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

3 Business models for new energy infrastructure

This section presents the key roles and business models that are used today for establishing energy infrastructure for new domestic buildings, the connection process and the key drivers for decision making.

It addresses the project questions around the business models for establishing energy network assets for new developments, how are decisions made and by whom, and the range of differing approaches and stakeholder involvement.

3.1 Key roles and business models

The key roles and organisations that are generally involved in establishing electricity energy infrastructure for new developments are listed in Table 3‑1. The table also details the key business driver and revenue stream of each party.

Table 3‑1: Key roles and organisations that are generally involved in establishing electricity energy infrastructure for new developments

Role	Description	Business driver
Housing developers	Within this project, the term 'housing developer' is generically used for the organisation or collection of organisations responsible for buying and developing land for housing; this includes developers of both private and affordable housing, and can represent a consortium or subcontractor arrangement as well as single organisations (these structures are not explored in this report). The developers who have contributed to this project are CALA Homes and Angus Housing Association, Homes for Scotland who represent over 200 housing developers, and five additional affordable housing associations who responded to a survey.	Private housing developers aim to build their homes at a financial profit, either through sale of the property or retaining the property as a rental asset. Generally, the sale or rental price of the property is driven by the wider market, and so any increase in development cost will be borne by the development company itself. Affordable housing is generally developed with the intention of meeting a need for housing. The cost of development is recuperated through rental of the properties. Often, affordable housing is managed over a large portfolio with standardised rental between locations, potentially taking account of factors such as energy efficiency.
Distribution Network Operators (DNOs)	A DNO owns, operates and maintains electricity distribution networks in one or more designated geographic regions in GB. They must hold a distribution licence from the energy regulator Ofgem. The two DNOs operating in Scotland are: Scottish Power Energy Networks (SPEN): Central & Southern Scotland. Scottish & Southern Electricity Networks (SSEN): North Scotland. We engaged with both SPEN and SSEN as part of this project.	DNOs get their funding the Distribution Use of System (DUoS) charge, which is part of every electricity customers' bills. DUoS charges are regulated by Ofgem. Connecting new developments generally involves: Non-contestable work (reinforcement to existing electricity network) which must be completed by the DNO. Contestable work (new equipment) which can be installed by a DNO or an ICP (see below). DNOs have a licence obligation to respond to connection requests with quotes which represent the least cost option overall [6] [7]. Requests may be for both contestable and non-contestable work, or a point of connection request for the non-contestable work only.
Independent Distribution Network Operators (IDNOs)	An IDNO owns and operates an electricity distribution network, typically serving new developments within DNO geographic regions and connected to the DNO network. IDNOs differ from DNOs in that they are not geographically based; they own and operate smaller networks within the areas covered by DNOs. They are licenced under Ofgem, although there are some differences in the terms of their licence. There are several IDNOs in operation in Scotland, including Last Mile and GTC who were included in the stakeholder engagement work package of this project.	IDNOs are funded through DUoS charges collected through customer bills. Many IDNOs also manage other local utility networks and infrastructure within their sites (e.g. gas, communications or wastewater) as a complete offering to a development. IDNOs typically adopt electricity networks built by an ICP (see below). Some IDNOs have inhouse or partner ICPs and may be involved with a developer to establish new infrastructure on site. In order to secure the adoption of a local network, an IDNO will offer an 'asset value' payment, which is payable to the developer.
Independent Connection Provider (ICP)	The role of the ICP was created to encourage competition within the connections process. An ICP can provide design and installation of new infrastructure for developments. ICPs may have inhouse or partnered IDNOs that they generally choose to adopt their infrastructure, and the ICP and IDNO functions can be coordinated. DNOs can provide a list of ICPs that are active in their area. Energetics is an ICP who were part of the stakeholder engagement work package of this project.	ICPs are contracted and funded by the developer to design and install the equipment. ICPs cannot alter existing DNO networks, but generally interface with the DNO to establish the connection and any reinforcement work needed. ICPs cannot operate networks; an adoption agreement must be set up with an adopting network operator (either a DNO or an IDNO). The installed equipment must comply with the requirements of the adopting network operator, and inspections may be required.

An important distinction in the development of electricity infrastructure for a new development is between contestable and non-contestable work.

The definition of each is as follows:

• Non-Contestable work: This is work that the DNO must complete, and therefore cannot be competitively contested. It includes any work on the existing network equipment which is owned by the DNO.
• Contestable work: This is work that is not part of the DNOs network, for example, new cables and substation on a development site. Contestable work can be undertaken by DNOs or ICPs, allowing developers to achieve lowest cost through a competitive tender process.

Figure 3‑1 below illustrates the differences between contestable and non-contestable work for a new domestic development [6] [7].

