Electricity network constraints and the 2024 New Build Heat Standard: research

Executive summary

The 2024 New Build Heat Standard will require all new homes in Scotland to use heating systems which produce zero direct emissions at the point of use from 2024 onwards. This change will have an impact on the energy infrastructure costs for new domestic developments. The Scottish Government commissioned Ricardo Energy & Environment (Ricardo) to undertake research into the network constraints issues associated with the electrification of heat for domestic new build developments.

The project aimed to address the following questions:

• What are the main business models, contractual arrangements, revenue streams and methods of apportioning risk for the installation and operation of new energy infrastructure?
• How are these decisions made?
• What are the costs for network infrastructure for various new build case studies?
• Who pays these costs, and how are they passed onto house buyers or tenants?
• How do these costs compare between developments with fully electrified heating and traditional heating solutions?
• How does this vary between contexts, technologies and locations? What is the impact of other low carbon technologies like electric vehicles?
• How are decisions made regarding the potential trade-offs between building efficiency, heating requirements and electricity network connection costs?
• What are the findings into innovative projects or activities where technology has been optimised to minimise network costs?
• What are the specific considerations for stakeholders in relation to the 2024 standards and network constraints?
• How do the answers differ between a development using an IDNO and one where the network will be adopted by the local DNO?

The project methodology included three work packages:

Literature Review

Leveraged existing, published documents to inform the answering of the project questions, and provided context and data for the stakeholder engagement and the technical modelling.

Focused on four high level topics: standards, industry documentation, heating technology options and

Stakeholder Engagement

Gained an understanding of the processes, underlying business cases, decision factors, and how this might be impacted by the choice of heating technology.

Stakeholder categories included developers, Independent Distribution Network Operators (IDNOs), Independent Connections Providers (ICPs), Distribution Network Operators (DNOs) and technology providers

Technical Modelling

Explored the connection costs for three modelled case study examples:

Private housing development:

300 homes in the North Glasgow area with a strong local electrical network.

Social housing development:

60 houses and flats in the Dunfermline area, with a highly constrained network

Small scale rural development:

10 detached homes in the Scottish Borders.

The following sections address the key project questions.

Business models for establishing energy assets for new developments

The main roles and business models are described in the table below:

Description	Business driver
Housing developer: Within this project, the term 'housing developer' is used for the organisation or collection of organisations responsible for buying and developing land for housing	Private housing developers aim to make a profit through sale or rent of the properties. As sale or rental prices are driven by the wider market, an increase in development cost generally reduces profit. Affordable housing is developed with the intention of meeting a need for housing. The cost of development is recuperated through rental.
Distribution Network Operators (DNOs) A DNO owns, operates and maintains electricity distribution networks in one or more designated geographic regions in GB. They provide connections to their networks for new developments. New electricity network assets can be built by either a DNO or an ICP.	DNOs get their funding through the Distribution Use of System (DUoS) charge, which is part of every electricity customers' bills. DUoS charges are regulated by Ofgem. DNOs have a licence obligation to respond to connection requests with quotes which represent the least cost option overall.
Independent Distribution Network Operators (IDNOs) An IDNO owns and operates a local electricity distribution network, typically serving new developments within the DNO network, built by an ICP.	IDNOs are funded through DUoS charges from connected customers. Many IDNOs also manage other utilities (e.g. gas, communications, wastewater). IDNOs can offer an 'asset value' payment, which is payable to the developer for the adoption of a network. This asset value is determined through balancing the revenue potential of the network with the competition to adopt.
Independent Connection Provider (ICP) An ICP can provide design and installation of new infrastructure for developments. Once built, the network must be adopted by a network operator. Alterations to existing DNO networks must be built by the DNO.	ICPs are contracted and funded by the developer to design and install the equipment. They cannot operate networks and must set up a contractual arrangement with an adopting IDNO or DNO. ICPs may have in house or partnered IDNOs that they generally choose to adopt their infrastructure, and the ICP and IDNO functions can be coordinated.

The process for establishing energy infrastructure can take two main forms:

• Process includes the developer and DNO: Where the developer directly engages the DNO to supply the energy infrastructure and the connection. In this case, the DNO will produce a design and quote for the installation, and if the developer accepts this quote, a formal agreement is set up. Once built, the DNO operates the network as part of their wider network.
• Process includes the developer, ICP and DNO / IDNO: The developer may engage an ICP through existing partnerships or through open tender arrangements. The ICP selects a network operator (IDNO or IDNO) to adopt the assets after construction, interfaces with the DNO to provide a connection to their network and designs and builds any new energy infrastructure.

Engaging an ICP to provide the work involves more parties and can be more complex. However, this option provides the developer the opportunity to seek out the most cost-effective option for providing connections. They may issue a tender, receiving submissions from multiple ICPs and comparing this with a quote provided by the DNO. The ICP quote may include the cost of connection (gained through a connection request to the DNO), and an asset value payment from an IDNO, as well as the cost to install the new assets. The selection of the provider is generally driven by cost or through existing relationships with an ICP or IDNO.

