Heat networks delivery plan

Executive Summary

Introduction

Heat networks are an established technology and are common in the Nordic countries and across much of Northern Europe. In Scotland they are currently less common and at present there are an estimated 1,080 heat networks supplying heat to domestic and non-domestic properties.

This Plan sits in the context of wider heat decarbonisation policy, in particular, the Heat in Buildings Strategy, which highlights that over the coming years the Scottish Government proposes a focus on the no and low-regrets strategic technologies, of which heat networks is one.

Ambition and targets

The Heat Networks (Scotland) Act 2021 (the 2021 Act) sets targets for the amount of heat to be supplied by heat networks, requiring this reaches 2.6 Terawatt hours (TWh) (3% of current heat demand) by 2027, and 6 TWh (8% of current heat demand) by 2030. Beyond this, Scottish Ministers are required to set a target for 2035. This target will be consulted on in early 2023, and confirmed by 1 October 2023.

Heat networks will form an important part of Scotland's overall heat decarbonisation programme. Scenarios broadly estimate emissions savings to be between 1.1 and 1.19 MtC0₂e per year in 2030.

We are committed to ensuring that heat in buildings programmes align with our fuel poverty targets. As such, we will work with the Scottish Fuel Poverty Advisory Panel to ensure that the Heat Networks Delivery Plan (HNDP) supports efforts to eradicate fuel poverty and does not adversely impact those in or at risk of fuel poverty.

Regulatory regime

Building assessment reports (BARs) will be required for public-sector non-domestic buildings and certain other non-domestic buildings, to assess their suitability for heat network connection. This will feed into the review and designation of heat network zones – which are areas particularly suitable for heat network development and operation.

The introduction of heat network licensing could potentially help to build trust in the market, and heat network consents will be introduced to ensure that heat networks meet local and national objectives. Additionally, the 2021 Act introduces heat network permits, building on the designation of heat network zones by providing the permit authority with the power to issue permits within these zones. We are proposing permits be awarded via competition to a single, winning bidder thereby providing exclusivity for a specified number of years.

The 2021 Act also introduces transfer schemes, ensuring continuity of supply for consumers and enabling a smooth transition between operators in the event that an operator ceases to trade. This will be consulted on alongside consents and key network assets provisions.

We will publish a Local Authority Cost Strategy prior to the regulatory system becoming operational in 2024, and will work with local authorities and stakeholders to ensure the provision of relevant resources in order for local authorities to meet their duties under the 2021 Act.

From the time that the legislative framework is in place in 2024, we will require the vast majority of heat for new heat networks, and additional plants for extensions, to be provided from low and zero emissions heat sources. However, in the near term a small percentage of annual heat provided through some new networks may need to be sourced from natural gas for the purposes of peaking and backup.

We are proposing that licence holders will have to prepare and implement a Heat Network Decarbonisation Plan between 1 and 3 years of a licence being granted. We will commission work to test and develop an approach to these plans in 2022.

Consumer protection remains reserved to the UK Government, who will appoint Ofgem as heat networks regulator under the Great Britain-wide Heat Network Market Framework. We continue to work with the UK Government to ensure consumer protection and licensing can both be dealt with by Ofgem in Scotland.

Guiding development

Our First National Assessment, which will be published soon, has taken the first steps to identify potential heat network zones across Scotland, where heat networks can be considered a suitable long-term solution. To guide the development of heat networks within zones, we are adopting a Building Connection Hierarchy which prioritises the connection of existing buildings based on their heat demand and ownership, allowing for flexibility as appropriate.

Recognising that sufficient levels of demand assurance are a gap within the overall picture of heat networks, we are proposing several measures to support confidence in future revenues for investors. Specifically, we will introduce a New Build Heat Standard requiring new buildings consented from 2024 to install only zero direct emission heat sources, and, subject to devolved competence, bring forward regulatory proposals to require the installation of zero or very near zero emissions heating systems in existing buildings. In addition, we will consult in 2022-23 on a series of phased targets for all publicly owned buildings to meet zero emission heating requirements by 2038. We remain committed to consulting on proposals, subject to devolved competence, to address the issue of demand assurance. In doing so, we will consider the UK Government's proposals to mandate connection to heat networks in England.

