Chapter 5 Preparing Scotland’s Energy Infrastructure for Decarbonised Heat
Decarbonising heat will substantially change the way we use our existing energy infrastructure and influence where we develop new infrastructure such as heat networks, energy network upgrades and additional electricity generation capacity.
We know that our energy networks will need upgrading to support the net zero transition. For many parts of Scotland, energy network upgrades are already underway or being planned. We need to ensure this investment is targeted to support the decarbonisation of heat in buildings, and is paid for in a way that is fair and does not place the burden on those least able to afford it. We will be transforming the way we heat our homes and non-domestic buildings at the same time as we decarbonise transport and industry. It will be important that we can consider and manage these impacts in the round. We will publish an Energy Strategy and Just Transition Plan for consultation in Spring 2022, taking into account the whole system issues raised by our net zero climate targets and the wider infrastructure and investment needs of our energy system.
The Electricity System
By 2030, a much larger proportion of heat demand will be electrified compared to today. As set out in Chapter 2, electric heating systems will likely be predominantly either individual heat pumps within buildings or larger heat pumps providing heat to heat networks. Transitioning such a large number of properties to electric heating systems will substantially increase the demand on our electricity system. This will bring both challenges and opportunities with new technologies and potential to change patterns of demand as well as a new set of stakeholders who will be interacting with electricity networks for the first time or in new ways.
Delivering this change in a way that is resilient, affordable and low carbon means ensuring that we have sufficient low carbon generation in Scotland, that our electricity networks are capable of delivering that electricity to where it is needed, and there is sufficient flexibly – for example from energy storage – to balance supply and demand.
It will be critical to ensure that we have the right infrastructure to ensure sufficient renewable electricity is available, at the right times and in the right places. Wider policy initiatives to decarbonise other sectors, including transport and industry, will increase electricity demand still further. Although Scotland’s electricity generation is already largely decarbonised, we need to understand the generation capacity necessary to meet future demand, as well as an indication of where in Scotland renewable generation will be located and how it will be delivered to consumers.
As noted in Chapter 2, meeting our ambition for decarbonised heat is likely to require fossil fuel consumption to reduce by 28 TWh in 2030 compared to today. Taking account of the impact of increased energy efficiency of our building stock, initial estimates indicate that if heat decarbonisation is largely delivered through electrification, relying primarily on heat pumps and with limited contribution from hydrogen, the level of renewable electricity required is equivalent to the output of an additional 3GW of onshore wind or 2GW of offshore wind. We continue to develop our understanding in this area, particularly in terms of the need to ensure a secure supply at all times and to balance supply and demand at all times.
A majority of respondents to the consultation highlighted the need for further action that can be taken to create resilient networks ready for heat decarbonisation. Respondents stressed the need for infrastructure upgrades across the electricity system, the need for an appropriate regulatory approach that will enable network investment and growth in capacity, alongside the Scottish Government’s role in facilitating public and private investment.
As electricity policy and regulation is reserved to the UK Government, action from the UK Government and Ofgem to ensure that renewable electricity generation is properly supported and enabled will be crucial. We continue to seek assurances from the UK Government and energy regulator on the measures that they will take to ensure that this need is met.
Electrifying a significant proportion of our heat over the course of this decade will substantially increase the amount of energy that our local electricity distribution networks need to deliver to buildings. There will be places right across Scotland where network owners will need to reinforce cables and upgrade the substations that serve our neighbourhoods and buildings, and do so in a way that coordinates with plans for conversion to electric heat pumps. As set out in our Principles for the Development of Scotland’s Gas and Electricity[xliii] networks, this means ensuring an integrated approach to planning electricity network investment linking the Scottish Government, Ofgem and Scotland’s network owners. These principles were developed in partnership with Ofgem and Scotland’s gas and electricity network companies, and we continue to work with all those involved in planning and delivering our energy networks to ensure the principles underpin decision making.
