development of this transfer scheme will be integral to work on the consents system (including provisions in respect of the register of key network assets). The transfer scheme will be in addition to any provisions relating to insolvency provided for in UK legislation. These elements of the heat networks regulatory system will be consulted on in early 2023.

Local authority cost strategy

We will prepare a strategy setting out the costs to local authorities in relation to their duties under the 2021 Act. The final strategy will depend on the full detail of the regulatory system. As such, we will publish a final Local Authority Cost Strategy in line with our timetable set out above and before the regulatory system commences operation in early 2024.

We will work with local authorities and relevant stakeholders to ensure that appropriate resource is provided in order to deliver the ambitious provisions of this 2021 Act, such as heat network zoning.

Decarbonising existing heat networks

As set out in the Heat in Buildings Strategy, from the point that the heat network legislative framework is in place, new heat networks, and any additional heat plant(s) for extensions of heat networks, will need to be powered using low and zero emissions sources of heat, bar potentially a percentage of back up and peaking heat (see next section of this Chapter).

However, many existing heat networks will continue to use fossil fuels as their main source of heat. These systems will need to decarbonise over time in order for us to live within our emission limits.

Pathways and timescales for decarbonising systems will vary between systems, but planning and advanced preparation will be important. As such, we propose that licence holders who operate existing networks in Scotland will be required to prepare and then implement a Heat Network Decarbonisation Plan. The Plan would set out the journey each network will take to reduce greenhouse gas emissions in line with the emission reduction targets – covering both efficiency improvements and replacement of heat sources where these are not already low and zero emission. These could also potentially be expected to consider the impact of these changes on consumer costs – a factor in the depth and rate of fuel poverty.

We propose that Heat Network Decarbonisation Plans should be produced and approved within an appropriate period of time. This may be anything between 1 and 3 years of a licence being granted depending on the size of the network and key relevant circumstance. Plans will include milestones for making significant reductions in emissions by 2030 and 2035.

A large majority of consultation respondents referred in some way to cost being the key challenge facing the decarbonisation or efficiency improvement of existing networks. Upfront costs of network decarbonisation were highlighted as a concern as these might be passed onto customers. In response to this, the recently launched Heat Network Fund (see Chapter 6) will provide grant support for a range of heat networks projects including the decarbonisation of existing fossil fuel heat networks. The Heat Networks Support Unit, once established, will include support for projects decarbonising existing networks.

To support the preparation of Heat Network Decarbonisation Plans, in 2022 we will commission work to test and develop an approach to developing such plans, with a view to piloting them in due course.

Low and zero emissions requirements of new heat networks

We have previously set out in our Heat in Buildings Strategy and Draft Heat Networks Delivery Plan that from the time that the legislative framework is in place, new heat networks, and additional plants for extensions, will need to be powered using low and zero emissions heat sources. Heat from sources such as surplus or waste heat, electric heat pumps, solar thermal or plant using low carbon or green hydrogen would be considered low and zero emissions.

However, feedback from existing networks that are aiming to deliver zero emissions systems has highlighted that for many such networks it is currently necessary to include fossil fuel back-up systems, which in some cases also provide heat at times of peak demand on the networks.

Therefore, in order to ensure that networks can remain resilient and affordable, we will require that, from the point that the regulatory system is in place in 2024, the vast majority of heat for new networks is to be provided from low and zero emission sources. However, in the near term a small percentage of annual heat provided through some networks may need to be sourced from natural gas for the purposes of peaking and backup. The exact percentage will be determined on a case by case basis and the need will have to be evidenced, while showing other options have been explored. New networks would be expected to have a plan as to how that percentage is expected to reduce over time, with significant progress made by a set year. This could for example be by 2035.

We will commission independent advice to support the preparation of guidance on this issue. We would also propose to keep this under review considering the impact of any such approach.

We do not expect to provide the same leeway to extensions to existing networks as existing heat plant(s) may act as back-up. Therefore new heat sources in existing networks will all need to be low or zero emissions.

Consumer protection

Robust consumer protection is needed to ensure that Scottish consumers experience an equitable energy system in which all consumers have clear access to redress. Strong consumer standards will be important for heat network consumers who are locked in over the long term to a single supplier and unable to easily switch as is currently the case for gas and electricity.

Respondents to the consultation were overwhelmingly supportive of universal consumer protection irrespective of scheme size or ownership.

The 2021 Act does not provide consumer protection powers as these remain reserved to the UK Government. The UK Government has committed to legislating to implement heat networks regulation and to do so at the earliest possible opportunity. The UK Government's expectation is that all domestic and micro-business consumers of heat networks should have ready access to information about their heat network, a good quality of service, fair and transparently priced heating and a redress option should things go wrong. The UK Government has set out that Ofgem will be the heat networks regulator under the Great Britain-wide Heat Network Market Framework and that the Energy Ombudsman should take the role of the independent ombudsman service.

Both the Scottish and UK governments have agreed that alignment between the two regulatory systems is desirable. Our aim is for consumer standards introduced under the UK's Heat Network Market Framework to be incorporated into the Scottish regulatory system seamlessly. Ofgem seem best placed to act as the regulator under both Scottish and UK legislation. We continue to work with the UK Government to ensure consumer protection and licensing can both be dealt with by Ofgem in Scotland.

In the meantime, we will continue to use our capital funding programmes (see Chapter 6) to increase the number of heat networks in Scotland. We will require as a condition of grant funding that schemes, where possible and appropriate, are registered under the Heat Trust. Projects will be required to submit as part of their application that they will meet the expected level of service and quality alongside information on the complaints process. The Heat Trust is a stakeholder-led customer protection scheme which sets a common standard in the quality and level of customer service expected from heat suppliers. It provides an independent process for settling complaints between customers and their heat supplier through the Energy Ombudsman. The standards of service have been designed to be comparable to those required by electricity and gas suppliers.

As we develop regulations to implement the 2021 Act, we will engage with consumer-facing organisations including advice bodies, the Energy Consumers Commission and, following its establishment, Consumer Scotland in order to gain insight on the experience of consumers of heat networks. This will help inform our engagement with the regulator and other key stakeholders and ensure that any issues for consumers are fed in quickly. Additionally, we are working with the UK Government so that the Heat Networks Consumer Survey provides an understanding of consumer concerns and operating experiences for the first time in Scotland. The results of this work are expected to be published in Summer/Autumn 2022.