New funding for District Energy - a golden opportunity

This article was first published in Energy Manager magazine in August 2017

In March this year the Institute for Public Policy Research (IPPR) predicted that decentralised energy systems, or district energy, could radically change the way that homes and businesses are heated, and forecast that by 2030 heat networks could be servicing at least 10% of the UK's total heat demand. Government estimates put the possible share of heat supply contributed by district energy even higher at 14%. But why should local authorities and other public sector organisations adopt this technology and exactly what funding and other support is available to help them do so?

District energy is not a new phenomenon. The technology is tried and tested. The first heat network in the UK went live as far back as 1988 in Sheffield and is still operational today. Government data indicates that there are currently approximately 2000 heat networks in the UK supplying heat to 210,000 homes and nearly 2,000 commercial and public buildings. Yet impressive as those numbers seem, a step-change is expected in the number of new heat networks being commissioned by both the public and private sectors. This is due to the coalescence of a number of important planning drivers: the requirement to deliver low-carbon development; the need to reduce fuel poverty; and the availability of new Government funding to make it happen.

A low-carbon solution

Government support for district energy is being driven by a number of factors, not least of which is the requirement under the UN Paris Climate Agreement for carbon emissions to be reduced to 80% of 1990 levels by 2050. Since buildings account for 40% of total energy consumption, decarbonising heat has become a clear focus for policy-makers, and district heat networks are being seen as a key means of delivering the low-carbon objective. District heat networks such as Metropolitan's King's Cross network deliver significant energy and carbon savings. The statistics speak for themselves: a 50% saving in carbon emissions compared to traditional utility solutions; 80% efficiency compared to 30% in the conventional UK electricity supply; and energy centres which meet almost 100% of heat demand and 80% of power demand.

As well as reducing carbon emissions, district energy is a very flexible solution, which is scaleable and designed to grow with the increasing demands of the development, as well as the ability to be modified as technology advances. Currently, many heat networks are powered by Combined Heat and Power (CHP) engines driven by natural gas or biomass. There are debates about which is the most sustainable power source but once a network has been installed then the heat source can be changed, future-proofing the system. For example, further carbon savings can be delivered through the development of hydrogen fuel-cell technology. Other sources being explored include utilising the waste heat from the London Underground system and using heat pumps to draw upon the heat in rivers, canals or sewers. As demand grows, additional engines can be installed, making this a very flexible solution. Nor are heat networks confined to new developments, with retro-fitting of existing buildings possible as their heating systems need to be renewed. District energy networks are thus a prime example of 'joined-up thinking', literally bringing communities together.

Fuel poverty and consumer protection

District energy also has a role to play in the fight against fuel poverty. For example, residents at the King's Cross development enjoy savings of 5% on their fuel bills. Nor are they responsible for maintenance, whilst still being able to control the heat input and be individually metered for the energy used.

The benefits for communities and residents, therefore, extend beyond the delivery of low- carbon, and in some cases, zero-carbon development. District energy networks generate employment both in delivering and managing the networks but also by attracting investment from commercial and public-sector organisations looking for sustainable energy solutions for their buildings.

Residents' interests can be safeguarded through the Heat Trust, an industry-led, self-regulatory initiative which recognises best practice. Metropolitan was one of the first to register a scheme (King's Cross) with the Heat Trust and as a member commits to abide by the scheme rules which protect and safeguard the interests of all heat customers. Service standards cover: billing and payment arrangements; fault and emergency reporting; support of vulnerable customers; and complaint handling.

New funding to help implement networks

District energy therefore offers important advantages both in terms of sustainable development and ongoing management of energy provision, but also benefits residents and the wider community. Making the case, then, for district energy seems straightforward, but where can an organisation source the expertise and financial resources to implement it?

Public sector organisations in England and Wales can now apply for substantial loan funding to help pay for the installation of district energy networks for non-commercially viable schemes. The Heat Networks Investment Project (HNIP) has just entered its main funding phase with £300 million available in loans. The pilot phase, which closed in April 2017, awarded nine proposed schemes with £24million in funding. Four of the successful bids were from London boroughs whilst the other five were spread across the country including Sheffield, where grant and loan funding were provided to expand the existing heat network and connect it to another, illustrating the flexibility and scalability of this low-carbon solution. The awards ranged from £1 million to £5 million and will enable those local authorities to expedite their heat network plans. Similar funding is available in Scotland through the District Heating Loan Fund (DHF).

Not all applications will be successful of course, and competition for this valuable funding is expected to be fierce. Submitting the best possible application is therefore imperative. The winning applications in the pilot phase all demonstrated well-defined business cases; a robust timetable for construction; and an awareness of the financial risks and plans of how to mitigate them. Public sector organisations wishing to bid for funding therefore need to seek technical, legal and commercial expert advice to prepare their bid and to progress their projects beyond the feasibility study stage.

A key element of successful projects is the development of a robust business case and an understanding of how to commercialise the heat network. Without a realistic return on investment (ROI) it will be difficult for proposals for public sector district energy networks to attract funding either from the Government or the private sector. Without a clear roadmap for the future ownership and management of a network there is a real danger that such networks become a drain on resources for organisations rather than assets. Fortunately, assistance to devise future-proofed plans and to choose an appropriate ownership model is readily available from consultants and experienced district-energy suppliers, such as Metropolitan, who provide the full package from design and build, to financing, owning and operating the district energy network. Funding to pay for district energy networks is provided by the Government (and the GLA in London) and also the private sector.

These two options allow councils to transfer operating and financial risk to third parties. In the concession model, this is more complete but with the consequence that the council only benefits from cheaper energy rather than an income stream. The SPV model enables the council to share the risk and also generates a revenue stream. Private companies that enter partnerships to develop and operate networks bring a wealth of experience to projects, ensuring that networks are developed in an optimum way. Invested for the long-term, they have as much interest as the public-sector partner in the efficient running of the network and the lowest associated life-cycle costs.

Free technical, legal and commercial advice

In 2013 the Government established the Heat Networks Delivery Unit (HNDU) to provide consultative support to local authorities in England and Wales exploring heat network opportunities. Currently in its seventh round of funding, the scheme is intended to assist local authorities through the initial development phases of projects by providing grant funding and a pool of commercial and technical specialists to guide organisations through the process. HNDU funding can provide up to 67% of the estimated eligible external costs of early-stage development studies, with local authorities needing to match fund the remaining 33%. The project stages that can be supported in this way are heat mapping, energy masterplanning, feasibility studies, detailed project development and early commercialisation. The guidance offered under the scheme enables best practice to be incorporated into applications and, more importantly, into the energy networks themselves. HNDU has already distributed over £14 million in funding.

For London boroughs, further help is available through the GLA's Decentralised Energy Enabling Project (DEEP) which became operational in June this year. The project offers technical, commercial, financial and legal support services through an OJEU framework, giving access to pre-approved suppliers and to expert consultants who can provide assistance in bringing projects through to the procurement stage.

A golden opportunity

In conclusion, the case for implementing district energy is compelling. It is a proven technology, with an impressive track record of delivering low-carbon, energy-efficient heating for the benefit of whole communities. The active support of the Government and private sector in providing significant funding and access to specialist expertise, means that public sector organisations should take advantage of this opportunity and explore the potential of district energy now.