The Heat Networks (Scotland) Bill was put before the Scottish Parliament in March and is open to feedback until 29 May.
The Bill introduces a framework to regulate the construction and operation of heat networks across Scotland with the aim of accelerating their deployment and decarbonising Scotland's heat supply.
Why regulate?
Heat networks aren't new - there are many across Scotland and the UK at varying stages of development. However, they are much less common than connections to the gas network, with no minimum technical requirements or regulatory oversight. Lack of regulation arguably leaves consumers vulnerable to abuse and investors vulnerable to risk. It also creates barriers to deployment of new heat networks because operators don't have the same powers as other utilities.
What's in the bill?
Eight parts, 85 sections; it's regulation from scratch so there's a lot to cover. Key elements include:
Heat network licences (Licences)
All heat network operators (including existing operators) will need a Licence. Operators will need to demonstrate that they can provide this essential service in line with licence conditions. The detailed conditions and the full application process will be specified in secondary regulations. Operating a heat network without a licence will be a criminal offence.
Scottish Ministers will have the power to introduce licence exemptions by regulations (which could include geographical differences), recognising the need for proportionality and the developing nature of the market. None are yet proposed.
Powers of licence holders
The Bill gives heat network developers and operators similar rights to those enjoyed by other utilities on compulsory acquisition of land, wayleaves, survey works and access to land for repairs etc. These rights are subject to certain safeguards (e.g. payment of landowner compensation). The Scottish Government hopes that greater utility rights will reduce barriers to deployment and enable investment.
Licensing authority
Scottish Ministers are the licensing authority, unless and until they designate an alternative by regulations. Scottish Government's preference for the licensing authority is Ofgem, however, it does not have the legal power to adjust Ofgem's regulatory functions.It hasn't been ruled out in the future, but it will require Westminster legislation.
Heat network consents (Consents)
In addition to a Licence, operators will need a Consent to construct or operate a heat network. It is not yet clear how this will apply to existing networks. While Licences will regulate operators, Consents will be granted for individual developments giving Scottish Ministers the opportunity to scrutinise proposed development of networks and impose development conditions.
Again, no exemptions to the requirement for a Consent are detailed in the Bill, but there's the potential for them to follow in regulations.
The Consents process will be similar to the process for energy consents under the Electricity Act 1989. Scottish Ministers will grant Consents but will consult local authorities to ensure that local circumstances are considered. Deemed planning permission will be granted as part of the process, avoiding unnecessary duplication with existing planning controls. Consents will be granted to individual operators but can be transferred with Scottish Ministers' consent.
Heat network zones (Zones)
The Bill encourages a strategic approach to heat networks and expands the principles of local heat & energy efficiency strategies by placing a duty on local authorities to consider designating Zones. Local authorities can designate Zones themselves, ask Scottish Ministers to do it, or choose not to designate Zones. This flexible approach ensures local authorities lacking resources and/or capacity to designate Zones can pass the baton to Scottish Ministers.
Heat network zone permits (Permits)
While the licensing and consent regimes are based on tried and tested frameworks in other utility sectors, Permits are a new innovation. They are designed to address the route to market risk, which has so far limited the development of heat networks. Power projects can sell their power by connecting to the GB electricity network, which enables their product to be sold to anyone connected to the network, but heat networks are local and can sell only to a local market. This means they can only build if they can first sell their heat to local consumers.
Permits seek to address the demand risk conundrum by designating the permit holder as the sole heat network operator within a Zone.
The Scottish Government hopes that Permits will facilitate the deployment of large, strategically-sited heat networks and de-risk the development and operation of heat networks. They hope to attract more private sector investment by providing a more secure customer base from which to recover the infrastructure capex. However, with no requirement on customers in the Zone to connect (see below), this secure customer base may be difficult to achieve.
What isn't in the bill?
The Bill covers much more than what we've picked out. But what isn't included?
Compulsory connections
It isn't compulsory for building owners/ occupiers to connect their buildings to a heat network within a Zone. Network licence holders will have powers to take heating pipes up to the curtilage of a building i.e. within the property of the building owner, to the edge of the building itself. However, building owners/ occupiers are not obliged to connect to the network, to take heat from it or even to consider doing so. The reasons are legal and political – Scottish legislation cannot override UK competition law, and making it compulsory for individuals to take a service from a monopoly supplier would undoubtedly engage competition law.
With no restriction on the right of providers of gas or heat by other means, or any obligation on householders or businesses located in a Zone to connect to the heat network, the jury is out on whether Permits will enable the wide scale development of heat networks hoped for by the Scottish Government.
Consumer protections
There are no minimum consumer standards contained or anticipated in the Bill as the Scottish Parliament has no devolved powers to make laws in this area. The Scottish Government has requested devolution of consumer protection for heat networks so that consumer standards can be delivered through the licensing regime. Even with scrutiny and quality standards through Licences, Consents and Permits, this leaves a noticeable gap in the regulatory framework which may impact consumer confidence.
Road work rights for licence holders
Road work rights are not extended to licence holders by the Bill. Further consultation with roads stakeholders is required to ensure that any provisions are compatible with existing, long-established processes that govern utility providers' access to roads. The Scottish Government acknowledges the omission and plans to introduce amendments to cover road work rights in the Bill's passage through parliament.
Detail e.g. licence conditions and licencing/consent process
The Bill is a framework; much of the detail will be filled in by secondary legislation. One key aspect will be the standard conditions to apply to Licences. The Bill was expected to codify the Heat Trust Scheme rules, but at the moment, it's a 'TBC'. More detail is also awaited on the application processes for Licenses, Consents and Permits and the standards applicants must meet. This includes details on the appeals process and the fees and charges that may be levied for the process.
An effective piece of legislation
The Bill covers much of what was anticipated, but there are significant gaps relating to an obligation on consumers to connect and protecting those consumers' rights.
Like many pieces of primary legislation, the Bill leaves a lot of the detail to secondary regulations. This process could take until 2023/24 to complete, however, it's clear that decarbonisation of heat is firmly on the Scottish Government agenda.
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