Insights

What are Heat Networks

Picture a ‘Film Noir’ setting. We’re in New York, a distant siren blares. The shadowy street is illuminated by passing vehicles, revealing a solitary figure, concealed by plumes of steam rising from sidewalk grates. In considering such a scene, one may wonder why it is that Scotland’s streets have never featured these columns of hot vapour. But that Hollywood look may start to be a common sight in Scottish towns as a result of recent Holyrood legislation, coming in the form of the Heat Networks (Scotland) Act 2021 (“the Act”).

Aside from creating nuanced shots for budding street photographers, heat networks could actually present a realistic solution for the imminent energy crisis faced by the UK. Instead of all properties having their own individual boilers and central heating systems, a heat network heats water centrally, and then distributes this, perhaps just to the residents of a single tenement block or potentially to a whole area. This hot water is then piped into a Heat Interface Unit within each property, which uses the heat energy to heat up clean water, which can then be piped out of a hot water tap, or circulated around the property for heating. The now cold water is then piped back out of the Interface Unit to the central boiler to start the cycle anew.

Why Heat Networks?

The benefits of such a system, particularly in these times of soaring energy costs, are abundant. A market report by the Association of Decentralised Energy from 2018 noted that an average heat network customer payed £100 less per year than gas customers, a saving which only increases once considers the additional savings incurred by not having to deal with a household gas boiler. Heat networks are also far more efficient than having every property served by its own boiler. Couple this with the opportunity to use alternative fuels, including household waste, and you are looking at a system that is much more environmentally efficient. The ostentatious Amager Bakke ‘Waste-to-Energy Plant’ is a stunning example of this idea in practice, taking the waste of up to 700,000 people and 46,000 businesses, and converting it into power for 150,000 homes, all the while reducing Copenhagen’s emissions of CO2 by 100,000 tonnes a year. Furthermore, heat networks could be used alongside heat pumps, to provide heating when temperatures that are sub -10 degrees Celsius, as this is below the operating window of current heat pump technology.

So how does this apply to Scotland?  Well the purpose of the aforementioned Act is to increase the uptake of the technology, in an attempt to secure the Scottish Governments goal of having low carbon technologies provide the heating for 35% of domestic and 70% of non-domestic properties by 2032. As of June 2002, there were 830 heat networks in operation in Scotland, meaning around 1% of Scotland’s heating requirements were being met by heat networks. However, prior to the implementation of the Act, the sector was largely unregulated. The legislation detailed below should provide greater consumer protection and increase uptake of the technology.

The Provisions of the Act

Licence Requirement

Part 1 of the Act, more specifically s.2(1), requires that any person supplying thermal energy by way of a heat network must hold a heat network licence. Anyone looking to acquire such a licence must apply to the Scottish Ministers, and licences will only be granted if the Ministers are assured of the applicant’s ability to actually operate and manage such a scheme. At this time, the Scottish Ministers are the sole regulatory and licensing authority for heat networks. The Scottish Government’s preference would be to have OFGEM take on this responsibility, but this will require further Westminster legislation to implement. The licensing authority will be required to maintain a register of licences, which will be publicly accessible, free of any charge. Should anyone operate a heat network without the required license, they will be committing an offence, punishable by a fine of up to £10,000. 

Heat Network Consents

Part 2 of the Act, at s.18, requires that those looking to construct a heat network first obtain a ‘heat network consent’ from the licensing authority, in addition to the aforesaid licence.  This will give the regulator the opportunity to scrutinise the operator’s development plans and impose various obligations and development conditions. Failure to obtain such a licence may result in the constructing/operating body receiving an enforcement notice. Such a notice will detail the actions the operator of the network must take/cease in order to be compliant with s.18, within a specified time frame.  Failure to comply with requirements of such a notice will constitute a criminal offence in accordance with s.42.

Heat Network Zones and Permits

Part 3 of the Act covers the creation of heat network zones. This will allow local authorities to designate certain areas for the construction of heat networks. Part 4 then covers the allocation of specific permits for construction of heat networks in these allocated zones. The aim of this is to try and incentivise more private sector investment and deployment. Traditional power infrastructure projects, such as wind or solar, can sell their produced capacity to the main UK electricity network and thus recover their costs. Whereas a heat network has to sell their product locally, and thus, investment will only come if an operator can be sure they will be the only game in town. This will be facilitated by the permit system, providing operators with a secure market from which to recover their upfront investment. However, a potential barrier remains, as there is no requirement for those living and working within a heat network zone to actually connect to and use the network itself.

The remainder of the Acts parts covers the powers given to the licence holders, including a new compulsory purchase power. Which, upon authorisation of the licensing authority, gives licence holders the power to purchase land, or servitude rights over land, required for the construction of their heat network. Furthermore, the Act allows for the creation of ‘network wayleave rights’ allowing operators to convey steam and/or liquids, install and keep network apparatus on land and access that land for maintenance and repair of the said equipment.

Is the Act enough to incentive adoption?

While big steps have been taken to encourage private sector investment in heat networks, it will remain to be seen if this new piece of legislation is enough to encourage large scale developments in Scotland, the like of which is common place in Scandinavia. As previously mentioned, owing largely to competition law considerations, there is no mandatory connection requirement for properties located within heat network zones. This may continue to be a barrier to developers looking to invest the funds required, as their market for recouping costs is by no means guaranteed.  However, large scale infrastructure changes have never occurred overnight. It is good to see that potentially more efficient and ecological heating systems are on the Scottish Governments priority list.

Should you have any questions relating to the contents of the foregoing article, or wish to find out more about Heat Networks, please feel free to contact our Commercial Property Department.