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Heat Networks (Scotland) Bill

Overview

The aim of the Bill is to encourage greater use of heat networks in Scotland. Heat networks are made up of insulated pipes and heat generation systems which make heat. This can be in the form of hot water or steam. This will help reduce emissions from homes and other buildings.

The Bill puts in place rules and regulations on heat networks, including:

  • making applications
  • identifying exemptions
  • granting licenses
  • setting up heat network zones

All public sector building owners will need to assess their buildings to check if they're suitable to connect to a heat network.

You can find out more in the Scottish Government's Explanatory Notes document that explains the Bill.

Why the Bill was created

The heat network sector is currently not regulated. This Bill will set up these license and regulation arrangements. 

The Climate Change (Emissions Reduction Targets) Act 2019, was passed by the Scottish Parliament. 

One of the big challenges to meeting the targets will be reducing the emissions caused by heating. 

Heat networks are often:

  • more efficient than individual fossil fuel heating systems
  • run fully from renewables or recovered waste or surplus heat sources 
  • allow the heat source to be changed without disrupting the user’s supply

You can find out more in the Scottish Government's Policy Memorandum document that explains the Bill.

Introduced

The Scottish Government sends the Bill and related documents to the Parliament.

Heat Networks (Scotland) Bill as introduced

Related information from the Scottish Government on the Bill

Scottish Parliament research on the Bill 

Financial Resolution

The Presiding Officer has decided under Rule 9.12 of Standing Orders that a financial resolution is required for this Bill.

Stage 1 - General principles

Committees examine the Bill. Then MSPs vote on whether it should continue to Stage 2.

Stage 1 timetable

The Parliament agrees that consideration of the Heat Networks (Scotland) Bill be completed by 4 December 2020.

Have your say

The deadline for sharing your views on this Bill has passed. Read the views that were given. 

Who examined the Bill

Each Bill is examined by a 'lead committee'. This is the committee that has the subject of the Bill in its remit.

It looks at everything to do with the Bill.

Other committees may look at certain parts of the Bill if it covers subjects they deal with.

Who spoke to the lead committee about the Bill

Video Thumbnail Preview PNG

First meeting transcript

The Convener

Our main item of business this morning is to take evidence on the Heat Networks (Scotland) Bill. I am pleased to welcome our first panel of witnesses. We have Nicola Mahmood, senior business development manager at ENGIE; Eoghan Maguire, director for Scotland and the north with Vattenfall UK; and Claire Mack, chief executive of Scottish Renewables. Good morning, and thank you for giving your time to us today.

Unless anyone on the panel specifically wants to make opening comments, I will move to questions from members. I remind everybody to keep your questions and answers succinct and to give broadcasting staff a few moments to make sure that your microphone is on before you begin to speak.

Alison Harris (Central Scotland) (Con)

Good morning. What involvement did you have in the development of the bill? Are you content with the consultation process and the development of the bill?

Nicola Mahmood (ENGIE)

I sat on the Scottish Government working group, so we have been heavily involved in the development of the bill and we are delighted to see many of the recommendations and much of the feedback that we gave to Government officials reflected in the bill. We broadly welcome the bill and we think that it is a good step forward in helping to put consumer confidence behind heat networks and to help us with the growth of the market.

Eoghan Maguire (Vattenfall UK)

I echo Nicola Mahmood’s sentiments. We were involved in the run-up to the bill and we are happy to see some of the key recommendations coming through. The bill is long overdue and provides a nice framework to allow for wider investment in heat networks as we move towards the decarbonisation of heat. As I am sure members are well aware, with a lot of the issues, the devil is in the detail, but the direction of travel is broadly very positive.

09:45  



Claire Mack (Scottish Renewables)

We have similar sentiments. We very much welcome the introduction of the Heat Networks (Scotland) Bill. It is very timely, because we can see its strong capability to help us with the green economic recovery that we have been talking about in Scotland. District heat networks are very much a proven and low-regrets solution. With the right policies, they can help to support decarbonisation as well as economic growth.

Alison Harris

Has anything that was considered in the consultation been omitted from the bill? Should anything else be included in the bill?

Claire Mack

We think that, largely, the bill is an excellent foundation to get the infrastructure in place. However, the technology infrastructure perhaps does not have the same consumer demand as its driver that certain other technological roll-outs that we have seen have had. It is different from broadband or even digital television, for example, and it does not have the same consumer demand running behind it. We need to create that demand to make it viable and ensure that we can gain the wider benefits of the heat network roll-out that we are about to see in Scotland.