The cost of this investment could be significant, especially when coupled with the impact on electricity networks of increased electrification of transport. We have worked closely with Scottish DNOs, SPEN and SSEN, to support business planning for the RIIO ED2 price control. Investments made over the RIIO ED2 period (2023 – 2028) will be critical for the Scottish 2030 interim targets as set out in the Climate Change Plan update. The proposed investments from both DNOs, if approved by Ofgem, would support as many as 500,000 heat pumps on the electricity system in Scotland. ‘Uncertainty mechanisms’ will allow networks to seek additional allowances where the need for investment becomes clear, potentially allowing greater numbers of low carbon technologies to connect. In addition to ensuring investment is delivered appropriately during the ED2 period, it will be important that we continue to work closely with DNOs throughout the 2020s so that ED3 business plans, which will cover the period 2028 – 2033 reflect progress made and developing ambition.
We will continue to work with DNOs as they prepare to submit final business plans in December this year. We have set up a new Heat Electrification Strategic Partnership with the Scottish DNOs as a forum for working together to understand the scale, pace and location of network investment needed, build the evidence for the right investment decisions for Scotland and ensure compatibility with strategic policy direction, and delivery plans.
As well as gathering evidence on areas such as the cost profile of network investments, through this new partnership we will investigate and invite demonstration projects which allow us to model the real time network impact of heat pump deployment, energy storage and demand management.
We recognise that there is a great deal of uncertainty on the scale of costs, as well as on understanding how these costs will be met, who will pay and what the impact may be on consumer bills. We are commissioning work to explore the potential network investment costs of the heat transition for Scotland, to provide greater clarity on the likely range of costs, and likely impacts on consumers, to help inform further decision making.
There will also be increasing value in energy storage. This includes large scale energy storage such as pumped hydro systems and large-scale battery storage but also heat storage in heat networks, building-scale batteries and thermal storage. These tools could help balance the use of electricity for heat in buildings ensuring that networks are not overloaded and help to keep consumer bills affordable. We are undertaking research into the role of energy storage in supporting the electrification of heat. In particular we will consider the role of energy storage in buildings and heat networks.
LHEES will be rolled out for local authority areas across Scotland, providing a strategic plan for network companies to draw on in targeting their investment.
Summary of action we are taking:
32. We will publish an Energy Strategy and Just Transition Plan for consultation in Spring 2022, taking into account the whole system issues raised by our net zero climate targets and the wider needs of our energy system.
33. We will continue to conduct analysis to understand generation and network requirements, in terms of the scale and location of the demand that heat electrification could bring.
34. We continue to press the UK Government to continue to provide the support needed to develop Scotland’s renewable electricity pipeline needed to meet a decarbonised future for heat.
35. We are commissioning work to explore the potential network investment costs of the heat transition for Scotland, to provide greater clarity on the likely range of costs, and likely impacts on consumers, including those in, or at risk of, fuel poverty and help inform further decision-making.
36. We will conduct research into the role of energy storage in buildings in reducing consumer costs.
37. We will continue our Heat Electrification Strategic Partnership with Scotland’s electricity network operators, and use this forum to ensure that the upgrades required are delivered when and where they are needed and that the LHEES framework can inform this.
38. We will investigate demonstration projects through our delivery programmes strategic priorities to allow us to model real time network impact of heat pump deployment, smart-enablement, energy storage and demand management.
39. We continue to engage Ofgem and work with them in line with the Principles we agreed for development of Scotland’s Gas and Electricity Networks to ensure that Scottish Government targets and ambitions as set out in this final Strategy are fully considered as part of decisions on network investment.
Renewable electricity generation will need to continue to grow to meet the additional demand created by electric heating. This will include large scale renewable generation such as offshore wind along with local generation connected to the distribution network.
Energy storage including batteries and thermal energy storage can help integrate electric heating into the networks.
The national transmission network will play a critical role transporting renewable electricity from large scale generation to demand including demand for electric heating.
The higher voltage parts of the distribution network need to be developed strategically and flexibly to support increased demand.
Local, low voltage parts of the distribution network need substantial upgrades to accommodate electric heating. Investment will need careful coordination with the role out of zero emission heat.
Some customer connections will need upgrading to supply electric heating along with EV charging.
Scotland’s mains gas network currently delivers a secure supply of energy to domestic consumers and businesses. Around 81%[xliv] of homes and approximately 30% of non-domestic buildings use mains gas for heating. Currently, the gas supplied via the mains gas network is predominantly natural gas, a fossil fuel composed mainly of methane.
To meet our emissions targets, we must reduce significantly - and eventually phase out entirely - our use of natural gas in domestic heating systems. By 2030 at least 1 million homes will have to have switched to zero emissions heat.
