Scottish Heat Networks Bill – What do I need to know?

United Kingdom

The Scottish Government is introducing a Heat Networks Bill this year to ‘introduce regulation of the heat network sector to support, facilitate and create controls in respect of the development of district and communal heating infrastructure in Scotland’ (the Bill). The aim of the Bill is to accelerate the deployment of heat networks to help Scotland decarbonise its heat supply and contribute to our climate change targets.

We’re taking a look at the background to the Bill and the measures it could include.

Why regulate?

Scotland has a target to achieve net-zero emissions by 2045. It’s an ambitious target and one which will require accelerated decarbonisation of our heat sources. Heat networks themselves are not new – whilst the sector is in early development there are many examples of operating, developing and planned heat networks across Scotland. Significant growth is expected in the sector and in light of this the CMA undertook a market study in 2018 and recommended that regulation be introduced to manage the natural monopoly of the industry, costs to consumers, technical standards, customer services standards and level of transparency.

What could the Bill include?

A Regulator

It has been an agreed principal for some time that a heat sector regulator be introduced to oversee the heat network market. Discussions have primarily focused on Ofgem performing the role, and indeed the CMA suggested in its report that Ofgem would be well placed to take on the role. However, the Scottish Heat Networks Woking Group (SHNWG) has recommended using a Scottish regulator, due to the accelerated legislative timelines in Scotland and the additional functions likely to feature in the Scottish regulatory framework. Unlike other areas of energy policy, heat is not a “reserved matter” under the Scotland Act 1998 reserved for the UK Parliament in Westminster (save for general consumer protection). However, it is likely that any Scottish regulator would need to work closely with any equivalent regulator in England and Wales to ensure consistency of standards.

Licences

The Scottish Government is considering conditions which would require operators to have a licence, issued by a national body, to develop or operate a heat network (in addition to holding a specific district heating consent). The licence would ensure technical and operational quality standards and potentially codify existing UK-wide consumer protection frameworks such as the scheme rules of the Heat Trust. An ombudsman is also being considered as an embedded licence dispute resolution mechanism.

Consumer protection controls

The CMA recommended that heat network customers be given the same or similar protections to electricity and gas customers. For example, by quality of service targets on matters such as supply, outages and response times, a priority services register for vulnerable customers, billing content and frequency conditions and compliant handling measures.

Whether price controls should be included is still under debate. The recent report of the SHNWG did not reach a conclusion on this but noted that publication of tariffs and benchmaking were generally seen as being beneficial.

Heat Network Zones

The creation of Heat Network Zones is seen by developers as a positive step for the market which reduces the demand risk facing heat networks. Heat Network Zones would be bid for by developers who would get exclusive rights to develop or operate a new heat network within the identified zone. However, whilst such options are still under discussion, they are unlikely to feature in the Bill due to concerns about consumer protection and competition with alternative forms of low carbon heat being potentially shut out of the market.

Obligation to Connect

An obligation to connect is another measure which, whilst still under discussion, is unlikely to feature in the Bill. This would compel existing buildings (currently only non-domestic buildings with substantial heat energy use are under consideration) located in Heat Network Zones to switch their heat supply to the heat network rather than continue with their existing (likely gas) supply. Whilst there are examples of this working well in other jurisdictions (for example, Denmark), it is seen by industry as an onerous condition and there are a number of commercial, legal and consumer protection concerns which need to be considered before it is implemented.

Subsidy

An industry wide government subsidy has been suggested as a measure to help de-risk investment in heat networks and allow them to compete against gas heating. However, it is unlikely that Bill will introduce one. Instead, financial support is likely to come from discrete funding programmes, such as the £30 million which the Scottish Government has recently announced it will invest in renewable heat projects (for which applications  are now being accepted) and the Heat Networks Investment Project, which is delivering £320m of capital investment support for the construction of heat networks. It is hoped that the existence of funding and favourable regulatory conditions will create the conditions for a sustainable market to operate without direct government subsidy.

Planning and technical standards

The Bill is likely to set out requirements for mandatory technical standards. It is anticipated that these will focus on measurable performance outcomes such as operational efficiency. A certification scheme for the design, build and operation of heat networks run by the regulator to support these standards has also been suggested. We would also expect such technical standards to be enforced via separate planning and building regulations.

What’s next?

We’ll be keeping an eye out for the Bill being introduced, at which point it will be published on the Current Bills page of the Parliament’s website. The SHNWG is also continuing its review and we expect a further report from the SHNWG on the contents of the Bill as well as wider issues such as public funding for heat networks, planning policy, building standards, demand risk and consumer protection.