Heat Networks (Scotland) Bill: BRIA

Scottish Firms Impact Test

58. Most of the heat networks operating in Scotland can be classified as small to medium size enterprises. Typically, the networks would outsource many of their activities to contractors or arms-length organisations.

59. As part of the Scottish Firms Impact Test, the Scottish Government met with 7 businesses who are involved in heat networks market in Scotland:

• Angus Biofuels
• Fintry Development Trust
• Aberdeen Heat and Power
• Highland Bioheat
• Vital Energi (University of Strathclyde Project)
• Shetland Heat and Power
• Shetland Council Waste to Energy Plant

60. The main element of the proposals that was identified to impact existing organisations in the sector was introduction of Heat Networks Licensing. Since most of the organisations consulted as part of the Scottish Firms Impact Test were small or medium size they highlighted the challenges around the capacity to handle any regulatory burden. However, all of the stakeholders were able to also identify a range of benefits resulting from Heat Networks (Scotland) Bill proposals.

Benefits:

• Licensing can offer a commercial opportunity to increase credibility of heat networks by "conferring the reassurance to customers that the Scottish Government has faith in operations".
• Licensing can also help companies in expanding their business, applying for funding and attracting new partners as they would be able to prove their ability through the licence which would significantly streamline any scrutiny process.
• Regulation of the sector would lead to standardisation in terms of technology and general practice which would benefit smaller businesses.
• Collection of data on the heat network market in Scotland through the licencing regime would give market participants a better idea of competition, potential partnership and expansion opportunities.
• Any Licensing Authority in charge of the market oversight would be able to increase the profile and credibility of the technology in Scotland.
• Requirement to be member of Heat Trust as part of the licencing regime would be welcomed by most of the businesses as it would increase consumer acceptance.

Challenges:

• Licensing and any other elements of regulation could add a disproportionately large burden of cost (compliance and administration). Those costs depending on the amount may need to be passed on to consumers which will increase the prices. The costs may even be preventative for some business to continue operations should they be too high.
• Licensing needs to be design to take account of differing business models of network operators and different circumstances such as islands or other off-grid areas. If the large amount of administration is required it may discourage growth of heat networks.
• Existing networks should not be asked to replace their apparatus to comply with new standards. Instead set of exemptions or alternative models to technical standards should be developed.
• Publication of selected number of data out of context may result in publically destroying the image of district heating in Scotland.
• Complexities with enforcing the consumer protection as in some circumstances the only client of the heat network is a housing association or local council which may result in unintended consequences if one size fits all system was to be adopted.
• Any sudden changes to funding may result in decline of growth in the sector as micro, small and medium size businesses often rely on additional support.

61. Feedback provided by stakeholders was taken into consideration when developing proposals for the Heat Networks (Scotland) Bill. In particular, the provisions regarding licensing have been developed to allow for flexibility in developing the preferred licensing process. The Bill also provides powers for Scottish Ministers to make exemptions as well as set the fees at levels that it feels are appropriate. All of those provisions were developed to ensure proportionality in any forthcoming regulation.

62. The stakeholders did not provide any monetary estimates in relation to the impacts the regulations may have on their businesses.

Competition Assessment

63. Throughout the evidence gathering activities undertaken by KPMG they considered the potential impact on market dynamics. They received limited evidence or stakeholder engagement that highlighted the risks of changes in costs or barriers to entry limiting competition within the market or leading to market exit of potential developers and/or operators.

64. However, their assessment did not consider the introduction of permits. These permits will offer the market the opportunity to be the sole heat network within a Heat Network Zone and therefore will limit the competition within an area. However, permits will be subject to a robust initial competitive process and therefore the introduction of this legislation is not expected to lead to changes in the number of suppliers looking to develop or operate networks.

"Test Run" of Business Forms

65. The Heat Networks (Scotland) Bill will not introduce any statutory business forms.