Big Problems Need Radical Solutions – Time to Play Monopoly with District Heating?
Steve Gummer examines how local authorities might make district heat networks a reality.
“We are in a climate emergency”.
While true, this is a very fashionable phrase at present amongst legal and political professionals. It is so often used that there is a risk that it begins to lose all meaning. A few facts worth reciting to remind us all just how real the climate emergency we face is:
- We will see rising temperatures – Even with only a modest increase in temperatures of 2°C the impacts could be huge. In the UK there could be a 30% decrease in river flows during ‘dry’ periods, a 5-20% increase in river flows during ‘wet’ periods, and between 700 and 1,000 more heat-related deaths per year in South-East England compared to today[1]. Ofwat has stated that in England, it’s estimated that there is a 25% chance of the worst drought in recorded history within the next 30 years[2].
- Sea levels will rise – As polar ice sheets and glaciers melt and the warming oceans expand. Even small increases of tens of centimetres could put thousands of lives and settlements at risk from coastal flooding during stormy weather[3].
- Food and Global Trade will be disrupted – Malnutrition could become more widespread as crop yields are affected by increased drought conditions in some regions, leading to reduced food production.
- Diseases may become more prevalent – In London and other major cities there is an understandable inquisition in to the air people are being asked to breathe. Warmer temperatures could increase the range over which disease-carrying insects are able to survive and thrive. Vulnerable people will be at risk of increased heat exposure and the number of deaths due to temperature extremes is expected to increase in the future, although in the long term there will likely be fewer health problems related to cold temperatures[4].
None of this is new. It’s just helpful to put the words “climate emergency” into context. Some of the ideas proposed in this paper are radical. However the challenge society faces in terms of climate change and our commitment to cut emissions of greenhouse gasses is immense. The consequence of failure is catastrophic.
Heating
At present the majority of heating in the UK is provided by gas. Gas-fired space heating accounts for around 720 terawatt hours (TWh) of energy consumption each year in the UK. Of the 25 million homes in the UK, over 23 million have a gas supply for heating[5]. Heating contributes approximately 30% of the UK’s total greenhouse emissions[6]. Heating is a huge part of our national climate change discussion. This has a huge environmental impact.
Heat Networks
Heat networks are a series of pipes that transport heat from a central source and deliver it to a variety of different customers including businesses and homes.
Heat networks provide a unique opportunity to move away from gas and to utilise low-cost renewable and recovered heat sources at scale. Heat networks currently supply around 1% of buildings heat demand[7].
The Fundamental Problem with Heat Networks
Many local authorities and others across the UK are setting up district heating networks. However the initial start up costs and capital investment is significant. This is particularly the case when projects face huge demand risk and uncertainty. We have worked with many local authorities on district heating schemes and (even where public sector buildings provide significant baseload demand) the business case is frequently marginal. In the majority of cases it is certainly too marginal to attract low cost private capital which would facilitate major construction and the cheapest cost of energy for customers. Heat networks tend to work best when everyone joins in. Given customer choice this is unlikely to happen. There are any number of reasons why not everyone wishes to connect to a district heat network including a preference for the status quo.
Challenges with financing district heating projects are due to increase with the closure of RHI – a form of incentive that supports district heating schemes. While this will likely be replaced with some alternative form of support it is unlikely to be a game changer to facilitate the widespread proliferation of heat networks. Nor is it likely to facilitate investment by funds needed to allow construction at scale.
Central Government
Central government has been hugely supportive of Heat Networks. The Heat Networks Investment Programme and the Heat Networks Delivery Unit have done sterling work providing support to marginal projects.
The exit from the European Union now affords public authorities wider discretion as to subsidies which could enable greater use of public funds for such projects than was previously permissible under EU rules.
Central government also remains committed to banning the installation of gas boilers in new build homes.[8].
The government has committed to producing a Heat Policy Roadmap to set out next steps.
All of this represents significant progress but none of this (as yet) provides the paradigm shift needed regarding heating. The fundamental problem with heat networks remains.
Solving a Problem Like Demand – Danish Heat Laws
While customers (both domestic and business) are signing up to heat networks the incentives are not yet sufficient to increase demand and (consequently) make investing in heat networks financeable at scale.
While it may run counter to years of free market considerations in the heating sector, restricting customer choice as to whether or not to join a heat network may hold the answer.
