Economy, Energy and Fair Work Committee

Meeting date: Tuesday, August 25, 2020

Official Report 656KB pdf

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Heat Networks (Scotland) Bill: Stage 1

Welcome back. We move to item 4 on the agenda, which is evidence on the Heat Networks (Scotland) Bill at stage 1. Again, I ask members to identify which witness they are putting their questions to. Our witnesses are Dr Paul Moseley, the associate director of the Scottish Futures Trust; Charlotte Owen, the policy manager at the Association for Decentralised Energy; and Dr Keith Baker, a researcher with the Built Environment Asset Management Centre, or BEAM, as it is known. Welcome to you all.

Our time is limited, so I ask committee members and witnesses to be succinct. The witnesses may submit further written evidence following the session, if they feel that they were unable to cover any points sufficiently in their answers today.

First, are the witnesses content with the consultation process and the development of the bill thus far, or have matters been omitted that they would like to have seen included? There is a chat function on their screens where they can indicate that they wish to come in. Charlotte Owen would like to comment.

Thank you. The association is very content with the process of engagement so far. The consultation process with industry and external stakeholders has been very satisfactory.

Paul Moseley would like to come in as well.

I echo that. It is an important piece of legislation, resulting from several consultations. It includes everything that I would expect to see in such legislation.

Is there any disagreement with that? Does Dr Baker want to comment?

Yes. We are generally okay with the consultation process, but—and this applies more widely to the Scottish Government—where people who could potentially benefit through contracting respond, that needs to be made clearer, not only in this process, but in many of the energy efficiency consultations that we have seen. I am conscious that someone who is giving evidence today is from an organisation that is part of District Heating Scotland. We have no problem with that organisation specifically, from what we know so far. However, when people are giving evidence, it would be helpful to members of the public to be aware that some organisations will stand to gain from the process. I am not one of them.

Thank you for that comment. Does either of the other witnesses wish to comment on the point about whether their organisation stands to gain from the process? Paul Moseley is happy to comment.

Just to clarify, District Heating Scotland is the heat network partnership for Scotland, which was established by the Scottish Government in 2013. It is a virtual organisation that co-ordinates support across public sector agencies for the development of heat networks in Scotland. The Scottish Futures Trust is a partner of District Heating Scotland, but it does not stand to gain from anything in the bill.

Thank you for that clarification. We will now move on to questions from Richard Lyle.

The Heat Networks (Scotland) Bill was introduced in March 2020, and it provides for a regulatory and licensing system for district and communal heating, to accelerate its use in Scotland. Nowadays, we often hear the phrase “heating or eating”. How could definitions—and the bill as a whole—be future proofed to include emerging technologies such as sea-source heat pumps and shared group loops, to bring value heating systems to homes in Scotland?

That is a really important question. We must consider fuel poverty when we look at any sort of energy legislation. The Association for Decentralised Energy proposes that the definition of “heat network” could be future proofed to ensure that it covers emerging technologies by including the phrase “production, capture and/or upgrade”, to recognise that heat may not always come from what we traditionally understand to be a source of production. For example, it could come from the use of a heat pump to upgrade a source of waste or ambient heat from an industrial process or the sea. By making the definition slightly more flexible and including that specification, we will ensure that we are capturing those—[Inaudible.]—approaches to heat networks that, ultimately, on our journey to net zero, we would like to see more of, to enable the heat networks industry to decarbonise.

Heat networks are entirely agnostic when it comes to where the heat is coming from, which can be from a variety of technologies. It can be recovered heat from the environment or waste heat given out by industry—heat can be generated from a range of sources. Essentially, district heating is a network of pipes, taking heat from the place where it is produced to the place where it is needed. Therefore, over time, it is possible to switch sources of heat in and out, as lower carbon and cheaper sources of heat become available. That should filter through to the prices charged to the end user, so that they benefit from newer and cheaper sources of heat.

I think that Dr Baker wants to come in on that as well.

Yes, please. As the committee will be aware, I and two of my colleagues emailed the entire committee with some reports, and we urge you strongly to read, in particular, “Just Warmth: Developing Equitable and Sustainable District Heating Systems in Scotland” and “Carbon-free, Poverty-free: Heating Options for Rural Scotland”, in which we talk about multitechnology district systems, including the incorporation of thermal storage. That has been pioneered in Denmark by Ramboll UK Ltd, which is the world leader in what it does. I have raised the issue with Scottish Government civil servants before, and the planning for a multitechnology system on these designs largely seems to be ignored. I commented on the issue in The National, and I was told that it has been considered. I will not go into detail, because it would take too long, but I urge the Government strongly to become very aware of the technology. It is bringing costs down to between €30 and €50 per megawatt hour in Denmark, and it is an absolute game changer for district heating.

