District heating will play a key role in achieving climate change targets and helping to reduce fuel poverty across Scotland.
At Burness Paull, we are regularly advising on these schemes and have recently seen an uptake in instructions from housing developers looking for advice. At present, only around 1.5% of Scotland’s heat is supplied by district heating, but a target has been set to increase this to 8% by 2030. South of the border, district heating schemes are more widespread and the expansion in Scotland is clearly happening now.
Key issues for housing developers
There are a few key issues housing developers will have to consider when deciding how and if to set up a district heating scheme. There is no settled contractual structure for setting up the suite of agreements between the various parties involved so it is crucial to take legal advice as early as possible, to balance risks and liabilities.
- Credibility of the energy service company (ESCO)
Typically, the ESCO will ultimately be responsible for the management, operation and maintenance of the heat network and its energy centre. Therefore, its financial stability, technical know-how and reputation are key. In terms of back-up, the regulatory position is not yet fully established and future safeguards such as permits and licences have not been put in place. At present, the Heat Networks (Scotland) Act 2021 is only partially in force, so the district heating sector in Scotland remains relatively unregulated.
- Construction risk
A prominent risk lies in coordinating the works and timings for building the district heating scheme and how this ties in with the overall development plan. There has to be a clear allocation of responsibility for different elements of the heat network, particularly in respect of interface with the homes. Developers will want to build in sufficient flexibility to deviate from the development plan, at least until an appropriate date for a design freeze has been reached. The technical and legal teams need to work very closely together to ensure the programme and the consequences of changing it are appropriate.
- Operational risk
Careful consideration needs to be given to the effects of disruption to service, planned down time for maintenance, access to the infrastructure and emergency protocols. In the event of the insolvency of a key party, such as the ESCO, the position of who should be a supplier of last resort needs to be evaluated. As each individual homeowner will be responsible for the heat infrastructure in their home, thought needs to be given to effective maintenance and management of customer-side obligations.
Fairness for customers
Customers should expect to receive fair and transparent pricing and rest assured that their heat supply is reliable, secure and efficient.
The housing developer should therefore review the supply agreements the ESCO will enter into with the customers and assess comparator pricing data from an equivalent gas-based heating scheme. We would always recommend that service levels promised in these customer supply agreements are no less favourable than the service levels set out in the Heat Trust Scheme Rules (https://www.heattrust.org/the-scheme-rules). Most schemes will result in the district heating being the only heating scheme available, so customers must be given adequate information to purchase their homes knowing that they must sign up to the heating network. Marketing the development accordingly and raising awareness of the benefits of the district heating scheme as part of the plot reservation process is therefore essential. Ultimately, any customer dissatisfaction is going to reflect poorly on the market reputation of the Housing Developer rather than (or in addition to) the ESCO.
Overall, district heating is an excellent step towards a greener housing stock. Contract arrangements are currently complex and unregulated and there are many issues to consider that will require careful commercial and legal evaluation.
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