Scotland's Heat Network Fund: application guidance

It is mandatory that the proposed project aligns with Scotland’s net zero ambitions. To successfully meet this criterion, the application should contain robust evidence of the ability of the project to contribute to the reduction of greenhouse gas emissions in Scotland. This generally means carbon calculations which estimate the reduction in carbon dioxide equivalent for the project in comparison to the existing heat sources or the counterfactual new option.  

Projects that demonstrate carbon savings using robust methodology will receive a higher score in application assessment.  

Low scoring applications will not demonstrate the SHNF grant will result in carbon savings or will have included carbon savings calculations that are poorly referenced and are unreliable.  
Carbon dioxide equivalent calculations 

The use of fuels lead to emissions of carbon dioxide (CO2) and small quantities of other greenhouse gases– including methane (CH4) and nitrous oxide (N2O). For a given quantity of a gas, the equivalent quantity of CO2 that would be needed to give the same greenhouse effect can be calculated using its ‘global warming potential’. This quantity is quoted in units of kilograms carbon dioxide equivalent (kgCO2e) and factors are published by the UK Government. The energy conversion factors are quoted as total direct per unit of fuel. 

These factors are used to calculate the carbon footprint of the counterfactual case or conventional fuel source/s and the heat network project proposal. The applications should clearly show the potential savings or carbon footprint reduction. 

This can be calculated using the method below: 

1. Counterfactual energy use (kWh) x energy conversion factor for fuel source = Business as Usual kgCO2e emissions 

2. Heat network project energy use (kWh) x energy conversion factor for fuel source = Heat network Project kgCO2e emissions 

3. Counterfactual l kgCO2e emissions – heat network project kgCO2e emissions = Savings in kgCO2e emissions resulting from the heat network project. 

Carbon models should include: 

1. Use of the latest government emission factors 

2. Emissions over the time period of the expected life of the equipment/installation 

3. Annual break down of emissions 

4. Energy use of project throughout lifetime. 

5. Emissions for the counterfactual 

6. Absolute figures for emissions reduction from counterfactual 

7. Clear sources for all calculations, with references provided as web links or as attachments (in the case of specs or reports) 

8. Presentation in an excel sheet showing formulas.  

9. Evidence for assumptions including energy specs for technologies to be installed including coefficient of performance, estimated energy use etc.  

10. List of assumptions e.g. % use of system 

11. Consideration of grid electricity decarbonisation in the future 

Any other carbon calculation methodology provided should be understandable and well-referenced. Underlying assumptions should be clearly explained as these will be checked during the due diligence process.  

As the SHNF will provide grant for up to 50% of the total eligible CAPEX, applications must demonstrate the sources of funding for the rest of the CAPEX. 

To successfully meet this criterion, projects must provide evidence of match funding. It is not the purpose of the SHNF to provide grant offers which can then be used to attract investors to the project. This is because if sources of funding have not been agreed, there is a significant risk that the project will not proceed. We understand that some applicants may not have fully approved, legally binding, funding commitments at the time of application. If this is the case, applicants must provide the strongest possible evidence demonstrating funding has been approved in principle. 

 Depending on the source of match funding, evidence at application stage should include: 

• A Letter of Intent or a Heads of Terms from local authority, partner organisation, bank or loan scheme (signed and dated) 

• Confirmation of other sources of grant funding awarded 

• Signed letter from CFO/CEO confirming budget availability and commitment  

• Detail of what conditions will need to occur for match funding to be provided   

 Legally binding agreements are not necessarily expected at the time of application. For successful projects, providing this evidence will be a condition of the grant and included as a milestone in the grant offer letter. This milestone must be met before grant can be drawn down. 

 The legitimacy of match funding agreements will be scrutinised during due diligence checks.  

Financial statements should be provided alongside the application for the applicant, any parent companies and, if applicable, any delivery partners that are investing in the project. Signed and audited (if applicable) accounts/financial statements for the previous two years should be provided. 

 The total funding contribution for the heat network project from Scottish or UK Government funding programmes should be 50%. Therefore, if the application requests SHNF funding of 50% of eligible CAPEX, other Scottish or UK Government sources cannot be use. This is excluding loans, which can be used as a source of funding if the grant is at 50% of CAPEX. 

 Without evidence of match funding, the application will receive a low score and will be unlikely to receive a grant offer due to the uncertainty of funding sources. 

 The SHNF will only support projects that would not progress without capital grant funding or would not progress to the same scale. This is to ensure the SHNF results in additional benefit. To successfully meet this criterion, the project must make a clear case for the additionality that would result from a grant offer with supporting evidence.  

 Applicants should use the section on additionality to describe the impact that SHNF support will have on progressing the project.  

The following factors should be considered to demonstrate the additionality of grant:  

• Availability of capital  

• Ability to reduce carbon emissions  

• Ability to accelerate project construction  

• The financial feasibility of the project and ability to attract investment 

Evidence should be provided to support the application’s case on additionality. This should show the funding currently available to the project and support any other arguments raised on additionality.  