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On the demand side, we are using energy performance certificates to assess demand in local areas. I and others have written consistently on that, and we are in dialogue with Kevin Stewart. We need to change dramatically the way that we produce EPCs or we will end up with either undersized or oversized district heating systems, which will mean either that the poor are not served with sufficient heat or that they are paying too-high costs, because the heat that cannot be sold will be passed on as part of standing charges. EPCs are a critical flaw in Scottish Government policy making on energy.

Do you not think that we must interest construction companies in bringing such systems in?

As I said in my email to committee members, I would contact Ramboll. It has developed most of the world-leading district heating systems in Denmark. Question Ramboll as hard as you possibly can and get it involved in the process. I am not associated with Ramboll commercially, although we have done some work together in the past, but they are world respected as the best guys to do this on the ground. If we are going to have Scotland as a world leader, it is that sort of international expertise that we need to access. However, I would certainly agree with your comment.

Maurice Golden has the next question.

Are there likely to be any practical differences between having the Scottish Government or Ofgem as the licensing authority? Is there a preference for who the licensing authority should be?

For the Association for Decentralised Energy, the way that the bill is drafted has built in a lot of flexibility for the discussion about who should be the licensing authority to evolve over time. It is important to recognise that the point of the bill is to stimulate market growth as well as to drive good consumer outcomes and support decarbonisation. However, in a situation in which we are encouraging that market growth and seeing greater levels of investment, we can expect that there will be an increase in the number of heat networks that will need to be regulated. As a result, in the long term, it probably does not make sense for that responsibility to continue to sit with the Scottish ministers, and we could envisage a role for a body such as Ofgem or somebody else. However, the way that the bill has been drafted to allow that discussion to evolve is probably quite practical, given that it is an emerging and evolving situation. Ultimately, the regulations from Westminster will also affect the regulatory package in Scotland and may change the perspective of both industry and the Scottish Government on a role for Ofgem versus ministers versus another body.

As members will be aware, I work with Common Weal and other organisations, and we have a preference for the development of a Scottish regulator. Ofgem’s plan was unveiled earlier in the year. If you have a suspicious political mind, you might see a power grab going on there. We do not know—as Charlotte Owen said, it is an evolving situation—but it is something to be cautious about.

Heat networks do not cross borders unless we are building them right on the border. We do not see why regulation should not be fully devolved. It is worth bearing in mind that Ofgem considers economy 10, which includes a third of Scottish householders, as a non-standard tariff. Therefore, my general view is that Ofgem does not do enough to consider the Scottish situation, and we would be better served by a Scottish regulator, particularly on heat.

I echo the useful point that the bill is essentially enabling legislation and that it provides flexibility for the Scottish ministers to take on the role of regulator in the first instance and then transfer that role to another entity in due course. It makes sense to allow that decision to be postponed, depending on how other matters evolve.

The other point is about the difference in approaches in Scotland and in England and Wales. The difference is in regulatory approach. However, from the soundings that we have taken, it is clear that the market is really interested in investing in Scotland, and the key point is that the bill provides a framework in which that investment can enter the Scottish market. I have heard nothing in my discussions with the market that would suggest that that is not the case, notwithstanding the fact that there is a slightly different approach.

To follow that up, are there any practical differences between a licensing authority, as is set out in the bill, and/or a regulator, as is set out in the policy memorandum?

That is a really interesting question. I would say that there are—[Inaudible.]—but that they do not really amount to practical outcomes. The Association for Decentralised Energy would be happy to submit something in writing to the committee, exploring that question, if that is of interest. We could reach out to our members for a view on that.

It should not practically affect outcomes in the sense that what we need to achieve is a standard set of licence conditions for network operators to adhere to, to ensure that networks are built in the right places and to the right standards, with the right outcomes for customers. Whether those are administered through the Scottish ministers or through a different regulator is not the most important question. Getting the licence conditions correct and getting them out to the market as soon as possible are the key issues.

Convener, I have a quick supplementary question. Is there any potential for difficulties to develop with Ofgem as the result of the creation of a Scottish Government licensing authority? For example, is there a potential overlap that could lead to Ofgem and the new authority being at loggerheads? If so, is there a way to resolve that in the bill?

I will bring in Paul Moseley and then Charlotte Owen and Dr Baker.

It is early days to envisage that sort of difficulty between regulators. The approach that is taken in the bill is correct in so far as it provides flexibility about the choice of regulator. I am not sure that I envisage a situation that could not be resolved in the future through the flexibility in the bill as drafted.