The more customers that sign up to a heat network, the more quickly initial capital expenditure can be offset and the greater savings can be passed through to consumers in the form of lower bills.
As of 2015, 63% of Danish dwellings were connected to a district heating network. The reason for such comparatively-high consumer uptake – at least compared to the UK where, in 2018, only c.450,000 domestic customers were connected to district heating networks – can be found in Danish Law.
Firstly, Danish law gives Danish municipalities the option of requiring new and existing buildings to connect and stay connected to a district heating network. Secondly, national bans on electric heating in new and existing buildings (where connection to district or gas heating is available) were introduced in the ‘80s and ‘90s[9].
As a result of these two policies that inhibit choice of heating method, Danish energy companies have an assured income in respect of their district heating schemes and renewable heating projects have expanded and become investable with a low cost of energy for consumers.
There is no equivalent of this law on the statute books in England (although – as noted above the gas boiler ban is a good start). While district heating schemes for tenanted new build blocks may have some level of certainty of demand, there are very limited means by which to mandate retrofit district heating. As older homes tend to be the least energy efficient and powered by gas the climate challenge remains.
Local Authorities to Lead the Way
Local authorities have done huge amounts of work developing local heat networks for residents and businesses alike. We have advised many local authorities in respect of such projects. As such we are aware that local authorities have also wrestled with the challenges of uncertain demand and the difficulties of attracting low cost private capital to unlock investments.
What we set out below are seven options/approaches that local authorities do or may consider to limit demand risk and compel use of local district heating schemes (in turn making schemes more investable and cheaper for customers). Some of the approaches are commonplace. Others are more radical ideas. While some of the proposed solutions may seem unattractive it is important to go back to the context established right at the start of this article. The scale of the climate challenge is immense and radical solutions should not be ruled out.
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Mainstream Ideas |
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Idea 1 – Be your Own Best Customer – Public Sector Baseload Approach: Putting in place supply contracts with other public sector entities to ensure a minimum baseload supply for the Project. Use: This approach is already widespread and is usually a critical part of getting existing local authority heat networks off the ground. Challenges: Procurement issues (Public Contracts Regulations 2015) need to be considered when public sector entities issue long-term supply arrangements as do matters of subsidy control. These issues are usually surmountable by setting up and establishing an appropriate competition process. Ability to solve the demand challenges of Heat Networks: This approach will assist heat networks in dense urban areas which have a large amount of government offices, swimming pools and schools. If all of these buildings sign up it can provide a significant, long-term and secure revenue stream from which to meet capital commitments and attract other customers at value. However its efficacy and usefulness is conditional upon accidents of geography (namely proximity of public sector demand to the source of supply). This approach would not support the development of heat networks in rural settings nor does it guarantee any take up beyond the public sector. |
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Idea 2 – Embrace the New – Use Businesses and New Build Developments as Baseload Approach: Putting in place long-term supply contracts with businesses and with new build tenanted blocks can create long-term committed revenue streams. Unlike heat supply agreements with domestic customers, long-term heat supply agreements with businesses and developers of tenanted blocks can include break clauses with termination payments to recoup lost revenue and wasted expenditure – this means that revenue streams are secure even if these customers elect to leave. Use: This approach is already widespread and is usually a critical part of getting existing local authority heat networks off the ground. Challenges: Terms and conditions will need to be compliant with law including the Unfair Contract Terms Act 1977. Any agreements with consumers (as opposed to businesses) will need to be compliant with the Consumer Rights Act 2015. This means equivalent break clauses are not achievable with non-business customers. A core challenge will be getting businesses to sign up to long-term – perhaps 15-20 year agreements. This may be a commitment many businesses and residential blocks are reluctant to make – and particularly so unless pricing guarantees and environmental guarantees can be made. Ability to solve the demand challenges of Heat Networks: This approach provides some long-term secure supply but does not address the critical issue – namely retrofitting standalone homes that are fitted out with gas boilers. |
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Idea 3 – The Status Quo – Delivering Through the Planning System Approach: Updating local development plan policies to ensure that buildings are required to sign up to local authority district heating schemes is quite a common approach. Local authorities are already required to write policies which address the need to reduce carbon emissions. The NPPF states that local plans should “take a proactive approach to mitigating and adapting to climate change” and “identify opportunities for development to draw its energy supply from decentralised, renewable or low carbon energy supply systems and for co-locating potential heat customers and supplies”. Use: This approach is already widespread (particularly where heat networks already exist). By way of example one London Borough requires (as part of its local plan) that:
