The Climate Change (Emissions Reduction Targets) (Scotland) Act 2019 (the "2019 Act"), has committed Scotland to reaching net-zero greenhouse gas emissions by 2045.  According to the Scottish Government's Climate Change Plan, published in accordance with the 2019 Act, heat networks will supply "heat to 35% of domestic and 70% of non-domestic buildings by 2032."[1]  As things stand in 2020, however, only around 1% of Scotland's heat is provided through heat networks. To address these concerns, and in recognition of the role that heat networks will inevitably play in delivering the net-zero commitment, the Scottish Government has published the Heat Networks (Scotland) Bill.  

The current enthusiasm for heat networks can be seen also at Westminster with the publication in February of this year of the Heat Networks: building a market framework consultation (the "Consultation"), which mostly applies just to England and Wales.  The ethos of the Scottish Bill is broadly similar to that of the Consultation, but, as we pointed out in our previous article on the UK Government proposals (Heat Network Market Framework), there are a number of key differences in the Scottish scheme, in particular surrounding its approach to regulation and licensing.  

Licensing, Consent and Regulation

Licensing

The Competition and Marketing Authority (CMA) recommended to both the Scottish and UK Governments that either "a general authorisation or licensing regime that regulates heat networks…would be a proportionate regulatory regime given the number and diversity of networks in the UK and the projected growth in the sector." [2] However, it is on the topic of regulation where we see the greatest divergence in policy between the Scottish and UK Governments' approach.  

As set out in our previous article, the Consultation favours a general authorisation scheme where it would be generally permissible to operate a heat network - providing certain conditions set out by the regulator are met - but that there would be optional licences available to heat network companies in order for them to obtain rights and powers.  Such an arrangement would be similar to Code Powers under the Electronic Communications Code.  

By contrast, section 2 of the Scottish Bill prohibits the supply of "thermal energy by means of a heat network unless the person holds a heat networks licence."  Applications for a licence under the Scottish Bill are open to anyone however it is understood that most applicants will be potential heat network operators.  The difference between the Scottish and English arrangements are quite obvious: a licence is only required in England, for example, in order to obtain development rights or to install equipment and carry out associated works. The approach in Scotland is much stricter than in England and more in line with the regulation of utilities such as electricity or gas.  

As we noted in our preceding article, an English licence for specific rights and powers would attach to the developer and would thus be valid for all of that developer's heat network schemes.  Similarly, the Scottish licence would cover all of a heat network operator's schemes.  However, whereas the English licence would be a grant of specific rights, the Scottish licence would act as a way of ensuring operators met a defined standard.  Consequently, as discussed below, the creation and/or operation of a heat network would not be permitted in Scotland without obtaining heat network consent for individual projects.  

The Policy Memorandum accompanying the Bill states that the Scottish Government's rationale for a licensing regime stems from its success in the effective regulation of other utilities including gas and water.  It is hoped that introducing a Heat Networks Licence will prevent abuse of the market and consumers by companies with insufficient expertise in building and operating heat networks – a common complaint with some of the earliest schemes – particularly relevant if we see a surge in the number of operators.   

The Consultation deems the "full licensing regime" inappropriate for use in relation to heat networks - seeing it as too burdensome in contrast with the general authorisation's "lighter touch."  The Consultation goes on to state that using a scheme that is too burdensome may drive up costs for consumers especially if the scheme had to include exemptions.  However, in a similar fashion to electricity and gas, the Bill does allow Scottish Ministers, by way of further regulations, to create exemptions from the requirement to hold a licence which, depending on the extent of those exemptions, may alleviate this issue. 

Although there may be some debate as to whether the general authorisation scheme or licensing approach will provide for the greatest expansion in the number of heat networks and which will provide the greatest protection for consumers and consumer confidence, stakeholder views on licences have been broadly supportive.  Scottish Renewables noted that licensing would "improve standards and quality in the industry"[3]  and West Dunbartonshire Council considers the proposals "fair."[4]   However, Scotia Gas Networks Commercial Services stressed the importance of creating an independent licensing body to "control and administer the licensing process."[5]   

The licences are ultimately designed so that potential heat network operators are properly solvent and are fit and proper persons – a point that was praised by Citizens Advice Scotland.  Nonetheless, Citizens Advice Scotland did note that there may be "potential tension with the system of general authorisation which has been proposed in the BEIS Market Framework consultation and which would apply in the rest of the UK."  Any potential Scottish regulator would need to take this issue into account when working with its English counterpart to safeguard consistency.  

Consent

Heat network operators will not only need a heat networks licence, but section 17 of the Bill requires that operators also obtain heat network consent for individual projects.  Accordingly, if someone wishes to operate or construct a network, that operator must personally have a heat networks licence and they also must apply for heat networks consent in respect of the network they wish to build/operate.  

Heat network operators would apply to the Scottish Ministers to obtain heat network consent, affording the Scottish Ministers the opportunity to scrutinise the proposed scheme. Usefully, section 19(3) acknowledges that there may be different people involved in the construction and operation of the heat network.  Therefore, heat network consent may be applied for to construct or to operate the heat network or, indeed, for both.   

