Heat network licensing: partial business and regulatory impact assessment

Section 1: Background, aims and options

Background to policy issue

During our engagement with the heat network sector an issue has consistently been raised which can act as an obstacle to the development and operation of heat networks in Scotland. Most major utility providers such as gas, electricity and water companies have certain statutory powers which allow them to build and maintain their infrastructure. For example, powers to access land to maintain apparatus or carry out surveys, and powers to carry out road works. At present heat networks do not have equivalent rights and powers and industry have told us this is a problem for larger heat network entities being able to install and maintain heat networks at pace and scale in Scotland.

The relevant rights and powers have already been defined by Part 6 of the Heat Networks (Scotland) Act 2021 (“The 2021 Act”). That Act also sets out a mandatory licensing regime which would confer the powers to licence holders. However, for reasons explained in the consultation paper which this BRIA accompanies, we are now proposing to introduce an alternative, opt in installation and maintenance licence regime via the Heat in Buildings Bill.

Purpose/ aim of action and desired effect

The purpose of installation and maintenance licences is to support the development of heat networks in Scotland at pace and scale by allowing heat network companies to access statutory undertaker rights and powers.

The 2021 Act set ambitious targets for the amount of heat to be supplied by heat networks (2.6 Terawatt hours (TWh) of output by 2027 and 6 TWh of output by 2030), in line with our wider targets to reduce Scotland’s carbon emissions. To meet these targets we need to significantly increase our use of heat networks across Scotland^[1].

We are aware of major heat network projects in Scotland where the absence of statutory undertaker powers has acted as an obstacle – for example where the pipework required for large-scale projects will pass under roads or railway lines. At present businesses must acquire the necessary rights (e.g. rights to access land) on a case-by-case basis, and may have to change or delay projects where rights cannot be obtained. Removing these obstacles will make investment in large-scale heat network projects in Scotland more viable.

The UK Government is taking forward similar proposals to grant rights and powers to licensed companies in England, meaning our proposals are necessary to ensure heat network companies in Scotland are operating on a level playing field. Because areas like road works are devolved a distinct Scottish rights and powers regime is required.

Options considered so far/ still open

Option 1 – Introduce installation and maintenance licences under the Heat in Buildings Bill

This is the proposal which we are seeking views on in the current consultation, and the details of which are set out fully in the consultation paper. We believe that this option would achieve the policy aim of granting rights and powers to the heat network companies which need them, without overburdening the sector with disproportionate regulation.

Option 2 – Implement mandatory heat network licences under the 2021 Act

The 2021 Act allowed statutory undertaker powers to be granted to holders of a ‘heat network licence’ issued under that Act. We could implement a mandatory licensing regime under this legislation to grant heat networks the powers they seek. However, as explained in the consultation paper, we believe that the licensing regime under the 2021 Act has been largely superseded by UK legislation and that implementing it would not align with the Scottish Government’s ‘Better Regulation Approach’^[2].

Option 3 – Do not provide rights and powers

This option would mean not introducing further legislation to provide statutory undertaker powers for heat networks. As explained in the previous sections, we believe this would disadvantage Scottish industry and risk the Scottish Government’s targets being missed. It would also put the sector in Scotland at a disadvantage compared to England where similar rights are conveyed. This option is therefore not being considered further.

Sectors/ Groups affected

Our installation and maintenance licence proposals are expected to affect a narrow sector of the heat network industry. As set out in the consultation paper our proposal is for an opt in licence, meaning only companies which want to access the associated rights and powers need to apply.

We expect that mainly medium to large-scale heat networks are likely to require the rights and powers in question. For example, powers to survey land or conduct road works are unlikely to be necessary for a communal network consisting of a boiler room supplying heat to a single block of flats.

Our most recent data suggests that of the approximately 1,090 existing heat networks in Scotland, 66% were communal systems (single building), and only 4% supplied heat to over 100 customers^[3]. We therefore believe that the number of licence applications in early years may be low, perhaps 30 to 40. However we expect this number to steadily increase as the sector matures and new projects begin development.

Applications may come from companies in the private sector, as well as local authorities or public sector bodies (eg hospitals or universities) involved in heat network installation or maintenance. Based on information from the Scottish Heat Network Fund we estimate around two thirds of applications will come from the private sector and one third from the public sector.

Because we only expect applications from large organisations with experience in the heat and/or construction sector, we believe that complying with any licence requirements will not create any significant additional burdens.

Installation and maintenance licences may also have limited, indirect impacts on businesses associated with heat network development and maintenance, such as the building industry, or companies specialising in areas like land survey, road works or traffic management. Licences may create new opportunities for such businesses, however they are unlikely to need to obtain a licence themselves as any work would be carried out under the conditions of a licence held by the heat network owner.

It is proposed licence holders will be required to demonstrate financial capacity and insurance coverage to offer compensation should works carried out under the terms of their licence have wider impacts – for example if works on private land temporarily disrupt the landowner’s use of that land.