Alongside implementing energy efficiency measures, there are two main ways to achieving this reduction: replacing the natural gas provided in the network with decarbonised alternatives; or switching to alternative heating systems in buildings, such as heat pumps and heat networks.
Many respondents to the consultation supported our recognition that decarbonised gas is unlikely to play a significant role in emissions reduction before the late 2020s and agreed that there is a need to continue to gather evidence. Some respondents expressed concern that this may introduce further uncertainty around policy support for gas decarbonisation, delaying investment decisions.
Green Gas Support Scheme
The UK Government is launching the Green Gas Support Scheme, which will run for 4 years from autumn 2021. Under UK Government proposals, the scheme will support biomethane injection in to the gas grid - expected to contribute 21.6MtCO2e of carbon savings over the lifetime of the scheme. The scheme will be funded via a Green Gas Levy.
At GB-level, the gas network sector is working to blend alternatives to natural gas – currently biomethane but in future also hydrogen – into the gas network. This delivers near-term emissions reductions and helps to build supply systems that over time may be able to fully displace natural gas. In 2019, an estimated 1.5% of Scottish gas consumption was accounted for by biomethane blended into the gas grid[xlv], up from 0.3% in 2015. This is estimated to reduce emissions by around 130 kTCO2e per year. Over this decade we need to see an increasing blend of biomethane used in our gas networks. We will work with the UK Government and project partners in Scotland to maximise investment under the UK’s Green Gas Support Scheme.
The gas industry is testing options for blending hydrogen into the gas network up to the limit that can be safely used in existing appliances. Using a blend of hydrogen (up to 20% by volume) has the potential to reduce carbon emissions from gas use by up to 8%. We are working with the gas network sector and the UK Government to explore opportunities for blending hydrogen in the gas network. We continue to keep under review the benefits and cost-effectiveness of increased hydrogen blending at GB-level, including in terms of the wider energy system and supply chains. The Scottish Government’s Hydrogen Policy Statement[xlvi] sets out our wider vision for the role of hydrogen in Scotland.
Regulation of the gas network is a matter for the UK Government. We are urging the UK Government and regulator to expedite changes to regulation to facilitate greater levels of gas blending, and will continue to engage with industry to encourage supply chain growth as part of our green industrial strategy.
100% hydrogen for heat
Our overarching objective is to ensure Scottish consumers are able to access low-cost hydrogen in the gas grid, should that become available in the late 2020s and early 2030s, and to maximise the volume, and accelerate the deployment, of hydrogen from renewable sources.
In the longer term, should demonstration and safety case trials prove successful, conversion and repurposing of parts of the gas network to carry 100% hydrogen could play an important role in reducing emissions from buildings. Hydrogen may be particularly appropriate in certain locations, where there is local supply or where industrial demand creates economies of scale. It will be important that the heat transition happens in a planned way so that piecemeal deployment of heat pumps and heat networks does not undermine the socio-economic case for converting parts of the gas network to 100% hydrogen in the longer-term. We are actively exploring where in Scotland hydrogen might ultimately be most appropriate for heating homes and buildings and we are using this evolving understanding to guide our approach. We will set out more detail on the pathways to decarbonised gas and options for hydrogen in the net zero transition in our Energy Strategy and Just Transition Plan.
As above, SGN are exploring the potential for eventual 100% conversion of large parts of their network. This work is being taken into consideration at GB and Scottish levels, and we are working in partnership with the sector to ensure the evidence base on the future of Scotland’s gas networks is robust and can inform policy development. We expect this work to be published soon and to highlight the near term actions that would be needed for 100% hydrogen conversion of parts of our gas network to remain open as an option for the longer term.
Our work with the sector will inform our Energy Strategy and Just Transition Plan, where we will set out in more detail the options and timescales for deployment.
Case Study: H100 Fife Neighbourhood Trial
SGN is partnering with other UK gas operators on a world-first demonstration of a 100% hydrogen energy system, to evidence the role that hydrogen can play in decarbonising heat. The project is constructing and will operate a hydrogen network in Fife able to service around 300 houses. This will be of UK-wide significance, offering validation of the evidence base carried out by the UKG in their Hy4Heat Programme[xlvii].