A few things can be done to make a robust and proportionate licensing regime, including making regulations on obligations to connect; doing work on permitting with local authorities; and strengthening the network assessment process in order to bring forward specific zones in which we can look to develop heat networks.

Eoghan Maguire

On areas in which we think that levels of focus could be increased, and consumer protection in particular, I understand that there are issues around development and powers that might curtail Scottish ambitions to enforce protection levels for the consumer. This is the first pass, but Claire Mack mentioned the obligations to connect and heat network zones. We can look at how those will be enforced and what obligations there would be on local authorities not just to produce studies. If we look at the developments down south, we can see that the Department for Business, Energy and Industrial Strategy and heat network policies have resulted in a lot of studies but very little action. There is definitely more of a drive from us to be able to see more material obligations on local authorities to push forward with heat network zones where appropriate and suitable.

Nicola Mahmood

We think that the only thing that could strengthen the bill would be considering the potential of a stronger transition period. With the networks that we already have in Scotland—we are currently developing one in Edinburgh—the investment cases have been made based on the current technologies. Currently, the bill does not give protection in respect of the existing investment cases for those specific networks.

We think that the bill is a very strong start, but we would like to see a better definition around the transition from where we are now to the bill and the obligations that that will bring, if that is possible.

Richard Lyle

Good morning, panel. Can you remind the committee what shared group loops are and how extensively they might be used in low-carbon heat networks?

Eoghan Maguire

That is one of those nice technical questions like, “How long is a piece of string?” I will be succinct. The shared ground loop is ultimately a technology relating to the extraction of low-grade heat from the ground. The shared element is that several different individual heat pumps can be applied to that shared ground loop, which allows for various different nuances of heat transfer to be used. It uses a ground-source heat pump to increase the performance of a heat pump, which reduces the cost of the production of that low-carbon heat. There are two ways in which the shared element can work: a communal source can be shared where there is a ground-source heat pump that provides heat for a large number of individual blocks—that would be classed as a shared loop; or there can be ambient temperature loops in a closed-loop system. For example, one building might require cooling, so heat could be transferred to another building that requires heat. It is a case of balancing demand and supply.

Nicola Mahmood

My colleague has made an excellent summary of the technology.

Claire Mack

I will add a wider point around what Eoghan Maguire said. We need to underpin the technology and drive it in the most effective way possible for Scotland; there are lots of different outcomes that we want from that, not only to reduce carbon emissions but to drive inclusive economic growth and drive down fuel poverty in any way possible. The building assessment tools and the information that we gather as we go along this journey are really important to work out how we can aggregate demand in the way that Eoghan just explained and make sure that we can drive a strong partnership between not only industry in an area but domestic heat demand in an area, and to work out whether there are opportunities to attract heat-intensive industries to an area and how they could serve the domestic market through heat transfer and other options of that nature.

The Convener

That sounds sensible.

Richard Lyle

Does the panel have a view on how the definition in the bill could be future proofed to include emerging technologies—for example, sea-source heat pumps and shared group loops, as have been discussed, and on whether the possibility of amendment by regulation is adequate to ensure the flexibility that we may need over the next few years?

Eoghan Maguire

I will take a step back from the question, which focuses on the technologies, and point to heat networks. I will crudely separate them into two different components: the generation side, which I think Richard Lyle refers to, and the heat networks. Richard Lyle is right that it is key that we ensure that those heat networks are future proofed; creating heat networks to be technology agnostic and considering how we can ensure that they are decarbonised, or enable the easiest form of decarbonisation, are ways to do that. We need to look at outcomes rather than inputs; ensuring that the heat generated is measured by its carbon contribution and carbon reduction is one way to do that.

Secondly, there is a technology aspect to that for heat networks; there is a large push for heat networks to decrease their operational temperatures. For the committee’s benefit, a lot of old heat networks used to be run at very high temperatures, which is a facet of the fact that they were running off old combined heat and power plants that were burning coal or gas, so the temperature is a little bit irrelevant. As we move towards low carbon and the next generation of technologies, we can see that the operational temperatures of those networks need to come down. That answers Richard Lyle’s question about how we future proof. If we can ensure that we have a technology agnostic lower temperature network, we can then look at various degrees of how we get the cheapest form of heat generation to use it—sea or ground loop, or river source.

