Regulating district heating: a new Scottish model?

The Scottish Government has issued initial proposals for a new regulatory regime for district heating. What impact will these have on the proliferation of district heating in the UK?

27 January 2017

District heating (which replaces individual gas boilers in homes with a central boiler [or waste heat from a power plant] to pipe hot water into a building for both space heating and hot water) offers several benefits including cost savings, higher efficiencies, and the potential to use low carbon heat – key for reducing carbon emissions. Other European countries have embraced the technology (in Denmark, for instance, over 60% of all homes are connected to district heating systems), but it is still not widely used in the UK.

One of the key barriers to deployment of district heating in the UK has been the absence of an effective regulatory regime to underpin the necessary investment whilst ensuring protection of the interests of heat users. On Tuesday, as part of the wider consultation on its draft Energy Strategy, the Scottish Government issued initial proposals for a new Scottish regulatory regime for district heating, raising the prospect that this key barrier will be removed.

The ambition
The Scottish Government sees significant deployment of affordable low carbon district heating as part of the route to a largely decarbonised heat system.  It recognises that, as capital investment is the largest investment in any heat network (and finding low cost capital is currently a major hurdle for any new project), reducing the cost of capital to something akin to that seen in other regulated utilities could support the development of more networks and reduce charges to heat users.  The Government also makes the important point that, given that the majority of Scotland's heat infrastructure is delivered locally, a new regulatory framework should ensure that local strategies for heat and energy efficiency are developed to integrate programmes for heat supply decarbonisation with energy efficiency programmes, ensuring a coordinated approach to energy demand reduction and heat decarbonisation through SEEP (Scotland’s Energy Efficiency Programme) which is due to begin in 2018.

Outline of proposals
The proposals for a regulatory framework cover the following areas:

  • area-based zoning for district heating through Local Heat & Energy Efficiency Strategies (LHEESs);
  • granting of concessions for district heating networks (awarding monopoly rights in exchange for roll-out and other public service obligations);
  • requiring building owners to connect to district heating systems within a concession area;
  • revealing and exploiting opportunities to make use of surplus industrial heat, and
  • setting minimum technical and consumer protection standards (enforced through a licensing system).

The Scottish Government suggests that, since regulation of consumer protection is an issue reserved to the UK Government, the ability of the Scottish Government to develop consumer protection standards may be dependent on the UK Government agreeing to devolve the necessary powers or on the UK Government developing the appropriate consumer protection aspects of any licensing regime.

This is a somewhat cautious approach, since the Scottish devolution settlement is specifically designed to permit encroachment on so-called 'reserved matters' where this is consequential on some other devolved purpose (as would be the case with heating regulation).

Next steps
The consultation exercise closes on 18 April 2017.

The evidence received in response to the consultation will be used to allow Scottish Ministers to take decisions during 2017 on the extent of district heating regulation required.  It is anticipated that more detailed consultation would take place on the preferred approach to regulation in late 2017.

Evidence from this second round of consultation would be used to inform final decisions on whether any legislation (primary and/or secondary) would be needed for district heating regulation.