Heat and energy efficiency strategies: consultation

4. District Heating Licensing and Connection

4.A Broad Principles for District Heating Regulation

What we consulted upon

88. In our policy scoping consultation in January 2017 we set out a possible regulatory scenario aimed at helping district heating to achieve its full potential. This regulatory scenario would:

• establish district heating zones;
• create concessions and provisions for connecting users to district heating networks within these zones;
• set minimum technical and consumer protection standards, enforced by licensing of district heating operators; and
• look at opportunities to make use of low cost, low carbon surplus heat from industry.

Summary of consultation responses ^[25]

89. The broad principles for regulation outlined in the consultation were generally accepted and while there were various suggestions for priority areas, a key theme was the importance of tackling fuel poverty.

90. Consumer protection was another key principle identified by respondents and this included ensuring security of supply.

91. The regulation of technical standards, perhaps in a way similar to that seen for other utilities, was also seen as important.

4.B Licensing for District and Communal Heating

Licensing – What we consulted upon

92. The regulatory scenario on which we sought feedback included the creation of a licensing system for district heating, covering consumer protection and technical standards. Licences would also be a means of conferring certain rights and opportunities on district heating developers.

93. The scenario considered drawing on the work of the Heat Trust in mirroring consumer protections available to gas and electricity customers and on any requirements the Scottish Housing Regulator places on heat supply to social housing tenants. (We noted that regulation of consumer protection is a reserved issue.)

94. The scenarios suggested that technical standards could be based on the Heat Networks Code of Practice developed by the Association of Decentralised Energy ( ADE) and CIBSE. The ADE is currently developing a compliance scheme, to be launched in the Autumn. However, technical standards are likely to be more specific than the Code of Practice, establishing common network parameters for district heating in Scotland to ensure interoperability of different networks, as recommended by the Expert Commission.

95. In the scenarios a licensing system could be used to confer enabling powers on licence holders. Holding a licence could also be a condition of holding a concession and of being eligible to apply to public authorities for specific buildings to be required to connect to a network.

96. Heat networks present specific monopoly issues distinct from electricity and gas. Their scale means competition among multiple suppliers operating across a single network has not often been achieved in other countries and is unlikely to be viable for the foreseeable future in Scotland. The prices operators charge, the financial returns they make and other licensing details, would require further investigation and would be subject to further policy development and consultation. A licensing system could be more effective than general standards as it could establish a robust enforcement mechanism. The regulatory scenario set out that a significant breach of the terms of a licence could result in the licence holder being deemed unfit to operate district heating in Scotland. Under the scenario an organisation whose licence was revoked could lose its concessions, which would transfer to a Supplier of Last Resort which would manage the concessions until they could be tendered to other organisations.

Licensing – Summary of consultation responses ^[26]

97. Almost all respondents to our first consultation, who provided a definitive response, agreed that, as district heating becomes more widespread, it will need to become a licensed activity (47 responses out of 56 replies). Both consumer protection and consistent standards were seen as important issues that would be protected by a licensing system. Respondents suggested the Heat Trust and Chartered Institution of Building Services Engineers ( CIBSE) as measures that could be included. Respondents suggested that there is a need to provide a national framework applicable to all local authorities across Scotland to ensure consistency.

98. There was also a view, however, that adherence to strict standards might negate the need for formal licensing. Some respondents felt a licensing system might prove onerous, overly bureaucratic or costly and may act as a barrier to operators, particularly for public sector or small organisations that may wish to take out a licence. To address this it was suggested that the Scottish Government engage with industry when developing the licensing system to ensure a proportionate, light-touch and well-designed system.

99. On the question of who should issue District Heating Licences and ensure that technical standards are being met, most of the small number who commented suggested a new national or central body; smaller numbers said the Scottish Government or SEPA.

100. While a small number of respondents felt that the benefits of the concession area would outweigh the costs of the licensing arrangements, a similar number said it was not possible to tell at this stage. Respondents highlighted that district heating operators would need a long time period to recoup investment (in concessions and licenses). Equally, the licensing system would need to ensure affordability for the customers as well as providing access to an independent arbitrator to ensure consumer protection, in particular for vulnerable customers. Respondents agreed that a licensing system was the best way to confer enabling powers in order to "level the playing field" with other utility providers.

101. Respondents suggested principles of any licensing system should include: transparency, sustainability, fair pricing, security of supply, consumer protection, skills and technical experience, industry-wide standards, financial viability, environmental considerations, including energy efficiency and decarbonisation of heat sources.