Typically, planning authorities implement their local plans via s.106 agreements Challenges: Compliance with planning rules. This would not necessarily affect the millions of existing dwellings with high carbon fossil fuel heating systems. Ability to solve the demand challenges of Heat Networks: While this approach is helpful its scope is limited in nature. Again this approach relates primarily to new build developments. It may be possible to update local plans in advance of the existence of a heat network. Whilst it may seem counter-intuitive to adopt such an approach in areas where there is no existing heat network, using the planning system to make properties “heat network ready” is a good way of safeguarding a window of opportunity to connect as many properties as possible when a heat network becomes available. |
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Less Mainstream Ideas |
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Idea 4 – The Partial Solution – Property Restrictions Approach: Putting in place restrictions in leases and other property documents. Local authorities tend to be significant landowners and it may be appropriate for local authorities to begin to add to their leases requirements to sign up the district heat network. Use: Outside of tenanted blocks we are not aware this approach is widely used. This may simply be because local authority energy and property teams tend to be staffed by different personnel with different priorities. Challenges: Ensuring compliance with relevant contract fairness rules as above. Also local authorities will be keen to ensure changes they make to property documents do not diminish the value of the relevant property or render it unmarketable. Ability to solve the demand challenges of Heat Networks: While this approach is helpful its scope is limited in nature. Reliance in this instance is on land being owned by local authorities so this does not address the fundamental issue of residential sign up. |
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Idea 5 – Local Legislation – Private Bill Approach: A local authority could seek to obtain a specific private Act in Parliament in respect of a specific heat network(s). This may (for example) designate a relevant area as a heat network area and require (as with Danish Law) that all properties in the area be connected to a local heat network within a certain period of time. Private bills are typically promoted by organisations, like local authorities or companies, to give themselves powers beyond, or in conflict with, the general law. Private Bills only change the law as it applies to specific individuals or organisations (like local authorities), rather than the general public. Historically they were used to authorise railways, canals, harbour installations etc., but there is also a long history of local authorities promoting their own private bills to give them general powers exercisable in their areas. For example, the London Boroughs have promoted 13 “general powers” bills since 1990, which have included provisions about environmental protection, traffic and highways and licensing, among others. Perhaps one appealing aspect of private bills is that there is a history that where a local authority proposes a progressive and innovative private bill it may (in time) be more widely adopted by the Government – this, for example, was the case in respect of Liverpool City Council – who introduced a private bill on banning smoking in public places before it was overtaken by national legislation. It’s also worth noting that the Clean Air Acts came about after a number of local authorities had secured their own local provisions in private Acts. Use: This approach has not yet been used. Challenges: We are industry leading experts in this field, having advised numerous local authorities (including the London Boroughs) on promoting private bills. There is no guarantee of success. Parliament may find that legislation which does something that would normally be a matter for government unacceptable and reject it early on public policy grounds. And those affected (but not individual residents) can object to the Bill by petitioning. As such the process is high risk and can be costly for local authorities – albeit the prize for innovation is significant. Ability to solve the demand challenges of Heat Networks: This is the first of our solutions which offers a more global solution – namely a requirement to sign up to a heat network akin to that in Denmark. Obviously any such private bill would have narrow geographical confines. However it nonetheless could be a precursor (whether or not the promotion was ultimately successful) to national legislation. |
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Idea 6 – Very Local Legislation – Byelaws Approach: A local authority could attempt to make, and obtain confirmation of byelaws mandating sign up to the relevant local heat network. Local authority byelaws are laws made by local authorities requiring something to be done, or not done, in a specified area. In other words, local laws to deal with local issues. Four elements are essential to the validity of a byelaw:
