Heat Networks (Scotland) Bill: ICIA

Heat Networks (Scotland) Bill : Island Communities Impact Assessment

Introduction

1. Under the Islands (Scotland) Act 2018^[1], Scottish Ministers and other relevant authorities, including a number of public authorities, must complete an Island Communities Impact Assessment (ICIA) and take account of island issues when developing any new policy, strategy or service.

2. Section 13 of the 2018 Act states that an ICIA must:

• describe the likely significantly different effect of the legislation;
• assess the extent to which the Scottish Ministers consider that the legislation can be developed in such a manner as to improve or mitigate, for island communities, the outcomes resulting from the legislation; and
• set out the financial implications of steps taken under this subsection to mitigate, for island communities, the outcomes resulting from the legislation.

3. Although the requirement to carry out an ICIA has not yet formally begun, in line with the spirit of the Act the Scottish Government will seek to address these points in respect of the Heat Networks (Scotland) Bill.

Background

4. In September 2019, the Scottish Parliament passed the Climate Change (Emissions Reduction Targets) (Scotland) Act^[2] which has set a statutory target for Scotland to reach net-zero greenhouse gas emissions by 2045, with interim targets for 2030 [of 75%] and 2040 [of 90%].

5. Reducing the emissions caused by heating our homes and other buildings is a major challenge to reaching these targets.

6. The Scottish Government recognises this and our Programme for Government 2019-2020^[3] set out a range of actions which formed our initial response to the 'global climate emergency'. In relation to heat, commitments included:

• a draft Heat Decarbonisation Policy Statement that will be consulted on in summer 2020, setting out actions to decarbonise heat supply;
• the phase out of fossil fuel heating systems in all new homes from 2024. Similarly, our ambition is to phase in renewable and low carbon heating systems for non-domestic buildings consented from 2024;
• a new £30 million fund for renewable and low carbon heat projects; and
• the introduction of a statutory duty on local authorities to develop Local Heat and Energy Efficiency Strategies (LHEES) to identify the most suitable heat decarbonisation technologies across Scotland.

7. The Programme for Government also committed the Scottish Government to bringing forward a Heat Networks (Scotland) Bill during 2020.

8. Heat networks are a proven solution which can reduce (or remove) the carbon emissions associated with heating our buildings. Recent research by Scottish Renewables^[4] highlighted the latent potential of the heat networks market in Scotland, with a sample of 46 projects able to save 100,000 tonnes of carbon per year, if using low-carbon sources from day one.

9. In the right circumstances, heat networks can also provide our homes and buildings with lower-cost heat. As such they can contribute to the target set out in the Fuel Poverty (Targets, Definition and Strategy) (Scotland) Act 2019^[5] that in the year 2040, as far as reasonably possible no household in Scotland is in fuel poverty and, in any event, that no more than 5% of households in Scotland are in fuel poverty.

10. The Scottish Government is clear that there is a key role for heat networks to play in the decarbonisation of heat and the aim of the Heat Networks (Scotland) Bill is to accelerate the deployment of more district and communal heating schemes across the country.

11. The Scottish Government has consulted widely on the proposals within the Bill, with a:

• Policy Scoping Consultation on LHEES and District Heating Regulation (2017)^[6]
• Second Consultation on LHEES and Regulation of District and Communal Heating (2017)^[7] accompanied by a concurrent programme of full-day workshop events around the country.

12. Further to this, the Minister for Energy, Connectivity and the Islands invited stakeholders to form the Heat Networks Regulation Working Group in May 2019 to support the preparation of legislation. The Group provided its experience and expertise to the Scottish Government and refined how it could create a regulatory framework that supports the deployment of heat networks.