I echo Paul Moseley’s point about the benefit of the flexibility in the bill. In general—[Inaudible.]—go as far as the—[Inaudible.] However, there are opportunities that we can pursue to ensure that that tension does not happen. The Scottish Government’s and the Department for Business, Energy and Industrial Strategy’s teams are in regular communication to consider that issue, and industry is factoring it in when engaging on the Scottish bill and the discussions at Westminster. There will be a role for discussion and communication to ensure that tensions are ironed out. However, in general, the two Administrations are working well together, and that is not an on-going issue.

The key words are “we need a different approach”. I would like to see the body, as it may become, increase in scope to consider matters such as fuel supply chains. Those are the things that we may want to regulate—for example, to prevent unsustainable biomass from getting into the system. I do not think that Ofgem would be likely to consider those wider aspects, based on its activities in the past. Therefore, as part of an evolving role, we could scope out something really different in Scotland.

We move on to questions from the deputy convener.

Thanks, convener. On technical standards, a previous witness identified the issue that a lack of standards led to

“the potential for the industry to be a bit like the wild west.”—[Official Report, Economy, Energy and Fair Work Committee, 23 June 2020; c 13].

Do you agree, and should we detail technical standards in the bill? Who should look after the technical standards? Should it be the licensing authority? Should we try to firm that up a bit more in the bill? What are your views on that?

Keith Baker talked earlier about the Danish model. How did they do it in Denmark? I would be keen to hear how technical standards are defined and protected there, so that we can learn something from that country.

In my email to committee members, I said that we have been in talks with the Danish embassy and that we are happy to facilitate knowledge exchange with the Scottish Government. The Danish embassy is keen to do that. Denmark is a world leader in district heating because its history on that goes back to about 1901 in Copenhagen. In 1979, it introduced the Heat Supply Act, and it is critical that something along the lines of that act goes into the bill. That has been critical to the Danish success when you consider where Denmark has come from on this and where it is now.

On technical standards, we absolutely want to see scrutiny by the professional institutions, such as the Institution of Civil Engineers and the Institution of Mechanical Engineers, as well as the associations for building professionals. Those should scrutinise and oversee the technical scrutiny of all aspects of developing district heating, right from the top to working with local authorities on the ground to develop the networks. That has been a critical omission in a great deal of Scottish Government energy policy so far, and it is partly why we ended up with EPCs being as they are.

Could I hear from Paul Moseley and Charlotte Owen on that issue?

Local authorities have a key role to play in the consenting process for heat networks. Therefore, the licensing system will establish an operator as being a fit and proper person to operate and construct networks. That is a single-point-in-time application process, after which an operator will be licensed. However, they will still need to apply for a consent to operate a particular scheme. The local authority will have a role in that.

A key point is that you must ensure that the outcomes of the scheme are consistent with a local authority’s desired outcomes for decarbonisation of its area; an appropriate contribution to decarbonisation objectives is needed. The technical standards are still in development and are evolving; currently, there is a voluntary code of practice. However, the consenting process should allow local authorities to say that, in order to be granted a consent, applicants must adhere to a certain set of technical standards for the construction and operation of the network.

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The Association for Decentralised Energy supports the inclusion of technical standards in the legislation. We can see a role for that coming through in this legislation or, more likely, through secondary legislation. Paul Moseley noted that we have the voluntary code of practice that was developed by the ADE and the Chartered Institution of Building Services Engineers. The industry view is that the voluntary code of practice has not been around long enough for us to have really seen its benefits and rewards yet, although there are many well-functioning networks that have implemented that technical standard.

Both the Department for Business, Energy and Industrial Strategy and the Scottish Government are exploring the introduction of a product specification or British standard for heat networks in the UK. That is an evolving discussion, so there will be some clarification of how exactly the technical standards will fit with the forthcoming legislation. However, we definitely see a role for technical standards in the legislation, to boost the consumer outcomes that we want to see more of and to encourage decarbonisation and more efficient networks.

That is lovely. Thanks, convener.

Thank you. Andy Wightman has the next question.

I want to explore some of the processes around licensing and consenting, which are key gateways to operating heat networks, elements of which will represent valuable business assets. Section 11, on revocation of heat networks licences, sets out the process for revocation. There are no regulations proposed there, so the circumstances in which revocation of a licence would occur will be as set out in the bill. There is also no appeals process for the revocation of a licence. That contrasts a bit with section 24, on revocation of heat network consent, which would occur in circumstances set out in regulations. In other words, there is flexibility on how consents will be withdrawn. Do the witnesses have any concerns, particularly about section 11, which gives little detail about the circumstances in which licences could be revoked? Are the witnesses concerned about the fact that there is no scope for any variation or about the absence of any right of appeal?

All three witnesses want to come in.