Cost associated with network infrastructure for new build examples

Costs associated with establishing energy infrastructure are highly variable between developments, mainly driven by:

• Size of the energy load: The maximum demand expected to be drawn over the whole development, to which the energy infrastructure must be designed.
• Distance and complexity of the route: A longer route between the development site and the point of connection on the energy network, or the inclusion of waterway or carriageway crossings, can increase costs significantly.
• Status of adjacent energy network: Available capacity on the energy system to support new loads, and the work required to release additional capacity, impacts cost to connect.

The modelled case studies show illustrative examples of infrastructure costs for connection of traditional electricity and gas networks, shown below.

Private housing development:

300 home development connecting to an unconstrained network. Infrastructure includes cabling over a 30m route, a substation, and service connections to each property.

Electricity infrastructure:
£262k to £586k

Gas infrastructure:
£90k to £150k

Social housing development

60 home development connecting to a highly constrained network, although this development does not exceed the available capacity. Infrastructure includes cabling over a 100m route and service connections to each property.

Electricity infrastructure:
£49k to £105k

Gas infrastructure:
£54k to £72k

Small scale rural development

10 home development connecting to a rural network. Infrastructure includes overhead line route of 200m, a pole mounted transformer and service connections to each property.

Electricity infrastructure:
£40k to £86k

Gas infrastructure:
£9k to £12k

The costs are shown as broad ranges, as costs are highly dependent on site specific circumstances . There are several notable costs that are not included in the scope of this project, such as the costs of the technology appliance, installation costs and the operational costs of the resulting heating system. These costs are important to consider when comparing costs of heating technologies.

Impact of fully electrified heat technologies

Moving to an electric heating technology increases the size of the electricity load across that development, in some cases requiring additional electricity network infrastructure. However, gas assets are no longer required.

The modelled case study findings are given below:

Total electricity infrastructure costs for different heating technology choices

Private housing development:

As the network is unconstrained, the additional load associated with electrification of heat can be accommodated without significant additional infrastructure. The range of costs reflect the onsite infrastructure needed to support additional load.

Heat pumps:
£326k to £763k

Storage heaters:
£381k to £913k

District heating:
£269k to £607k

Social housing development

As a highly constrained network, moving heat load to electricity results in the need for significant and costly infrastructure. As the it is a developing area, reinforcement costs are apportioned and only £400k to £650k is charged to the developer.

Heat pumps:
£4.2m to £6.4m

Storage heaters:
£4.2m to £6.4m

District heating:
£4.2m to £6.4m

Small scale rural development

The variation in demand across different heating technologies is not enough to result in additional network infrastructure required, and as a result, the electricity infrastructure costs do not change across the heating technologies.

Heat pumps: £40k to £86k

Storage heaters:
£40k to £86k

District heating:
£40k to £86k

Apportioning costs between stakeholders

The table below shows how costs are shared and apportioned between stakeholders.

	What they pay	What they are paid
Developers	Pays the DNO/ICP to develop new energy infrastructure for sole use by the development. Pays the DNO a proportion of the costs for assets that are likely to be used by other connections or other network customers.	May be paid an asset value by an IDNO to help offset the infrastructure costs. This may be incorporated into the quoted infrastructure costs Recover costs through sale or rent of properties.
DNOs	Costs incurred from designing and installing network infrastructure. Where the DNO operates the new assets; incur operational costs on an ongoing basis.	Developer pays for all assets that are for sole use by the development, and a proportion of the assets that are likely to be used by other connections. Remaining reinforcement costs are socialised – recovered from all connected customers through their bills. Ongoing revenue recovered from all connected customers through their bills.
IDNOs	Where an IDNO adopts the assets: May pay an asset value to the developer to adopt the assets. Incur operational costs on an ongoing basis.	Ongoing revenue recovered from all connected customers through their bills.
ICPs	Where an ICP installs new infrastructure: Costs incurred from designing and installing new infrastructure.	Developer pays for the development of new energy infrastructure for sole use by the development.

The housing developer takes on the majority of the costs of the energy infrastructure for a development. If the energy assets are being adopted by an IDNO, the developer may be provided an asset value to offset their costs. Any remaining costs must be covered by the sale or rental value of the properties as a decrease in profit or where possible, an increase in sale or rental price. However, the sale or rental prices are generally driven by the wider market.

Costs adopted by the DNO, through apportioned network reinforcement costs, are socialised through an increase in the Distribution Use of System (DUoS) charges to their connected customers. Due to the number of customers, the impact on individual customers is negligible.