13. In summary, the Bill will:

• introduce a Heat Networks Licensing system to ensure those developing and operating the infrastructure are suitable to do so. The system will be overseen by a Licensing Authority that will monitor and report on the sector;
• create a Heat Network Consent system to ensure project-specific scrutiny of new developments can take place, and that local factors (such as fuel poverty) are considered before new networks proceed;
• enable the identification of Heat Network Zones – those areas where a heat network is the appropriate heat decarbonisation solution;
• enable the award of long-term but time-limited Heat Network Permits – an exclusive right to operate a heat network to a single organisation within a Heat Network Zone;
• provide heat network licence holders with new rights and powers, similar to those enjoyed by other utility companies, to facilitate and reduce the costs of construction; and
• place a duty on public sector building owners to undertake an assessment of the suitability of their building stock to connect to a heat network. This will enhance the validity of Heat Network Zones and increase awareness amongst the public sector about the opportunity to connect to district or communal heating.

Methodology

14. As part of the consultation process outlined above, four local authorities with island communities – Argyll and Bute, Highland Council and North Ayrshire councils – provided official responses. Shetland Council was also represented at a consultation event held during the consultation period.

15. Following the public consultations in 2017, the Scottish Government held ICIA consultation events across the six island Local Authorities between September and October 2019. The following consultations took place:

• Na h-Eileanan an Siar: Stornoway, Isle of Lewis, 19 September 2019
• Highland: Portree, Isle of Skye, 1 October 2019
• North Ayrshire: Brodick, Isle of Arran, 10 October 2019
• Orkney Islands: Kirkwall, Orkney, 22 October 2019
• Shetland Islands: Lerwick, Shetland, 21 October 2019
• Argyll and Bute: Craignure, Isle of Mull, 29 October 2019

16. These events were attended by representatives from:

• local authorities
• housing associations
• Highlands and Islands Enterprise (HIE)
• environmental and energy Sector
• advice and information bodies
• island community groups

17. During the six events, participants were given an overview of each of the provisions in the Heat Networks (Scotland) Bill and then asked to discuss their concerns on the impact of the Bill for their communities as well as the unique challenges faced by island communities.

18. In addition, while on the Shetland Islands, Scottish Government officials visited Shetland Heat Energy & Power Ltd (SHEAP), Lerwick's District Heating Scheme which has been in operation since 1998. Officials toured the plant and discussed the challenges and opportunities that the heat network brings to the community of Lerwick.

Key Findings

Heat Networks Licences

19. Island stakeholders supported proposals to licence the heat network sector. However concern was raised about the cost of licensing for any existing and future heat networks on the islands. Attendees from SHEAP and Lochalsh & Skye Housing Associations pointed out that this would need to be a low (or even zero cost) in some instances as, in their experience, the margins in operating a Heat Network are very small.

Mitigation Action:

A. The Scottish Government will explore the cost of licensing fees in the regulations and it is expected that exemptions will apply in some cases. Stakeholders will be consulted further in this area as regulations are considered.

Heat Network Consent

20. The new Heat Network Consent process proposed in the Bill will enable a project-specific approval process to be introduced in the heat networks sector. The Scottish Government believes this is needed to enable scrutiny of how new heat networks (and expansions to existing heat networks) meet local and national objectives, and whether adaptations should be proposed before a new network is approved to proceed.

21. Stakeholders at islands consultation events were largely in agreement with this view and highlighted that awareness of local circumstances and resources of local communities is essential when developing projects on the scale of a heat network. One of the most important considerations it was felt should be taken into account was fuel poverty rates.

22. The Proposed National Islands Plan^[8] highlights that:

"Extreme fuel poverty rates are higher for most of the island authorities (ranging from 18% in Shetland to 25% in Na h-Eileanan Siar over the 2015-17 period) than for Scotland as a whole (12%). We also know that extreme fuel poverty can be particularly difficult to eliminate in island communities where building types are harder to improve to the required energy efficiency standard and opportunities to reduce fuel costs are more limited. In addition, the hard to treat housing stock can vary between the islands. Such issues combined with the colder climate in the islands means that some of these homes might have the heating on throughout the whole year. Higher living costs on islands, combined with higher fuel costs, for households on low incomes, can create the conditions for extreme fuel poverty."

23. These issues were echoed in our ICIA consultation events, with stakeholders commenting that they pay 2 to 5 units of energy more than other parts of the UK and that affordable warmth is needed.

