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Heat Networks: Meeting Potential

Our director of energy, Andy King, lists four things that must happen to enable the UK to capitalise on the full potential of district heating.

Following all the recent government interventions in the energy market and significant alterations of the incentive regimes to support renewables (solar cuts, onshore wind cuts, Biomethane adjustments to name but a few), are we really able to meet our stringent carbon targets enshrined in the Climate Change Act 2008 without properly tackling the carbon-intensity in how we heat our homes and work places?

Only two per cent of heat demand in the UK is supplied by heat networks, but as the nation s reliance on renewable energy continues to grow, so too does the potential of this proven technology. One thing is for sure; heat from a district network has great potential. More than 210,000 UK properties are connected in the UK, including 100 of the 250 largest hospitals and 15 per cent of universities and colleges. One recent study predicted we could get three per cent of heat from district heating by 2020 and rising to 18 per cent by 2050. This could increase CO2 abatement to 15.1 mtCO2, a massive increase from the current level of 0.3mtCO2.

Back in November, George Osborne laid out in his autumn statement: The government will provide over £300m of funding on heat networks over the next five years& leveraging around £2bn of private and local capital investment& expected to lead to the construction of some 200 large heat networks in towns, cities and communities across England and Wales.

As we all know there have been huge political changes since then but what we do know is that the government is pressing on with current district energy plans and a lot has happened in the last two years.

The Heat Network Delivery Unit (HNDU) was established under DECC to help provide grant funding to help Local Authorities fund a series of energy mapping and masterplanning, and techno-economic feasibility studies into heat networks. More than £11million has been committed in over 201 heat projects across 118 local authorities and round seven of funding has recently been allocated. Consultants across the land are researching, studying and modelling to find the potential heat networks that warrant a business case for development.

The Heat Network Investment Project has been set up alongside HNDU to help take these projects on to the next stage. With £320m of capital support to call upon, and a further £2bn of private capital to be encouraged, this team is currently considering the outputs from a recent market consultation before deciding on the content of support they can provide to ensure a sustainable heat network market, matched by sufficient volume of private finance.

This is all encouraging but if one thing is clear from the work I have already done in conjunction with my European colleagues, clients and partners, it is this; for the UK is to build on the work carried out to date and capitalise on the opportunity that district heating affords us, a number of significant changes must be instigated. Here are four of the most critical.

1. Better regulation

One of the biggest barriers to heat networks in the UK is widely perceived to be the lack of regulation.   The decision not to regulate the emerging district energy market in the same way as gas and electric markets was not without good intention. In fact, it was taken as part of the Government’s efforts to drive investment in the sector by avoiding red tape. The industry has drawn up its own code of conduct and standards that some companies have adopted, but the concern is that this voluntary scheme does not go far enough to protect consumers.

A report by consumer watchdog Which? has shown that there is consumer dissatisfaction with costs, landlords are not always being upfront about heating bills, long-term contracts mean customers can t switch and there is even difficulty in assessing whether bills are fair or accurate. All of this means a lack of trust, a fear of being tied to a monopoly supplier, and clarity amongst consumers is unlikely. The establishment of the Heat Trust last year is in part an answer towards this problem of considering consumer protection, however this is a another voluntary scheme.

2. Better collaboration

We also need to ensure central Government, local authorities, energy companies and local stakeholders collaborate better, as they do in other lead countries where district energy has already been successfully rolled out on a large scale.

Collaboration between all parties is necessary in order to understand and enable the benefits of heat networks, resulting in better knowledge sharing and stronger foundations that can help to grow penetration.

Part of the problem of course is a continued lack of cohesive energy strategy from central Government. With DECC now disbanded and the nation still in the midst of Brexit uncertainty, you could argue the need is even greater now than it ever has been.

The HNDU funding must be followed by a clear, articulated Government plan particularly for those projects that did not come out with perfectly viable answers that individual local authorities can move forward and deliver.

3. Enhanced finance modelling

District energy requires significant upfront capital and there are inevitable risks attached to the development, installation and operation of energy generation and distribution systems before any return can be achieved from energy sales. It is no surprise that investor confidence is key, but system owners are also looking for reasonable assurances about the size and time profile of district energy revenues in order to underwrite capital expenditure.

If investors are to reach financial close and return on investment quicker, it requires better risk assessment and management. Generation plant must be matched to the anticipated energy load profile, while the distribution system including main trunk supply and return pipework must be adequate for the final load and installed at the outset. Smaller spurs can be added as new buildings are brought online.

Pipes in the ground can come with an operational life span of fifty years plus, which may attract different longer-term lending rates than for shorter-life generating plant. Government-backed long term, low interest rates may be more suitable to help fund the expensive network installation (PipeCo), with other investors concentrating on the GenCo assets.

4. Greater sector resilience

We must also remember that district energy is an immature market in the UK and this can have a greater impact way beyond the investment stage. Crucially, there remains a shortage of designers and contractors with the skills, resource, experience and technical excellence required to design and install a buried heating network.

If you wanted to build an office block for example, you could choose from a long list of qualified and suitable contractors, but only a small number of contractors could deliver a well built, professional heating network and inevitably this means a premium price.

We need to build sector experience to increase competitiveness and resilience, not to mention make use of international expertise and knowledge, especially from Sweden and from Denmark – where 63 per cent of homes are powered by heat networks. Until then, we will continue to fall behind.

You can find out more about Sweco s energy services here.

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