The key driver in that instance—I touch on what Claire Mack said earlier—is that Scotland is fortunate to be blessed with a huge national resource of, for example, wind. We can use that low-carbon energy—green electricity when the wind blows or when the sun shines—to decarbonise the rest of society through heating and transport.

The heat network itself is rudimentary. My engineers give me a lot of grief when I say that it is just plumbing, but it is a simple concept: when the network can store energy as cheaply as it can through hot water, it acts as a key enabler for the modern energy system.

To come back to Richard Lyle’s question, I am reluctant to take a technology-specific approach, but I try to look at the problem as a whole, which comprises electricity, power, transport and the question of where heat networks can enable the energy transition.

Richard Lyle

I have a quick supplementary. Does the panel believe that energy companies and housing developers work together or separately? We could do a lot to develop heating through connecting up energy companies and housing developers. A quick reply is fine—yes or no?

Eoghan Maguire

Crudely, no—at the moment—but there is room for improvement.

Nicola Mahmood

We work quite extensively with housing developers—I grant that it is mainly in Lanarkshire, but we are seeing more of that come through the rest of the country. Developers take a proactive view on heat sources with a view to the decarbonisation requirements. We should absolutely promote and bring forward the development and nurture of those relationships to become closer to developers by helping them design their buildings in a way that gets in the best possible heat technologies.

To go back to the first question, the beauty of heat networks from our perspective is that they are technology agnostic. As Eoghan said, they are a good low-regrets option that allow the generation technology to be swapped out as the existing one comes to the end of its life, and they give us a better opportunity to keep pace with whatever the future developments are. The fact that the bill gives ministers the powers to amend the definitions in the regulations provides a proportionate approach to ensuring that both the regulations and the heat networks keep pace with future emergent technologies.

To go back to Richard Lyle’s supplementary question, our view is that we already do that work and would like to do more of it, as well as developing connections with local authorities and therefore covering social housing as well as private developers.

The Convener

For the avoidance of doubt, when you talk about technology agnostic, you are talking about the heat supply—[Inaudible.]—generation. Does Claire Mack want to add anything?

Claire Mack

No, the point has been covered well. Eoghan Maguire mentioned the requirements on carbon emissions: we need to be really aware of that and keep it at the front of our minds. At the moment, our heat networks will need to compete with fossil fuel gas to be economically viable. We need to ensure a level playing field, and one way of doing that is to measure carbon emissions at the source.

10:00  



Willie Coffey (Kilmarnock and Irvine Valley) (SNP)

Good morning, everybody. In the panel’s view, what is the public perception of this whole area? I occasionally tell my constituents what I am doing with my time in the Scottish Parliament, and the subject that we are discussing does not register with too many of them as something that they are familiar with or aware of. What do we have to do to raise awareness that heat networks are on the way and that they might be beneficial to people?

Claire Mack

Mr Coffey, you are absolutely correct, in that the decarbonisation of our energy networks has been really successful, but it has been done very much behind closed doors. We are now at a different point, where developments in heat and transport will impact on consumers and households. You are absolutely correct that there is a need to bring people along with us and get them on board.

There has been a lot of recognition in recent times—certainly over the past year or so—of the impacts and risks of climate change. When people ask, “Why are we doing this?” or “Why would we do this?”, that is why. I have already spoken about the need to drive consumer demand, and it is right that you ask that question.

One of the reasons for taking action in this area, and one of the explanations that we need to get out there, is the fact that the future costs of climate change have not yet been calculated and, as with Covid, they will affect everybody. The impacts of climate change will fall in a very similar way to the impacts of Covid—they will fall disproportionately on lower-income households and those in less secure work. The fact that extreme weather events and resilience challenges will impact their ability to work and to travel and the type of housing that they live in means that it is likely that they will suffer more than other people in different areas of society. That is a really strong driver that we need to be clear about.

The other aspect of this is that we are talking about a fantastic opportunity for a fantastic infrastructure project. We need to do it for climate reasons, but we also want to do it for economic reasons. As Eoghan Maguire mentioned, the pumps for heat networks can be manufactured here in Scotland, so we have an existing supply chain, but the huge bulk of the costs of a project and the revenue from a project go into civil engineering works, which we have huge strength in here in Scotland.

When we are thinking about how to modernise our economy and how to get ourselves fit for the future and for a cleaner, healthier, more resilient economy, that is the story that we need to start telling everybody in Scotland to explain why this is necessary and why it is necessary now.