Thank you for the question. There needs to be a degree of consistency in relation to the terms under which licences or consents—or, indeed, permits under part 4 of the bill—could be revoked. That is a question of fairness for operators. In particular, where private operators are making substantial investments in heat networks, they need certainty—as do any third party finance providers—about the terms under which licences will be granted, administered, modified or, in extremis, revoked. I think that the bill deals with that, but it is a good point.

I would expect there to be an appeals process for an operator that is threatened with revocation of its licence. That would be a normal process for licensing, which would apply to any utility; it would be no different for the energy sector.

The Association for Decentralised Energy would probably agree with Paul Moseley. We need to ensure that the licensing package reflects the processes that we see in other regulated or licensed markets. That said, there are differences between the heat networks market and the gas and electricity markets that must be recognised. With regard to revocation, there is always a balance to be struck, but we must always consider the outcomes for consumers. Ultimately, that is the most important consideration.

As drafted, the bill leaves scope for a process of discussion and a process where heat network operators that face potentially losing their licences are expected to engage in a dialogue with the licensor to try to improve the situation. That is welcome, but I could see a need for an appeals process to be embedded. I am not sure whether that should be done through primary or secondary legislation. However, the need for some sort of appeals process is a fair challenge, ultimately with the consideration that, as a principle, we must always consider what the best outcome is for consumers.

Andy Wightman opens the door to the question of what we are licensing heat network operators to do. The term “heat network” encompasses a wide range of technologies and systems. The Association for Decentralised Energy report that came out yesterday included comments on being more technology specific and pushing specific technologies. That is a good message. I think that we need to go even further. We have a nascent industry and, as we said in our written evidence, we worry that some of the conditions in the bill are in danger of damaging it.

We need to develop exemplar systems—[Inaudible.]—whereby we can meet demand, and we must work with local authorities and give them more support so that they can put out contracts, or so that the Scottish Government can put out contracts, for systems that are designed to do X, Y and Z. As Andy Wightman said, there is not a lot of detail on that in the bill, and more detail is needed about the strategic planning, the systems that we will be putting into communities, and which communities the systems will be put into. In that way, an operator will have a much more focused set of licensing conditions under which to operate.

Thank you for those responses.

Dr Moseley, in response to a previous question, you said that local authorities have a key role to play in consenting, yet sections 19 and 20 of the bill, which are about granting consents, give that power to ministers, and local authorities have no role whatsoever. What did you mean by that comment?

My understanding is that there is flexibility and that local authorities will have a statutory duty to create a local heat and energy efficiency strategy, which is not set out in the bill but will be introduced by a separate piece of legislation. That will involve a duty to consider the building estate across the local authority’s administrative area and to identify zones for heat networks and other heat decarbonisation technologies. Local authorities may then tender opportunities in those areas for people to operate heat networks. My understanding is that local authorities will be involved in that consenting process and that the Scottish ministers could also issue consents. I think that the bill sets up the Scottish ministers as the entity that would initially award consents, but I imagine that local authorities would have a direct role in that. I would expect that role to be more than that of a consultee and that they would be involved in exercising that power in some way.

I will leave it there. I think that you are correct about permits and zoning but—[Inaudible.]—consent as well, but one of my colleagues may follow that up. Thank you, convener.

The next questions are from Rhoda Grant.

Do the witnesses feel that fuel poverty is adequately taken into account in the consenting process, particularly in the initial stages, given what was said about excess heat and cost to customers?

I will take that question, as fuel poverty is my speciality, along with heat. The answer is no. I know that you will be hearing from Scott Restrick of Energy Action Scotland in later evidence sessions. I have already commented about EPCs and their impact, which could result in undersized or oversized systems.

On how to use district heating to address fuel poverty, we need the Scottish Government to take a strategic approach and to start looking at the fuel-poor areas of Scotland, where sensible district heating can have a real impact. That must be done at a strategic level, and we have set out proposals for a Scottish energy development agency that would do that. Part of the problem, which has also been an issue under local heat and energy efficiency strategies, is that, for a consortium, a local authority or whoever is going for these projects, the onus is very much on those tendering and those who want the project done rather than on the Scottish Government to say that it has identified areas with high levels of fuel poverty and high levels of vulnerability with certain resources—biomass, water or whatever. We need a much more strategic direction, because there is only so much money in the pot in the first place. We need to ensure that the systems have the greatest benefit from the start and then evolve the national networks from there.

I agree with Keith Baker to an extent, but he is almost saying that some of the questions around fuel poverty sit more with other, more strategic pieces of forthcoming legislation and policy from the Scottish Government. Given that consumer protection is not devolved to the Scottish Government, there is only so much that can be done within the scope of the bill to protect consumers. The Association for Decentralised Energy believes that, within Scottish competences, the bill goes as far as is possible in protecting consumers.