The project will connect with the existing 7MW wind turbine situated off the coast of Leven in Fife to directly supply power to the electrolyser for hydrogen production, evaluating the opportunity for grid integration systems between renewables and hydrogen production, and demonstrating the business case that offshore wind can offer for production of hydrogen at scale.
The Scottish Government provided £6.9 million support towards the cost of this £27.7 million project. The bulk of remaining funding has been awarded by Ofgem with other funders including, SGN, Cadent, Northern Gas Networks, and Wales and West Utilities. H100 Fife is recognised as a key building block in the strategic ‘Gas Quality Decarbonisation Pathway’ set out by UK gas distribution network operators and adopted by the Energy Networks Association.
Over the next decade we need to see increased demonstration of hydrogen for heat including the testing of appliances in homes and businesses, and trials of increased blends of hydrogen in the existing gas distribution network (through recently upgraded polyethylene pipes). The UK Government is also supporting industry to conduct first-of-a-kind hydrogen heating trials, including a neighbourhood trial by 2023 and a village scale trial by 2025. We urge the UK Government to increase the pace of these trials and ensure they are delivered soon enough to provide the critical underpinning needed to keep options open for mass conversion to hydrogen in Scotland. In addition, to unlock delivery at scale and to meet our climate targets, key strategic decisions on the future of the gas network are required as soon as possible to drive investment planning for delivery.
It is essential that UK Government launch its Call for Evidence and accelerates decisions on the future of the gas network, and rapidly develops regulations to support these.
The trialling of ‘hydrogen-ready’ boilers and appliances designed to run on hydrogen is underway through the Hy4Heat programme.
We urge the UK Government to progress the consultation on enabling or requiring hydrogen-ready boilers by 2026 as announced in the Energy White Paper and UK Hydrogen Strategy.
We look forward to working with the UK Government to ensure the boiler market can develop rapidly in readiness for a future decarbonised gas grid.
Summary of action we are taking:
40. We will continue to work with SGN and National Grid Gas Transmission to provide evidence on the role gas decarbonisation can play in meeting our targets, and a timeline for resolving uncertainties.
41. In cooperation with stakeholders, including network companies, local authority and delivery partners, we are working to identify strategic areas most likely to have access to hydrogen in the future, and high-potential areas for the use of hydrogen for heat in Scotland
42. We will work with the UK Government to ensure that the Green Gas Support Scheme meets the needs of Scotland. We will monitor the impact of the Green Gas Levy on end user costs, especially in relation to fuel poverty levels, and we will continue to urge the UK Government to make progress on the transition to a volumetric mechanism for the levy.
43. We will work with the Gas Network Operators and the UK Government to explore opportunities for increasing the blend of hydrogen in the gas network.
44. We will urge the UK Government to expedite progress on amending regulations and legislation to support hydrogen blending, accelerate decisions on the role of 100% hydrogen in the gas grid and to enable our ambition to maximise volumes of renewable hydrogen in our energy system as quickly as possible.
45. We will continue to support the development of evidence on the potential role of hydrogen in decarbonising heat including demonstration projects such as H100.
46. We will continue to press the UK Government to progress the consultation on enabling and requiring hydrogen-ready boilers.
47. We will support initial action by SGN on their pathway to converting large segments of their network to 100% hydrogen, wherever those actions are commensurate with keeping options open and limiting consumer costs.
Creating the conditions to secure growth of Heat Networks in Scotland
Heat networks are a tried and tested technology used extensively across Europe. Currently heat networks supply only 1.5% of heat in Scotland, but are a key strategic technology for reducing emissions from heating our homes and buildings. Heat networks are a low regret option as they are agnostic of fuel sources and are capable of being changed over time. For example, some heat networks are powered by high emissions Combined Heat and Power (CHP) systems but in the future could be switched to water source or ground source heat pumps should this prove cost-effective.
As part of the Heat Networks (Scotland) Act we have new targets for the amount of heat to be supplied by heat networks. These require the combined supply of thermal energy by heat networks to reach 2.6 TWh of output by 2027 and 6 TWh of output by 2030. This is 3% and 8% respectively of current heat supply. The Act requires Scottish Ministers to set a target for 2035, in addition to the 2027 and 2030 targets.
The “Opportunity Areas for District Heating Networks in the UK” report[xlviii] published in August, used geospatial modelling to identify areas where there may be economic potential for heat networks. This analysis estimates that heat networks could provide around 15TWh of heat per year in Scotland by 2050. This is likely to be the maximum potential.