Willie Coffey

Thank you very much for that. Does anybody else want to comment or shall I move on to another question?

The Convener

If you go ahead and ask the next question, people can always add any comments to their answers.

Willie Coffey

I have a really exciting question about regulation. As you know, Ofgem is a UK agency, so the Scottish Government cannot appoint it as the regulator in the bill. Does the panel have any views on that and on whether we should invite Ofgem or someone else to be the regulator? Should the Scottish ministers retain stewardship of regulation in the whole sector? Any views would be welcome.

The Convener

Who wants to lead on that? As there are no volunteers, I will pick on Nicola to start.

Nicola Mahmood

Thank you very much for that question, Mr Coffey. [Laughter.]

We can see that Ofgem has the appropriate skills and expertise to perform that role. We would not say that Ofgem is not an appropriate regulator; it is well versed and skilled. We might consider Ofgem to be the Rolls-Royce of regulation in an emerging market. Perhaps the ability for the Scottish ministers to have a closer eye on how this is progressing in Scotland might be more desirable in the short term.

Claire Mack

I echo what Nicola Mahmood said. Ofgem is absolutely fit for purpose. It would know what to do. However, we need to think more about the wider outcomes that we might want here in Scotland, which could direct us to a different solution. The partnerships that we are talking about will be one of the strongest sets of public-private sector partnerships that we have ever seen in Scotland. For that reason, the role of local authorities is extremely important, which might suggest that we need a different model, in which local authorities can be front and centre as we set the regulation, as we monitor it and as we make sure that it is delivering the outcomes that we want.

One of the key aspects here is the important issue of consumer protection, which I think that Eoghan Maguire mentioned. That is not a devolved power of the Scottish Government; the UK Government is developing regulations in that regard, which could apply to Scotland. However, we could think about whether those regulations should be devolved here, and whether they could be part of a package that would help us to develop a full heat network deal. Such a deal might give us different outcomes, such as social outcomes, along with economic and regulatory outcomes. Those outcomes should be one and the same, but given that we are bringing together a slightly different set of partners, a regulatory system that is more attuned to that could be considered.

Eoghan Maguire

I echo the views of Nicola Mahmood and Claire Mack. The risk of going towards Ofgem is that Ofgem would take a model that is based on electricity and would not necessarily have the skills or experience to apply regulation to district heating. If that were the case, it would need to be upskilled in that area.

The other consideration with any form of regulated business is that you need to balance regulation with strategic innovation. The industry is going through a huge amount of innovation and is going to need to innovate more. As I touched on earlier, you need to ensure that, in integrating heat pumps and heat networks with electricity, time-of-use tariffs and getting better customer protection, you do not get bogged down in the world of old and well-established electricity regulation. In principle, regulation by Ofgem could work, but the detail would need to be fleshed out. As Nicola and Claire said, it might be more prudent early on to keep regulation closer to home.

The Convener

If I can interject, would there be any conflict of interests for the Scottish Government in driving the regulations on what needed doing if it were the regulator? Do customers and organisations need a third party that stands separate from Government, in the way that Ofgem does?

Nicola Mahmood

I can see the benefits of having a third-party organisation. The thing that might need to be considered in that field is the set-up costs for a new regulator, and the on-going running costs. We might not have made it entirely clear how small the heat network industry is. There is probably only a handful of players that operate nationwide; other organisations are much more localised. The cost burden of setting up regulation needs to be considered. We are pleased that the Scottish Government has acknowledged that, in the early stages, those costs might need to be absorbed in other ways. I do not know whether Ofgem or an independent regulator would be needed. What might be needed is a route for appeal or an independent ombudsman.

The Convener

Claire Mack, did you want to add to that?

Claire Mack

No. Nicola Mahmood has covered that perfectly.

Andy Wightman

That conversation was interesting. We are not actually talking about a regulator; we are talking about a licensing authority, and I have a specific question for Eoghan Maguire of Vattenfall on that. Section 11 of the bill deals with the revocation of heat network licences, and it does so without containing any regulation-making powers, so the revocation conditions would be as set in the bill. Section 11 sets that out without specifying any appeal rights.

I note that Vattenfall has sought greater clarity on

“what the circumstances or criteria will be under which a licence may be withdrawn”.

Can you say a bit more about whether you think that that should be included in the bill or covered through licensing? Should there be an appeal right? From the industry’s point of view, what are the kinds of things that end up with companies losing their licences?

