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Christian Cavillo CXC fellow & Research Associate |
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Gioele Figus CXC Fellow & Research Associate |
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Antonios Katris Research Associate |
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Karen Turner Director, Centre for Energy Policy |
Please note: Some of the consultation questions are unanswered, as we considered they fall outside our area of expertise.
Q1. Do you agree that local authorities should have a duty to produce and implement a Local Heat & Energy Efficiency Strategy (LHEES) as outlined above? Please explain your view.
Yes, it seems sensible that local authorities have an important role on designing and delivering local measures such as LHEES. However, there are several questions that should be answered first. Some of these questions are:
- How LHEES relates to other SEEP programmes?
- Who sets the LHEES targets? Who guarantees the “burden” is shared fairly?
- Who will carry out the socio-economic assessments?
- What are the responsibilities of the different agents involved?
- What are the sources of funding LHEES?
Q1b. What are your views on the appropriate geographical scale for the preparation of LHEES? Should each local authority produce a single strategy for its area, or would it be possible for local authorities to work together to prepare strategies jointly for a wider area?
It is difficult to define such a geographical scale with our available knowledge. However, it seems sensible to consider that the collaboration between local authorities could be related to the available resources. Bigger cities might have the resources to carry out their assessments, while smaller municipalities could join others in the region to perform a joint assessment.
Q2. Do you agree with the proposed scope and content for LHEES? In particular do you agree LHEES should (a) set targets for energy efficiency and decarbonisation and (b) include a costed, phased delivery programme that will meet local targets? Please explain your views.
a) Yes, but it is important to know who sets, approves and enforces these targets. If everything is left to the local authority, you might risk to (willingly or unwillingly) not achieve the overall SEEP goals (for instance, if the local authority sets too low targets due to lack of resources or lack of interest, or if the targets are set too high due to poor a priori assessment). See also the answer to Q1.
b) Yes, but it should be clear the scope of LHEES and it relation with SEEP. In particular, responsibilities should be clear. Who is responsible to facilitate and provide incentives for the LHEES measures, do LHEES also considers private EE measures, who is responsible to enforce them?
Q4. What are your views on the broad principles for regulation outlined above? What else do we need to consider? What should be prioritised in cases where principles may not always be compatible?
A point that is not explicitly mentioned in the proposed principles relates to the technical guarantees to ensure security of supply. Indeed, the other principles mentioned are also important (decarbonisation, affordability, etc.) and should be implemented whenever possible, but as remarked in (Wilson, 2017) when there are conflicting principles, security of supply for the users should be prioritised.
Hence, other principles that should be taken into account in the new regulation (in addition already mentioned):
- Security of supply
- Public acceptance (which will be strongly determined by impacts on public citizens, potentially particularly linking to impacts on fuel poverty)
- Decommissioning of current systems (gas boilers in individual homes)
Q5. What are the key principles or approaches that should inform how our regulatory approach manages risk for district heating across the whole system?
Of course, there are several risks that should be taken into account. However, the biggest risks probably fall in the creation of a market for heating districts. It has been remarked at an event hosted by the Centre for Energy Policy (2017) that currently, there is no market for energy efficiency (no supply, no demand, no financial mechanisms). There could potentially be a similar situation in the case of district heating. Therefore, regulation is possibly the only real solution to create a market for district heating and other energy efficiency measures, at least in the scale and rapidness required by SEEP.
If regulation can create an economic case for both suppliers and consumers, it is likely that most of the other risks will be reduced/overcome without further regulatory action. For instance, in Sweden there is no obligation on connecting to district heating, but the high taxes on fossil fuels makes the district heating a competitive option. As a result, in 2014, 93% of all Swedish dwellings in multi-family residential houses were connected to district heating (Werner, 2017).
Q6. What are your views on local authorities having the power through LHEES to zone areas for district heating? Please provide any relevant evidence.
It makes sense that the local authorities taking a leading role in deciding on LHEES, but the design and implementation are likely to require considerable efforts and resources (for instance, specialized workforce is needed and might not be available within the local authority; also, it is not clear if LHEES will include EE measures and how they will be funded). Therefore, adequate information (necessary to engage effectively with SEEP agenda) and incentives should be given to local authorities so they perform as best as possible (Fudge et al., 2016). For instance, extra budget could be given if the proposed LHEES perform above certain threshold, or if they achieve better results than neighbouring communities.
