The recovery of heat from power generation in Scotland: study

10 Ideas for Policies and Ranking Policy Ideas

This section of the report details ideas for policies with the potential for overcoming barriers and promoting uptake of heat recovery systems. The policy suggestions are summarised and presented in the following groups:

1. Communication or informational policies.
2. Local or national planning policies.
3. Funding and Project Capital policies.
4. Technical policies; and
5. 5. Risk and uncertainty policies.

As with the barriers there are some overlaps between the policy suggestions but these groupings make reporting on suggestions easier and will be beneficial in framing the multi criteria analysis that follows.

10.1 Communication or Informational Policies

• Provide information / evidence about the benefits to consumers of renewable heat to consumers.
• Training on district heating attributes for planning officials.
• Training on district heating attributes for power plant operators.
• Provide funding for feasibility studies.
• Develop detailed heat maps for Scotland; and
• Establish a large scale demonstration project to illustrate the potential for renewable heat.

10.2 Local or National Planning Policies

• National level policies, supporting renewable heat (the Renewable Energy provisions within SPP, S182-186 may not yet have had time to take effect).
• Apply Heat Plans in S36:
  • Require developers to implement elements of the required heat plan ( i.e. strengthen existing policy).
• Connection of adjoining development proposals:
  • Require the co-location of developments and provide support for this.
• Reduce scale of new biomass plant to increase pressure for heat utilisation.
• Introduce Single Outcome Agreement commitments to link planning into the public bodies duties on Climate Change.
• Planning in favour of low carbon heat supplies:
  • Include heat infrastructure within National Planning Framework to ease planning burden on proposed development.
• Use planning system to locate heat producers near to a heat demand within Strategic Development Plans and Local Development Plans.
• Require new electricity generation to be:
  • "Heat ready".
  • Supply hot water; and
  • Increasing requirement for energy efficiency.
• Amendments to building regulations:
  • Require new homes to be capable of receiving heat; and
• Establish a central co-ordinating body.

10.3 Funding and Project Capital Policies

• Financial incentives:
  • Fossil fuel CHP to be rewarded within RHI system.
  • Long term certainty over price and incentive systems ( UK Government); and
  • Carbon credit mechanism to reward investors.
• Public sector investment:
  • Loan fund to support connectivity infrastructure.
  • Grants to support Capital investments; and
  • Guarantees over income streams.
• Public private partnership for infrastructure.
• Demand side issues:
  • Favourable tariff regime for domestic customers and commercial scale users.
  • Price stability mechanism (such as the Contracts for Difference mechanism within Feed in Tariffs system); and
  • Fixed ratio of cost of alternative heat supply.
• Support for customers to switch.
• Consumer grant schemes (similar, for example, to boiler replacement incentives).
• Fossil fuel levy (hypothecation) to fund district heating infrastructure.

10.4 Technical Policies

• Minimum efficiency requirement for electricity generation plant.
• Detailed Heat mapping (included above in information).
• System to support infrastructure installation; and
• Explore potential for meta grids (linking local heat networks into broader regional and national grids).

10.5 Risk and Uncertainty Policies

• Policies to increase certainty (included above in 3. Finance and Capital Policies); and
• Use of public sector as anchor heat loads providing certainty over a proportion of the available supply.

10.6 Ranking the Policy Ideas

With a large number of policy ideas a method is needed to select those ideas that have the greatest benefits and these will be taken forward and modelled. Multi-Criteria Decision Analysis (or Weighting and Scoring) is a way of assessing a mix of both monetary and non-monetary benefits. The extent to which each option meets the identified criteria is measured, and explicit weights are given to each of the criteria to reflect their relative importance. Using this technique, options can be ranked and a preferred option identified.

Guidance on how to approach Multi Criteria analysis is provided in Department for Communities and Local Government (2009) Multi Criteria Analysis; A Manual, available at; http://www.communities.gov.uk/documents/corporate/pdf/1132618.pdf

This guidance sets out the following "Steps in Multi Criteria Analysis"

1. Establish the decision context.
2. Identify the options to be appraised.
3. Identify objectives and criteria.
4. 'Scoring'. Assess the expected performance of each option against the criteria. Then assess the value associated with the consequences of each option for each criterion.
5. 'Weighting'. Assign weights for each of the criterion to reflect their relative importance to the decision.
6. Combine the weights and scores for each option to derive an overall value.
7. Examine the results.
8. Sensitivity analysis.