102. A related theme which emerged in responses was that in the event of failure of a licence holder or concession holder, local authorities may have to become the supplier of last resort and that they would need to have mechanisms in place to enable this. There were a small number of comments that the Scottish Government may need to be the supplier of last resort.

Licensing - What We Propose

103. In order to be able to develop and/or operate a district heating or communal heating scheme, we propose that a developer/operator must have a licence. The licence would ensure that the licence holder meets any appropriate fit-and-proper-person tests and that technical and operational quality standards (using the CIBSE Code of Practice), network compatibility, and would codify existing UK-wide consumer protection frameworks. There would be thresholds for requirements for a licence and the licensing regime would be as light touch as possible to achieve aims.

104. Developers could apply for a consent without at that point holding a licence, however before development and operation of the district heating network could commence, a licence would need to be obtained.

105. We propose that licences would be issued and monitored nationally, in line with regulatory provisions which would be set out by the Scottish Ministers. The national licensing function could be exercised by an existing body, or as part of a wider national governance framework for SEEP (see Section 4.E). We will explore the precise purpose of any national licensing body. This may for example include being an economic regulator, acting in the interest of customers, and potential customers, reducing emissions and fuel poverty objectives.

106. Licences would be issued, by a national body, with conditions to ensure that the licence holder reports appropriately and their sites meet national standards and any other appropriate performance standards (including, if necessary, penalties for non-compliance). In the event of significant breach of licence conditions the regulator would ultimately have the power to revoke the licence as is the case with other utilities.

107. We propose that any licence conditions would be consistent with the EU Energy Efficiency Directive's Article 14 requirement that for any new or existing district heating networks, any new or replacement or substantial refurbishment of heating equipment above specified thresholds, should include consideration via cost-benefit analysis of potential use of waste heat from nearby industrial plant ^[27] .

108. We propose further exploring contingency measures that would ensure that market stability and customers' heating supply was maintained in the event of a District Heating supplier (or developer) failing either through insolvency or failing to meet conditions of their license ^[28] . Contingency measures, for example, exist for the gas and electricity sector in the event of failure of an operator or loss / revocation of licence . In addition, in the event of failure to complete a development we are also considering the potential to introduce performance standards (means of incentivising or penalising non-completion of work) through licence conditions (see Section 4.B).

Q10. What are your views on our proposed approach to district heating licensing?

Please explain your answer, including any available evidence or examples.

4.C Consumer Protection

Consumer Protection - What we consulted upon

109. The scale of district heating has meant that competition between operators across a single network has not often been achieved in other countries and that it is unlikely to occur in Scotland in the near future. As heat networks are therefore effectively operated by monopoly providers, the Scottish Government recognised that specific risks in relation to consumer protection ^[29] may exist in district heating provision.

110. In light of this, in our first consultation the Scottish Government considered including minimum consumer protection standards in a licensing system for district heating operators to ensure fairness between users and operators of heat networks. This would likely increase consumer acceptance of district heating, which would in turn aid its development.

111. The regulatory scenario suggested the licensing system would draw on established industry schemes – such as the Heat Trust – to provide protections similar to those which gas and electricity customers enjoy.

112. However, the provision of consumer protection is a reserved issue. As such, the ability of the Scottish Government to provide consumer protection within district heating would depend on the UK Government agreeing to devolve powers specifically for the purpose of consumer protection in district heating or on the UK Government developing the appropriate consumer protection aspects of any licensing regime.

Consumer Protection - Summary of consultation responses

113. Almost all respondents agreed that district heating should become a licensed activity, for reasons relating to consumer protection, including price and security of delivery ^[30] .

114. However, there was a greater variety of views on how consumer protection could be provided. Some respondents felt that the Heat Trust, a current, voluntary scheme led by industry offered a sufficient consumer protection framework. However, others suggested that there is a need to explore whether mandatory consumer protection measures should be introduced to ensure greater oversight of operators and to increase the credibility of heat networks. A smaller number suggested that the Heat Trust could act as a starting point for the development of district heating licence conditions.

115. A number of stakeholders identified specific measures which were felt to be important in providing suitable consumer protection in district heating. These included: pricing, affordability and transparency of bills / tariffs; joining and leaving rights; guaranteed minimum standard of supply; impartial and independent advice; a process for breakdowns and maintenance; complaints handling and a mandatory dispute resolution service; and a supplier of last resort.