24. In 2019, the Scottish Government commissioned KPMG^[9] to consider a range of evidence sources around the potential impacts of the proposed heat network regulation in Scotland. The evidence gathered concluded that heat networks could provide savings in aggregate, and that these savings could potentially range up to 36%, with a medium potential saving of around 17% or 1.29p p /kWh. In the right circumstances, therefore, heat networks can reduce heating costs for householders.

25. The Scottish Government's Draft Fuel Poverty Strategy and Energy Efficient Scotland programme sets out how it plans to work across government and with partners to prioritise support to those who need it most.

26. The Heat Networks (Scotland) Bill will align with these programmes and policies by ensuring that new heat networks are built only where they will reduce fuel costs to householders (through Heat Network Zones, below) and after scrutiny of the impacts they are expected to have (through Heat Network Consent).

Mitigating Action:

B. The Scottish Government is therefore content that the Bill will support our islands communities in addressing their higher fuel poverty rates, but it will continue to work with stakeholders to consider any refinements to the Bill's provisions, and subsequent regulations, which may help.

Heat Network Zones

27. Heat networks are most cost effective in areas with a large anchor load such as a school or hospital.

28. Feedback from stakeholders highlighted that the complex geography and demographics of the islands – where many remote areas and outlying islands populated by small numbers – makes most parts unsuitable for a heat network.

29. While more densely populated areas may be suitable, they bring other challenges. For example, population shifts risk closure to schools that may be acting as anchor loads or there may be housing but no people living there to use the heat.

30. It was also suggested that the tourist season can have an impact on heat demand, with many holiday homes lying empty in the winter months and businesses closing. On the other hand, it was suggested that the colder climate in some islands may lead to a higher heat demand throughout the year which could offset this uncertainty over the offtake of heat, thereby increasing viability of a heat network.

31. There was concern raised by some island stakeholders that the introduction of the Bill would result in heat networks being forced upon their communities. During the Scottish Government's visit to Orkney, stakeholders highlighted that earlier work with Ramboll explored a heat network scheme in Kirkwall using waste heat and water-source heat pumps. They concluded, however that there was no business case due to dispersed heat loads.

32. An additional challenge faced by some island communities is connected to the availability of fuel sources used to heat their homes. Some communities, such as in the Orkney Islands, have an abundance of wind that can be harvested to generate electricity. In those circumstances, heat networks may not offer the most cost effective solution.

Mitigation Actions:

C. Since heat networks are most cost effective in areas of dense heat demand, zoning will allow island local authorities to find the most appropriate decarbonisation solution, whether that be a heat network or other more suitable heating system. Guidance to undertake zoning will take account of unique island circumstances and will be island-proofed in line with requirements of Islands (Scotland) Act 2018.

Heat Network Zone Permits

33. The Bill seeks to maximise the deployment of large-scale, strategically sited heat networks by introducing Heat Network Zone Permits, which will offer (on a competitive basis) the opportunity to be the sole heat network provider within a Heat Network Zone.

34. Many island stakeholders were uneasy about the monopolistic nature of heat networks. Given the high prevalence of fuel poverty on the islands, stakeholders were concerned about:

• consumer protection;
• security of supply of the fuel source being used; and
• a supplier of last resort.

35. From a customer perspective, the way to address the challenge of being a monopoly is by providing a good customer experience.

36. As part of its Heat Networks Market Study, the Competition and Markets Authority (CMA) found that heat networks were already effectively operating as monopoly providers. In light of this, it has recommended to the Scottish and UK governments that minimum, statutory consumer standards are required in the sector, ahead of its expected growth.

37. The Scottish Government supports this view and welcomes that the UK Government is consulting on the introduction of consumer protection in the heat networks market^[10]. However, in light of the distinct needs of island communities (and island heat network operators) that were identified, the Scottish Government will request the devolution of consumer protection in relation to heat networks. This will also enable consumer standards to be implemented coherently in Scotland, through the licensing system that the Bill will create.

