On 29 June 2016, just weeks before its integration into the Department of Business, Energy and Industry (BEI), the Department of Energy and Climate Change (DECC) launched a consultation on the design and management of the Heat Network Infrastructure Project.

The focus of the consultation is how the much-trumpeted £320 million of support for heat networks that was announced in the Government's last Spending Review should be spent over the course of the next five years.
Here, Gowling WLG's energy experts summarise the key provisions of DECC's consultation.

Background

While we have several large heat networks in city centres across the UK, and many smaller-scale heat networks in housing developments (predominantly in relatively new apartment blocks), we are still lagging behind our European neighbours. For example, in Denmark 60% of the population is connected to a heat network (in Copenhagen this reaches over 90%), while in the UK, just 2% of heat is supplied through a heat network.

The UK is committed to reducing its carbon greenhouse gas emissions to 35% below 1990 levels by 2020 and to 80% below 1990 levels by 2050. Increasing the efficiency of our national heat consumption has the potential to make a significant impact on our ability to meet those targets.

Properly designed and operated heat networks offer much greater efficiencies than standard isolated gas-fired boilers, with heating costs for flats, for example, being up to 30% lower for consumers on a gas-supplied heat network than comparative consumers using individual gas boilers[1]. Heat networks also facilitate the option of low-carbon heating sources, which can only be used at scale. This is in addition to the benefits to the local economy of such schemes.

It is for these reasons that the Government is seeking to encourage further investment in heat networks through the distribution of its allocated £320 million war chest. It hopes the support will leverage up to £2 billion of additional capital investment - resulting in hundreds of new heat networks that will collectively generate enough heat to supply the equivalent of over 400,000 homes, and in doing so, create a self-sustaining market.

It is important to note that the funding is not just intended for new heat networks - expansions of existing networks, refurbishment works and interconnection of heat networks are all potentially eligible.

Key provisions

DECC is seeking views on how best to utilise the £320 million of funding available to it (only half of which is fiscal - i.e. half must ultimately return to Government after its distribution, whether as a result of loan repayments or through equity stakes). DECC intends to have a narrow pilot funding round initially - for which local authorities (and possibly other public sector bodies) will be eligible, ahead of a full rollout to the wider public sector, community, not-for-profit groups and the private sector.

The issues raised in the consultation are:

  1. Eligibility - who should be able to access the funding? As we mention above, initially DECC proposes that only local authorities and potentially other public sector bodies should be eligible. DECC has proposed detailed eligibility criteria for consideration.
  2. Purpose of funding - what should the available capital be used to fund? Construction costs and commercialisation transaction costs (technical, financial and legal work prior to construction) are the proposed primary targets.
  3. Funding mechanisms - which funding mechanisms should be used? For the pilot, it's proposed that it is limited to grants and/or loans. For the wider roll-out, DECC is considering grants, soft loans, equity stakes and/or guarantees.
  4. Decision making criteria - what criteria should be used to assess applications for the funding?
  5. Monitoring - how should DECC monitor the fund to ensure that it achieves its aims?

Responses to the consultation are requested by 3 August 2016.

Comment

The launch of the consultation has been a long time coming and is to be welcomed. DECC has recognised that heat networks are not currently attractive investment opportunities (most new heat networks are installed as a result of planning obligations rather than investment potential) and it is hoped that the available £320 million will help trigger a step change in the way the UK consumes its heat.

That's a big hope for such a (relatively) small amount of money, but if the Government is able to leverage the expected £2 billion of private sector investment, then we very well may see the emergence of a self-sustaining market. As always, only time will tell, but our initial reaction to the proposed scope of the funding is overwhelmingly positive.

Our energy team has extensive experience of advising on the development of heat networks;  advising on the appointment of Energy Services Companies (ESCos) to operate and maintain such networks; and advising the heat supply agreements (both commercial and domestic) between the owner/operator and the end customer.

Footnote

[1] AECOM (2015) Assessment of the Costs, Performance, and Characteristics of UK Heat Networks - pp 35-36