116. One respondent commented on legislative issues, suggesting that although the Scottish Government was unable to enact new legislation to provide consumer protection, it would be possible to introduce a licence for district heating operators which could include existing protections provided under current law. Alternatively, a small number of stakeholders suggested that the Scottish Government continue to work with the UK Government to seek the creation of consumer protection provisions for district heating on a UK-wide basis, or through executive devolution of powers to Scotland, in lieu of legislative competence ^[31] .

Consumer Protection - What we are proposing

117. As set out in Schedule 5 of the Scotland Act 1998, there are specific matters over which the Scottish Parliament cannot legislate. These include reservations in relation to regulation of consumer protection (outlined in Section C7) ^[32] .

118. However, the Scottish Government will set out in guidance the existing, UK-wide consumer protection framework which already applies to district heating. We expect that the rights and responsibilities which this framework establishes for district heating users and operators will be complied with.

119. Meanwhile, the Scottish Government intends to continue to press for further devolution of consumer protection – both in full and specifically in district heating – to ensure that district heating consumers ^[33] benefit from the same protections afforded to users of other utilities. We will also explore the protections which can be extended to microbusiness customers through licensing of Scotland's district heating market.

120. The Scottish Government continues to work with the Association of Decentralised Energy ( ADE) on the development and implementation of voluntary schemes and standards, namely the Heat Trust on consumer protection and on the Codes of Practice for the UK. We currently require operators of large-scale district heating schemes which receive Scottish Government support through our District Heating Loan Fund ( DHLF) or Low Carbon Infrastructure Transition Progamme ( LCITP) to be Heat Trust members as a condition of funding. We may now look to extend this requirement to small-scale projects, with a possibility of reviewing the threshold to zero.

121. Additionally, the devolution of consumer advocacy and advice through the Scotland Act 2016 provides an opportunity to design a system that is focused on ensuring consumer policy is person-centred and focused on bringing tangible benefits. In particular, we will work to ensure practical solutions are sought to longstanding consumer problems, and that the consumer interest is at the heart of regulatory and policy decision-making. We will publish a separate consumer consultation later this year that will set out more detailed policy proposals.

122. In relation to district heating specifically, we will investigate how advice can be provided to district heating customers in Scotland to help users to ensure they are operating their system effectively and are assisted to control their bills – whether through an independent source and/or licenced operators and how metering data can be used in this provision.

123. We will explore how a robust dispute resolution mechanism – including the consideration of an ombudsman – can be incorporate into our proposed licensing system.

124. To ensure that potential heat users have access to relevant information we will also seek to improve the provision of information to district and communal heating consumers in Scotland by making amendments to the Recommendations Report of Energy Performance Certificates ( EPCs).

Q11. Taking into account the limitations of the Scottish Government's legislative competence in relation to consumer protection:

a) what are your views on our proposals around consumer protection

b) how do you think could we provide a robust complaint resolution process in relation to District Heating in Scotland?

Please explain your answers, including any available evidence or examples.

Q12. What are your views on how consumer advice should be provided for district heating customers in Scotland – what form should this take? Who should it be aimed at? What should be provided?

Please explain your answers, including any available evidence or examples.

4.D Enabling Connections

Heat Users

What we consulted upon

Existing buildings

125. In our previous consultation we recognised that a voluntary approach to developing district heating has worked well to date, but that investment has been piecemeal. We suggested that in order to achieve a larger rollout, further coordination beyond this voluntary approach would be required. Connecting significant heat loads would maximise the penetration of district heating and reduce the risk of wasted investment from underutilisation. We considered a scenario which focused initially on compelling existing buildings to connect on the basis of a positive project level socio-economic assessment, with public authorities having the power of last resort to direct connects when other approaches have failed.

New buildings

126. In our previous consultation we considered that LHEES could create the conditions to promote and support the development of district heating in new developments. We set out a scenario where LHEES and Local Development Plans would operate under separate legal regimes but would be considerations in the other. They would be interdependent - for example local authorities could use LHEES to inform the location of new industrial zones in the development plan.

Summary of consultation responses

Existing buildings ^[34]

127. Many respondents said that connecting significant heat loads was essential

to making district heating networks viable, and that long term heat supply commitments were needed to reduce investment risks.

128. However views on whether to give local authorities powers to compel connection of heat users to district heating networks were mixed. There was qualified support amongst some respondents, but only as a power of last resort and on the basis of demonstrable positive socio-economic assessment. However other respondents felt that the approach should remain voluntary, focusing on persuasion. There were also mixed views on whether exclusive concessions would mitigate risks by reducing costs and providing certainty over level of demand.