As part of this evidence, all projects must submit a detailed financial model in support of their application. It is expected that the 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, dividend and repayments 

• Includes a return on investment calculation in the form of IRR and NPV calculations, and shows 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 

• Includes consideration of the impact of taxes such as business rates; 

• 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  

The financial model should also demonstrate the project’s funding gap. This is an important measure to show the additionality that will result from grant support and ensure that the value of the grant is appropriate. Depending on the project, this can be demonstrated by:  

• Showing the grant required to bring the Internal Rate of Return, or other appropriate financial metric, up to investors’ hurdle rate. This should also include evidence of the hurdle rate (i.e. the minimum level of financial return a project would need to make) of the organisation(s) that will provide funding.  

• Showing the difference in cost between the proposed heat network project and the counterfactual. For example, if a project is installing a communal heating system, comparing this to how much it would cost to install individual heating systems. Evidence should be provided on the capital and operation costs of the counterfactual, including the consumer’s heating costs.  

Fair Work First is the Scottish Government’s policy for driving good quality and fair work in Scotland.   

Please use this section in the application form to advise how you will commit to Fair Work First practices or evidence existing commitment to Fair Work Practices. A strong application will identify practical and measurable actions. Highlighting barriers and challenges that you must overcome will also be of value.  

There are seven principles in the Fair Work Framework:  

• appropriate channels for effective voice, such as trade union recognition 

• investment in workforce development  

• no inappropriate use of zero hours contracts 

• action to tackle the gender pay gap and create a more diverse and inclusive workplace 

• payment of the real Living Wage 

• offer flexible and family friendly working practices for all workers from day one of their employment 

• oppose the use of fire and rehire practice  

For more information on the seven principles and practical examples, please read Fair Work First Criteria: What It Means In Practice. The examples given are not prescriptive or exhaustive. The principles will manifest in different ways in different workplaces, balancing the rights and responsibilities of workers and employers.  

The Fair Work First approach should be progressive, relevant and proportionate, taking into account the type of organisation, its size and sector, and how much progress has already been made in adopting fairer work practices. Organisations can use the Fair Work Employer Support Tool to understand fair work practices and access support to enable them to strengthen their approach.  

Fair Work requires employers to go beyond statutory employment rights and protections. The principles of Fair Work hold true for all workers: direct employees as well as others who are paid to work for and on behalf of an organisation.  

It is essential that projects supported by the SHNF align with the Scottish Government’s objective to eradicate fuel poverty. Applications must demonstrate that heat is provided at a cost that is affordable to consumers.  

A strong application will show how the cost of heat provided by the heat network compares to the Alternative Zero Direct Emissions Heat option(s) and demonstrate that the project will help prevent or alleviate fuel poverty.  

A weak application will have made no attempt to evidence the affordability of the heat network project in comparison with other zero direct emissions options or will have made this comparison but shown the heat network will be more expensive to consumers than other zero direct emissions options.  

The Alternative Zero Direct Emissions Heat option is the alternative zero direct emissions option that could be installed if the heat network project does not progress. Examples of this alternative option could include individual air source heat pumps or electric heaters.  

Applications should include the following information and relate back to the financial model:  

• A description of the methodology used to set tariffs and vary them over time when accounting for changing costs 

• Detail on the tariffs to be charged to heat consumers must be provided. Where applicable, this should include the heat sale price in pence per kWh.  

• Modelling of tariffs over at least a 20 year period, showing tariff’s relationship with the cost of providing heat.  

• If different tariffs will be used for different consumer groups (e.g. social housing, private residential, non-domestic) then the proposed tariffs should be included for each type of consumer.  

• Comparison of tariffs with the Alternative Zero Direct Emissions Heat option that would be installed if a grant is not received for the heat network project. 

 For projects where consumers will be purchasing heat from the heat network, applicants must also supply evidence of Heat Trust compliance. Heat Trust is an independent, non-profit consumer champion for heat networks. It works with suppliers to promote best practice, innovation and continuous improvement in customer service. It also applies strict customer service standards to heat suppliers, like those for traditional gas and electricity suppliers, and provides access to an independent dispute resolution service through the Energy Ombudsman. 

Projects can apply for Heat Trust membership and will receive a Scheme Membership Certificate. As a minimum, applicants are expected to have registered as a participant of the Heat Trust and registered the site before the first connections to the heat network are made.  

A strong application will demonstrate the positive impact the project will have on skills and supply chain in Scotland. The application should, where possible, quantify the economic impact of the overall project to Scotland. Details of positive economic impact should seek to cover: 

• whether the project’s procurement approach will prioritise Scottish contractors and supply chain 

• capital investment and Scottish supply chain impact (for example, proportion of capital expenditure expected to be retained in Scotland, key Scottish suppliers) 

• number of full-time equivalent (FTE) jobs to be safeguarded (split by direct employees and contracted workers) 

• number of additional FTE jobs to be created (split by direct employees and contracted workers) 

• expected increase in sales/turnover as a result of the project 

• potential for replicating projects in other parts of Scotland 

• expected savings related to improved infrastructure, for example, per annum reduction in energy costs 

The application should also provide details of any wider economic benefits associated with the project. Where it is not possible to quantify the economic impact of the project, the application should clearly articulate in qualitative terms how the project is expected to deliver a positive and significant economic impact to Scotland. Without information on skills and supply chain, the application will receive a low score. 

Grant funding must be fully drawn down by March 2026. Projects can be commissioned after this date if the commissioning date is agreed with the SHNF team.  

The projects’ ability to meet this criterion must be evidenced by providing a project programme. Further detail of this requirement is provided in the supporting evidence section of 'How to apply'.