38. In the interim, the Scottish Government will work to drive membership of Heat Trust^[11] – the voluntary but comprehensive set of consumer standards that has been developed by members of the industry. There are currently three Heat Trust members in Scotland and the Scottish Government is keen to see much more comprehensive involvement.

39. Lochalsh Housing Association, which runs a heat network on Skye, commented that cost considerations have deterred it from joining Heat Trust to date. The Scottish Government will consider how this can be overcome.

Mitigation Actions:

D. The Bill will now require heat network operators to agree a transfer scheme prior to supplying to customers. This will enable, the Scottish Ministers or another party to act as supplier of last resort, if required. In developing the subsequent regulations needed to implement transfer schemes, the Scottish Government will consider whether adaptations are needed within Scotland's islands.

E. The Scottish Government will require any heat network project funded through our District Heating Loan Fund (DHLF) or Low Carbon Infrastructure Transition Programme (LCITP) to join Heat Trust.

F. The Scottish Government will work with Heat Trust to explore how membership of the scheme can be encouraged in Scotland and how heat networks can be supported to overcome any barriers to joining.

Additional Island Impacts

Community-led ownership

40. There was widespread agreement that any island heat network would likely be costlier to develop than one on the mainland, due to the costs of transportation to remote areas and supply chain constraints.

41. Therefore, the profit margins were thought to be likely much lower and it was felt that any heat network development would be taken forward for wider environmental, socio-economic benefits.

42. As such, it was strongly felt that community groups should have sufficient opportunity to take ownership of schemes as their social aims and understanding of the local area make them highly suitable.

43. Island stakeholders raised concern about bidding for Heat Network Zone Permits as they felt that a community-led scheme would be at an unfair disadvantage against the 'big players'. They also expressed that communities should have the power to be consulted on any potential new heat network development in their area.

Mitigation Actions:

G. The Scottish Government will ensure that regulations in respect of Heat Network Zone Permits are developed to create a 'level playing field' for all potential market participants.

H. The Scottish Government will also explore how it can support community groups to build capacity to be ready for competing for Heat Network Zone Permits, where desired.

Skills and job creation

44. An area of concern highlighted across the islands, was the difficulty in sourcing dependable contractors to carry out renewable heating installation and maintenance. It was noted that many staff with the relevant skills are either retiring or moving away.

45. One individual in Shetland explained that while air pumps have been popular, the community couldn't find anyone local who was qualified to carry out maintenance. When faults started to develop, this resulted in many residents returning to electricity.

46. Island stakeholders spoke about reliance on sub-contractors from the mainland and the difficulties this can bring. The price to carry out work is often increased due to additional cost of transportation of materials, staff travel and accommodation requirements. Severe weather causes ferry and plane cancellations which can result in work taking longer than planned, suspended or cancelled all together. Furthermore, if the work was undertaken on an outlying islands, the costs can further increase as often the public transport options or accommodation may be limited.

47. The need to train and upskill the local workforce on renewable and low carbon heating systems was highlighted across all six island visits as a priority. It was noted that the skills for renewable heating are complex with a mix of plumbing, electrics and heating required and that the cost in training staff can be significant. There is a challenge to convince local contractors to invest in training staff for new low carbon technologies and it was suggested that this needs to be incentivised. Additionally, the time constraints were mentioned as one of the key challenges as local contractors often work on full schedule and are unable to afford the day off for training.

48. All six island communities stressed the importance of trust – local contractors are trusted by local people. The Hebridean Housing Partnership spoke about a training success story on the Isle of Lewis. Six years ago, heat pumps were beginning to be installed on the island but people did not like them due to a lack of understanding of how they operated and poor installation. However, opinions changed when resident contractors where locally trained to become MCS accredited heat pump installers.

49. It was agreed that apprentices need increased exposure to renewables and that more courses should be run through island colleges to serve the local market. In Skye, for example, it was suggested that their local housing association network could be used as an apprentice base for training in association with the college.

