Heat Networks (Scotland) Bill: BRIA

Options

Option 1 - Not legislating

Option 2 - Lighter-touch legislation (e.g. the introduction of a Heat Network Licensing system only)

Option 3 -Heat Networks (Scotland) Bill, as presented

Sectors and Groups Affected

35. The Scottish Government commissioned KPMG^[8] to undertake a range of specialist evidence gathering activities to supplement the existing evidence around the potential impacts of the Bill. The key impacts that have been identified can be categorised as follows:

• Consumers:
  • Consumer pricing and bills - the potential for changes in the levels of consumer bills.
  • Consumer disruption from installation - the potential for increased one off disruption for consumers stemming from an increase in the number of heat network developments.
  • Consumer service offering - the potential for changes in the services offered to consumers, for example changes in the availability of tariff types, services and technologies.
  • Consumer health and wellbeing - Potential for increases in health and wellbeing from policy targeted at reducing fuel poverty.
• Local Authority and Government:
  • Development costs of a heat networks regulator - The set up and administrative costs which would be required in order to develop any new heat networks regulator to deliver the new regulatory regime. Including:
    • Development and delivery of any licencing regime
    • Development and delivery of a heat network consenting process
    • Delivery of facilitator role
  • Development costs of a heat network consenting process – the set up and administrative costs which would be required in order to resource any team that would be issuing heat network consents.
• Business:
  • Development and operating costs - Potential for increase in development and operational costs for business stemming from specific technical requirements within the licence.
  • Socio-economic assessments - costs of developing and submitting project specific socio-economic assessments alongside the application for consent of any new heat network developments.
  • Licensing process - Costs of application fees for licence within the new heat network licensing scheme, as well as preparation and submission time.
  • Unintended licence consequences - potential consequences stemming from the inclusion of a single licence regime covering the design through to operation for multi-site operators. With individual licences delivered at organisation level there could be potential for single problem specific sites to risk licence revocation.
  • Market dynamics - The potential for changes in the number and concentration / market power of participants within the market due to higher barriers to entry.
  • Deployment - Changes in the deployment and number of heat networks installed and operated, due to the overarching support provided to heat networks from the wider regulatory package.
  • Connections - The potential for the regulation to lead to changes in connections for waste heat providers, due to better facilitation and mediation from local authorities with developers and producers of waste heat.
  • Essential services companies - Potential impacts on other essential services companies such as retail energy suppliers, including decreases in provision of energy and subsequent revenues for energy suppliers from an increased deployment of households switching to heat networks.
• Wider Society:
  • Carbon savings - Reductions in carbon emissions from the incremental increase in deployment of heat networks.
  • Wider economic and job impacts - Wider economic impacts from policy stemming from increases in deployment of heat networks and potential impacts on the number of jobs.

Benefits

Option 1 - Not legislating

36. Heat network deployment is expected to increase even if there is no legislation. Figure 1 shows the three potential deployment scenarios identified by KPMG. They estimate that currently, in the absence of legislation, Scotland could meet the expected low scenario of around 3.4 TWh of heat supplied by heat networks in 2050. However, the Scottish Government is committed to encouraging greater deployment of heat networks in Scotland, in pursuit of our climate change ambitions.

Source: KPMG

Option 2 - Lighter-touch legislation (i.e. the introduction of a Heat Network Licensing system only)

37. Overall, it is expected that this option would result in benefits arising to consumers, businesses and the wider society.

38. For consumers, evidence collated by KPMG suggests that heat networks could provide bill savings, potentially ranging up to 36%, with a medium potential saving of around 17% or 1.29 p/kWh in 2019. However, these savings will depend significantly on the scheme, household type and future changes in energy prices. For example, larger networks are able to generally create higher cost savings, due to their lower average cost of development and operation, driven by factors such as more consistent demand, storage potential, renewable usage and available business models.

39. KPMG also considered the potential for increases in bills. However, the introduction of legislation is not expected to lead to a material cost increase for businesses and therefore there is limited evidence that there would be an increase in prices for consumers from these proposals.

40. In order to understand the potential aggregate cost savings it is important to assess the potential impact on heat network deployment.

41. For businesses the lighter-touch regulation is expected to support the deployment of heat networks through standardisation and increasing consumer trust and engagement and consumers likelihood to connect. With the introduction of Option 2 it is expected that the medium scenario is achievable with 7.0 TWh met by heat networks. This would represent an incremental increase of 3.6 TWh in heat supply compared to Option 1.

42. Given the additional deployment of heat scenarios it is estimated that by 2050 the aggregate consumer bill savings could be in the region of £46 million per year (in 2019 prices).

