Scottish Parliament passes Heat Networks (Scotland) Bill

Scotland

On 23 February 2021, the Scottish Parliament unanimously agreed to pass the Heat Networks (Scotland) Bill (the “Bill”). The Bill sets out a long-awaited regulatory framework for the growing number of communal and district heating systems in Scotland. It aims to encourage greater deployment of these networks to decarbonise the Scottish heating system, address fuel poverty and help Scotland meet its target for net zero emissions by 2045. It is also hoped that the Bill will stimulate growth and investment in the renewable heat sector, increase consumer confidence and protection, as well as support heat network developers and operators.

In January 2020, we looked at why regulation was needed and what measures the Bill might include. We can now analyse which key measures have been included in the final Bill as passed and how it might work in practice.

A Licensing System

A key measure implemented by the Bill is the creation of a heat networks licensing system. Heat network suppliers must apply for and retain a heat networks licence, unless exempted by the regulations. Applications are made to the “licensing authority”, a role to which Ofgem is ultimately intended to be appointed but, until such further regulations provide otherwise, means the Scottish Ministers. Having a licensing system is intended to ensure that those who develop and operate heat network infrastructure are suitable and able to do so and to drive up standards across the sector. In assessing an applicant’s ability to perform licensed activities, the licensing authority is obliged, at a minimum, to take account of an applicant’s expertise and ability to operate the network in a way that minimises emissions, accounts for just transition principles and contributes to meeting fuel poverty targets. The licensing authority will determine and publish standard conditions relating to the obligations of licence holders and individual licences may also include special conditions if considered appropriate by the licensing authority. The licensing authority must also prepare and maintain a register of heat networks licences for the public to inspect.

Upon successful application, licence holders will be able to acquire rights to facilitate the development and maintenance of their infrastructure. For example, provision is made for licence holders to compulsorily acquire land or rights over land which are required to construct or operate a heat network, with authorisation by the Scottish Ministers. Network wayleave rights may also be conferred upon licence holders, including by acquisition where necessary, to facilitate the installation and maintenance of apparatus. These rights and provisions aim to allow heat network operators to respond more quickly to outages, in turn protecting vulnerable consumers and improving consumer confidence in the network.

A Consent System

To operate and/or construct a heat network, the Bill requires that a heat network consent is granted by the Scottish Ministers (unless, alike licences, a regulatory exemption applies). Provision is made for local authorities to be designated as consent authorities, although consent applications may be “called-in”, (i.e. referred to the Scottish Ministers for determination). Heat network consent may attach conditions or limitations, be transferred or modified, and once received, the Scottish Ministers can give a direction for planning permission to be deemed granted for the development. The consent system aims to ensure that heat networks will be developed in areas which will benefit most, and that the impact of a heat network on local factors, assets and property is scrutinised before new developments are approved.

Heat Network Zones and Permits

Although heat network zones were not anticipated to be included in the Bill, the Bill enables their identification. Local authorities or the Scottish Ministers may designate areas which are particularly suitable for the construction and operation of a heat network, considering the area’s energy use, infrastructure and potential to meet fuel poverty or heat output targets. The Bill also imposes a duty on local authorities, effective from the Bill’s enactment, to carry out a review and publish a statement on whether one or more areas within the authority have potential for a heat network, and to consider designating any as a heat network zone. 

As well as designating zones, the Bill facilitates the award of heat network zone permits. The permit authority (which, until such further regulations provide otherwise, means the Scottish Ministers) may give notice prohibiting the operation of a heat network in a particular zone unless the operator holds a heat network zone permit. This could give a developer with a permit the exclusive right to operate a heat network within a heat network zone. While further regulations are to provide for the process of inviting, making and determining applications for a heat network zone permit, this is envisaged to be a competitive process and is hoped to level the playing field with other utilities through the creation of developer rights and identifying optimum zones for development.

Building Assessment Reports 

The Bill places a duty on Scottish public authorities to prepare a ‘Building Assessment Report’ in relation to each non-domestic building in which they have an interest or own, setting out (i) the potential for the building to be supplied with thermal energy by a heat network and (ii) the period for which any system providing such energy is expected to operate effectively and efficiently. Exemptions to this duty or its application to particular buildings may be provided for in future regulations.

Targets and Delivery Plans

Alongside its net zero targets, the Bill introduces new Scottish targets specific to the supply of thermal energy by heat networks. Combined supply is to reach 2.6 terawatt hours of output by 2027 and 6 terawatt hours by 2030. The Scottish Ministers must also prepare a heat networks delivery plan setting out how the Bill, and supporting policies, will contribute to increasing the use of heat networks in Scotland. This plan will include how the targets are to be met, how heat output will be measured, and how the deployment of heat networks will contribute to Scotland meeting its emissions reductions targets. A copy of the plan must be published and laid before parliament by 1 April 2022.

What’s next?

The Bill is a long-awaited and welcome measure for regulating Scotland’s expanding heat network infrastructure. The passing of the Bill is a key milestone to reach, but is nevertheless a milestone and not an end point. Many of the substantive provisions in the Bill need to be clarified by further regulations and guidance. The process of turning the framework set out in the Bill into a functioning regulatory scheme will require a series of implementing regulations to shape how the licensing, consenting, zoning and permitting will work in practice. This will take some time and the Scottish Government has estimated that the new system will not be in place fully until 2023. The Scottish Government’s delivery plan will be a welcome update for industry and should offer more insight into how each aspect of the new regulation system is to be managed in practice, however it is not due until April 2022. From now until next April there will be a number of detailed consultations released on how the Bill should be implemented. We will watch these with interest. The results of the UK Government’s heat networks consultation should also be released later this year and should provide more detail on how the Scottish and UK regulatory systems might align.

For now, we join industry in marking the passing of the Bill, which should be submitted for Royal Assent and formally enacted by the end of March.

The bill as passed can be viewed here.

Article co-authored by Kirsty Mitchell.