By Michael King: Social entrepreneur, researcher, author and commercial adviser
What are these measures? Firstly, in November 2015 the Government announced that £320m will be allocated for capital investment in heat networks over the next five years. Known as the Heat Network Investment Programme (HNIP) DECC are presently engaging with stakeholders on how this funding might be most effectively allocated – via grants, loans, equity or underwriting – as well as the investment vehicle to manage it. The overall aim is to trigger a broader investment to reach a point where the market is self-sustaining. Secondly, the Government encouraged the industry trade body, the Association for Decentralised Energy (ADE), to work together with the Chartered Institute of Building Services Engineers (CIBSE) to produce a ‘Heat Networks: Code of Practice for the UK’, which was published in July 2015. This comprises a set of technical standards to improve the quality of heat network design, construction, commissioning and operation. CIBSE is now providing a training and registration programme for those delivering projects under the Code. Thirdly, the Government is supporting the development of the District Energy Procurement Agency (DEPA). This is an initiative being led by Manchester City Council and seeks to benefit suppliers and manufacturers providing a single entry point into the UK market, standardizing procedures and acting as a competent negotiating partner with them. By reducing transaction costs for market actors it aims to reduce the 20% higher cost for delivering heat network projects in the UK compared to other European markets. Lastly, the Government encouraged the industry to establish a consumer protection scheme. After two years of discussion between industry and consumer groups, the ADE established the Heat Trust in November 2015. This is an industry-led self- regulation initiative that sets customer service standards and customer requirements for member network operators to adopt. Although Government supported membership is voluntary. It is hoped that these measures will provide investors with confidence, particularly when a secondary market for fully built- out projects develops. But do they go far enough to address market concerns, particularly around customer protection that will influence widespread acceptance of heat networks?
In 2013, the United Kingdom’s Department of Energy & Climate Change published ‘The Future of Heating’ which set out the Government’s ambition to de-carbonise the heat sector. District heat networks play a crucial part of this vision in providing anywhere between 14 – 43% of the heat market by 2050. In this document it was envisaged that most of the necessary funding would come from the private sector. The role of government was to develop the opportunity for commercial investors to take up. However, the debate has moved on to consider issues of reducing risk, increasing confidence, and a much wider range of ownership models. This was illustrated in September 2015 when the UK Trade & Investment arm of the Department of Business, Innovation & Skills (BIS) in association with the Department of Energy & Climate Change (DECC) hosted a conference with an audience from the investment community to present opportunities in a document ‘Investing in the UK’s heat infrastructure: Heat Networks’. This highlighted the work of DECC’s Heat Network Delivery Unit in building a pipeline of 280 projects supported through heat mapping, energy and master planning together with technical feasibility and financial viability studies. The objective is to develop these projects to reach commercialisation over the next ten years. Within this timeframe DECC estimates these projects will require a capital investment of £2 billion generating a further £3.2 – £6.4 billion’s worth of operational and maintenance contracts over the next 40 years. This resurgence of interest in heat networks now represents a substantial opportunity for the investment community. A question raised at the conference noted that the investment market presently seeks a rate of return in the region of 15% whereas the majority of projects in the pipeline delivered a return between 6 – 10%. The answer is that DECC expects to build confidence in the heat network sector through a number of measures presently under development so that investor expectations will drift down towards the lower range, which should attract greater institutional and pension fund interest. Furthermore, drawing on a report by the Scottish Futures Trust ‘Guidance on Delivery Structures for Heat Networks’ ownership could be structured in a range of commercial options with varying degrees of public and private sector involvement allowing for investment from both sectors to be blended.
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