10.6.1 Decision Context

In this context we are using multi criteria analysis as a means to highlight the most promising policy areas that will encourage investment in recovery of waste heat from large scale power stations.

Identification of options to be appraised

The list of policy options is derived from the ideas suggested by respondents and in the course of the workshop identified above.

Identify objectives and criteria

In the course of the workshop participants were invited to suggest possible criteria by which these policies could be assessed these were refined s

Central to the idea behind the criteria development is an attempt to identify criteria that would help to distinguish between a good policy option and a poor one. In so far as possible we seek to set criteria that cover a complete spectrum of relevant choices without over analysis. In addition the best criteria are likely to be independent of each other so as to avoid double counting.

Initial criteria suggested are grouped as Quantifiable and Qualitative:

Quantifiable criteria

• Cost to Scottish Government.
• Cost to developer / private sector.
• Potential GVA added.

These criteria have been assessed using a judgement about the scale of the likely quantifiable costs and benefits but without undertaking any detailed cost benefit assessment at this stage. Cost to Scottish Government included policy implementation as well as delivery costs, costs to the developer / private sector focused on capital and ongoing (regulatory burden) costs. Potential GVA added was considered from the point of view of scale of potential GVA within Scotland.

Qualitative criteria

• Public acceptability.
• Meets other policy aims.
• Within devolved powers / competence of the Scottish Government.

These criteria have been assessed using a judgement about the extent to which policies will meet the criteria. Other policy aims have focused largely on climate change and fuel poverty policy aims although where other policy aims were directly relevant these were considered as well. Assessment of policies within the competence of the Scottish Government was considered as a yes or no question with those within the competence of the Scottish Government scoring maximum points and those out-with the Scottish Government scoring minimum points.

Other potentially relevant criteria

• Ease of implementation.
• Effectiveness.

These criteria were assessed by making a judgement with the assumption that the easier or more effective a policy was likely to be the more highly rate it would be. Ease of implementation considered the need for primary legislation, and the need for new administrative arrangements as suggesting implementation would be less easy, small additions to existing arrangements regarded are relatively easy. Effectiveness was considered from the point of view of effectiveness of delivering greater uptake of waste / renewable heat systems on its own. This does not reflect the potential benefits of a combination of measures each supporting one another. Each of the proposed policies have their effect over differing timescales as far as possible each were assessed in the context of the timescale appropriate to the policy.

Scoring and weighting

The methodology adopted is a simple linear additive scale, where each criterion is weighted and scored on a scale 1-6 with the highest numbers being the most beneficial or advantageous and 1 being the least.

Weightings for the scores are 1.0 except for:

• Effectiveness - Weighted at 2.0 - as this is the overall test for each policy.
• Within devolved powers - Weighted at 0.5 - as Scottish Government works with UK Government on many policy issues.

The detailed scores can be found in the annex

Examination of the Results

Communication and information policies generally score well because of their relatively low cost to Scottish Government and low cost burden on business; however they may generally not be particularly effective at overcoming the barriers identified.

Planning policies also generally scored well for similar reasons, while financial and project capital policies were much less likely to achieve high scores.

The following table summarises the gross scores and rankings of the thirty three policies considered:

Table 35 Gross scores and rankings of the thirty three policies considered

		Total Score	Rank
Communication and Information Policies	Provide information / evidence about the benefits of renewable heat.	32	9=
	Training on district heating attributes for Planning officials.	32	9=
	Training on district heating attributes for power plant operators.	31	15=
	Provide funding for feasibility studies.	33	5=
	Develop detailed heat maps for Scotland.	36	1
	Large scale demonstration project to illustrate benefits of heat recovery.	32	9=
Local or National Planning Policies	Apply Heat Plans in S36.	33	5=
	Connection of adjoining development proposals.	32	9=
	Reduce scale of new biomass plant to increase pressure for heat utilisation.	28	23=
	Single Outcome Agreements on renewable heat.	35	2
	Going further on heat recovery in the National Planning Framework.	33	5=
	Use planning system to locate heat producers near to heat demand.	32	9=
	New Generation to be "heat ready".	27.5	25=
	New Generation to supply hot water.	27.5	25=
	New Generation to meet increasing energy efficiency requirements.	27.5	25=
	Amend building regulations to make new homes capable of receiving heat.	29	22
	Establish a national co-ordinating body.	30	19=
Funding and Project Capital Policies	Financial incentives within RHI for fossil heat.	25.5	31
	Long term financial incentives ( UK Government).	23.5	32=
	Carbon Credit mechanisms.	23.5	32=
	Public sector loan fund.	31	15=
	Public sector grants.	31	15=
	Public sector Guarantees.	31	15=
	Establish public private partnership mechanism.	30	19=
	Establish favourable tariff regime.	26.5	28=
	Establish price stability mechanism.	26.5	28=
	Establish fixed ratio of heat cost to alternatives ( i.e. Gas or Oil costs).	31.5	14
	Support for consumer switching to district heating.	34	3=
	New fossil fuel levy to fund infrastructure.	26.5	28
Technical Policies	Minimum efficiency requirements.	30	19
	System to support infrastructure installation (rights of access to road infrastructure similar to those for other services.	33	5=
	Explore potential for meta grid.	28	23=
Risk and Uncertainty Policies	Use of public sector as anchor heat load.	34	3=