The inclusion of considerations around fuel poverty and the consenting process is particularly welcome. We support the role that heat networks can play in alleviating fuel poverty, and that should be embedded in any considerations about whether a heat network is appropriate for an area. Ultimately—[Inaudible.]—can be locally effected. Therefore, including the fuel poverty assessment as part of the heat network consenting process, which is ultimately a local decision, makes a lot of sense. The bill generally does as much as it can to address the question of fuel poverty in the context of greater powers for the Scottish Government around consumer protection or forthcoming changes to fuel poverty legislation within existing competences. The flexibility with which the bill is drafted should also enable it to mould to those new circumstances.

Thank you. Paul Moseley also wants to come in.

I agree with Charlotte Owen in recognising that there are limits to the bill’s ability to tackle fuel poverty. However, there are good examples of where district heating has made a significant impact on alleviating fuel poverty, including in Aberdeen. In a previous evidence session, the committee heard from Michael King about the work that Aberdeen Heat and Power has been doing, which has helped to bring a lot of people there out of fuel poverty through access to low-cost district heating.

The wider point is that there is a tension between technology and the cost of heat to customers, and the cheapest solution is not necessarily the lowest-carbon solution. That is as true for district heating as it is for anything else. The bill can help in that regard by creating a set of conditions that allow investment to come in with the lowest possible cost of capital. If that happens, it will translate into the lowest prices for customers. Therefore, the key thing that the bill can do is help to create a set of investment conditions to de-risk the investments to enable the private sector to come and help to build out these networks at a low capital cost.

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What are the implications of the Scottish Government granting deemed consent? Should we be considering other systems for planning permission, perhaps including the involvement of local government or communities? Should we be looking at something different? Does deemed consent by the Scottish Government create a hostage to fortune?

To reiterate a point that I have already half made about the importance of the Heat Supply Act in Danish legislation—I should add that I first recommended that to the Scottish Government back in 2012—and to touch on the previous question, if you are developing a new source of waste heat, you should be putting in place infrastructure to deliver that to local communities and, ideally, retrofit it. That is an opportunity that we have missed in planning and that would fit quite well within the scope of the bill. It may require secondary legislation, but we could put something in the bill as a step towards, or setting out the need for, a heat supply act, to ensure that those who produce excess heat are not wasting it and that those who need that excess heat, because they are fuel poor, can be connected over time. The Danes staged it over multiple revisions, and that is how we must do it in Scotland. We could do it in a shorter time than the 30 to 40 years that it took Denmark, by learning from its experience. However, we are transposing generation 4 legislation from Denmark, in the form of the proposals as they stand, to a country that has less than 1 per cent penetration of district heat. There is a challenge and a potential solution in that answer, I hope.

The Association for Decentralised Energy supported the inclusion of deemed planning consent in the consenting process. That was partly a response from the discussions in the working group that having to go through the planning permission process alongside a permitting, licensing and consenting process creates a significant amount of additional administration that ultimately increases costs for consumers. However, another reason for our support for deemed planning consent is that it helps to overcome part of the question around demand risk. It helps to overcome some of the investment barriers and to create a bit more certainty for investors about how likely it is that a heat network will happen. Planning has been known to be a barrier to the development of heat networks in some cases, so having deemed planning consent supports that.

That said, the committee is right to flag the importance of community engagement in the process. That is paramount. In the creation of local heat and energy efficiency strategies and heat network zones, we expect there to be an extensive consultation process with the local community so that people understand the processes, understand that a heat network has been identified as the right solution for their area and understand that there is a low-cost, low-carbon opportunity available to them. That would also facilitate people’s engagement in the process and their understanding of what the decarbonisation pathway for their home or business looks like.

Therefore, my answer is in two parts: we feel that deemed planning consent makes the most sense for the heat networks market and helps to overcome many of the barriers, and that it is a rigorous process that will support the delivery of the right outcomes for heat networks in Scotland and for the communities that are served by them. However, it is important that communities are engaged in the process and that, as Paul Moseley noted, the local authority has a role in the consenting process and that it is formally consulted and ultimately has some say in the designation of a consent.

Should we have an appeals process? Is the balance of power too skewed towards the developer?

That is where we see the benefit of having the Scottish ministers involved in the consenting process. We think that that power is fairly balanced by having the local authority, the Scottish ministers, the heat network developer and the local community involved in that discussion and process. The oversight by the Scottish ministers means that they must consider the overall strategic outcomes that the Scottish Government is seeking, including, for example, whether the project delivers the right thing for the local community and whether it supports the Scottish Government’s net zero carbon ambitions. In general, the process is a rigorous way to ensure that we drive the right outcomes and engage the right people.