New buildings

129. Respondents felt that LHEES and local development plan should be aligned ^[35] .

What we are proposing

Existing buildings

130. Under Part 4 of the Climate Change (Scotland) Act 2009, public bodies are required to exercise their functions in a way that contributes to the delivery of the targets set in Part 1 of the Act (for greenhouse gas emissions reduction). We propose that the Scottish Ministers would require the public sector to assess the potential for using low carbon heat, including the connection of its buildings to district heating, in collaboration with local authorities preparing their LHEES, and any local-authority-initiated procurement process. In addition, we propose that the Scottish Ministers could also encourage ( e.g. via administrative arrangements, funding etc.) public sector connection where it is socio-economically cost effective to do so. Such a requirement would need to take account of the constraints of Scottish public procurement regulations. This could help the public body demonstrate that it is exercising its functions in a way that contributes towards Scotland's climate change targets as required by the Climate Change (Scotland) Act 2009. In addition, we will explore opportunities to engage and promote district heating to local authorities and the wider public sector, including updating the guidance on public bodies climate change reporting.

New buildings

131. We propose that local authorities would continue to encourage new buildings (public and non-public sector) to connect to heat networks via our proposed district heating consent process ( Section 3.B), with new provision to require them to undergo socio-economic assessment, and incentives.

132. Scottish Planning Policy encourages the development of heat networks, including the safeguarding of piperuns within developments and to the curtilage of development for later connection to heat networks:

"Local development plans should support the development of heat networks in as many locations as possible, even where they are initially reliant on carbon-based fuels if there is potential to convert them to run on renewable or low carbon sources of heat in the future. Local development plans should identify where heat networks, heat storage and energy centres exist or would be appropriate and include policies to support their implementation. Policies should support safeguarding of piperuns within developments for later connection and pipework to the curtilage of development. Policies should also give consideration to the provision of energy centres within new development. Where a district network exists, or is planned, or in areas identified as appropriate for district heating, policies may include a requirement for new development to include infrastructure for connection, providing the option to use heat from the network" ^[36] .

133. Future versions of Scottish Planning Policy will have regard to Scottish Government strategies and requirements on district heating in its preparation. Planning authorities would continue to have their existing discretionary planning powers, to encourage the infrastructure needed to make connections to district heating.

Q13. What are your views on the proposed approach to connecting heat users?

Surplus Heat Suppliers

What we consulted upon

As well as exploring data provision by potential heat suppliers (see Section 3.D), we explored scenarios in two areas:

Supplying heat

134. In our previous consultation we recognised that surplus heat cannot be the main heat source for district heating networks (due to interruptibility, compatibility with industrial batch processes etc), and that surplus heat could only be supplied once district heating networks were established.

135. Therefore we suggested a phased approach to connection and supply of surplus heat into district heating networks identified by LHEES starting with enabling and ending up with a directive phase.

Development of new plant

136. We set out a scenario where new industrial plant would be required to be 'district heating ready' (which could mean installed equipment for connection and/or relevant buildings included in planning permission and space safeguarded for pipework and necessary equipment), and that there could be a regulatory power to require new plant to connect to district heating networks.

137. The scenario also included that LHEES could be a consideration in the allocation of industrial sites, informing the local development plan, and vice versa.

Summary of consultation responses

Supplying heat ^[37]

138. There were mixed views over compelling the supply of surplus heat to district heating networks. Most respondents considered that an enabling approach for supplying surplus heat was appropriate, with compulsory mediation appropriate in some circumstances and direction as a last resort where there were security of supply concerns.

139. Respondents recognised that there are challenges and barriers to supplying surplus heat that need to be addressed: reliability of supply, capital costs, risk, quality of waste heat and determining a heat price that balances the need to incentivises business and ensure districting heat doesn't create fuel poverty.

140. In particular industry respondents said that there are perverse incentives to supplying surplus heat to district heating networks: the PPC Regulations required to continually improve plant efficiency to reduce the surplus heat; supplying heat isn't their main business so contracts shouldn't oblige them to provide uninterruptible supply or include penalties; the ownership structure and business planning cycles are at odds with the longer term planning cycles required to reduce risks for district heating; and that there is a lack of appropriate skills and business models for industry to supply surplus heat to district heating networks.

141. Respondents suggested that incentives could be provided to reduce the payback period for investing in connecting to district heating networks.

142. Some respondents did not agree with the idea of a mediator when parties could not reach agreement, saying that local authorities do not have a role to intervene in contractual negotiations outside their own assets.

Development of new plant ^[38]

143. There was qualified support from respondents for new industrial plant to be 'district heating ready', but only within a district heating zone identified by LHEES and where there is demand for heat. Being district heating ready should not reduce the viability of the development or lead to extra heat being produced.

