Heat Network Fund: application guidance

Guidance

Lead organisation and project partners

The lead organisation should be the organisation that absorbs the risk, has the rights and responsibilities in regards to the project during the delivery process, and is responsible for the match funding in terms of sharing of financial risk. The lead organisation will be responsible for all aspects of the management and delivery of the project, including, in the majority of cases, accepting responsibility on behalf of the consortia for any funding and any associated conditions of funding.

We expect project partners to be in a co-operative relationship between people or groups who are prepared to contribute resources to their shared projects, share in development risks and or anticipated benefits, profits and losses, and are individually liable for the entity's (project's) actions in relation to any support ultimately offered from Scottish Government.

Heat network proposals will be welcomed from a consortia of organisations. In the case of a consortia proposal, a lead body must be identified that will be responsible for all aspects of the management and delivery of the project. This includes accepting responsibility on behalf of the consortia for all offers of funding and any associated conditions of funding. All partners must be identified in the EOI form with a named contact that will be able to confirm commitment to project.

Only projects that meet all the eligibility criteria as detailed below will be invited to submit a full proposal.

Guidance on the anticipated qualities that eligible projects should be able to demonstrate

Proposals are welcome from heat network projects that will be delivered in Scotland, with a project location, and an end user for output identified at time of submitting a proposal.

The projects are required to meet the following mandatory criteria:

1. Ability to demonstrate a contribution to our zero emissions heat targets, including the potential to deliver a reduction of greenhouse gas emissions (MtCO2e) and energy consumption.
2. Ability to provide confirmation of other sources of funding/finance that make a contribution towards the final delivery costs of the project.
3. Ability to demonstrate additionality and a requirement for grant support, including clear evidence of the funding gap to become an investable project.
4. Ability to demonstrate the organisation’s commitment to the Fair Work criteria.
5. Ability to demonstrate the project will provide heat at an affordable cost to consumers and support the eradication of fuel poverty.
6. The potential to have a positive and significant impact on skills and supply chain in Scotland.
7. The project can demonstrate it will be commissioned by March 2026.

The financial support does not cover:

• projects or technologies at research and development stage or any research and development related activities
• established generation technologies in Scotland such as large scale onshore wind, biomass, or conventional gas-fired CHP supported technologies
• developing technologies at technology readiness level 1-6

Developing an investment grade proposal

Please note that you can submit a draft business case with your completed EOI form. A full business case will required to be submitted with the full proposal form in the event the expression of interest is successful.

The following HM Treasury guide sets out useful guidance on the development of a business case:

HM Treasury has published useful guidance on the development of a business case.

In terms of structure, we refer you to chapter two which sets out the Five Case Model, namely:

• the strategic case
• the economic case
• the commercial case
• the financial case
• the management case

Whilst not exhaustive, below we set out some information that we require to see in the investment grade business case:

• information relating to project developers, owners and borrowers
• partner(s) (include web links if available/documents that highlight partner skills/successful track record in similar project)
• project location
• project description including background and objectives
• proposed technology(s)
• consents such as planning permission, section 36 consent, marine licence, etc.
• breakdown of project funding and/or investment requirements
• potential revenue streams
• project time frame – clearly identifying current status and each future stage of the project
• analysis of financial model outputs, including the forecast target internal rate of return (IRR) (with and without support from the Heat Network Fund). Information of minimum investor IRR thresholds
• any additional government grant/support subsidy
• risk register including mitigation – approach to de-risking
• beneficiaries
• economic and social impact
• community engagement
• project delivery programme

Financial modelling

A robust financial model should be provided for the proposal.

Please ensure your financial model:

• ties in to the figures set out in the application
• covers the construction and commissioning period on a monthly basis and the operating period on a quarterly basis
• shows all expected capital expenditure, showing a monthly profile of the construction and commissioning phase
• shows all finance cashflows (debt/equity/grants/etc.), including a monthly drawdown profile of the construction and commissioning phase, interest payments, dividends and repayments
• includes return on investment calculations in the form of IRR and NPV calculations, and the model should be able to show any debt servicing ratios where the project has external debt/equity
• includes all expected revenues (including incentives) for the project with each line item shown separately
• includes all expected costs of the project with each line item shown separately
• is dynamic (i.e. calculations do not contain hardcoded figures) and allows for sensitivity testing of key assumptions (including inflation)
• includes a databook and assumptions
• demonstrates the funding gap of the project (if there is a counterfactual heating option, a breakdown of the capital expendenditure (CaPEx) of this should be provided)

Project plan

The project plan is used to forecast, track and monitor the progress and delivery of the project and resulting outcomes. This should include:

• timescales and sequences
• key dates for approvals and deliverables
• inter-dependency relationships

This will include significant detail, breaking tasks down into sub tasks and highlighting interdependencies.

The project plan should also include details of the individual with responsibility for taking forward and completing a particular task or project milestone e.g. the project manager or another named individual. This is to ensure clear lines of responsibility and provide us with reassurance that the governance structure and processes in place to monitor project progress are adequate.

Further guidance and templates to be used to submit proposals will be published in due course.