That said, there could be a role for an appeals process. However, in general, given how rigorous the bill is already, that is not a necessary amendment.

I echo much of what Charlotte Owen just said, particularly with regard to the role of community engagement. There is a practical point about the balance between regulatory benefit and burden. Under the Scottish proposals for regulation, operators will be asked to apply for a licence before they apply to operate or build any schemes, and they then need a separate consent. It makes sense to consider the planning applications for that in the context of the wider considerations in the consenting process, looking at the match between the application for a particular scheme in a particular place and the local authority’s local heat and energy efficiency strategy to ask whether it is a good fit, whether it will deliver the right outcomes for customers and whether it is the right solution in the area.

The deemed planning consent avoids having to apply for a third consent. It makes sense for a deemed planning permission to accompany a consent, granted by the Scottish ministers, as the bill envisages, in the first instance, but, I imagine, with significant input and consultation with the local authority concerned, as I said.

How long, on average, might it take to recover the capital costs from a heat network? A fair bit of investment goes into the heat network in the way of equipment and various other assets. Based on past experience, how long would it take to recover that cost?

It can take a significant time for investments in heat networks to be recovered, because they are capital intensive. A significant up-front investment is made in installing the infrastructure, and the revenues to repay that investment accrue over a long time and are spread over a relatively small customer base. That is different from, for example, gas and electricity markets, where the costs are recovered through a regulated asset base over a large number of customers. The cost of a heat network will be recovered from the customers of the network. Because that is a relatively small number, the cost needs to be spread over a long time so that the charges to the customer are kept as low as possible.

Business cases for heat networks are typically done over a 40-year period, and it is not uncommon for the capital to be paid back over a period of significantly longer than 15 years. Therefore, it needs patient capital, and investors and contractors are content with that, provided that they can see the certainty of the revenue streams, which is about de-risking the demand for the heat networks.

That question is two questions in one—there is a purely technical answer and a wider socioeconomic answer. On the technical answer, I largely agree with Paul Moseley that a period of 15 years is bandied about. However, in Danish projects such as those in Marstal and Brædstrup, by incorporating interseasonal thermal storage in heat networks, they have managed to reduce the payback periods and the cost of energy to householders. Incorporating interseasonal thermal storage should be seen as critical in the specification of future heat networks. It will not work in absolutely every case, but it works in those world-leading examples.

On the socioeconomic question, if you are dealing with fuel-poor householders, you get benefits to the economy from reduced costs to the national health service. With biomass, if you develop local and sustainable biomass, you get economic benefits for the local economy. Therefore, it is important to consider not just the technical payback period but the wider benefits and the co-benefits. I covered that in a report on co-benefits of adaptations to built environments that was published with the “Climate Change Plan: The Third Report on Proposals and Policies 2018-2032”.

Those are the two issues. On the technical side, we can reduce the time if we follow the Danish example; on the socioeconomic side, we must consider the wider picture and factor that in to economic decision making.

There would therefore be a long time before any sort of transfer competition could take place. We are talking about 15 years, but potentially more, depending on the development. That would appear to need tight regulation, up to the point that some form of competition comes into play. Do the witnesses agree?

That is an important question and one that we have considered a lot at the ADE and in discussion with our members, as well as through the Scottish Government’s heat networks working group. We are of the view that concession or permit-type processes help to introduce competition to the heat networks market by introducing various specific points at which competition takes place and where the outcomes that a heat network delivers will be considered. For example, to win a permit, operators would have to have a discussion about what sort of heat prices they might charge, whether they would meet certain decarbonisation outcomes and whether they would tackle fuel poverty. That creates an incentive for the heat network operators to perform well and to deliver good customer outcomes. They would of course do that anyway, but there is that additional incentive, because they want to re-win the rights to continue to have control of the heat network permit or to have that advantage in that particular area.

The permit or concession-type model helps to introduce the elements that drive good customer outcomes into the market, particularly given the competences that the Scottish Government has through devolved powers. However, it is important to consider the interplay between that and the consenting process. That is why we welcome the introduction of a mechanism that supports the licensing framework to drive good consumer outcomes, given that heat network operators are being granted some level of benefit in a particular area.

Does the transfer—[Inaudible.]—whether it could be improved.

11:00  

[Inaudible.]—of permit holders and the need to protect consumers through that process. It is possible to define a concession competition that tightly links to the concessionaire’s ability to build out networks to consumers. If the concessionaire does not build out according to the agreement and the terms of the permit, the ultimate sanction is that the permit can be revoked and the assets transferred to a new operator. The bill envisages the mechanism through which, first, competition can be introduced and, secondly, the permit holder or concessionaire can be incentivised to comply with its terms.