The Bill allows the Scottish Ministers to make regulations concerning the content of consent applications and what operators will need to include in them.  Furthermore, section 27(2) of the Bill states that regulations concerning the determination of the consent applications may "make provision…to the likely environmental effects" of the construction or operation of the network. 

Regulation

The Scottish Government in its Policy Memorandum names OFGEM as its preferred regulator, as does the Consultation.  However, given that OFGEM is a UK wide statutory body, the Scottish Parliament lacks powers to appoint it as a heat network regulator.  Hence, section 4 of the Bill states that the Licensing Authority is the Scottish Ministers or such body that is later designated by the Scottish Ministers.

Until such point that the UK Government makes legislative changes to allow the Scottish Government to legislate on consumer protection (or with respect to appointing OFGEM to the role of regulator) the Bill leaves the matter of a long-term regulator open.  

Consumer Protection and Devolution

As we identified in our previous article, the UK Government identified Transparency, Pricing and Quality of Service as the three primary aspects of consumer protection in respect of heat networks.  However, although the Scottish Parliament has powers to legislate in respect of heat, consumer protection remains a reserved matter.  

The Bill does allow for the scrutiny of proposed heat network schemes through its provisions on consent (see above), but it is the Scottish Government's intention to ask the UK Government to devolve consumer protection in respect of heat networks (consumer protection is already fully devolved in Northern Ireland).

With consumer protection remaining a reserved matter for the moment, it is perhaps unsurprising that the Bill favours a more stringent licensing approach instead of a general authorisation.  Compounding this is the fact that the Policy Memorandum refers to evidence the Consumer Rights Act 2015 does not adequately protect consumers on a heat network.[6]

Step-in Rights and Transfer Schemes

The Bill adopts what it terms a "transfer scheme" arrangement to address circumstances where the continued operation of a heat network may be called into doubt through, for example, the insolvency of an operator.  Section 74 of the Bill states that the Scottish Ministers may create a transfer scheme where an operator either ceases or is about to cease operating a heat network.  This is similar to a supplier of last resort model, empowering the Scottish Ministers to transfer the rights of the former operator to a third party to ensure the continued operation of the heat network.  

The transfer scheme model shares some similarities with OFGEM's supplier of last resort system for the regulated energy markets; a procedure which applies to electricity and gas suppliers.  The problem here is that, in the Scottish heat networks market, a single organisation will generally perform several tasks in the network as opposed to supply alone.  It is encouraging that the Scottish Government has recognised the limitations in OFGEM's procedure and has proposed a system to address the needs of the Scottish market and protect consumers.  This transfer scheme is an important move for heat networks as it addresses one of the key concerns for any heat network customer.

Decarbonisation, Heat Network Zones and Building Assessment Reports

In a similar manner to the Consultation, the Bill does not propose any radical ideas on the topic of decarbonisation.  However, the Bill does address the topic indirectly through its sections on Heat Network Zones and Building Assessment Reports.  

Part 3 of the Bill states that local authorities may point out appropriate areas for the development or operation of a heat network.  It is not compulsory for local authorities to designate zones (they merely have to consider it) and, moreover, they may ask the Scottish Ministers to designate heat network zones for them.  

However, in order to facilitate the establishment of Heat Network Zones, the Policy Memorandum states that it will be important to have up to date data on building energy performance.  Part 5 of the Bill requires public authorities in Scotland to prepare a report (Building Assessment Report) for all non-residential buildings in which they have an interest setting out the feasibility of connecting the building to a heat network.  These Building Assessment Reports will then allow the local authority or the Scottish Ministers to draw up accurate Heat Network Zones.  

As indicated in the Policy Memorandum, the designation of Heat Network Zones, as informed by the Building Assessment Reports, should "identify the most appropriate heat decarbonisation solutions."  

With SSE Enterprise stating that they would like to see heat network zoning made "mandatory" for local authorities, the general reaction of stakeholders towards the Bill's provisions on Heat Network Zones has been lukewarm.  On the other hand, the Building Assessment Reports have received stakeholder praise.  The Association for Decentralised Energy pointed out that the reports will help give the Scottish Government, "oversight of the opportunities and limitations for public sector and non-domestic buildings for low carbon heating retrofit."

Conclusion

It is encouraging to see that the Scottish proposals on heat networks are already progressing to the bill stage.  As these schemes begin to roll out in the future, it will be interesting to see what the effects of the heavier touch scheme will be in Scotland compared to England and Wales and which of the approaches proves more effective.  However, stakeholder feedback on the Scottish licensing and consenting provisions has been, by and large, supportive.  

As with the Consultation, proposals to enhance decarbonisation of heat networks and district heating schemes are reasonably thin on the ground in the Bill.  However, the draft legislation is a promising step in the right direction.  

[1] Alasdair Reid, Heat Networks (Scotland) Bill, Executive Summary, Scottish Parliament, 2020. 

[2] Heat Networks Market Study: Final Report, the Competition and Markets Authority, 23 July 2018.

[3] Reid, Op. Cit.

[4] Ibid.

[5] Ibid.

[6] Different Rules for Different Fuels: Exploring Consumer Protection in the District Heating Market, Citizens Advice Scotland, May 2017.