To further develop our understanding of the suitability of heat networks in Scotland we are undertaking the First Nationwide Assessment for potential heat network zones. This and work carried out to develop Local Heat & Energy Efficiency Strategies will inform a proposed 2035 heat networks target, which we will consult on in early 2023.
We continue to support the deployment of heat networks in Scotland. The centrepiece of our efforts is our Heat Networks (Scotland) Act[xlix] which, was unanimously agreed by the Scottish Parliament. The Act and secondary legislation to be developed will:
- regulate the market through a licensing system so that homes and businesses are supplied by solvent, fit and proper operators, while requiring networks to be developed and maintained to high standards;
- create a bespoke system of scrutiny for new networks, to ensure that they can contribute to climate change and fuel poverty objectives, before they are consented for development;
- require heat networks to have a scheme in place to transfer operational rights to a third party to ensure sustained supply, if and when needed;
- require the identification of particularly suitable areas for heat network development and operation across Scotland – Heat Network Zones – including by drawing on information obtained through a new requirement on the public sector to assess the suitability of its non-domestic buildings to connect to heat networks (this may be applied to other non-domestic buildings beyond the public sector);
- attract new, and lower cost investment in the sector by awarding long-term Heat Network Permits to develop and operate in the most opportune areas. This will provide assurances over the customer base available, and enable borrowing to be repaid in line with the long-lived nature of the heat networks infrastructure; and
- grant new rights for heat network operators – such as wayleaves, compulsory purchase, road works and surveying rights – to reduce the costs and time involved in construction and maintenance.
The full regulatory regime will take time to establish and a phased approach may be needed to enable the heat networks industry to adjust to new requirements. We remain committed to working with the heat networks sector as we develop detailed regulations and aim to put in place a functioning regulatory system, subject to public consultation by 2024. As with the Bill, we will work with our Heat Networks Working Group in preparing the Regulations. The working group’s membership may be refreshed to ensure we have the necessary skills and expertise to inform what will be detailed secondary legislation.
Consultation respondents expressed their support for the Act and the clear targets in it, though some highlighted specific challenges to heat network deployment. We will take these into account as we develop and publish a Heat Networks Delivery Plan by April 2022. This will set out how the Heat Networks Act and wider policy will increase the use of heat networks in Scotland by 2021.
In addition, we are committed to working with the UK Government to develop technical standards for the heat networks sector that build on existing good practice and apply across the UK. We are jointly investigating options for developing a common set of standards following an initial scoping project.
We will continue to support the development of heat networks in communities across Scotland through our funding and delivery programmes such as the successor to the Low Carbon Infrastructure Transition Programme (LCITP) and the refocused District Heating Loan Fund (DHLF) (see Chapter 6).
To help support and encourage investment in heat networks, the Non-Domestic Rates (District Heating Relief and Renewable Energy Generation Relief) (Scotland) Amendment Regulations 2021 introduced a 90% relief from non-domestic rates until 31 March 2024 for new networks run from renewable sources. This goes beyond the existing 50% relief that is in place for heat networks. These regulations also provide for the 50% relief to continue until 2032; responding to calls to from the sector to provide this certainty. These rate reliefs help to support the business case for new networks by reducing their operational costs at the same time that revenue support for new schemes under the UK Government’s non-domestic Renewable Heat Incentive (RHI) came to an end.
We cannot rely on public investment alone to fund the development of heat networks in Scotland. It is imperative that we create a sustainable and investible market for heat networks. The Heat Networks (Scotland) Act, along with our proposed 2024 New Build Heat Standard (see Chapter 8), already includes many of the key ingredients to make heat networks an attractive proposition for investors. We know that investors need confidence in future revenues and in order to create this demand assurance securing key anchor buildings is vital. Later this year we will consult on detailed proposals to:
- require anchor buildings in the non-domestic sector to make adaptations to become ‘heat network ready’ to connect, and
- use the non-domestic rates system to encourage such buildings to go on to use a local heat network.
These changes would provide the substantial, long-term and secure customer bases needed, and along with wider sector regulation will enable commercially viable heat networks to develop at the scale needed to meaningfully contribute to Scotland’s climate change targets.