It is important to realise that we need private investment in the networks, and at some scale. Heat networks work best when they operate at scale, and they benefit from economies of scale. There is a real advantage to having an operator who has the exclusive right, won through competition, to develop out networks in a particular area, to drive economies of scale and to bring their finance and expertise to that. It is really important to balance the potential for harm from a monopoly environment with the benefits that can be gained through bringing in expertise, a long-term view and strategic planning from heat network operators.

The flipside of regulation is getting the design and specification right in the first place. If we are talking about overregulating the district heating market in Scotland at the moment, that shows how far we are from where we need to be when it comes to getting the technical specifications and the technical side right.

I have been in contact with the heat networks team in the Scottish Government, and I am aware of District Heating Scotland, but I do not see that technical expertise there. To put it bluntly, you are not paying the guys enough. The sort of people who we need to be involved in setting the specifications are consulting engineers, who will be charging 50 grand a year more for their salaries. I know James Hemphill, and I happen to know what his salary is. We need to pay our technical experts better and create a technical hub, in line with our proposals for a Scottish energy development agency. That would mean getting it right in the first place and that we would not have to introduce such strong regulations early on, which risks damaging the industry at a nascent stage.

I return to an earlier discussion on consent. To date, a significant number of heat networks have been led by local authorities. Was there a danger that, if they had been left to local authorities, that could have presented a risk of self-regulation? With the involvement of the Scottish ministers, is there enough of a safeguard in the bill to prevent that?

The heat networks regulation working group, which the Scottish Government convened when introducing the bill, considered the question of self-regulation in some detail. That is partly where the role for ministers has come in. It was the view of many members of the group, including me, that having that role for ministers has helped to overcome the concern about self-regulation.

It is important to recognise that, ultimately, local authorities are still trying to drive the best outcomes for their areas. They are the bodies that are most aware of the opportunities in a particular area—they are aware of the priorities for alleviating fuel poverty and addressing air quality considerations. For instance, they will be aware of where waste heat opportunities could be utilised, and they will have relationships with industry and consumers, helping to drive successful heat networks. That has been seen across the UK and particularly in Scotland, where local authorities have been driving successful heat networks that have harnessed low-carbon opportunities and have offered consumers a really good outcome.

For us, the proposals strike the right balance between placing powers in the hands of those who are well placed to identify where heat networks could develop and ensuring an adequate level of oversight. It is important to recognise that the private sector has a key role in driving successful heat networks. In general, the process will help to support that, and we can see that the process is generally fine.

I echo what Charlotte Owen said—she has dealt very well with the point about the potential for self-regulation. I would add only that there are some really good examples of heat networks in Scotland and in the rest of the UK in which the local authority has taken the lead, has developed and funded a scheme and now owns and operates it successfully. Aberdeen City Council and Fife Council provide great examples of that. However, that is not the only approach, and the sector will not achieve its full potential unless we lever in significant private sector investment. Midlothian Council is currently tendering out a project and is bringing on board a joint venture partner, which will provide significant expertise and finance.

If the sector is to achieve its potential, it is important to allow such networks to be opened up to the market, to have partners that can bring in expertise and significant finance, and to find a way to do that that keeps the cost of capital down.

I laughed slightly when I heard the question. I would refer the committee to the response issued by the Convention of Scottish Local Authorities to the consultations on the local heat and energy efficiency strategies 1 and 2, and to our response. The bill seems to be the latest in a tradition of legislation in which an awful lot of responsibility is placed on local authorities, but with very little in the way of enforcement powers or resourcing to enable authorities to use those powers. As Paul Moseley said, local authorities have led some of the best district heating schemes in the UK, and they should be critical to the process, but we are not giving them the resources that they need to engage in those processes and to move on their responsibilities.

How could the designating and permitting process be improved to align with development planning and wider strategic objectives?

That is a classic opportunity for me to plug the proposals for a Scottish energy development agency. We absolutely have to make the development of district heating part of our wider objectives of tackling social deprivation, tackling fuel poverty and creating jobs. A short answer would be, “Please see our proposals.” A much higher level of strategic planning is involved than we see in the bill.

The parallel piece of legislation introducing a duty on local authorities to create local heat and energy efficiency strategies will be key to the wider strategic planning process, ensuring that the right decarbonisation solution is put in place in the right part of the local authority area and that, within the zones that are identified for district heating, we do what we can to ensure that there is enough demand to be attractive to investors.

Everything that the bill does in that regard is helpful, although I wonder whether some of the provisions on mitigating demand risk for investors could be strengthened. Regarding the role of public sector buildings within a zone that has been designated a heat network zone, could we do more to encourage or require building owners to connect to networks when it is the right thing for them to do that—and similarly for private building owners?