The scoring system resulted in a number of projects sharing the same score and these are represented as equal.

The most favourable Information and communication policy was identified as the Development of detailed heat maps of Scotland.

Local and National Planning policies also scored well again largely due to assumptions about relative costs and including Renewable heat obligations within single outcome agreements between the Government and Local Authorities.

Financial and project capital Policies were understandably less favoured under this methodology and therefore scored less well although Support for consumer switching to district heating was ranked third.

10.7 Conclusions on Policy Ideas

The following table summarises the proposed policies ranked up to 9 ^th (15 polices in total covering aimed at the most substantial barriers).

Table 36 Key Policy Ideas

	Proposed Policy	Rank
Communication and Information Policies	Provide information / evidence about the benefits of renewable heat.	9
	Training on district heating attributes for planning officials.	9
	Provide funding for feasibility studies.	5
	Develop detailed heat maps for Scotland.	1
	Large scale demonstration project to illustrate benefits of heat recovery.	9
Local or National Planning Policies	Apply Heat Plans in S36.	5
	Connecting adjoining development proposals.	9
	Single Outcome Agreements on renewable heat.	2
	Going further on heat recovery in the National Planning Framework.	5
	Use planning system to locate heat producers near to heat demand.	9
Funding and Project Capital Policies	Support for consumer switching to district heating.	3
Technical Policies	System to support infrastructure installation (rights of access to road infrastructure similar to those for other services.	5
Risk and Uncertainty Policies	Use of public sector as anchor heat load.	3

10.8 Detailed description of key policies

This section provides further detail on the key policies from the assessment process, in general terms and in terms of how these policy ideas can be represented in the model.

10.8.1 Planning Policies

Apply Heat Plans in S36

Consents required under Section 36 already require developers to submit a heat and power plan. This should show the potential for recovery of heat. This proposed policy would require developers to commit to implement, some, or all, of the heat recovery opportunities in the heat and power plan.

Connecting adjoining development proposals

Co-location of sources of heat demand next to sources of heat is a key issue. This policy proposal envisages affects developments that adjoin a power station. The developer will be required to consider heat supply from the power station. Supporting evidence may include a price for the connection of a heat supply and a price for the heat supply contract.

Single Outcome Agreements on low carbon heat

Single outcome agreements signed with each local authority are based on local circumstances, However they are prescriptive in other respects about what they should contain. A renewable heat clause within the SOA could place a duty or requirement on the Local Authority to explore or promote low carbon heat with in their area, it could also, for example, place a duty on authorities to produce and maintain heat maps.

Use Planning System to locate heat producers near to heat demand

This proposal envisages allocations of land within Strategic and Local Development Plans to indicate the desirability of certain developments going ahead. A clearly marked allocation for proposals that offer low carbon heat would represent a strong signal to developers that such developments can be beneficial in securing consent.

Going further on heat recovery within the National Planning Framework

The current NFP2 sets out clearly national developments, whose that are regarded as strategically important for Scotland. NFP2 also contains broad support for heat recovery and district heating. This policy proposal suggests going further in NFP3 and requiring heat loads to develop closer to the main power station sites.

10.8.2 Funding and Project Capital Policies

Support for consumer switching to district heating

The costs of connecting to district heating will deter potential consumers. Hence there is a role for policies that will support consumers switch to district heating. This is analogous to the logic used to support recent boiler scrappage schemes, helping consumers remove old inefficient boilers and replace them with more modern and more efficient boilers.