Case study: Glenrothes Energy Network
Fife Council and RWE received financial support of £8.6 million through the Scottish Government’s Low Carbon Infrastructure Transition Programme (LCITP) to develop and deploy a low carbon heat network in Glenrothes. The project uses heat produced from the RWE-owned Markinch biomass combined heat and power plant and comprises an energy centre, thermal storage and a distribution network.
The award-winning project, which officially opened on 24 April 2019, is supplying reliable, low carbon heat to a range of customers in Glenrothes town centre including the Fife House Complex, Rothes Halls and the sheltered housing accommodation at Jubilee Grove. The £24 million scheme is an exemplar of partnership working to achieve emissions reductions and has potential for expansion in the future.
New heat networks will need to be powered using low and zero emissions sources of heat, for example from heat pumps or surplus or waste heat. When regulation of the heat network sector is implemented we will only consent heat networks with low and zero emission heat sources. This will mean that gas CHP may not be used in new heat networks in Scotland, unless new, credible evidence emerges that such systems can provide the needed emissions savings from the point that the consenting regime is in place[l]. From the time the licensing regime is in place, existing, fossil fuel powered heat networks will be required to decarbonise upon replacing their heat generation assets. Further details are set out in our draft Heat Networks Delivery Plan. The remainder of our fossil fuel based existing networks will be required to decarbonise by 2045 at the latest as required by our climate change targets.
There are two significant examples in Scotland of heat being used from energy from waste (EfW) plants, with Shetland Heat Energy & Power being one of the largest networks in Scotland and a new network being developed to provide heat to Shawfair Town from Millerhill in Midlothian[li]
Energy from Waste projects have been instrumental in the growth of heat networks in Norway. It is important that we learn from this, given the scale of the challenge in Scotland’s buildings sector. We have already set out in Scotland’s Fourth National Planning Framework: Position Statement[lii] that a potential change to planning policy will be to encourage applications for energy from waste facilities to provide a connection to a heat network. Alongside this, in 2021-22 we will engage with stakeholders and as relevant consult on whether there is need for further measures to increase the utilisation of waste or surplus heat via heat network. For example there may be ways in which the completion of heat offtake agreements between Heat Network and Energy from Waste operators could be supported or streamlined. In addition, Heat & Power Plans could be further developed to form a useful source of information for those seeking to develop heat networks.
To help identify and build a pipeline of heat network projects we will develop a Heat Network Investment Prospectus, which will build on the report on Opportunity Areas for District Heating, to identify key strategic opportunities for heat network development in the 2020s. This investment prospectus will help to guide our capital investment and will underpin the development of LHEES.
Heat networks are technically complex infrastructure projects requiring a range of specialist expertise. In order to drive projects forward, we will launch the Heat Network Pre-Capital Support Unit in 2021 to expand on the previous role of the Heat Networks Partnership in Scotland to act as a key mechanism for supporting the development of a pipeline of projects across Scotland, co-ordinating support across the public and private sectors, identifying and nurturing opportunities for new heat networks, expansion of existing zero emissions networks and considering the options for decarbonising existing fossil fuel powered networks.
Summary of action we are taking:
48. Consult on the use of sections 44 and 63 of the Climate Change (Scotland) Act 2009 to introduce mandatory connections for large and publicly-owned buildings in next Parliament.
49. Consult on how new powers under section 15 of the Non-Domestic Rates (Scotland) Act 2020[liii] could be used to de-risk investment and drive net zero behaviour, including connections to heat networks.
50. Develop a set of common technical standards for development and operation of heat networks across Great Britain which will help support the development of skills and the sector’s supply chain.
51. Include heat networks in our ongoing programme of reviewing Permitted Development Rights (PDR) and, subject to the findings, lay Regulations.
52. We will consult in 2021-2022 on whether the need for further regulatory measures or support measures to increase the utilisation of waste or surplus heat, for example from Energy from Waste plants, to be supplied and/or used through heat networks.
53. Publish a Heat Network Investment Prospectus during the next financial year that will demonstrate the size and location of heat network opportunities across Scotland, as well as information on the decarbonisation requirements of existing networks in Scotland.
54. We will launch the Heat Network Pre-Capital Support Unit in 2021, expanding on the previous role of the Heat Network Partnership to provide enhanced support to the public and private sector in developing a pipeline for delivery.
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