I leave aside domestic consumers, because of the concern about consumer protection being a reserved matter, but we should be doing all that we can, first, to encourage investments involving public sector buildings and showing leadership in that regard; and, secondly, to encourage the owners of large private sector buildings to connect to networks as much as possible. That would help the wider strategic aspect to play out.

I echo what Paul Moseley said. There are opportunities to strengthen the bill to help it to deliver the Scottish Government’s wider strategic outcomes. Introducing a requirement for public sector and some non-domestic buildings—particularly anchor-load buildings—as well as new developments to connect to heat networks and heat network zones would be one way that we could strengthen the bill. We would like such provisions to be included at this stage but, even if they were included at a later stage in the discussions, the bill would result in positive impacts for the heat network sector in Scotland.

In particular, when you are considering waste heat opportunities in Scotland, having some of those greater powers—for example, to require that those with waste heat connect to the heat network and supply heat to it—would be one way to encourage a circular economy in Scotland, and it would help to provide lower costs for consumers, because waste heat is often relatively cheap.

I have one final question, which relates to the previous conversation on the building assessments.

The bill contains an obligation on public authority owners of buildings to conduct assessments and consider the potential for connection, and it leaves it open to ministers to extend that. Is there an argument for having more prescriptive provisions in the bill in relation to private non-domestic buildings? I am thinking, for example, of places such as universities, colleges and quite large complexes that might be associated with retail.

There is a strong case for doing exactly that. It makes sense to start with public sector building owners, because the public sector is usually able to plan its estate on a fairly long-term basis compared with the private sector. Larger buildings in the public sector, in particular, make good anchor loads for heat networks, whereas there can be increased uncertainty around private sector buildings. However, owners of large private sector buildings with significant heat demands should certainly be encouraged to do what you suggest.

There is also scope for tightening the building assessment report so that it does not just tell us whether a building could connect but goes further and says whether it should connect. It should look at the low-carbon alternatives for that building, such as removing fossil fuel. For example, replacing a gas boiler with another gas boiler locks in carbon emissions for another 10 to 15 years, and that should be removed as an option as soon as possible, with low-carbon alternatives being considered. When the building assessment report says what the right solution is for the building, the choices for the building owner should become constrained by that. We have to get to that position.

The important thing is that, when we make such decisions, we make sure that we use real data. Obviously, that should be relatively easy in relation to public sector buildings. Access to energy data should be one of the public’s rights. I am aware that some organisations treat such information as commercially confidential, and we need to have a discussion about whether we can use legislation to force them to release that data.

With regard to the homes that we are connecting to, when we design heat networks, we need to be sure that we have estimated the level of demand correctly. That involves using real measured data and not—for want of a better phrase—getting the Energy Saving Trust to go round and deliver home energy checks. The errors in EPCs can be orders of magnitude out. We cannot afford to do that when we plan district heating, because of the costs that could be passed on to consumers through additional standing charges or through not meeting the demand in the first place.

The critical message that I would send is that we need to make all our decisions on the basis of real, measured data.

11:15  

I very much echo the points that Paul Moseley and Keith Baker have made. We must remember that the ability of the building assessment report to drive connections to heat networks is partially decided by measures that will fall outside the bill as drafted, such as new regulations that would prevent existing buildings from retrofitting heating solutions that are not consistent with our net zero pathways. Having a better understanding of the opportunity to install heat networks is a good thing—these are known as trigger points.

We welcome the extension of the requirement for building assessment reports to be undertaken by all non-domestic buildings within a heat network zone. Ideally, we would like that to go further so that, ultimately, we can overcome the demand-risk question that we have discussed. We welcome the emphasis that the Scottish Government has placed on addressing demand risk in its explorations around the bill. We welcome the fact that the bill recognises that, by addressing demand risk, we help to drive the good outcomes of high levels of decarbonisation and lower costs for consumers.

As far as possible, we should seek to drive those outcomes through the powers and competences of the Scottish Government. We would like the building assessment reports to be extended to include non-domestic buildings because, as Keith Baker notes, that would give us a wealth of data that could aid our understanding of why people do not connect to heat networks. Ideally, we would like the bill to be strengthened to include an obligation to connect to a heat network, particularly for anchor-load buildings.

Members have further questions, but we have run out of time, so we will write to you on a number of other points. If you feel that you have not had enough time to make the points that you wanted to, you can write to us to supplement the answers that you have given. Thank you for speaking to us.

Before I suspend the meeting, I inform members that the deputy convener, Willie Coffey, will chair the meeting for agenda item 5.

11:17 Meeting suspended.  

11:23 On resuming—