Another concern related to locating too much power with local authorities (e.g. in terms of them having full control on the design of district heating and managing concessions) is the potential corruption case (Locatelli et al., 2017), if the authorities chose a certain supplier due to personal interest instead of the collective. hence, even if the local authority has the power to decide on LHEES, it is important to have another independent organism that overviews the plans and performance of LHEES, making sure that the perform as expected and that the concessions are given fairly.
Q7. How should district heating zones be identified? For example, how should national targets, socioeconomic analysis, local priorities feed in to the designation of zones within the strategy?
On a first stage, the initiative could be given to local authorities to propose district heating zones (based in their own analyses). If the minimum targets are not meet, a second stage could be done where potential zones are identified (based in available data) and imposed to local authorities.
For instance, the Scotland’s heat map (Scottish Government, n.d.) is a good way to start, as it shows the large heat demand concentrations. Those areas could be prioritised. Nevertheless, there should be an organism that checks nation-wide that the district heating “burden” is shared fairly.
Q8. What are your views on taking district heating zones, or parts of district heating zones, and establishing an exclusive concession for either private- or public-sector heat network developers to fulfil that part of the LHEES? How will this alter the risk profile of district heating development?
Probably the concession approach is the best option to develop district heating (ensuring that a market exist, see the response to Q5) in the scale and speed required by the climate change plan goals.
Q8b. Do you agree that local authorities should be responsible for issuing and enforcing concessions in their areas? Please explain your answer.
Yes, as in theory, they will look for the best interest within their communities. However, it might still be needed a higher level organism that overviews this (see the answer to Q6).
Q9. What considerations should inform the design of concessions (target users, envisaged network growth, concession length, etc.)? Please provide any evidence you have to support your views.
Considering the long lifespan of district heating networks (up to 50 years), and that concession might be shorter periods (e.g. 10 years), the suppliers should have the right to renew their concessions (if desired by the stakeholders) and /or to transfer their assets to a different company. Always ensuring quality and security of supply to users.
Longer concessions are likely to create more certainty on the market, and better incentives for investments. Nevertheless, the right number of years for a concession is difficult to know at this stage as it depends on several factors including investment costs, potential revenues, discount rates, etc. Also note that there are different ways of computing optimal concession periods, as in (Zhang et al., 2016) and (Carbonara et al., 2014).
Q10. What are the implications of zoning and concessions for existing district heating networks?
Current networks are already operated by a private company, which also own the assets. A concession could be automatically given to these companies, so they can continue operating while also aligning with the aims of LHEES. In this respect, all suppliers (existing and new) are in the same regulatory regime.
Q11. Do you think the broad rights and responsibilities of concession holders set out in this document are appropriate? Why? Please provide any examples or evidence.
Yes. However, there are some general responsibilities that should also be considered, referring to minimum technical performance and security of supply (see the response to Q4).
For existing buildings
Q14. What are your views on the opportunities and challenges in connecting anchor loads to new heat networks? In your view, will the scenario set out address these issues and accelerate district heating development? Please explain your answer.
As mentioned before, we believe that this type of regulation is required to ensure that there exists a market for district heating (see the response to Q5), and that in the long term, when district heating becomes more common, consumer will be more eager to participate without any further action from the government.
At this point, profitability and public acceptance are potentially the biggest challenges. It is, thus, important to ensure users that the quality of service they know will not be affected (if not improved) and that the cost they will pay will be similar (if not cheaper). The added benefits should also be clearly explained (e.g. warmer houses all day, low carbon heat, etc., see also (Riddoch et al., 2016))
Q15. What are your views on the proposed power to compel existing buildings to connect to district heating?
See the response to Q14.
Q15b. Are the broad principles and criteria appropriate? Should other principles or criteria also apply? In particular, what approach should be taken to socio-economic assessment at the project level, prior to a compulsion to connect?
The analysis could be carried out in three steps:
- A general analysis of the building stock, taking into account materials and age, making a rough estimation of heating requirements. This first analysis could be assisted with the Scotland’s heat map.
- If the first analysis shows promise for a district heating installation, a second more detailed analysis could be done, including surveys of occupants to check the real state of the building, and learn about energy demand and costs, in addition to any forecasted EE improvements (affecting future demand).
