The department of energy and climate change (Decc) has launched a consultation to gauge how the £320m put aside for heat network development should be spent.
It is also trying to pick the best route towards a market framework that makes heat networks comparable with other utility asset classes such as electricity and gas distribution networks.
The aim is to enable heat networks to compete with such infrastructure for investment without subsidy by 2021. The Association for Decentralised Energy believes this is achievable. Director Tim Rotheray welcomed the consultation, which came as energy secretary Amber Rudd, said Decc would not walk away from its existing commitments post-Brexit vote.
Risk and reward
While some specialist infrastructure funds have appetite for heat network investment, others feel the returns are too low given that construction risk – with many moving parts – is relatively high. Additionally, demand-risk suppresses appetite because revenues depend on having a guaranteed heat offtaker for 40 or so years.
Decc aims to help alleviate some of those risks by helping to seed a project pipeline and de-risk the market to unlock private capital. It believes its £320m injection could bring in up to £2bn in finance.
To kick-start that market, the department proposes an initial pilot phase, where only local authorities/public sector sponsors and owner-operators can access funding. After the pilot is complete, the plan is to work findings into the next phase, which, subject to consultation, may open funding to a wider set of stakeholders, such as property developers and not for profit/community groups.
The consultation makes clear that funds can only be used for the heat networks, connections or heat sources themselves – while existing heat networks may be granted funds for refurbishment if they can prove efficiency gains.
The consultation also states that the funding may be used in conjunction with other support schemes such as the Renewable Heat Incentive (RHI) and ECO, provided there is no direct overlap with the former, i.e. the funding cannot go towards parts of the project that will be supported by RHI payments. Because ECO is a supplier obligation, it is not included as government support.
Decc now seeks view on how the funding mechanisms, eligibility, decision-making criteria and monitoring and evaluation should work. See the consultation here.