Connecting to a district heating scheme offers greater carbon savings that will be maintained over a longer period, compared to swapping to a new boiler. This principle has already been recognised in Scotland as connection to the Lerwick district heating system was eligible for grant support in the past. This policy idea will accelerate the rate of connection to heat networks.

10.8.3 Technical Policies

System to support infrastructure installation (rights of access to road infrastructure)

This proposal was ranked just outside the top 10 but is the highest ranked technical proposal. It is aimed at overcoming some of the barriers associated with the installation of infrastructure and envisages rights of access to the road infrastructure that is similar to that afforded other utility suppliers. The costs of such a policy are likely to be relatively low for the Scottish Government but there may of curse be additional costs imposed on road users through more disruption to road networks. Such a policy would, it is envisaged, substantially reduce costs for infrastructure provision and increase certainty that reasonable access is available for repairs and ongoing maintenance.

10.8.4 Risk and Uncertainty Policies

Use of public sector as anchor heat load

The use of the public sector as an anchor heat load would have a number of benefits where it is practical. It would provide a stable source of income for the heat supplier and ensure that a certain level of demand is likely to be maintained over a number of years. This would have the beneficial effect of overcoming some to the uncertainty and risk and potentially have the effect of reducing the overall cost of finance for a project. It is envisaged that buildings within the Government estate and the wider group of public sector buildings would be the most likely users of heat. It is assumed that this would not require any form of legislation and a direction would be sufficient to ensure implementation. Overall cost to the public sector should be minimal provided that the cost of heat is reasonably comparable with alternatives.

10.9 Policy Ideas Interpreted within the Model

The policy ideas described above need to be expressed in terms that the model can use. In other words, these are the changes in the assumptions or variables that the model uses.

The key variables are:

• Capital costs.
• Heat prices; and
• Connection rates for consumers.

These changes will be applied to a default - which assumes 75% of the potential heat customers are connected within 15 years.

The following table sets out the proposed changes to the model.

Table 37 Model Assumptions for the Policy Ideas

Policy		Impact on Model
Planning Policies
1	Apply Heat Plans in S36.	Enforcement of the heat plan will establish the DH network at an early stage and will incentivise the power station operator to win heat customers. The main financial incentive that the operator can offer is a lower price for heat. This is assumed to bring forward connections of all types of customers - which will improve the NPV of the scheme. This will be counterbalanced by the lower income from heat sales which will reduce the NPV of the scheme. The model assumptions are: A 10% reduction in heat price charged A 25% reduction in time to connect to the network
2	Connecting adjoining development proposals.	This policy would mean that new development is sited closer to the power station sites, with shorter pipe lengths and lower capital cost. Hence this is modelled as a reduction in the capital cost to serve these heat loads. There is potential flexibility in the location of new development particularly commercial development to be nearer to power station sites. It is assumed that these sites are 50% closer to the power station and hence the capital cost of connecting these is 50% lower.
3	Single Outcome Agreements on low carbon heat.	This would increase the connection rate of public sector buildings. Hence it is modelled as a reduction in the connection time for public sector consumers by 10%. In other words if the site was assumed to connect in 20 years' time, this now happens in 18 years' time.
4	Use Planning System to locate heat producers near to heat demand.	This policy would mean that sites for new power stations are closer to sites with heat demand resulting in shorter pipe lengths and lower capital cost. Hence this is modelled as a reduction in the capital cost to serve these heat loads. There will be much less flexibility over the siting of the power station. Hence this will have less impact than policy idea no 2. It is assumed that these sites are 33% closer to the power station and hence the capital cost of connecting these is 5% lower.
5	Going further on heat recovery within the National Planning Framework.	The National Planning Framework identifies major developments that are important for the economic development of Scotland. The current plan covers 14 projects, one of which is a power station (Hunterston). Only one of the 14 would have a significant heat load (Commonwealth games). These two locations are now fixed, hence the current NFP2 cannot have a great deal of influence over locating heat loads. However the next version of the NFP could exert this influence. It is assumed that the power station sites will be fixed by the time NPF3 is produced. However NPF3 could influence the location of a major heat load close to one or more of the power station sites. Hence this policy will add heat loads, assumed to be 5%, within a 5 km radius of the power station site.
Funding and Project Capital Policies
6	Support for consumer switching to district heating.	This policy will encourage earlier connection of domestic consumers. This will influence the connection of new housing developments. Hence it is modelled as a reduction in the connection time for new housing developments by 33%. In other words if the site was assumed to connect in 15 years' time, this now happens in 10 years' time.
Technical Policies
7	System to support infrastructure installation (rights of access to road infrastructure).	This will have a small impact in reducing the cost of installing the DH network. A 1% reduction in DH capital costs is assumed.
Risk and Uncertainty Policies
8	Use of public sector as anchor heat load.	This would increase the connection rate of public sector buildings, public buildings they would connected earlier that would have been the case. Hence it is modelled as a reduction in the connection time for public sector customers by 20%. In other words if the site was assumed to connect in 20 years' time, this now happens in 16 years' time.