In this case what is contemplated is the introduction of a Byelaw akin to a Danish Heat law requiring sign up to the district heat network. Use: This approach has not yet been used. However it is worth noting that local authorities have proposed somewhat controversial Byelaws in the past. In 2010, the councils in Greater Manchester agreed a draft byelaw to impose a minimum price on alcohol sales in the city[10]. In the end, the plans were shelved as the government decided to legislate on a national scale, but this is an interesting example of local authorities thinking outside the box when it comes to byelaws. Similarly Liverpool City Council contemplated a byelaw to ban plastic toys in McDonald’s Happy Meals[11]. Challenges: This approach may be challenging to get off the ground. The Secretary of State’s permission or confirmation is usually required, and one of the things he or she would consider is whether there is a clear enabling power. At present there is not a clear power that would enable this approach (although central government may wish to consider introducing legislation to enable it – which may be akin to the Danish approach described above, or indeed similar to the powers that local authorities have to make smoke control orders (not byelaws) under the Clean Air Act 1993). There is a general power for local authorities to make byelaws in s235 of the Local Government Act 1972: to “make byelaws for the good rule and government of the whole or any part of the district or borough… and for the prevention and suppression of nuisances therein.” There are two types of common law nuisance: public nuisance and private nuisance. Public nuisance is defined as follows[12]: However, despite this definition, public nuisances have been committed where the nuisance is not itself an illegal act. In AG v PYA Quarries [1957], for instance, quarrying – which is not an unlawful act – was found to be a public nuisance on the specific facts of the case. In particular it was noted that a public nuisance could be one which materially affected the reasonable comfort or convenience of a class of Her Majesty’s subjects. In an era of unclean and polluted air, one could suggest a resident who refuses to change to an environmentally friendly district heating network endangers the health of the public, due to the environmental damage caused by gas boilers and that this should be deemed to constitute a nuisance. It should be noted this would be a significant stretch of current law and (while we consider the bye law idea is a nice one) we do think it would have a very low chance of success in the event of a challenge (for a start there is something perverse about describing use of a gas boiler as a nuisance only in circumstances where a heat network operates – typically a nuisance either exists or it does not). However it might well be worth local authorities lobbying government to enact primary legislation to enable local authorities to make local orders akin to smoke control orders to better enable district heating. It is also worth noting that breach of a byelaw is a criminal offence and local authorities may not consider it appropriate to criminalise not signing up to a local heat network or retention of a gas boiler. Ability to solve the demand challenges of Heat Networks: Again this approach would (if successful) offer a more global solution – namely a requirement to sign up to a heat network akin to that in Denmark. Obviously any such byelaw would have narrow geographical confines. However it nonetheless could begin a process of passing heat law type rules. Such a byelaw would be certain to be challenged on legality grounds and it is very unlikely it would survive the challenge. |
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Idea 7 – Enforcement – Environmental Enforcement Approach: Local authorities could take a revised interpretation to s.79 of the Environmental Protection Act 1990. This states that certain “fumes or gases emitted from premises so as to be prejudicial to health” constitute a statutory nuisance. Where a local authority determines that a statutory nuisance exists it must either issue an abatement notice which can mandate works to be undertaken or take such other steps as it thinks appropriate for the purpose of persuading the appropriate person to abate the nuisance or prohibit or restrict its occurrence or recurrence (in this case, arguably, either could require connection to the local heat network). Use: We are not aware this approach has been used. Challenges: Describing the use of a gas boiler as a statutory nuisance would be (to say the least) challenging. The majority of homes in the UK have gas boilers. Further not all areas have heat networks and there is something perverse about saying use of a gas boiler is a nuisance only if you have a local heat network – a nuisance is either a nuisance or it is not. However given the scale of the climate emergency faced (and issues of air pollution) perhaps there is a slim argument that where local people refuse to sign up to a cost competitive heat network and retain their gas boiler they may arguably be committing this statutory nuisance. Perhaps an analogy could be drawn to coal fires. Coal fires could be said to have been the equivalent of gas boilers of their day: everybody had one, and before the Clean Air Acts and EPA, it would no doubt have been considered outrageous to suggest that use of a coal fire constituted a public nuisance. But now, there is no doubt that under s.79 it could be. However for the time being any local authority that took this approach regarding a gas boiler would be taking a significant departure from current practice and success is far from certain and any challenge would be likely to be successful. Ability to solve the demand challenges of Heat Networks: Again this approach would (if successful) offer a more global solution – namely a requirement to sign up to a heat network (if there was one) akin to that in Denmark. Obviously any such approach would have to have narrow geographical confines and only apply when a heat network was an option. However it nonetheless could begin a process of passing heat law type rules. Such an approach to enforcement would be certain to be challenged on legality grounds and there would be a high risk that such an approach would not be successful. |
All Stick and No Carrot?
Some of what is proposed above is radical (and likely not politically attractive). Depriving customers of choice runs contrary to free market principles that have governed the heating sector for generations. Further there is a question as to whether (in some cases) going so far as to criminalise a failure to sign up to a heat network is appropriate.