This report is focused on the development of electricity infrastructure, as the energy source for zero emissions heating technologies. However, it also considers the process for gas infrastructure as the counter-factual heating technology example.

The process and roles involved in installing gas infrastructure is similar to that for electricity; the Gas Distribution Networks (GDNs) own and operate gas networks in specific geographic regions in GB (the GDN for Scotland is Scottish Gas Network, SGN), and Independent Gas Transporters (IGTs) operate local gas networks within the GDNs' networks, usually associated with new developments. New gas network can be installed by the GDN, or by an independent company who then interfaces to the GDN to connect to their network.

3.2 Connection process

There are multiple routes by which energy infrastructure is established for a new development. This is determined by who with and when the developer forms an agreement.

The process involves four main stages:

• Establishing the project: This includes identifying the land and shaping the development, including location and design of homes. This stage is not part of developing the energy infrastructure directly but is vital to understanding the requirements of the infrastructure design. This stage is likely to include selection of the heating technologies and determining other related aspects such as energy efficiency of the buildings and the inclusion of EV charging infrastructure and solar panels. However, the design of the development can evolve over time, in parallel to the stages below. Large developments are often designed, consented and built out in phases, meaning the design of later stages may not be known when building the early ones. The process from buying and identifying land through to building can last many years.
• Design and agreement: This stage covers the design of the energy infrastructure to meet the requirements of the development. The parties involved at this stage vary, including:
  • Developer and DNO: Where the developer directly engages the DNO to supply the energy infrastructure and the connection, the DNO will produce a design and quote for the new energy infrastructure. This will include any changes and reinforcement needed to their network including the contestable and non-contestable works. If the developer accepts this quote, a formal agreement is set up.
  • Developer, IDNO, ICP and DNO: The developer may engage an IDNO and/or an ICP through existing partnerships or through open tender arrangements. Whilst an IDNO and an ICP can form part of an organisational group and offer a coordinated service, the two roles are technically separate. The ICP works with the developer to design the new infrastructure and contacts the DNO to request a quote for the required upgrades to the DNO network for the connection. The ICP also selects a network operator, which could be an IDNO or the DNO, to adopt the assets after construction. Agreements are set up between the developer, the ICP, the DNO for connection, and the IDNO / DNO for adoption of the assets.
  • In all cases, there may be further agreements and contracts required with landowners and other parties to support the infrastructure development and routing of the network from the development site to the connection point on the DNO network.
• Build and connection: The new energy infrastructure on the development site and any routing between the site and the connection point, is constructed by the DNO or ICP. The DNO also carries out network changes or reinforcement to support the connection of the new load. An ICP must build the assets to the requirements and standards laid out by the network operator who will be adopting the assets, who may also wish to sign off designs and inspect installations. Some ICPs are authorised to undertake work on the DNOs network, meaning that there could be very little input from the DNO unless reinforcement is required. If the infrastructure was built by an ICP, the connection may need to be inspected and information shared so that the IDNO / DNO is confident that the new network connection will not cause issues on the existing network. Where there is an existing relationship and track record between the ICP and the IDNO or DNO, then this process may be shortened.
• Adoption and operation: Operation of the network includes maintaining the equipment and responding to faults and supporting future developments on the networks (e.g. connections of new load). The new network can be operated in two main ways; if the DNO built the network or if they adopt it from the ICP, it is operated as part of their wider DNO network. If an IDNO adopts the network, they can operate it going forward as a smaller, local network connected within the DNO network. In some cases, high voltage assets built by the ICP may be adopted by the DNO, and an IDNO adopts only the low voltage network. Ongoing operation and maintenance costs are recovered through Distribution Use of System (DUoS) tariffs.

The process is described by a process flow diagram in Figure 3‑2.

3.3 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:

• Selection of heating technology
• Choice of building fabric and other technologies
• Choice of parties to engage in the design and build
• Design of the energy infrastructure

Details in respect of the decision makers and main factors that drive these decisions are provided in the sections below:

3.3.1 Selection of heating technology

There are many different heating technologies and suppliers available for installing into homes. These are described in Appendix A3 and summarised below:

