Until last week the heat network sector in Scotland was not specifically regulated. The recent Heat Networks (Scotland) Bill seeks to rectify this by creating a regulatory framework and licencing system designed to encourage the increased use of heat networks.
The aim is to make district heating more attractive to consumers, as well as creating new rights for heat network developers to encourage investment in the sector.
What does the Bill do?
Until last week the heat network sector in Scotland was not specifically regulated. The recent Heat Networks (Scotland) Bill seeks to rectify this by creating a regulatory framework and licencing system designed to encourage the increased use of heat networks. The aim is to make district heating more attractive to consumers, as well as creating new rights for heat network developers to encourage investment in the sector.
As heating is one of the major contributors to the UK’s carbon footprint, improving efficiency and lowering emissions in this area is imperative if the UK is to achieve carbon neutrality by 2050. In England and Wales Ofgem has been tasked with regulating district heating and it will be interesting to see whether similar models follow here.
How does regulation work under the Heat Networks (Scotland) Bill?
The Bill regulates the heat networks market in the following ways:
Part 1 – Licencing
The Bill makes it an offence for a person to operate a heat network without a licence. A licence will cover an individual operator and will include conditions. Any individual can apply, but a licence can only be issued if the licencing authority (i.e. the Scottish Ministers or such other persons as they may designate as the licensing authority) is satisfied that the operator can carry out the activities authorised by the licence. The licencing authority will have regard to the following factors when making their decision:
- the applicant’s knowledge, expertise and experience;
- the applicant’s ability to run a heat network in a manner that:
- minimises greenhouse gas emissions (within the meaning of the Climate Change (Scotland) Act 2009) from the heat network,
- takes account of the just transition principles set out in s35C of the Climate Change (Scotland) Act 2009,
- contributes to meeting the fuel poverty targets; and
- such other matter as the Scottish Ministers may by regulations specify.
A heat networks licence grants individuals wide reaching powers to construct and operate heat networks, including the following:
compulsory acquisition of land (with the permission of the Scottish Ministers);
network wayleave rights (including the power to install and keep installed heat network apparatus in the land, enter upon the land and carry out works in respect of the land for the heat network);
powers to carry out surveys over land and enter land to carry out repairs or replace equipment; and
powers to carry out road works.
All of this is similar to powers bestowed on other statutory undertakers but has not historically applied to the operators of district heating networks.
A licence can be revoked if the person holding it no longer has the ability to carry out the activities authorised in the licence, or if a condition of the licence is breached. Section 3 of the Bill states that Scottish Ministers can by regulation exempt individuals or persons of a particular description from the requirement to obtain a licence.
Consequences of failing to comply with licencing requirements – On summary conviction the penalty for operating a heat network without a licence is no more than the statutory maximum of £10,000, whereas on indictment the fine for doing so is unlimited.
Part 2 – Heat Networks Consent
A heat network cannot be constructed or operated unless it is granted heat networks consent. Scottish Ministers may grant this consent (with conditions) to an application themselves or designate a local authority as the consent authority for their area. As with licencing, the appropriate consent authority (i.e. Scottish Ministers or a designated local authority, as relevant) may exempt individuals from the need to obtain a heat networks consent under Section 18 of the Bill. Before agreeing to the application, the appropriate consent authority must be satisfied that each person the consent is granted to has, or will have, a right to use each listed asset of the heat network for the purpose of operating it.
Part 3 – The Creation of Heat Network Zones
Where an area is particularly suitable for the construction and operation of a heat network, a local authority or the Scottish Ministers may designate it as a heat network zone. In these areas, local authorities or the Scottish Ministers may also prohibit the operation of a heat network in such an area unless the operator has a ‘heat network permit’ (as described in Part 4 of the Bill).
Part 5 – Building assessments
At such intervals as may be specified, all public sector building owners must prepare a building assessment report on their non-domestic buildings to establish whether they are suitable for connection to a heat network. The Scottish Ministers also have the power through regulations to specify other parties who must provide building assessments.
What is the perceived impact of the Bill?
A number of organisations have voiced their support of the Bill, including the Association for Decentralised Energy (“ADE”), who praised the Bill’s purpose of delivering clean energy, and highlighted that regulation would also ‘increase confidence in decentralised energy systems, creating jobs and economic growth.’
Other organisations have been more reserved in their assessment of the Bill. While the Law Society of Scotland agreed in principle with the regulation of the industry to protect consumers and grant further powers to operators, it also raised concerns about the extensive use of regulations within the Bill causing uncertainty.
In relation to consumer rights (which are a reserved matter), Citizens Advice Scotland has called for clarification on how UK-wide consumer protections will fit into the Scottish licencing system, and questioned whether the Bill creates adequate safeguarding for customers. Their suggestion of wider community engagement within the Bill has not been incorporated into the final draft.
How does this compare to the current position in England?
Currently there is no specific regime governing the regulation of heat networks in England. However, the UK government has sought views on possible forms of regulation in its consultation, Heat Networks: building a market framework (“the Consultation”) published in February 2020. The Consultation applied to England and Wales and contained proposals which differ with the Scottish framework in a number of ways.
Most notably, the Consultation suggested that a general licencing system as contained within the Bill would be too burdensome on heat network operators. Under the proposals, England and Wales would use an ‘authorisation scheme’, meaning that the construction and operation of a heat network would be generally permissible, as long as particular requirements set by Ofgem were met. There would also be a licencing scheme, but the purpose of this would be to provide additional rights and powers to heat network operators.
After receiving public comments, the consultation closed on 6th June 2020, and the results are yet to be published.
Steve Gummer is a partner, Ellen Painter a solicitor and Beth Edwards a paralegal at Sharpe Pritchard LLP
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