Scotland's Heat Network Fund: application guidance

Eligible projects 

Who can apply 

Scotland’s Heat Network Fund (SHNF) is open to organisations seeking to develop and deploy heat networks in Scotland. Applicants could include: 

• enterprises of all sizes 

• community groups 

• registered charities 

• social enterprises/development trusts 

• local authorities  

• public sector organisations 

• registered social landlords 

• energy service companies 

• academic institutions 

Investment from nations outside of the UK is eligible provided the project is entirely delivered in Scotland. All projects are required to have a UK based bank account. 

Individuals seeking to provide heat to single domestic dwellings or single non-domestic buildings are not eligible for support under the fund.  

Projects must be of sufficient scale to be suitable for the SHNF, which will be decided on a case-by-case basis.  

Projects must meet the definition of a heat network as per the definitions provided in Heat Networks (Scotland) Act 2021. They can be district or communal heating systems. 

Email HeatNetworkFund@gov.scot if you have any queries about eligibility requirements. 

Eligible project types  

1. New low or zero direct emissions district heat network projects  

District heat networks are defined as a network by which thermal energy is distributed from one of more sources of production to more than one building. A new district heat network can include: 

• a new zero direct emission heat (ZDEH) source of generation (including capturing existing waste heat from an industrial process, energy from waste and wastewater) 

• new primary heat distribution 

• new secondary heat distribution, including Heat Interface Units (HIUs) (although existing HIUs may be used if a new heat network is connecting to buildings previously connected to a heat network) 

2. New zero direct emissions communal heating systems 

A communal heating system is a system by which thermal energy is distributed from one or more sources of production to one building comprising more than one building unit, for example a block of flats. 

A new communal heating system can include: 

• a new zero direct emission heat source (ZDEH) (including shared ground loops) 

• new Primary Heat Distribution 

• new Secondary Heat Distribution (including HIUs) 

3. Expansion of existing heat networks, with requirements to install additional ZDEH generation 

There are existing fossil fuel heat networks across Scotland which have scope for expansion. SHNF will support the growth of these networks, but the expansion must align with the core objective to reduce carbon emissions.  

To receive funding for expansion, the equivalent of the heat demand of the new connections must be supplied from a ZDEH source as a minimum and use of the ZDEH source should be prioritised. Post-commissioning, the grant recipient will be required to submit an annual declaration and supporting evidence to show ongoing compliance with these requirements.

CAPEX is short for ‘capital expenditure’. CAPEX for both the expansion of the heat network infrastructure and the commissioning of the new heat source are eligible for funding.  

For expansion projects, the lead applicant and grant recipient should be the organisation which owns the existing heat network, rather than an organisation which owns a building that will connect to the network. Evidence will be required to show this. 

Expansion proposals must demonstrate:  

• the heat demand of new heat connections and that the capacity of the additional ZDEH generation will be sufficient to meet this heat demand 

• that control strategies will result in prioritisation of heat provision from the ZDEH source with modelling of use provided to evidence this 

• plans to fully decarbonise the rest of the heat network 

4. Existing networks switching to Zero Emissions Heat Source 

The SHNF can also offer grant funding to support existing fossil fuelled heat networks to switch to zero emissions heat sources.  

Where the fossil fuel heat sources are being retained, applications must demonstrate to what extent the network will be decarbonised and provide assurance that the network will be managed in a way that minimises the use of fossil fuel sources.  

Applications must also demonstrate the future strategy to fully decarbonise the heat network which will be monitored as part of SHNF annual monitoring post-commissioning.  

We may request that a decarbonisation route map is submitted with timescales for decarbonisation. 

Decarbonisation proposals must demonstrate:  

• the extent of which the heat network will be decarbonised 

• if the heat network will not be fully decarbonised, plans to decarbonise the remaining heat provision  

Funding may be available for improvements to heat network efficiency where this enables the decarbonisation of the heat network.  

For example, funding may be provided for the capital costs of installing equipment to reduce flow temperatures to enable a heat pump to run more efficiently.  

Funding is not available for general maintenance costs. If the existing heating system is at the end of its working life and requires replacement, this will be considered when calculating the project’s funding gap. 

Not eligible for support 

The financial support offered through the SHNF cannot cover: 

• projects or technologies at research and development stage or any research and development activities 

• established generation technologies in Scotland such as onshore wind, large scale biomass, or conventional gas fired CHP supported technologies 

• direct emissions heating systems used for back-up or peak demand (although funding for back-up zero direct emissions systems, such as electric boilers, can be provided) 

• developing technologies at technology readiness level 1 to 6   

Technology readiness levels are defined as: 

• TRL 1 – basic principles observed 

• TRL 2 – technology concept formulated 

• TRL 3 – experimental proof of concept 

• TRL 4 – technology validated in lab 

• TRL 5 – technology validated in relevant environment  

• TRL 6 – technology demonstrated in relevant environment  

• TRL 7 – system prototype demonstration in operational environment 

• TRL 8 – system complete and qualified 

• TRL 9 – actual system proven in operational environment  

 The SHNF will not fund a project using biomass that: 

• does not adhere to existing regulations (including air quality standards) 

• uses fuel made up of virgin construction grade logs or timber 

• uses fuel not included in either the Biomass Sustainability List (BSL), the Sustainable Fuel Register (SFL) or any future Government approved scheme 

 Biomass projects must confirm annually that these criteria continue to be met. This will be monitored annually post-commissioning.  

Level of funding available 

Support will be provided on a co-funded basis. This approach encourages the growth of co-funding and allows for risk-sharing between the Scottish Government and other funders.  

A shared approach to project investment also accelerates the delivery of projects and enhances the quality and delivery of the objectives. Please note that historic/previous project spend cannot be considered as part of co-funding arrangements. 

A grant can be offered for the funding gap for the project up to 50% of eligible capital costs (further detail of this is provided in section 'How applications will be assessed' number 3). Points to be considered to assess the project include:  

• the level of grant required to demonstrate the project’s financial return is sufficient to secure investment from identified funders (i.e. the grant required to bring the Internal Rate of Return, or other appropriate financial metric, up to investors’ hurdle rate) 

• the difference in capital cost between delivering the project and the counterfactual (see Definitions section) 

• the difference in operating costs between delivering the project and the counterfactual where any financial savings are not passed directly on to the end users 

The funding gap must be evidenced within the financial model with supporting documentation. This includes evidence of the capital cost of installing the counterfactual.  

The application must also demonstrate that funding for the project is in place, excluding the amount requested from SHNF. Evidence of committed funding and agreed terms must be provided. 

District Heating Loan Fund 

Grant support for capital costs can be combined with a loan from the District Heating Loan Fund (DHLF). Using the DHLF is optional as projects can provide their own match funding. Projects must demonstrate a requirement for loan. Availability of the DHLF is subject to budget limits. 

Further information on the District Heating Loan Fund is available at: Scottish Government's District Heating Loan Fund - Energy Saving Trust.