43. As well as impacting on consumer bills, the increase in deployment is expected to lead to cost reductions for business through "learning by doing". A 2018 study by the Carbon Trust^[9] examined how through increased construction of physical assets and the expenditure of financial resources, learning can facilitate cost reductions for industry which might not otherwise been achieved. The report highlighted five key areas which could lead to cost reductions:

• Financing: Access to financial capital and processes related to the formulation of administrative, purchasing, planning and legal agreements.
• Supply Chain: Elements pertaining to the existence of a competitive supply chain of industry stakeholders and the multiplying effects of increased competition.
• Infrastructure: Built environment elements which facilitate the operation of heat networks.
• Standardisation: Benefits as heat networks begin to mature and systems, prices and designs become standardised.
• Sites: Better understanding and exploitation of the individual complexities of heat network sites.

44. By directly increasing the deployment of heat networks it is expected that there would be savings in CO₂ emissions, due to the potential for heat networks to provide heat at a lower carbon intensity than heat sources in a counterfactual scenario. Heat networks generally use a variety of heat sources with varying carbon intensities and therefore the emission savings are dependent on the fuel mix and the counterfactual heating source for individual schemes. KPMG's review of evidence suggest carbon savings could be in the region of 0-23% for each heat network.

45. If it is assumed that the 3.6 TWh of heat that is being met by heat networks in 2050 due to Option 2 was currently being supplied by gas boilers, then the carbon emission savings of moving to a heat network could reach 0.1 Mt per year.

46. Stakeholders have also highlighted the potential improvement in local air quality stemming from an increase in deployment of heat networks and the avoided combustion of fossil fuels from the counterfactual heat source in populated areas. However, the evidence is insufficient as a number of studies have highlighted potential negative effects, such as studies into the effects of CHP in populated areas.

47. It is expected that the increase in deployment arising from Option 2 would lead to additional jobs, revenues and business opportunities for those companies and individuals involved in the operation of these technologies. These opportunities could arise from areas such as:

• Specialist consultants, designers, architects and developers;
• System controls, sensors and heat modelling;
• Equipment manufacturers;
• Installation, civil engineering and drilling engineers;
• Maintenance; and
• Supply chain.

48. However, a secondary impact of the increase in heat network deployment is a redistribution of revenues with essential services companies seeing a reduction in heat demand of 3.6 TWh by 2050, potentially leading to reductions in employment. Consequently it is unlikely there will be a significant net jobs impact at a Scotland level but the impact at a local level will depend on the location of the heat network companies.

Option 3 - Heat Networks (Scotland) Bill as presented

49. It is expected that Option 3 will result in similar benefits as identified under Option 2, including potential consumer bill savings, business savings through 'learning by doing' and carbon emission savings. However, deployment levels of heat networks are expected to be higher and therefore the aggregate benefits would be expected to be higher under Option 3.

50. Given the measures within the Heat Networks (Scotland) Bill it is expected the regulations will help to reduce demand risk while also reducing competition with other technologies. Consequently, it is expected that the high scenario in Figure 1 is achievable, with 9.6 TWh met by heat networks in 2050. This represents an incremental increase of 6.2 TWh in heat supply compared to Option 1.

51. Using this higher level of heat network deployment the potential aggregate consumer bill savings are estimated at £80 million per year by 2050 (in 2019 prices), while carbon emission savings could reach 0.3 Mt per year.

52. An additional benefit of Option 3 stems from the facilitation function for waste heat connections. Stakeholders have highlighted how there is potential to work towards bridging parties across contractual hurdles, particularly through mediation from an independent third party. Consequently, facilitation is expected to lead to greater connection of waste heat for heat networks.

Costs

Option 1 - Not legislating

53. This option presents no implementation costs.

Option 2 - Lighter-touch legislation (i.e. the introduction of a Heat Network Licensing system only)

54. The estimates for the financial implications of Option 2 are based on the assumptions within the Financial Memorandum, with total costs over the initial 10 year period provided in Table 1.

Table 1 - Total costs of Option 2 over 10 years in nominal prices

Scottish Administration	£1,046,179 - £7,103,372
Other bodies, individuals and businesses	£6,683,785 - £13,799,305

55. Alongside the financial implications of the Bill, stakeholders have suggested that there is a potential for non-monetary costs for consumers associated owing to the potential for increased disruption from capital projects needed for implementation of the networks. As with other utilities, development comes with granting land access rights which could cause issues such as traffic disruption, noise pollution, road and path closures and the disruption from having to allow heat network operators access to private property. An increase in heat network deployment from Option 2 could lead to an increase in such negative impacts, leading to costs to consumers and the local area.

Option 3 - Heat Networks (Scotland) Bill as presented

56. The financial implications of Option 3 are provided in detail within the Financial Memorandum, with a summary provided in the table below.

Table 2 - Total costs of Option 3 over 10 years in nominal prices

Scottish Administration	£5,467,713 - £20,400,142
Scottish Local Authorities	£15,872 - £47,617
Other bodies, individuals and businesses	£24,472,191 - £94,567,569

57. As with Option 2, there is the potential for non-monetary costs for consumers associated with the potential for increased disruption from capital projects. Given the increase in heat network deployment is greater for Option 3 than Option 2 these non-monetary costs are expected to be higher under this Option.