Key drivers for decision making

There are several key decision points during the process to establish electricity network infrastructure for new housing developments. The most relevant for this project include:

Choice of parties to engage in the design and build

Who decides: Developer

Key drivers:

• Business case and convenience
• The majority of developments include an ICP / IDNO, due to the competitive process and the potential to offer an asset value

Selection of heating technology

Who decides: Developer

Key drivers:

• Meeting building regulations
• Cost to install, operate and maintain
• Experience and understanding

User experience / desirability

Choice of building fabric and other technologies

Who decides: Developer

Key drivers:

• Energy efficiency requirements of the building regulations
• Commercial case around desirability of the home for potential customers

Design of the energy infrastructure

Who decides: DNO or ICP

Key drivers:

• Energy requirements of the development
• Meeting the design standards of the adopting network operator

Innovative projects that might minimise infrastructure costs

Innovative projects have built experience in the electrification of heat and enhanced understanding about technologies and the effects they may have on the electricity network. The main topics include:

• Identifying opportunities for electrification of heating: There is no one-size-fits-all solution for heat decarbonisation. This must be considered at the local level as well as the national level. There are projects underway to identify the locations best suited to rolling out of heat technology.
• Understanding zero emissions heating options: A key barrier is a lack of understanding of the zero emission technology and its impact on the network. There are several initiatives that will build this understanding, allowing developers to build confidence in the technologies and ICPs and DNOs to develop more informed and efficient network designs.
• Energy management: Several projects identified opportunities to manage flexible electricity demand, such as heat pumps, storage and EV charging, to minimise the impact on the electricity network. This can be used to reduce the size of the required connection and to provide services to the wider electricity system, providing an additional revenue.

Key considerations for stakeholders in relation to the 2024 standards

An important finding of the project has been the insights into the key considerations from the perspectives of each of the key stakeholder groups. These are summarised below.

Key considerations for developers

• Developers need to understand the choice of zero emissions heating technologies that meet the new requirements, and the associated cost and practical implications.
• A number of barriers were flagged to the adoption of new heating solutions, including a lack of experience and confidence in the technology, a perception of higher costs, access to and maturity of the supply chain, operational costs and user experience.
• Developers are also concerned about the transition to the new 2024 standards, particularly regarding projects that are currently underway and the impact the new standards will have on business cases for established projects.

Key considerations for DNOs, IDNOs & ICPs

• Different low carbon technologies present different challenges and opportunities to the design and operation of energy infrastructure. However, the practical operation of these technologies and the implication on the network is not fully understood, leading to conservative or inconsistent infrastructure design. Some of this uncertainty is being addressed by innovative projects and data collection, the learning from which will be particularly valuable if the findings are combined and best practice is shared to ensure a consistent, optimised approach across stakeholders.
• IDNOs and ICPs need to be aware of the potential of innovative approaches and technologies that may support connection and operation of local development energy infrastructure, such as energy management and managed connections, and work with developers and the DNO to support adoption.
• As gas networks may no longer be needed for new developments with electric heating, there is a potential reduction in revenue for the ICP and IDNO for involvement in a given project. However, this may be countered if district heating technologies are adopted.

Key considerations for homeowners / occupiers

• The key consideration for owners / occupiers is the effectiveness of the heating technology, including ease of use, resulting comfort levels and impacts on energy bills.
• User education and ease of use of new appliances may be necessary to support effective and efficient operation to maximise user comfort for minimal operation costs.
• Operational costs of the system should be considered when installing the heating technology; there is a danger that lower installation costs of resistive heating technologies may mean that homes are expensive to heat.

Conclusions

The project outcome has been to build a greater understanding of the network constraints issues associated with the electrification of heat for domestic new build developments, through literature review, stakeholder engagement and modelled case studies. The key learning points include:

• The impact of adopting zero emissions heating in new developments on the energy infrastructure costs is variable based on factors including the selection of heating technology, the wider design of the development, the location of the development site, and the available capacity and status of the existing local electricity network.
• It is important to consider all costs associated with the heating technology, beyond the energy infrastructure, including the costs of the technology appliance, and the installation and operational costs of the resulting heating system.
• It is important to consider buildings and developments holistically. The heating technology cannot be considered in isolation; building fabric has a significant impact on the heating load; understanding the non-heating demand is important to understand the network impact and, where there are network constraints, the mitigation opportunities.
• It is increasingly important that stakeholders are open to innovative solutions and work closely together from an early stage in complex developments. If all stakeholders work together on a development, information can be shared and used in design decisions, and ideas around flexibility, optimisation and innovation can be explored.
• There are barriers to the adoption of zero emissions heating technologies beyond infrastructure costs, including a lack of understanding, skills and supply chain relationships, and concerns about user acceptance and usability. It is important to consider how to best support the transition towards successful adoption.

Recommendations for next steps

It is recommended that the next steps following this project include

• Combine learning from related projects: Relevant projects and research should be combined and synthesised into an overarching picture to inform policy and implementation.
• Support the transition to zero emissions heating: Consulting on the issues, barriers and solutions towards the adoption of renewable or zero emissions heating in new homes and developing and promoting best practice.
• Engage stakeholders in collaboration, innovation and best practice: Promoting and encouraging collaboration, and sharing best practice will best equip stakeholders to successfully transition to zero emissions heating technologies.
• Further exploration of district heating: Exploring the barriers, benefits and best practice for district heating.
• Explore barriers and solutions for adoption of retrofit zero emissions heating: The adoption of decarbonised heat across the retrofit housing stock is a significant challenge, with very different barriers and solutions. Scottish Government could build knowledge in this area to inform policy and implementation to support this transition.