144. Respondents said that the local development plan and the planning regime are most appropriate ways to ensure new industrial buildings connect district heating ready, ensuring decisions are appropriate for the local area. Being district heating ready should be a requirement of planning consent or building regulations.

What we are proposing

Potential supply of heat to district heating schemes: existing plant and new plant

145. We propose a phased approach for non-domestic sectors with potentially usable surplus heat, applying to both existing and new (including significant refurbishment or expansion) plant, to connect and supply heat:

• Phase 1 – voluntary approach: non-domestic sectors with potentially usable surplus heat would be encouraged to connect and supply to heat networks, but it would be left to market forces;
• Phase 2 – enabling approach: where non-domestic sectors with potentially usable surplus heat and heat network operators cannot reach an agreement, but where socio-economic assessment demonstrates it would be viable, either party can seek mediation from a designated body. Note the mediation does not compel connection or supply; and
• Phase 3 – compulsory mediation: where neither non-domestic sectors with potentially usable surplus heat, nor heat network operators have engaged in discussions for the supply of surplus heat, but where socio-economic assessment demonstrates that it would be viable to zone an area for district heating, those parties could be required to enter into discussions mediated by a designated body. We are still investigating the costs and benefits and effectiveness of this third phase and would welcome any evidence in this area.

146. While mediation will be provided, the outputs of these discussions cannot ultimately compel connection or supply between two third parties, though may be considered in any future licensing or consenting processes. We propose that mediation would be carried out individually or jointly by relevant consenting bodies or regulators such as local authorities, SEPA or the national delivery mechanism (see Section 4.E).

147. Planning authorities would continue to have their existing discretionary planning powers, and SEPA as statutory consultee, to encourage the infrastructure needed for new non-domestic sector developments with potential useable surplus heat to make connections to district heating.

Q14. What are your views on the proposed phased approach to non-domestic sectors with potentially usable surplus heat?

Please explain your answers, including any available evidence or examples.

148. SEPA currently regulates activities in the non-domestic sector that impact on the environment through a number of individual regulatory regimes (see Box 1), some of which can include consideration for energy efficiency and heat. However energy efficiency and heat are not the primary objective of these existing regimes. Therefore we are now calling for evidence from stakeholders to assess the scope and desirability for achieving more in the areas of energy efficiency and heat within the current suite of regulatory regimes. The information provided will be used to inform future policy development.

Further call for evidence

149. In this call for evidence we would like your views on the following questions.

Q15. Requiring all regulated non-domestic sectors (see Box 1) with potentially usable surplus heat to carry out energy efficiency assessments, including heat (and its recovery, and onsite and offsite use), and implement recommendations where feasible.

Q16. How should energy efficiency (including heat) be assessed across the regulated non-domestic sectors – including consideration for energy efficiency beyond the site boundary?

Q17. Could a more consistent approach be achieved within the PPC regime, with the existing energy efficiency requirements for Part A sites being applied to Part B sites?

Q18. Which benchmarks or criteria should be used / considered in assessing energy efficiency?

Q19. What range of industrial processes should be covered, including size and sector, and why?

Please explain your answers, including any available evidence or examples.

Box 1: Current Regulatory Framework

Scottish Legislation

• Pollution Prevention and Control ( PPC):
  • part A (combustion over 50 MW) - a systematic assessment of heat and energy efficiency (unless plant is also regulated under ETS); heat is considered a pollutant and energy efficiency must also be considered. Part B (combustion between 20 – 50 MW) – no requirement for energy efficiency but heat is considered a pollutant;
  • requirement for new or refurbished plant to undertake a cost benefit analysis for connecting to a district heating network;
  • Waste incinerators have to take into account SEPA's Thermal Treatment of Waste Guidelines which set energy efficiency standards and the requirement for a Heat and Power Plan setting out how these will be achieved.
• Medium Combustion Plant Directive ( MCPD) – from 2018 will regulate combustion plant between 1 – 50 MW with emission limit values. This has no energy efficiency requirements; and
• Water Environment (Controlled Activities) Regulation ( CAR) – heat is a pollutant in relation to protection of the water environment but not the wider environment. There are no energy efficiency requirements.

UK Legislation

• EU Emissions Trading System ( ETS) – a market based trading scheme which puts a price on carbon and requires industry to account for its emissions. Applies to combustion industries over 20 MW and other specified industries;
• Energy Saving Opportunities Scheme ( ESOS) – company groups from all sectors registered in Scotland that are over a certain size are required to undertake energy audits every four years which include energy saving opportunities.