10.10 Results with the Key Policy Ideas Applied

The initial results from the policy assessments are shown below. The core results are shown in the top section of the table.

Table 38 Results from the policy assessments

	Longannet		Hunterston		Cockenzie		Peterhead
Policy	NPV	IRR	NPV	IRR	NPV	IRR	NPV	IRR
None	-£48,104,483	2.80%	-£31,652,504	3.63%	-£87,960,720	2.31%	-£12,623,863	2.08%
1 Apply Heat Plans in S36	-£48,415,687	1.07%	-£32,398,920	2.03%	-£84,975,608	1.59%	-£12,519,219	1.14%
2 Connecting adjoining development proposals	-£43,618,415	3.16%	-£19,424,482	5.15%	-£57,220,334	3.78%	-£8,491,202	3.45%
3 Single Outcome Agreements on low carbon heat	-£47,747,977	2.85%	-£31,508,266	3.66%	-£85,045,106	2.51%	-£12,554,071	2.12%
4 Use Planning System to locate heat producers near to heat demand	-£27,435,761	4.70%	-£19,010,121	5.21%	-£43,146,751	4.65%	-£9,573,646	3.05%
5 Going further on heat recovery in the National Planning Framework	-£27,286,225	4.71%	-£18,602,520	5.27%	-£42,122,071	4.72%	-£9,435,890	3.10%
6 Support for consumer switching to district heating	-£47,194,060	2.91%	-£31,652,504	3.63%	-£82,046,759	2.71%	-£12,416,523	2.18%
7 System to support infrastructure installation (rights of access to road infrastructure)	-£47,484,422	2.85%	-£31,273,232	3.67%	-£86,616,301	2.37%	-£12,532,357	2.11%
8 Use of public sector as anchor heat load	-£47,089,326	2.92%	-£31,244,982	3.70%	-£79,625,844	2.87%	-£12,427,054	2.18%

The following charts show these results graphically with:

• The IRR for the base case of 75% heat load capture in 15 years on the left hand side.
• The IRR for the policy options when applied to the 75% heat load case on the right hand side.

Figure 21 Policy Results for Longannet

Figure 22 Policy Results for Hunterston

Figure 23 Policy Results for Cockenzie

Figure 24 Policy Results for Peterhead

10.11 Conclusions on Which Policies Offer the Best Results

The results from the analysis of the policy options show that none of the ideas tested help the schemes meet the 9% target IRR.

Policy 5, "Going further on heat recovery in the National Planning Framework", has the greatest impact in 3 out of 4 cases. This policy has a high impact because it re-locates all heat loads to be much closer to the power station, making a very significant reduction in the costs of the heat network. There will be practical issues with this policy, for example resistance from hosing developers to have their sites close to a power station. However this test shows the high impact of co-location of heat demand and heat supply.

Policy 4, "Use Planning System to locate heat producers near to heat demand", has a similar level of impact to Policy 5.

For Peterhead Policy 2, "Connecting adjoining development proposals", has the highest impact. Of the 4 sites tested, Peterhead has the highest %age of new development sites within the potential heat load. Hence this policy which only affects connection of new development proposals has a high impact at this site.

Policy 1 reduces the IRR in all cases. This policy was modelled as a 10% reduction in heat price by scheme developers in order to encourage early connection by 25%. This result suggests that developers cannot on their own create an early market from discounted heat sales. So other policy measures will be needed.

The remaining policies have minimal impacts on project IRR.

The two policy ideas with greatest impact co-locate heat supply and demand. This is a strong pointer to the changes that would be needed to bring forward large scale district heating. This is also in line with the experience from Denmark, where the Heat Planning Law is credited with creating Denmark's high use of district heating.