- With the information obtained, the next step will be to make the case of profitability to all stakeholders. If this is the case, the compulsion to connect can be made.
Q15c. Do you agree that this socio-economic assessment at project level should include an assessment of the impacts on consumers of requirements to connect?
Yes, the consumer should understand and ideally agree with the impact on the services they receive, and on their socio-economic well-being. This is likely to be crucial in terms of securing public acceptance (see response to Q4). Also see the response of Q15b.
Q15d. Do you agree that local authorities should exercise powers to compel connection of existing buildings (for example when requested by relevant concession holders)?
Yes, if previously agreed with users (a contract should be signed beforehand). However, caution should be exercised in compelling compliance where private benefits are not clear. In this context, if the socio-economic case is made (See the response of Q15b), it is less likely that users will oppose to participate in a programme that benefits them.
Q16. Do you agree that mitigating risk by establishing exclusive concessions will lower financing costs and heat prices?
Yes, as studied in (Carbonara et al., 2014) concessions (especially in public private partnerships) could allow for a fair risk sharing between the two parties, potentially offering a ‘win–win’ solution for all stakeholders.
Q16b. How can these regulations be designed to best ensure this happens?
Part of the regulation should offer an agreement to consumers that includes certainty on energy prices over time, making sure that the prices remain competitive and affordable in the long term. This, on the other hand, will also ensure a minimum demand for suppliers.
Q16c. What are your views on the time length of concessions in order to attract investment?
See the response to Q9.
Q17. Do you agree that compelling existing buildings to connect to district heating would mitigate heat demand risk, lower financing costs and help create an attractive investment proposition for district heating developers and financial institutions?
Yes. See the response to Q14.
Q17c. How can these regulations be designed to best ensure this happens?
See the response to Q16c.
Q18. What are your views on the relationship between LHEES and local development plans and how planning policy and development management should support the anticipated role of LHEES for new buildings?
It probably makes more sense to implement district heating in new buildings as they can be prepared to be connected from the beginning, and no extra infrastructure investment and decommissioning of existing heating systems has to be done. Therefore, whenever the district heating makes economic sense, it should be encouraged.
Existing industrial plant
Q19. What challenges and opportunities do you see for existing industrial plant to connect and sell waste heat to nearby district heat networks, both now and in the future?
The first and biggest opportunity from the industry is to obtain some revenue from the heat otherwise wasted. Also, this could replace heating production at the district, further reducing the carbon foot print.
The foreseen challenges include:
- That there is real potential waste heat to use. It is likely that most industries used their waste heat in their own processes. Hence, the first step for the Scottish government should be to carry out a detailed assessment of the potential waste heat that could be used for district heating, and decide if it is worth it to invest the resources for facilitating such a connection.
- To make an economic case for both sides: the industry and the district heating operator.
- Establish a fair price for the industry waste heat, high enough to make an economic case, but not too high that it replaces the main industrial activity.
Q19b. What barriers have industries experienced in the ability to sell their heat under current market conditions?
To the best of our knowledge, there are no business models for such use of waste heat. Therefore, such a business model should be created. See also response to Q19.
Q21. Under these proposed new arrangements, do you think that an enabling approach, perhaps using voluntary mediation, will be successful? How can we best encourage existing industrial plant to supply waste heat to a district heating network?
The use of this waste heat could be included in the environmental agenda of the industrial companies, so just an enabling approach from the government could be enough.
However, if this is unsuccessful, a different approach might be needed. As mentioned in the response to Q19, profitability is very important to encourage industry in supplying their waste heat. If it does not seem to be profitable, financial incentives (such as tax reductions) could be implemented.
New industrial plant
Q23. What are your views on requiring new industrial plant to be ‘district heating-ready’?
It makes sense in those industries that involve large quantities of unused waste heat. But again, as this is not the main economic activity of the industry, an economic (and environmental) case should be made first. See the response to Q19.
Q24. What would be the most appropriate way of ensuring that new industrial buildings connect to district heating networks? What role can zoning within LHEES play in this?
A similar concession could be given within the LHEES plan (as with the district heating operators), ensuring a demand and a revenue (or some financial incentive) for the industrial waste heat. This could encourage the new industrial plants to be ready to connect to district heating and to be built closer (it is remarked in (Chiu et al., 2016) that the heat transportation is the main contributing factor in cost and CO2 emissions).
