District heating: guidance on project level socio-economic assessment

2. Context

2.1 Introduction

2.1.1 Policy context

The Scottish Government's Climate Change Plan sets ambitious pathways for the decarbonisation of heat supply to buildings and reduction of their energy demand. Energy Efficient Scotland is the cornerstone of delivering these low carbon heat and energy efficiency priorities. The programme will be a strategic partnership with local government, building upon the successful components of existing programmes.

Given the need for strategic planning of Energy Efficient Scotland across the 20 years of the programme, the Scottish Government has consulted in detail on the introduction of a new statutory duty on local authorities to develop Local Heat and Energy Efficiency Strategies (LHEES)^[1].

LHEES would be the link between long term targets, national policies and the delivery of energy efficiency and heat decarbonisation on the ground. They would allow local authorities to prioritise and target work, whether that is supporting owner occupiers and SMEs to install energy efficiency measures or encouraging the development of district heating or other low carbon heat.

The Scottish Government has proposed that local authorities would be required to undertake a socio-economic assessment, following guidance, in developing their LHEES. This assessment should demonstrate that priorities have been designated appropriately according to national and local objectives, including fuel poverty.

In addition to LHEES, to further strengthen local authorities' existing powers and support the delivery of low carbon heat infrastructure, the Scottish Government has proposed a district heating consents and licence regime. In their application for a district heating consent, developers would be required to undertake a project level socio-economic assessment^[2]. The local authority would use the project level socio-economic assessment submitted by the district heating developer to decide on district heating consent applications. It would also use assessments as part of the criteria to judge tenders.

The Scottish Government has proposed that the guidance for socio-economic assessment for both LHEES and district heating consents would be made available in the form of a detailed methodology, laying out the overarching process and standard assumptions.

This document provides the methodology for assessing socio-economic impacts of district heating projects. There is a similar document detailing the methodology for assessing socio-economic impacts of LHEES, which can also be found on the Scottish Government's website.

2.1.2 What is socio-economic assessment

The purpose of conducting a socio-economic assessment is to identify and analyse the net impact on society of a given strategic intervention, relative to its closest alternative course of action.

In contrast to technical and financial analyses, socio-economic analyses assesses the impacts of a project or programme for the community beyond those directly involved in the formulation and negotiation of the content and scope of what is being delivered. In particular, in the context of energy and heat, socio-economic assessments allow consideration of impacts on fuel poverty and decarbonisation to be considered alongside the financial and technical viability of an intervention.

Technical and financial assessments are strictly limited to the direct impacts of a project; that is, they cover the technical and financial viability of a project, including an assessment of any constraints which could prevent the project from going ahead. Such constraints could include road access issues faced by the project developer, or limits to potential building fabric improvements due to a building's listed status.

Where a technical and financial analysis looks at whether a project or initiative stacks up on its own terms, a socio-economic assessment needs a basis for comparison because socio-economic assessments look at how a proposed intervention affects the status quo for society, across a range of different aspects.

In order to assess accurately all of the impacts of an intervention, it is necessary first to understand where and to what degree a given impact will influence the status quo; for instance, how an intervention in the form of a proposed heat network is likely to affect fuel poverty in a given zone, relative to the status quo of continued reliance on individual heating solutions. To avoid "cherry-picking" of potential impacts, which would bias the assessment one way or another, a socio-economic assessment must follow a robust, structured approach.

The socio-economic assessment methodology detailed within this document is based on best practice guidance from existing literature sources. A key document that has been referred to throughout is HM Treasury's Green Book (2018). Key elements of the Green Book are shown in Box 1.

Figure 1 Illustration of socio-economic, financial and technical analysis of a project

This document provides guidance on how to conduct socio-economic assessment at the project level. Cost Benefit Analysis (CBA) has been identified as the most appropriate socio-economic assessment methodology for assessing district heating interventions at project level.

CBA assesses the costs and benefits from a proposed project (intervention) against what would happen otherwise (the status quo or baseline, also known as the counterfactual).

Converting as many of the costs and benefits into monetary values, including those that are not usually bought or sold under market conditions, allows the analysis to generate a single value such as a social Net Present Value, which estimates whether the proposed project is better for society than the status quo.

This approach is generally most useful when most of the impacts identified can be monetised.

Box 1: Key elements to note from HM Treasury's Green Book (2018)

HM Treasury's Green Book (2018) provides guidance on appraisal and evaluation of policies, programmes and projects, a key requirement in any undertaking where public resources are used. The key aim of the guidance provided in the Green Book is to support decision making processes across all sectors in which UK public sector policy makers and practitioners are involved.

The following points of guidance from the Green Book have been considered:

• Identifying the correct valuation methods for energy usage and greenhouse gas emissions.
• Applying a suitable baseline methodology to serve as a benchmark from which alternative interventions can be compared.
• Taking into consideration costs and benefits that occur across different periods of time – by implementing a social discount rate of 3.5% in real terms.
• The appraisal of social value should be conducted using prices which are representative of values during the chosen base year (see section 3.3.2).
• Caution should be applied when calculating local employment impacts (termed 'labour demand'), as any deviations from a proposed intervention cannot be reliably measured or observed from a national perspective.
• Amending Cost Benefit Analysis outputs to take into consideration risk and uncertainty.

The methodology described in this guidance has been tailored specifically for the development of project-level district heating interventions. The intention is that this guidance sits as a comprehensive, stand-alone document aligned with existing best-practice guidance available in the UK and consistent with the development of the Green Book Five Case Model in public sector decision-making (which is covered in Table 6 of this guidance document).

2.2 How to use this document

This document is intended for public and private sector practitioners and project managers across Scotland, who, under Energy Efficient Scotland, may be required to develop socio-economic assessments of district heating interventions (i.e. proposed district heating schemes/projects).

This document aims to guide the user through the step-by-step processes that are needed to conduct an effective, robust socio-economic assessment. Concepts are based on best-practice guidance and the approaches outlined are replicable and illustrated with relevant examples.

The structure of this document focuses on:

• communicating the inputs required to conduct assessments;
• detailing how to set an appropriate baseline scenario;
• the process of calculating CBA;
• the key outputs which should be expected from assessments; and
• the importance of conducting uncertainty and sensitivity analysis.