Wider policy framework

Recognising that unused recoverable or waste heat is not fully utilised in Scotland, within the next 12 months we will make available to local authorities further information on the availability of surplus or waste heat, to support the identification of heat network zones and development of Local Heat and Energy Efficiency Strategies (LHEES). Additionally, as an initial step to increase use of waste heat, we will consider introducing a requirement for potential heat suppliers to provide information about recoverable heat when formally requested to provide it by a relevant authority or licenced heat network operator. This should support the use of heat offsite, after any onsite needs are accounted for. This year we will work with stakeholders, and as relevant, consult on information provision and any further measures needed to increase the utilisation of surplus or waste heat via heat networks.

Unlocking investment in the supply chain must start with clear demand for its products and services. Heat networks will create new demands on supply chains in Scotland, and to better understand this challenge we commissioned research by the Energy Saving Trust to identify Scottish skills gaps and training needs. We have also partnered with Scottish Renewables and Skills Development Scotland to undertake an assessment of workforce growth and transitions.

The Non-Domestic Rates (District Heating Relief and Renewable Energy Generation Relief) (Scotland) Amendment Regulations 2021 introduced a 90% relief from non-domestic rates until 31 March 2024 for new networks run from renewable sources, helping to support the business case for new networks by reducing their operational costs. This is additional to the existing 50% relief for all heat networks, which is guaranteed to remain in place until 2032.

Capital programmes and delivery mechanisms

It is essential that we invest in the development of a project pipeline in order to accelerate the development and growth of heat networks in Scotland. To begin to develop a stronger project pipeline we will soon publish maps and data from the First National Assessment of Potential Heat Network Zones. This will be supplemented by the work of local authorities on LHEES and heat network zoning.

To assist with the development of a long-term pipeline for capital investment, we recently announced our £1 million Heat in Buildings Development Funding Invitation. It will provide resource funding to stimulate and accelerate the development of a pipeline of zero emissions heat projects for buildings, including heat networks, across Scotland. This funding is a forerunner to establishing a fuller Heat Networks Support Unit later this year, which will become part of the National Energy Agency in due course. This will be a key mechanism for supporting the development of a pipeline of projects by co-ordinating support to identify and nurture opportunities to install new heat networks or expanding and decarbonise existing heat networks. In addition, we will support communities to engage, benefit and participate in heat networks through our Community and Renewable Energy Scheme.

The Scottish Government will publish quarterly updates through our Heat Network Fund to demonstrate the current pipeline of projects coming through Scottish Government programmes, providing a form of investment prospectus.

Over this parliamentary session, we will invest £400 million to support the development of large-scale heat infrastructure, such as heat networks. Our £300 million Heat Network Fund launched in February 2022 is part of this new suite of delivery schemes. It offers long-term support to enable the delivery of heat networks by making capital grant funding available to public and private sector organisations. It provides funding for new zero emission heat networks, including communal heating systems, the expansion of existing heat networks and the decarbonisation of existing fossil fuelled heat networks.

We are committed to establishing a National Public Energy Agency to accelerate the transformational change in how we heat and use energy in homes and buildings. To achieve this, the Agency will have a remit to raise public understanding and awareness, coordinate delivery of investment, and coordinate national, regional and local government delivery of heat decarbonisation and energy efficiency rollout. We will establish the Agency first as a virtual agency by September 2022, and transition to a dedicated body by September 2025. We will set out the role of the Agency in delivering support for heat networks as part of the transition process.

Monitoring and reporting

As required by the 2021 Act, the HNDP will be reviewed every 2 years, and we will report on the heat output of heat networks as well as emissions savings. To support this, data reporting requirements for heat networks will be developed as part of work on the regulatory regime. These will be consulted on in due course. We are also proposing that several other key parameters are monitored to further our understanding of the heat network sector as it develops. Consultation respondents were generally supportive of data collection though burdens were noted and support mechanisms suggested.