Supporting Heat Networks across the UK

Supporting Heat Networks across the UK

This is a guest post from Euan Murray, Legal Director at Shepherd and Wedderburn LLP.

Following on from our recent article around the regulation of heat networks, this article looks at some of the government sponsored programmes in the UK that may assist in delivering heat networks. The two key programmes we will look at are:

  • the Heat Network Investment Project (HNIP) in England and Wales; and
  • the Low Carbon Infrastructure Programme (LCITP) in Scotland.

Heat Networks in England and Wales

The UK government recently launched HNIP following a successful pilot of the scheme in 2016-2017.  HNIP provides access to government funding, targeted specifically at increasing the number of heat networks being built with a view to delivering increased carbon savings and to stimulate a sustainable heat network market. It is intended to provide £320 million of capital funding on a gap funding basis and is open to both the public and the private sector.

Funding rounds for HNIP take place on a quarterly basis though applicants can apply to the pre-applications stage at any time. The first round opened for applications on 5 February and has now closed and the first projects are due to be announced in May/June 2019.  The Scheme will close in March 2022.

A project must meet certain eligibility criteria in order to pass the pre-application stage. Following pre-application, a qualifying project can then progress to the full application for HNIP funding. The outcome of the full application is considered by the HNIP Investment committee who make the final decision on which applications will be awarded funding within that funding round. The application process is carried out on a competitive basis, so it is possible that even where a project meets all of the eligibility criteria, it may still not be awarded funding.

HNIP funding can be awarded through a grant, a loan or a combination of both, though awards of funding must be less than 50% of the capital expenditure for the construction of the project. The HNIP guidance also states that, for local authority projects, where capex is in excess of £2.4 million, the project must be structured off of the national accounts, for example via a special purpose vehicle. There are a number of legal aspects to consider in the application process, and there is a particular emphasis on the fact that applicants are responsible for ensuring compliance with the State Aid rules. The HNIP guidance indicates that if an applicant is awarded funding, compliance with the State Aid rules will be a fundamental condition of the Funding Agreement the applicant will be required to enter into in order to secure the funding.

Heat Networks in Scotland

The Scottish Government has also indicated that decarbonising heat is essential to tackling climate change and published a Heat Policy Statement in 2015 which set out three objectives for decarbonising heat:

  • reducing the need for heat;
  • supplying heat efficiently and at the least cost to consumers; and
  • using renewable and low carbon heat.

Projects in Scotland cannot apply for HNIP funding; however, the Scottish Government also has a number of programmes that may be helpful to parties considering investment in a heat project. The Scottish Government has noted that by 2020, its target is to have 11% of non-electrical heat demand met by renewable sources, and reiterated at the Scottish Renewables Low Carbon Heat Conference in April, that it is committed by 2032 to have 35% of heat for domestic buildings and 70% of heat and cooling for non-domestic buildings supplied using low carbon heat technologies.

The primary programme in Scotland is the Low Carbon Infrastructure Transition Programme (LCITP).  The Scottish Government originally launched LCITP in March 2015 together with Scottish Enterprise, Highlands and Islands Enterprise and the Scottish Futures Trust.  LCITP is currently supported by European Structural and Investment Funds and European match funding, is guaranteed out to Autumn 2021.  A key distinction between HNIP and LCITP is that LCITP supports various low carbon initiatives and is not targeted only at heat networks.

Generally applications can be made at three stages in the development of a low carbon project:-

  • catalyst stage: feasibility work and outline business case development;
  • development: final business case, investment options and investment propositions; and
  • demonstrator: capital support may be available to demonstrate the commercial viability of a proven technology in the Scottish context

Similarly to HNIP, there is a detailed application process and full applications are considered by the LCITP assessment panel which meets at a monthly case conference.

Demonstrator funding is only available under an open call process, which is launched by the LCITP according to market demand. The most recent invitation issued was the Low Carbon Innovation Funding Invitation. The successful projects cover a range of low carbon technologies, including allocation of £68,250 to Dundee City Council for the Dighty heat corridor to develop an investment-grade business plan for a district heating network to social housing; and an allocation of £7.3 million to Midlothian Council for delivery of a district heat network from the Millerhill Energy from Waste Plant to the new Shawfair development.

From a climate change perspective, it is clear that both central government and the Scottish Government are committed to decarbonisation of heat.  Heat networks will continue to increase in prominence going forward and programmes like HNIP and LCITP could prove helpful in terms of stimulating this market.

Euan Murray is a Legal Director in Shepherd and Wedderburn LLP’s Infrastructure Practice

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