50. The Scottish Government is aware of the additional jobs greater deployment of heat networks could create and that it is crucial that industry has the relevant skills to help this sector grow. It is clear from speaking to island communities that any localised skill shortages can increase system costs (by having to bring in skills from elsewhere), affect quality of installations, damage customer confidence for the operation and maintenance of heat networks and lead to local employment and economic benefits being missed.

Mitigation Actions:

I. As part of the overall commitment to the sector, the Scottish Government will continue to address skills and knowledge gaps and promote the opportunities in this market. As part of this, it will take account of the unique situations on Scotland's islands.

Flexibility of funding and heating solutions

51. The ICIA events also led to discussion of the wider challenges to achieving net zero from the buildings sector, with funding being a particular issue.

52. It was highlighted that the process to get to net zero is expected to be costly, given all the changes that will be required. There was wide spread feeling that where islands are net exporters of green energy they should have some exemptions or special package of support. Indeed, a stakeholder in Orkney commented that the community is being penalised by paying 3/4p more for their electricity while generating their own renewable energy.

53. There was feeling that any financial interventions for energy efficiency and heat decarbonisation measures should come with some degree of flexibility. Stakeholders in Orkney explained that currently councils must pull various grant schemes together to make households an offer that is attractive. Stakeholders explained that it would be of greater benefit to receive one large funding pot, with the freedom to use it to suit individual island needs. This method, it was felt, is more likely to reduce fuel poverty and carbon emissions.

Mitigation Actions:

J. The Scottish Government is currently developing its Heat Decarbonisation Statement that will be consulted on in Summer 2020. The Statement will consider specific needs of Island Communities and provide them with a chance to shape the future policy direction.

Conclusion

54. The Scottish Government has consulted extensively on the Heat Networks (Scotland) Bill, as well as having formed the Heat Networks Regulation Working Group to support the preparation of this legislation.

55. Consultation with island communities, local authorities and other relevant stakeholders has provided an understanding of the unique island issues in relation to the Bill and the potential impacts it may have on these communities. The Scottish Government has acted on this feedback by:

• introducing Heat Network Consent and Heat Network Zones, which will combine to ensure that the impact on fuel poverty rates is a central consideration as it seeks to accelerate the deployment of heat networks in Scotland; and
• requiring heat network operators to agree a transfer scheme prior to supplying to customers. This will enable, the Scottish Ministers or another part to act as supplier of last resort, if required.

56. However, in undertaking the ICIA, the Scottish Government has also identified the need for further mitigating actions to be taken, particularly as it proceeds to develop subsequent regulations and as it considers a wider support for the sector.

57. Specifically, the Scottish Government will take the following mitigating actions:

A. explore the cost of licensing fees in the regulations and it is expected that exemptions will apply in some cases. Stakeholders will be consulted further in this area as regulations are considered;

B. continue to work with stakeholders to consider any refinements to the Bill's provisions, and subsequent regulations, which may help eradicate fuel poverty;

C. ensure that guidance to identify Heat Network Zones will take account of unique island circumstances;

D. consider whether adaptations are needed within Scotland's islands when developing the subsequent regulations needed to implement transfer schemes;

E. require any heat network project funded through our District Heating Loan Fund (DHLF) or Low Carbon Infrastructure Transition Programme (LCITP) to join Heat Trust;

F. work with Heat Trust to explore how membership of the scheme can be encouraged in Scotland and how heat networks can be supported to overcome any barriers to joining;

G. ensure that regulations in respect of Heat Network Zone Permits are developed to create a 'level playing field' for all potential market participants;

H. explore how the Scottish Government can support community groups to build capacity to be ready for competing for Heat Network Zone Permits, where desired;

I. continue to address skills and knowledge gaps and promote the opportunities in this market. As part of this, the Scottish Government will take account of the unique situations on Scotland's islands; and

J. consider the evidence that this ICIA has provided on the wider challenges faced by island communities in respect to heat decarbonisation, as the Scottish Government develops its Heat Decarbonisation Policy Statement that will be consulted on in summer 2020.