• Conventional gas boilers: Gas boilers are the baseline of this study; conventional gas boilers incur a connection cost for developers who are connecting properties to the gas grid. They do not draw any significant load from the electricity grid.
• Resistance heating: Resistance heaters create heat by running an electric current through a resistor, and generally operate as stand-alone convection or storage heaters. Resistance heating systems have low capital costs due to their cheap parts and simple installation, without the need for property wide wet central heating systems. However, the operating costs are relatively high compared to other options due to the electricity to heat conversion rate.
• Heat pumps feeding individual properties: Heat pumps include air source heat pumps and hybrid heat pumps (which uses a gas boiler to support an air source heat pump). Other heat pump options, such as ground and water source heat pumps, are less common for an individual domestic property scale due to the high installation costs and access to land/water requirements. The operational costs of a heat pump are generally modest, as the efficiency can be very high (where a unit of electricity input can result in 2.5 to 4.5 units of heat output).
• District heating and shared heating systems: District and shared heating systems provide heat to multiple properties through a pipe network. This solution has the largest infrastructure costs of the options discussed here but has the potential to have the highest efficiency. Their scale and dedicated housing mean that they do not take up space in end-users' homes. They can be configured to store heat in advance of demand and can be optimised to provide the required heating load with minimal impact on the wider energy systems. The heat network can be fed by electrical means (for example through ground or water source heat pumps), with boilers burning gas, biogas or biomass, or with waste heat from industry or other activities.
• Emerging heating technologies: Innovative technologies are entering the low carbon heating market as new potential solutions for developers. Whilst they are worth noting, they have not become the focus of this report due to their commercial immaturity. Technologies reviewed include phase change materials, heat recovery ventilation, transcritical heat pumps and infrared heaters.

The choice of heating technology is driven by the developers. The stakeholder engagement activities identified that most developers install individual gas boilers as the preferred heating technology. Where there is not a gas network available, which is generally the case for more rural and remote locations, electric heating is installed, which is most likely resistive heaters or air source heat pumps. Some regions are now used to heat pumps, and they have become a proven default thus future-proofing their housing stock going forward.

The main drivers in this decision are:

• Meeting building regulations and requirements: building regulations include requirements to meet sustainability standards, which may be met through the selection of more sustainable options. However, there are also other technology and building fabric aspects that might be used to meet the requirements. Some developers may choose to exceed the minimum requirements, reaching Bronze, Bronze Active, Silver, Silver Active or Gold level. This will increase costs, but may be considered a selling point, or may be driven by local efficiency targets.
• Cost to install the technology: Developers are driven by cost in many of the decisions they make, which includes the selection of heating technology. Access to low cost technology may be influenced by existing supplier relationships. This is particularly the case for larger developers, who may have agreements with suppliers to provide appliances in bulk at reduced costs or increased convenience.
• Understanding and experience of the technology: A developer is more likely to select a technology that they have experience in, and that they fully understand. It is also attractive to use technologies that technicians have skills and experience in installing and maintaining.
• Cost: Some developers prioritise the cost to operate. This is a particular focus for housing associations building affordable housing, but private developers are also concerned with developing desirable homes for their customers.
• Ease of operation and maintenance: The usability and interface of the technology will impact the desirability of the property. The ease of use may also impact the effectiveness and cost of the technology, as if the heating system is easy to use and understand it is more likely to be properly managed.

It is widely recognised that the selection of heating technologies must change going forward, to include decarbonised and zero emission heating systems. Some developers may increasingly select zero emissions heating options without the mandate of regulation, for example if they have specific corporate targets or they see the demand in their target customer base. However, the stakeholders generally agreed that decarbonised and zero emission heating for most new developments would need to be driven by regulation.

Decarbonised and zero emissions heating options that are considered more likely to be adopted in the short term include heat pumps or other forms of efficient electric heating. The main barriers for adoption of these technologies, cited as reasons that they are not being adopted now, include a lack of understanding of the technology and concerns about cost to install, operate and maintain. The understanding and experience of future occupiers of the homes must also be considered; there is a concern that the alternative heating technologies may be considered undesirable, or that occupiers will not understand how to operate them effectively and efficiently, potentially increasing operating costs or reducing their lifespan.

District or shared heating systems can provide zero emissions heating, if fed by technologies such as ground or water source heat pumps. This technology may be more efficient than individual home heating options and can be managed centrally to maximise efficiency and flexibility over the development as a whole. However, there are significant barriers to adoption; stakeholders referred to homebuyers and occupiers wanting choice of supplier and the freedom to make changes to individual homes, while a district or shared heating system locks the home into a single supplier of heat. This perception may be less dominant for tenants renting properties, including privately rented and affordable housing, which can be managed through a landlord.

3.3.2 Choice of building fabric and other technologies

The choice of heating technology for a home cannot be considered in isolation. The wider building and development design has a significant impact on the energy infrastructure, for example, how insulated the buildings are and if EV charging or solar panels are installed.

The fabric of the building, including the level of wall, roof and floor insulation, thermal efficiency of the windows, and effective draft proofing, will impact the heating requirement of the building. This may mean a difference in the appropriate size and design of the heating technology.

EV charging is a significant energy load for a domestic property, potentially having as much impact on the electricity infrastructure requirements as moving from gas to electric heating. Other appliance choices, such as the cooking source or the existence of power showers will also impact the energy requirements. Note that the installation of gas cooking appliances was cited as becoming less common, or even obsolete.