Eoghan Maguire

That is a detailed question, and I thank you for it. Where to start?

In broad terms, we think that the licensing measures represent a very good step, and we think that they are needed. One of the reasons why, around eight years ago, Vattenfall was a bit reluctant to come to the wider UK market, and the market in Scotland, was the lack of standards and the potential for the industry to be a bit like the wild west. When we see the upcoming licensing, we know that there will be companies there with a certain level of economic standards and technical standards, as well as consumer protection.

The process of licence revocation could potentially be dealt with through secondary legislation, but I must admit that I am not completely au fait with the ins and outs of the mechanics of the legislation and how it will go through the Parliament.

The question of how firms end up losing their licences is an interesting one. Many of the markets that we operate and run in are regulated, so all the operators—such as ENGIE, ourselves and E.ON—ultimately do business according to regulation and standards. As far as I can see, the only instances in which licences might be lost would be through persistent and continuing negligence of customers and poor performance.

I suppose that it is incumbent on the Scottish Government to be careful about to whom it awards the licences. Any such company should have a sufficient technical, commercial and financial standing so as to be able to deliver on the heat networks, and it should have sufficient experience. That should be a matter for consideration when the licences are awarded.

I am not sure whether I answered your question fully, but I would be happy to take any supplementary questions.

Andy Wightman

Perhaps you could come back to us in writing, but you want more clarity on the circumstances and criteria under which a licence might be withdrawn.

Eoghan Maguire

Yes.

Andy Wightman

Should that be included in the bill, with the criteria being set out as a, b, c, d and e, for instance, or should it be left to regulations, which would make the process more flexible?

Eoghan Maguire

I think that it could probably be done through secondary legislation. I do not have an exact answer for you on that—I do not know where that should sit in the bill—but having clarity on the instances in which revocation would occur would certainly be welcome.

Andy Wightman

That is clear—thank you. I move on to part 2, which concerns the consenting process. The bill stipulates that ministers will provide consents. That is unusual, because consent is planning consent, in a sense, which is usually undertaken by planning authorities. I would like to hear the panel’s views on whether it is appropriate for ministers to award those consents. Should that be done by planning authorities? Should they deal with smaller schemes, with ministers dealing with larger ones, as in the case of, for example, renewable electricity?

Claire Mack

What you suggest would seem to be a very sensible way to do things. As you say, it is unusual for us, in the consenting process, to take a different approach on how we would do planning. We need to recognise that we are discussing a new technology and it needs strong power and drive behind it. It represents a full, wholesale technological change.

I wonder whether it is appropriate, in the circumstances and for bigger projects, to drive the strong message to industry that this work is linked into the Scottish Government’s wider remit, with climate change as a really strong driver for networks to get out there in the early days, as we start to build demand, aggregation and the localised energy networks that Eoghan Maguire talked about.

However, regardless of that, as I said earlier, the strength of the public and private sector partnership will be really important. Local authorities are central to that, so I cannot see them not being part of the development process, if not necessarily at the consenting stage.

10:15  



Nicola Mahmood

From our perspective, the important part is the recognition of who is an appropriate and fit-and-proper person in relation to licensing and what is an appropriate scheme in relation to consenting. We think that the provisions on the transition and consenting for existing schemes could be strengthened, because they are slightly unclear to us. The fact that there is no right of appeal means that investments could be made in schemes that do not receive consent. That would leave them inoperable and would leave customers stranded without heat, cooling and power. That issue needs to be clarified in the bill.

Eoghan Maguire

I will supplement what Nicola Mahmood and Claire Mack have said. It is unusual, but we think that some of the larger-build developments that are strategically important to national infrastructure should potentially be with the Scottish Government. The concern is that expertise in local authorities on district heating will vary widely. Similarly to the position with Ofgem, if responsibility is devolved to local authorities, there will be an expectation that the people who make the decisions will have experience of district heating.

Andy Wightman

On the point about local authorities having experience of district heating, I note that local authorities act as planning authorities for a range of developments of which they have no direct experience. My question is more focused on the fact that a district heating system has much more of an impact on local residents and businesses, space, house design and so on than offshore renewables have, which affect nobody in the vicinity. Ministers consent to such developments, but my question is whether planning authorities should be eliminated from consideration of quite detailed and complex schemes that will affect a lot of people in the local area. However, those answers were useful, so I thank the witnesses.

