In these torrid times, it is good to see some clear signals emerging from BEIS on its thinking on how to transform generation of the UK's heat requirements to support our zero carbon targets.
A run of consultations have been published during lockdown focused on stimulating investment in heat networks, the greening of gas networks and small scale heat generation. All of which are helpful in giving signals as to where we're heading- and in some cases highlighting what is still needed.
Starting with heat networks, it is anticipated that £16bn of investment is needed to move us from the existing 2% of heat that is generated by heat networks to the forecast of 18% to achieve net zero by 2050. The framework to achieve this, as outlined by BEIS, has a lot to be applauded. Establishing proportionate, principles based regulation for defined role types feels like it is not too heavy handed. Putting responsibility for regulation under OFGEM also makes a lot of sense allowing commonality and convergence of approach between energy and heat. In future markets we are likely to see suppliers offering propositions based around providing warm, light homes rather than a simple utility contract, so a common framework can do nothing but help here. The same applies to consumer protection, with common service standards, complaint escalation and regulator step in rights. And whilst, the concept of switching and price caps just does not work in the world of heat networks, forcing transparency of pricing will help drive competition and highlight efficient operators.
The application of consistent technical standards will also help build consumer confidence and enable interoperability of adjacent networks. Importantly giving heat networks the same rights and powers when it comes to planning, easements and wayleaves should result in significant savings in development time and costs.
There is a lot to like in the proposals, however there is one big elephant in the room which, if not addressed will continue to drag down investment. This relates to the knotty problem of how to give investors confidence to build a network when they have no assurance that the capacity of the network will be fully used. Those who may use the network don’t like to commit until they understand what they’re dealing with and specifically how much it will cost. With this catch-22 situation, the risk premiums attached to investor cases will likely continue to push potentially viable schemes into the long grass. The consultation as written, proposes that this risk is solved by local authorities, on a one by one basis. As history has shown, local authorities working with private investors can deliver great things, but there are too many public/private financed initiatives that have turned to disaster to assume that it will be any different for heat networks. Investors are inherently wary of the politics, speed and nature of decision making associated with investments reliant on local authorities, and if needed to be navigated on a case by case basis, will likely continue to provide too big a barrier to stimulate the level of investment that is required.
If this one issue can be overcome, heat networks are inherently a hugely attractive sector for infrastructure investors to move into- with low technology risk, long asset life and reliable revenues. There is a big prize to be had.
Investors should also be looking closely at the wording around greening of gas networks, and specifically the initial focus on bio-methane (created from anaerobic digestion) as the means of greening existing gas in the national infrastructure. Whilst, the ‘green gas support scheme’ is notionally a replacement for non domestic RHI, it is the first time that it has been overtly linked with national infrastructure. And what is clear from the consultation is that increased scale is being sought. Whilst hydrogen is not yet ready at scale to attract the same levels of support, it is clear that when it is, there is scope for similar treatment. And the tantalising reference to converting support longer term into a ‘supplier obligation’ is a reflection of the success of the ROC scheme in stimulating investment in renewables. Greening of gas is a key lever to transition to net zero and this consultation is just the start.
Changing domestic support to up front capital grants rather than long term tariffs could also help stimulate investment in heat pumps from those currently reliant on oil heating- although the publication of the consultation coinciding with the crash in oil prices was probably not helpful in supporting the underlying calculations of the level of grant needed to stimulate action.
A lot of food for thought for investors big and small. In terms of mountains to climb in achieving net zero, the heat mountain is probably the biggest. And whilst short term markets may be tough, we know that ultimately Covid-19 will be overcome. The climate emergency on the other hand will need investment for the foreseeable future if we have any chance of reversing it- focusing investment on heat solutions is likely to be a relatively safe port.
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