For more information see www.sepa.org.uk

4.E Enabling Activity and Additional Areas for Consideration to Support Our Regulatory Approach

What we consulted upon

150. In our previous consultation, we sought views on the potential impact upon local authorities of them having statutory functions around LHEES and district heating regulation. We recognised that the provision of appropriate support and resource would be vital in meeting our policy aims, building upon existing skills and expertise within local authorities and support structures such as the Heat Network Partnership. We also recognised that careful consideration would need to be given to the distribution of skills and resources across local and national levels.

Summary of consultation responses

151. Respondents told us that to support the development of LHEES, there would be a need for central government input to create Scotland-wide, standardised, information, data and resources, and make this available to local authorities. In addition, respondents suggested that there would be a need for financial resource for additional in-house staff and / or procurement of consultancy services. Finally, respondents told us that there was a need for technical resource and strategic guidance to support local authorities.

152. In terms of how to provide this support, there was a recurrent suggestion throughout the consultation, that SEEP as a programme, generally, and LHEES and district heating regulation by local authorities, specifically, would benefit from some form of oversight from a national body – either a Scottish Government department or agency, or an independent body. This would help in ensuring clear guidelines and support to provide a cohesive, consistent approach to attract investment into SEEP delivery programmes, and to provide reassurance to consumers. Respondents told us that national input could reduce the resource implications for local authorities, allowing local authorities to focus their efforts on successful local delivery and implementation of their priorities in their LHEES. Local authorities also sought specific support to help them prepare for LHEES ahead of any introduction of a statutory duty, and also ongoing support, thereafter, with delivery of SEEP programmes flowing from the LHEES ^[39] .

153. Specific suggestions for a national body or other form of national oversight included:

• provision of guidance, advice or templates;
• setting and implementing national standards. Working in partnership with local authorities to ensure local targets are in line with national targets and priorities or to oversee targets; both for LHEES and overall SEEP targets;
• provision of regulatory oversight and scrutiny to ensure the long term interests of both consumers and network operators;
• overseeing consumer protection, including service provision and complaint resolution;
• raising awareness among consumers; trusted or independent sources of information will be required;
• issuing and enforcing concessions: as this would need multiple expert resources across Scotland, a national unit could provide specialist skills and would offer economies of scale. A national framework for issuing concessions would provide consistency;
• checking for consistency of concession design;
• a Scottish Government backed national energy company could take over failing concessions or post-concession;
• collecting and providing data or providing support to collect data;
• National benchmarking of heat supply pricing compared to alternative supply options; or conducting annual tariff reviews;
• issuing licences, again to ensure consistency and also that technical standards are met; and
• Provision of analytical skills, resources and techniques; this will be cost effective and ensure consistency ^[40] .

What we are proposing – National Delivery Mechanism

154. Scotland's Energy Efficiency Programme ( SEEP) is a 20 year infrastructure programme with an estimated investment in excess of £10 billion. As a multi-stakeholder programme, SEEP will span a range of elements, linking national level policies and regulation with local delivery programmes.

155. Given the scale and duration of the programme we recognise that there is a need for co-ordination to ensure consistent and sustained delivery across multiple parliamentary cycles, in line with the Scottish Government's long-term fuel poverty and climate change targets. Consistent, long-term delivery will be needed to realise societal-wide benefits - e.g. fuel poverty, health , regeneration, economic, environmental – which accrue over a number of years.

156. As a long term national infrastructure priority, the Scottish Ministers have already committed through the Infrastructure Investment Plan ^[41] and Programme for Government to providing multi-year funding for SEEP, that is not tied into the cycle of an annual budget. In addition to its scale and duration, SEEP is technically complex requiring specialist input into its design and delivery, as evidenced in particular by consultation responses highlighted, calling for technical support and capacity to be provided nationally to assist local authorities in the preparation and approval of LHEES, and in the regulation of district heating. In responding to the previous consultation, we recognise the benefits that a national delivery mechanism for SEEP could bring in ensuring pooling of resources, and in helping to reduce resource implications for local authorities, as well as ensuring consistency across the programme.

157. There are a number of potential national delivery mechanisms that could support local authorities in delivering their proposed functions for LHEES and district heating regulation, and which could support delivery and governance of SEEP more widely, including:

• amending the functions of an existing independent body or government agency to co-ordinate and deliver SEEP;
• establishing a new body – either SEEP-only or with wider Energy/Fuel Poverty interests;and
• National oversight provided directly by the Scottish Government.

