Heat Networks Regulation Working Group: recommendations

Key Findings

Regulatory Framework

13. The Group agreed that the heat networks market would benefit from the introduction of a Regulator.

14. It was neutral on which body would be best suited for this role, but could see sense in a Scottish Regulator given that a counterpart in the wider UK has not been confirmed, the accelerated legislative timelines in Scotland and the additional functions likely to feature in the Scottish Regulatory framework.

15. However, the Group also agreed that should there be a Scottish Regulator, there should be alignment with any counterpart in the rest of the UK, as far as possible.

16. The Group supported the principle of introducing licensing to the sector, provided that this was balanced by sufficient measures to support developers and that licenses did not unduly burden smaller operators. Some Group members also advocated for a project-specific license to tailor standards and fees.

17. The Group briefly discussed Local Heat and Energy Efficiency Strategies (LHEES) and there was consensus that the requirement to produce Strategies should be made a statutory duty, subject to appropriate support for Local Authorities being put in place at a national level. It was also noted that, amongst others, heat network developers should be involved in the development of LHEES methodology to ensure that opportunities were fully identified and deliverable.

18. The Group felt that the consenting proposal should be reconsidered in order to reduce burden on both local authorities and network developers, and to reduce the risk of Local Authorities effectively self-regulating.

Addressing Risk

19. The Group welcomed the proposed introduction of LHEES and supported them being made a statutory duty. There was recognition that the creation of Heat Network Zones through LHEES would be a positive step for the market.

20. The Group also requested greater clarity over how heat network project identification and appraisal will be carried out as part of LHEES.

21. Despite the introduction of LHEES being welcomed (and despite heat network developers not being adverse to owning a degree of risk), they would not alone significantly change the risk profile for investors. More is needed within the framework of government support and legislation to support the growth of load which the market currently perceives to be uncertain and risky.

22. There were a number of suggestions on how to de-risk investment, and the Group felt that a combination of proposals and policies would be required to sufficiently de-risk demand. Such as:

• For heat network developers and other organisations to be able to compete to be awarded exclusivity within identified heat network zones;
• An obligation to connect to a heat network being placed on large anchor load non-domestic buildings within identified heat network zones to address decarbonisation of existing buildings as well as new build;
• That Scottish Planning Policy more strongly encourage connection to heat networks, both in new and existing buildings. The Scottish Government was asked to consider the 'London Hierarchy' model;
• Guarantees such as the 'demand assurance' model;
• Subsidy (to help compete against gas heating) for low-carbon inputs and some strategic infrastructure (e.g. joining of different schemes); and
• Using public procurement, taking account of total lifecycle costs, to ensure connections to heat networks.

23. It was agreed that statutory undertaker rights should be conferred on heat network developers and that this would be a beneficial change. However, it was noted that this, on its own, would not sufficiently de-risk investment in heat networks.

Consumer Protection

24. The Group had limited time to discuss in detail the specific consumer standards that should be introduced on a statutory basis. The Group was also challenged as it did not yet have clarity over who would be delivering any consumer standards in Scotland in future.

25. The Scottish Government assured that it recognised the extensive work done by Citizens Advice Scotland (CAS) and the Heat Trust in this area, as well as accepting the recommendations of the Competition and Markets Authority (CMA).

26. Key reccomendations were as follows:

• The Group wants consistency of service standards across the UK, particularly if there will be separate regulators in Scotland and the rest of UK, in which case the Working Group recommended they are broadly in alignment.
• Pricing was identified as a one of the key issues, but the Working Group did not reach a conclusion on whether and how this should be regulated. However, publication of tariffs (including standing charges) and benchmarking were generally seen as being beneficial, while not-for-profit schemes were felt by some to likely hinder private sector investment.
• The Group felt that clearer communication from the Governments on the benefits of heat networks is essential to support uptake – particularly in light of the changes which will need to occur in response to the global climate emergency.