The inclusion of solar panels on new developments can impact on the requirements of the electricity infrastructure in unpredictable ways, particularly the connection request to the DNO. Solar panels, as a generation technology, have the potential to export electricity to the wider electricity network, and this results in additional technical requirements on the network equipment. The connection request for a development must include details of the generation technologies to be installed, and this may significantly increase the connection cost depending on the status of the local network.

These technology choices are generally made by the developer, driven by the energy efficiency requirements of the building regulations and any local planning stipulations. The Standard Assessment Procedure (SAP) is the methodology used across the industry to ensure homes that are being built meet energy and environmental performance requirements [3]. There are many ways in which a developer may choose to meet the requirements, and the SAP methodology sets out how different energy efficiency measures can be compared and combined; a developer may choose to meet the requirements by selecting a lower carbon heating technology, such as a heat pump, or may instead choose to more effectively insulate the property or install solar panels. The SAP methodology does not necessarily reflect the ways in which these choices interact, which is an aspect that should be taken into account to ensure a well-designed heating solution.

3.3.3 Choice of parties to engage in the design and build

As illustrated in Figure 3‑2, the set of stakeholders involved in establishing electricity infrastructure can vary from development to development. Developers have the choice to engage a DNO directly, or to contract the design and build of the energy infrastructure to an ICP. Where an ICP is driving the design and build, there is also a choice about which network operator will adopt the equipment.

The factors for these decisions are summarised in the bullets below:

• Size of development: Generally, developers of single home and very small developments are likely to engage the DNO directly, or where an ICP provides the new network equipment, this is adopted by the DNO. Larger developments are more likely to have more complex arrangements including ICPs and IDNOs.
• Competition in connections provider: The developer has the opportunity to seek the most cost-effective option for providing connections for the properties on the development. They may issue a tender, receiving submissions from multiple ICPs and comparing this with a quote provided by the DNO. The selection of the provider is generally driven by cost, though developers may have existing relationships with an ICP or IDNO, which may provide them confidence in the service and convenience.
• Competition in adopting network operator: Where the energy infrastructure is being installed by an ICP, a network operator needs to be identified to adopt and operate the network. It is common for IDNOs to offer an 'asset value' payment, which is payable to the developer. This value is determined through an individual assessment by each IDNO which balances the desirability of gaining the contract with the potential profits that can be gained through DUoS charges over the operating costs of the network over time. DNOs do not offer asset values to adopt the infrastructure, and the asset values offered by the IDNOs is often the deciding factor for the selection of the adopting network operator. Therefore, it is most common for energy infrastructure on developments to be adopted by IDNOs. Note that this can happen at any stage of the connection process but it is likely to happen at the tender stage with the developer to ensure the ICP can provide a true reflection of the cost of the infrastructure works, and increase their chances of winning the work.

3.3.4 Design of the energy infrastructure

The design of the energy infrastructure, including the onsite infrastructure, the connection route and any DNO network reinforcement, is carried out by the developer or the ICP, driven by the energy requirement of the development. Electricity networks are designed to supply the peak electricity demand expected from the loads connected to it at any one time.

The maximum expected demand across a housing development is calculated through taking into account 'diversity'; the assumption that customers will use their loads at different times throughout the day, and therefore the maximum demand experienced on the network is significantly less than a simple addition of all connected loads. The After Diversity Maximum Demand (ADMD) is calculated either by:

• The DNO: Where the DNO is providing the complete network installation, including contestable and non-contestable work, they will calculate the ADMD of the development based on the data provided in the connection request.
• The ICP: Where an ICP is managing the connection, they will calculate the ADMD of the development based on the design of the development, meeting the requirements of the adopting network operator. They design the network to meet these requirements and inform the DNO of the size of the required connection so that they can design the non-contestable part of the work.
• The developer: The developer may see it necessary to identify the ADMD of the development themselves in order to inform the tender process, or to ensure a full understanding of the connected technologies.

The specifics of how the ADMD of the development is calculated differs between different stakeholders, meaning that the same development with identical designs may be result in different maximum demand calculations. The calculations have been built up over time, taking into account significant data and experience about the behaviour of electrical load over time. However, the impact that low carbon technologies (e.g. zero emissions heating and EVs) have on this behaviour, and the appropriate diversity assumption for them, is not yet well understood. This results in assumptions that are often conservative and inconsistent between stakeholders.

There is work being undertaken by some stakeholders to build greater understanding of low carbon loads and therefore enable more informed and efficient network design, and to develop a consistent approach to calculating ADMD across multiple stakeholders. An example of this is work being undertaken by SPEN and SSEN who are developing ADMD calculators that take more detailed data into account.