158. In terms of functions to support local authorities in LHEES and district heating regulation, a national delivery mechanism could potentially offer the following support:

• LHEES national guidance, approvals, and review;
• technical expertise, capacity and advice in preparing LHEES;
• approval and funding of SEEP delivery programmes (including investment in district heating);
• licensing of district heating (including monitoring, review, enforcement);
• appeals for district heating consent;
• wider issues in terms of SEEP financial incentive packages, loans etc; and
• technical expertise, capacity and advice in delivering local authority-led district heating schemes.

Q20. What are your views on the establishment of a national delivery mechanism to support local authorities in delivering their proposed functions for LHEES and district heating, and which could support delivery and governance of SEEP more widely? What form should it take? What functions should it have?

Please explain your answer, including any available evidence or examples.

What we are proposing – Local authority capacity-building support for LHEES

159. In summer 2017, we announced Scottish Government support to 11 local authorities to pilot the development of an LHEES in their areas through SEEP pilots ^[42] . This initial offer of support, includes access to dedicated consultancy expertise provided through our national programmes such as Resource Efficient Scotland, the Energy Savings Trust, and the Scottish Futures Trust ( SFT), as well as external consultancy to enable testing and piloting of different approaches to data collection, analysis, assessment of the building stock, and prioritisation of actions. The support also includes provision of a dedicated officer to ensure wider collaboration between local authorities, and dissemination of knowledge and information across all of Scotland's 32 local authorities.

160. We would envisage that prior to any introduction of a statutory duty to prepare LHEES, that this programme of pilot capacity-building support would be made available to all of Scotland's local authorities, to help them prepare for this duty. The lessons learned from pilots would be used by the Scottish Government to inform the design of any eventual duty, and associated guidance documents or regulations, and would be developed in partnership with local government. The wider SEEP pilot programme will continue to support local authorities to develop and test new approaches to delivery of energy efficiency and heat decarbonisation.

161. In addition to this programme focused on piloting LHEES, there continues to be support available for the district heating elements of wider local strategies through the Heat Network Partnership local authority strategy support programme. Additionally, the Heat Network Partnership is developing guides or supportive information for local authorities, to add to that available on www.districtheatingscotland.com. These include:

• a guide on heat supply agreements, and key issues to be considered within these, being developed by SFT; and
• supportive information on the procurement process for district heating projects, whether this is through concessions or other procurement mechanisms, being developed by SFT.

162. We are also investigating options for procurement frameworks to support local authorities in procuring district heating services and projects, since well-designed frameworks can support the Scottish supply chain e.g. Non Domestic Energy Efficiency ( NDEE) Framework the Scottish public sector http://www.gov.scot/Topics/Business-Industry/Energy/Action/lowcarbon/NDEE.

Incentives

163. The first consultation sought little feedback around financial support required to deliver district heating, other than support that may be required by local authorities to develop and deliver LHEES. The regulatory scenario worked up with the the Working Group aimed to reduce the cost of delivering district heating by reducing the risk of investment.

164. In the consultation responses, some respondents suggested incentives should be provided, in preference to using compulsion to connect. These included financial support to help upgrade heating in existing buildings or connection subsidies for anchor loads ^[43] .

165. Currently we have a number of programmes that provide support to district heating schemes, while these may not be their main focus in all cases. For example the Resource Efficient Scotland programme has carried out a number of opportunity assessment and feasibility studies for district heating. The Low Carbon Infrastructure Transition Programme ( LCITP) ^[44] has provided development and capital support for a number of district heating projects demonstrating innovative technologies' and approaches. The District Heating Loan Fund ^[45] is an ongoing programme that has provided loans to 44 projects. These work alongside the Renewable Heat Incentive which provides support for renewable heating equipment (but not for district heating technology). A number of projects in Scotland have developed using one or more of the above support mechanisms.

166. With the LCITP and RHI both funded to 2020/21, we need to consider options for providing support to district heating (and wider heat decarbonisation) as part of the SEEP programme and it's development.

Q21. Please let us know any views you have on the most cost effective way of supporting schemes that are socio-economically appropriate and in line with the local authority LHEES.

Wider UK Heat Market Reform

What we consulted upon

167. In the previous consultation we sought views on the wider regulation of the heat market to ensure decarbonisation, and on when decisions should be taken on the future of the gas network, given that gas provides heat to 78% of our homes and the majority of heat used by business and industry in Scotland. This was linked to the wider scenarios set out in our draft Climate Change Plan for decarbonisation of heat and for delivering our climate change targets in the residential and services sectors. Our consultation recognised that whilst regulation of heat is within the devolved competence of the Scottish Parliament, regulation of the gas network is a matter reserved to the UK Parliament. We highlighted work that is now underway by the UK Government to establish the evidence base needed to take decisions on the long-term direction of heat decarbonisation to determine the most appropriate mix of solutions such as district heating, electrification of heat with heat pumps, and decarbonisation of the gas network.