There is without question a place for positive incentives such as tax/business rates breaks for joining the local heat network. However the Danish case study shows that some restriction of choice (in favour of renewables) is needed.
Local authorities are already taking decisions to stray further in to inhibiting personal freedoms than ever before in the valid name of public policy. Licensing of landlords renting their property serves as a fetter on use of homes but provides certainty as to high standards of housing for tenants. Planning restrictions on new build properties preventing residents from obtaining parking permits is an encroachment on the right to own a car but is justifiable in the pursuit of clean air. Given the scale of the global climate crisis it seems reasonable to reach for radical solutions.
Quid Pro Quo – Competition and Consumer Protection
Mandating heat networks needs to come with consumer protections. It is often stated that heat networks are not regulated in England and Wales. That is not true – the Consumer Rights Act 2015 protects non-business customers and many schemes are signing up to voluntary regulation with the Heat Trust. However, where local authorities are to take some of the more extreme steps above greater protections will be needed.
By restricting customer choice an effective monopoly is being established. Ofgem is currently exploring how best to regulate heat networks but absent any further developments it is not impossible to imagine local authorities can also play a role as standard bearers ensuring customer protection. Where running of a heat network is outsourced via concession local authorities can establish themselves as quasi-regulatory bodies policing price and efficiency in a manner akin to Ofwat and Ofgem with other natural monopolies. Periodic reviews and price controls would be remarkably effective on a local level and may result in greater customer engagement.
Conclusions
It seems inescapable that the climate crisis is real and demands action in respect of heating.
In order to make district heating truly viable at scale and in a cost efficient way demand (and certainty thereof) is required. Heat networks work best when everyone joins up and it is not clear in the light of the risks faced by global climate change that opting out should be acceptable.
Local authorities have done huge amounts already in terms of establishing heat networks but we think more can be done to mandate heat networks and (in so doing) create a roadmap for long lasting change to the heating industry. Central government may well look to implement heat law type arrangements but at the moment this does not seem to be the intention. With this in mind there is gap for activist Councils to try to push the agenda. Albeit some of the more radical options set out in this paper come with significant challenge risk.
Case studies from Denmark show that nothing but compulsion will drive up usage of heat networks to the levels we need to make a meaningful environmental impact. Heat networks only work well where everyone joins up and there is a legitimate case to be made that in a time of global climate emergency (provided there are proper consumer price and quality protections) sign up to renewable heating should not be an option. While it is disconcerting to create an effective monopoly – the risks of abuse can be mitigated by effective regulation.
The more pressing risk is the climate change risk we all face and which requires urgent progress. In this regard and in terms of heat network sign up it is difficult not to draw the parallel between those advocating for heat networks and parents trying to teach their young children to act in their own best interests and eat their vegetables.
Sure they might figure it out on their own. But wouldn’t it be easier if there was nothing else on the menu[13].
Steve Gummer is a partner of Sharpe Pritchard LLP. With contributions from Alastair Lewis, Anna Sidebottom and Oliver Slater.
[1] https://www.gov.uk/guidance/climate-change-explained#the-impacts-of-climate-change
[2] Ofwat – PR24 and beyond: Creating tomorrow, together
[3] https://www.gov.uk/guidance/climate-change-explained#the-impacts-of-climate-change
[4] https://www.gov.uk/guidance/climate-change-explained#the-impacts-of-climate-change
[5] https://theconversation.com/we-can-decarbonise-the-uks-gas-heating-network-by-recycling-rainwater-heres-how-129497
[6] https://www.edfenergy.com/heating/advice/uk-boiler-ban
[7] BEIS – Heat Networks Investment Project 2018
[8] https://www.express.co.uk/news/politics/1183777/Gas-boiler-ban-boris-Johnson-green
[9] regulation_and_planning_of_district_heating_in_denmark.pdf (ens.dk)
[10] https://www.alcoholpolicy.net/2010/08/local-minimum-pricing-approach-recieve-pms-backing.html
[11] https://www.dailymail.co.uk/news/article-517955/Liverpool-set-ban-McDonalds-Happy-Meals-bid-cut-childhood-obesity.html
[12] Archbold: Criminal Pleading, Evidence and Practice (2015), para 31-4.
[13] Paraphrased from the West Wing – Manchester Part II.
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