In the rush to take advantage of that funding, how can councils ensure that they make the most of their investment in district energy?
Why implement district energy networks now?
Councils, and indeed the whole of the public sector, are considering developing district heating networks for a number of very cogent reasons, not least that of fuel poverty. The efficiency with which district energy networks generate heat and power means that residents’ energy bills can be reduced. They also contribute to meeting increasingly challenging planning requirements for low-carbon, or in London zero-carbon, development. Furthermore, district heat networks can enable a council to generate local investment and/or create a long-term revenue source. Each local authority will have a different balance of priorities depending on local conditions.
The rapid increase in district energy implementation – by 2030 some are predicting that these networks will be contributing 10% of the UK’s heat supply – has been given further impetus by the level of new funding being made available by Government to the public sector. The Heat Networks Investment Project (HNIP) has just entered its main funding phase with £300m available in loans and grants to support the deployment of new district heating schemes in England and Wales. Similar funding is available in Scotland through the District Heating Loan Fund (DHLF) and the grant-awarding Low Carbon Infrastructure Transition Programme (LCITP). These schemes are in addition to existing funding sources such as SALIX – for projects reducing carbon emissions and increasing energy efficiency, the Public Works Loan Board, institutional investors and active Energy Services Company (ESCo) developers.
Planning for the long term
Well-managed heat networks can operate for up to 60 years so it is essential that councils get the initial implementation right, and factor in the need to secure funding to replace plant every 15-20 years. Whilst emerging technologies, such as hydrogen fuel cells and heat pumps drawing heat from rivers, are being explored as potential future heat-generating technologies, typically an initial district heating scheme will connect to an existing source of waste heat such as an energy-from-waste plant or utilise Combined Heat and Power (CHP) technology, fuelled by gas or biomass. It is also important to have a diversified customer base for heat to avoid being too reliant on a single, large customer for the network.
The long-term viability of a network depends on it being large enough to realise valuable economies of scale. Generally speaking, this means that new heat networks should serve at least 1000 residential properties and ideally there will be a mixture of commercial and residential consumers. A council can achieve this by ensuring that all the properties under its purview connect to the network and that other public sector bodies in the area, such as hospitals and universities, also connect. The network can then be extended to incorporate new properties as they are built in the vicinity through their local planning policy, or to retrofit older buildings as their heating systems need renewal.
Running the network – how involved do you want to be?
Before committing to implementing a district energy network, councils need to decide to what extent they wish to be involved both financially and in the ongoing practical management of the network. This will, to some extent, depend on the council’s existing capability for running these networks. It will also be determined by the level of operational risk that the council is willing to accept. For some, the benefits of retaining full control of the network, and therefore investment decision-making and the level of residents’ fuel bills, outweigh the potential risks of being solely or mainly responsible for the network. For others, sharing the risk or transferring it completely to a third party is a more appropriate option.
Adopting the right ownership model is crucial. There are a variety of commercial structures that can be used to bring forward a new heat network including concession models and special purpose vehicles (SPVs) where the council works in partnership with a private sector partner, or adopts one of a number of frameworks where the council wholly owns the network, sometimes setting up a separate company. Working with external partners allows the council to determine the level of risk, and therefore the level of return, that is acceptable and to benefit from the expertise of experienced network developers and operators.
Help and advice for making key decisions
As has already been mentioned, it is very important to make the right decisions at the early stages when scoping the project and developing the business case. Fortunately, a considerable amount of assistance is readily available to local authorities through a number of Government initiatives.
The Heat Networks Delivery Unit (HNDU) provides consultative support to local authorities in England and Wales exploring heat network opportunities. Currently in its seventh round of funding, the scheme is intended to assist local authorities through the initial development phases of projects by providing grant funding and a pool of commercial and technical specialists to guide organisations through the process. For London boroughs, the GLA’s Decentralised Energy Enabling Project (DEEP) offers technical, commercial, financial and legal support services through an OJEU framework, giving access to pre-approved suppliers and to expert consultants who can provide assistance in bringing projects through to the procurement stage.
In addition, help and advice can be obtained from consultants and experienced district energy suppliers and investors, such as Metropolitan, who can provide the full package from design and build to financing, owning and operating the district energy network.
The availability of substantial funding and the growing momentum behind district energy as a heat solution indicate that now is the time for local authorities and other public sector bodies to seriously consider implementing these networks. Making the right decisions at the outset will result in low-carbon, energy-efficient heat networks that will serve the local community for many years to come.