Q25. Do you agree that as district heating becomes more widespread it will need to become a licensed activity? Please explain your answer.
As mentioned in (Centre for Energy Policy, 2017), there is a lack of trust on energy efficiency measures due to a non-regulated providers. Therefore, a licensing scheme, if adequately implemented and regularly reviewed, could ensure good performance (from an environmental perspective) and consumer protection.
On the other hand, a competent licencing organism will need to be created.
Q28. What principles, objectives and other considerations should guide the development of a Scottish district heating licence?
Minimum technical standards (quality and security of supply), affordability, customer service and use of low-carbon sources. See the response to Q4.
Q31. Would the benefits of the concession area outweigh the costs of the licensing arrangements?
We believe that is an assessment the Scottish government should carry out in the very short term, because if that is not the case, it is unlikely that district heating will developed with the scale and rapidness required.
Q32. What are your views on the best approach to ensuring that potential customers understand the differences as potential customers of a heat network, and who do you think is best placed to convey these messages?
It could be a joint effort from the supplier companies and the government.
This links to another possibility that has not been addressed in the consultation document. The opportunity should be given to existing energy service companies to invest and manage district heating networks. They could use their experience and their information channels to inform potential customers.
Q36. What are you views on the wider regulation of the heat market to ensure decarbonisation?
At this point, the regulation directives seem too general. However, they show the way to go (the priorities). Certainly, it is important that the heat regulation ensures sustainability: social, economic and environmental.
Q37. What are your views on when decisions should be take on the future of the gas network?
Considering that heat demand drives the use of energy carriers such as gas, it might be better to first decide on heat regulation, establishing priorities and clear directives, then follow with the regulation on gas networks.
Q39. Please set out any further views on issues covered in this consultation that you have not already expressed, providing evidence to support your views.
The following points have not been addressed with the sufficient level of detail, and we believe they require more attention:
- Scope and reach of LHEES should be defined more clearly.
- The Local Heat & Energy Efficiency Strategies suggest that energy efficiency measures are to be considered. But is not clear which types of measures (if any) are within the LHEES strategies, where are they going to be implemented or who is paying for them.
- Also, it is not clear how the LHEES falls within SEEP.
- Considering the “natural monopoly” that could be granted with long term concessions, customer protection should be particularly enforced.
- Financing and ownership issues are not discussed
- Business models are needed and require more attention in the regulation
- The possibility of involving existing energy service companies should be explored
References:
Carbonara, N., Costantino, N., Pellegrino, R., 2014. Concession period for PPPs: A win–win model for a fair risk sharing. Int. J. Proj. Manag. 32, 1223–1232. doi:10.1016/j.ijproman.2014.01.007
Centre for Energy Policy, 2017. Effective but not investible - there is no market for energy efficiency, in: Centre for Energy Policy: Energy Conversations. Presented at the International Public Policy Institute, University of Strathclyde (23 March 2017), Speakers: Thornton, M., Leighton, E., Wilson, D. and Turner, K.
Chiu, J.N., Castro Flores, J., Martin, V., Lacarrière, B., 2016. Industrial surplus heat transportation for use in district heating. Energy, Special issue on Smart Energy Systems and 4th Generation District Heating 110, 139–147. doi:10.1016/j.energy.2016.05.003
Fudge, S., Peters, M., Woodman, B., 2016. Local authorities as niche actors: the case of energy governance in the UK. Environ. Innov. Soc. Transit. 18, 1–17. doi:10.1016/j.eist.2015.06.004
Locatelli, G., Mariani, G., Sainati, T., Greco, M., 2017. Corruption in public projects and megaprojects: There is an elephant in the room! Int. J. Proj. Manag. 35, 252–268. doi:10.1016/j.ijproman.2016.09.010
Scottish Government, n.d. Scotland Heat Mapping [WWW Document]. URL http://heatmap.scotland.gov.uk/ (accessed 4.10.17).
Werner, S., 2017. District heating and cooling in Sweden. Energy 126, 419–429. doi:10.1016/j.energy.2017.03.052
Zhang, X., Bao, H., Wang, H., Skitmore, M., 2016. A model for determining the optimal project life span and concession period of BOT projects. Int. J. Proj. Manag. 34, 523–532. doi:10.1016/j.ijproman.2016.01.005