Scotland's Heat Network Fund: application guidance

What you can apply for

You can apply for:

• commercialisation and construction support
• commercialisation support only
• construction support only

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. 

Scotland’s Heat Network Fund can provide grant support for the funding gap of the project. The percentage of funding awarded will be based on the financial model of each project but is capped at 50% of eligible capital costs as a maximum.

Strong applications will provide a value for money case, demonstrating the need for government grant funding after full consideration of other financing and funding options available for heat decarbonisation projects.

Assessing the funding gap

When assessing your project's funding gap we will consider:

• the amount of grant needed to demonstrate your 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) 

• whether there is a need to install a new heating system regardless of SHNF funding being awarded. If a heating system is required, either because the connecting buildings are new or the existing heating system is at the end of its working life, we will consider the investment that will be needed  to ensure the grant does not replace investment that will be required regardless. Any financial savings resulting from installing the heat network where these savings are not passed directly on to domestic end users (such as social housing tenants) will be considered

You will need to provide evidence to show:

• your project's funding gap, including the capital cost of installing the counterfactual
• that funding for the project is in place, excluding the amount requested from SHNF
• committed funding and agreed terms

Please note: Scotland’s Heat Network Fund cannot provide grant for costs incurred prior to the date of issue of a signed grant offer letter.

You can apply for commercialisation costs and construction costs as detailed below.

Commercialisation costs

You can apply for commercialisation support for your heat network project's funding gap:

• up to 50% of eligible commercialisation costs, and
• with a maximum grant of £1 million capped at 10% of the total CAPEX (capital expenditure of the overall build cost) of your project

Commercialisation grants will be offered subject to programme budget availability.

We will assess applications on a case-by-case basis. Commercialisation grants can be either provided as

1. part of the same offer letter as the construction grant, or
2. a commercialisation-only grant which is provided separately with a construction grant potentially following at a later date once the full business case has been completed.

If your project needs additional commercialisation support you will have to submit a request providing detailed information on why additional funding is required.

If you are applying for a commercialisation-only grant, you will need to demonstrate that your project will progress to full capital delivery phase. To ensure spend can be processed eligibly as capital costs in line with public spending rules, SHNF will only accept claims for costs that can be capitalised within the applicant’s own financial accounts.

SHNF can provide commercialisation-only grants for projects which have a completed investment grade business case that demonstrates alignment with SHNF mandatory criteria and demonstrates the project is technically, financially, and commercially feasible. Other circumstances where a commercialisation grant is offered separate to a construction grant will be decided on a case-by-case basis.

SHNF can provide commercialisation grants for the following eligible costs:

• contractual negotiations for Energy Supply Agreements
• procurement for the heat network delivery or
• procurement of the concession to deliver the heat network
• legal Support through the procurement process
• commercial support through the procurement process
• financial support through the procurement process
• agreeing utility connections

Commercialisation-only grants cannot be provided for:

• earlier stage project development work that cannot be capitalised e.g. for the development of an Outline Business Case or feasibility studies
• activities relating to a project which has not been demonstrated as deliverable and compliant with the SHNF mandatory criteria
• activities that do not directly progress the eligible heat network project towards delivery
• costs for projects where there is no additionality from the grant i.e. there is alternative capital available and the project can progress at the same pace and scale without a grant
• costs that have incurred before the grant offer date
• other expenses beyond those outlined in the eligible cost section above
• any VAT reclaimable by the grantee for eligible commercialisation costs

The SHNF cannot cover costs incurred before the finalised grant offer letter date. Grant funding for eligible costs can only be claimed once costs have been incurred and paid by the grantee. SHNF grant funding cannot be provided up-front before costs have been incurred. See the 'What you can apply for' section for more information on eligible and ineligible costs.

Pre-capital development support for heat network projects (such as pre-feasibility, feasibility and outline business case work) is offered through the Heat Network Support Unit (HNSU). You can contact the Heat Network Support Unit about pre-capital support via this form.

Construction costs

Eligible construction costs

CAPEX, in relation to heat network projects, is the overall cost of building the heat network. This includes spend to acquire, upgrade or maintain depreciable and tangible long-term physical assets over the construction period of the project.

Where possible, you must demonstrate the project’s expected final capital costs. If final costs are still being refined, or are based on reliable estimates, you must provide evidence to substantiate any judgement areas.

Eligible construction costs include: 

• financial costs incurred for the purchase of physical assets 
• costs of project build, installation and construction 
• costs of project deployment and commissioning 
• non-reclaimable VAT for eligible capital costs 

SHNF will provide grant funding for the costs of installing the heat generation equipment (including an energy centre but excluding grid connection costs) and heat network infrastructure up to and including heat interface units. Thermal storage, such as hot water cylinders, within a building unit or home can also be eligible where the counterfactual is a combi-boiler.

Examples of eligible heat network construction cost items may include:

• energy centre
• zero direct emissions heat sources and associated items 
• thermal storage
• heat interface units 
• heat network spine and distribution pipework
• civil/ground works
• metering and monitoring equipment
• preliminaries for the delivery of eligible capital items 

The following heat network infrastructure elements are eligible up to and including secondary distribution:

• accessing heat sources of installing heat generation 
• low carbon generation
• primary heat network distribution 
• secondary distribution 

Tertiary distribution costs - for example, items such as radiators that are located downstream of the heat interface unit - are not eligible under the fund.

Ineligible construction costs 

Construction project costs that are not eligible for funding include (but are not limited to): 

• costs incurred before the grant offer date 
• costs for work carried out after the contractual end of the project
• costs and fees for feasibility, development and design for the project
• staff costs where staff members are not contracted to work 100% on activities funded by SHNF 
• notional costs and in-kind contributions
• any VAT reclaimable by the grantee for eligible capital costs
• any non-essential subsistence costs, meal allowances
• interest and service charges arising from hire purchase, leasing or credit arrangements 
• advertising, marketing and entertaining
• profit earned by a subsidiary or related enterprise or person(s) in providing materials, subcontracting, consultancy or trials/testing
• directors’ dividends
• certification fees
• contingency allowances 
• costs of printing operating, service and maintenance manuals
• costs of licensing in background intellectual property when the intellectual property is being licensed from a subsidiary or related enterprise or person(s)
• training costs related to sales or distribution of the developed product, process or service
• the purchase of land and buildings
• the cost of preparing the SHNF application
• recruitment and relocation costs
• other expenses beyond those outlined in the eligible cost section above
• costs associated with purchase fees for necessary licenses or other consultancy and legal fees 
• statutory activities including Grants In Aid (GIAs), consents and planning activities 
• grid connection costs
• grid upgrade costs
• hire or rental costs 
• retainer fees
• insurance costs
• office equipment and furniture
• PPE and safety equipment 
• tertiary distribution capital items that are downstream of the heat interface unit (e.g. heat emitters)

Any eligible commercialisation or construction costs listed above which are incurred prior to the grant offer letter date will no longer be eligible for grant funding.

Seek clarification if you are unsure of the eligibility of project costs.

Email HeatNetworkFund@gov.scot if you have any queries.