168. We also reiterated that, during the period when we await UK Government decisions on the future of gas, the Scottish Government will continue to focus its efforts in the meantime on areas of heat decarbonisation which are within our competence:

• with a priority on reducing heat demand as set out in the heat hierarchy of the Heat Policy Statement, through Scotland's Energy Efficiency Programme; and
• low carbon heat supply via low regrets options as set out by the Committee on Climate Change ^[46] such as:
  • district heating projects in areas where heat density is high and district heating is financially viable delivering affordable, low carbon heat efficiently; and
  • renewable heat technologies to individual properties particularly in areas off the gas network.

Summary of consultation responses ^[47]

169. Respondents to the consultation told us that in general they supported the Scottish Government's approach. Many comments focused not only on decarbonisation but also on the need to address fuel poverty as a priority, and a need for controls to ensure that energy for district heating is low or zero carbon and that new plant can be adapted in future to operate on other fuels or technologies.

170. There were mixed views expressed as to whether regulation relating to heat should focus on transition to a largely decarbonised energy system and not extend to regulation of other heating fuels. One or two respondents commented on the need for balance to ensure there is fair competition and also to protect consumers. Several responses included suggestions for the use of incentives for take up of low carbon solutions, and carbon taxes or obligations for energy service providers ( ESPs) to reduce CO2 emissions. There was also some comment on the need for investment and support for green gas projects, low carbon solutions and appropriate infrastructure.

171. Respondents told us that UK Government decisions on the future of the gas network should be taken "as soon as possible" or "as a matter of urgency"; others referred to 2020, by 2023 (before the next gas price control review), mid 2020s or within the next five years.

172. Comments from those who favoured early decisions included suggestions that this would assist local authorities in their planning, ensure consumers are making appropriately informed decisions regarding purchase of heating systems and give clarity to businesses who may be affected. Others commented on the potential benefits of socialising the costs of heat decarbonisation as widely as possible – either through support from taxpayers, or through creation of a regulated asset base for heat. This could bring benefits to investors, developers and also to customers for the socialisation of development and maintenance costs to be spread across the widest possible heat market.

What we are proposing

173. The Scottish Government welcomes the views given by stakeholders on wider regulation of the heat market and on the decisions to be taken by the UK Government on the future of the gas network. We reaffirm our commitment that during the period when we await UK Government decisions on the future of gas, the Scottish Government will continue to focus its efforts in the meantime on areas of heat decarbonisation which are within our competence – heat demand reduction and low carbon heat supply via low regrets options. Further information on our approach will be set out in our final Climate Change Plan pathways for the residential and services sectors, in light of recent advice from the Committee on Climate Change ^[48] .

174. We will also:

• continue to urge the UK Government to take decisions on the future of the gas network, and the overall mix of heat decarbonisation in reserved areas (electricity, gas, oil) as rapidly as possible, taking into account advice from the Committee on Climate Change;
• develop regulation of district heating in Scotland to support investment and consumer protection, as outlined elsewhere in this consultation;
• continue to provide support for the development of low carbon heat supply and heat demand reduction through our existing funding programmes ( e.g. District Heating Loan Fund, LCITP), and the development of new funding programmes under SEEP;
• work with stakeholders to consider future support for low carbon renewable heat, including discussions with the UK Government around the ending of the current Renewable Heat Incentive commitment period to 2020-21 (see Paragraph 163/4 on 'Incentives');
• initiate discussions with the UK Government to consider the possibility of further devolution of powers necessary from Westminster for the regulation of consumer protection in the heat market;
• continue to participate as Government observers in the Association of Decentralised Energy's taskforce ^[49] which is advising Government on how to create a self-sustaining market for heat networks, and address challenges created by heat networks' natural monopoly, to reduce investment risks, investment costs, and the cost of heat to customers; and
• work with the UK Government to consider the recommendation of the ADE taskforce, and to agree an approach on how to respond to these within our devolved powers.

Q22. We would welcome stakeholders' views on our suggested approach to wider UK heat market reform, and in particular:

a) any additional evidence that can be offered around the approach that should be taken to decisions on decarbonisation of the gas supply

b) any views on the issues being considered within the remit of the ADE taskforce