The Convener

I will pick up on some of the detail. If the bill does not specify the framework or the timescale for a heat network licence, and if technical standards are not referred to or detailed in the bill, there will be an open season in terms of the Scottish Government consenting to things being built. As Andy Wightman said, there will be an impact on communities in which schemes are built.

Would there be a greater degree of safety if the bill included more specification of the frameworks and timescales for the building of heat networks and the technical standards to which they should be built, or would that restrict the development of heat networks as time goes on? As a starting point, I throw that question to Eoghan Maguire.

Eoghan Maguire

In short, I think that a lot of what you raise could be addressed through secondary legislation. I do not have strong views on that, so I am happy to hand over to Nicola Mahmood or Claire Mack.

Claire Mack

I tend to agree with Eoghan Maguire. Given that this is an evolving situation and we are developing new business models and new local economic models to make the developments work, I agree that secondary legislation would be quite valuable in enabling flexibility, as Mr Wightman identified. That is the benefit of using secondary legislation rather than putting things in the bill.

Zone permits is an area that we could strengthen. Local authorities could be required to state whether they intend to issue zone permits, which would offer a level of certainty on the timeline. There might be enabling legislation to create a heat network and get people to connect, but if you cannot get the local zone permit, that will increase the risk to anybody coming in. The bill could be strengthened to require local authorities to state clearly whether they intend to issue zone permits. If they do not, they should explain why and publish, alongside the zone assessment plan, their plan for commercialising the opportunities and taking things forward.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

This question might be for Claire Mack. How long, on average, might it take to recover the capital costs from a heat network, which is the point at which a transfer competition could take place?

Claire Mack

My colleagues might be better placed to answer that, as they have experience of that abroad, having rolled out such schemes in Europe.

The trajectory that we are going to have to take is clear. As you have identified, we will start off with a set of capital funding that is perhaps subsidised through some sort of public-private partnership, in order to move the project forward. However, there are lots of inclusive growth opportunities in the year for various entities to become involved as electricity services companies and to use that role as a revenue-generation proposition. That includes entities—such as local authorities—that have the right skills and can grow the necessary expertise. There are huge opportunities in that regard.

These are long-term capital and revenue projects, but they will be around for a long time. They are future-proofed solutions, which is what is great about them. One reason why operators in the industry feel so strongly about being technology agnostic is that that approach retains flexibility in heat networks, which means that they will retain their value as assets and will not become tied to a fossil fuel lock-in or an additional risk that we might start to see in future because of legislation that comes forward. For example, at the moment, we are unclear about how we might tackle climate change globally. Programmes around carbon emissions taxation and so on could very much alter the business models of some of the things that are being put in place if we do not set them up in the right way.

Colin Beattie

So you are saying that you do not know.

Claire Mack

I am saying that my colleagues who have experience of developing those networks would be able to give you a more detailed answer.

The Convener

Let us put the question to Eoghan Maguire, as Vattenfall has experience of setting up heat networks.

Eoghan Maguire

The recovery of the capital costs will take double-digit years. We are not getting single-year payback. We are investing in a long-term asset, and the flipside of those long-term investment time horizons is that we end up investing over, say, 40 years.

As Claire Mack said, some of the assets that are in place have been around for a long time. For example, some of the heat networks in Berlin have been around for 80 years—they have been through two world wars and the rise and fall of the Berlin wall. We are talking about long-term assets with a long-term payback.

Vattenfall is happy to invest in those assets at lower returns if we can manage the risk. A key area that the bill is trying to address is regulation, standards and quality in order to manage the risk that allows Vattenfall to invest in an infrastructure asset over a long period. One of our projects is the Millerhill district heating network in Midlothian, which will be in place for a long time, growing over 30 or 40 years in order to enable economic development. That is what heat networks do—they are an enabling technology that enables businesses and buildings to be built with low carbon at their heart.

In short, capital recovery takes a long time. The flipside is that it can take roughly 18 years for some payback. However, we can make those long-term investments if we can manage risk over that period.

Nicola Mahmood

Most of our contracts for development of heat networks are for between 20 and 40 years. As Eoghan Maguire said, it can take up to 20 years to get payback of the capital that has been invested, and there is on-going investment in the infrastructure as well.

Our view is that we should start small with a core number of buildings and look to build out from there. As we do so, it will help to bring down the length of time that repayment takes, so we can speed up the recovery of our capital investment. However, these are long-term investments that have significant on-going capital expenditure investment points in order to maintain them properly and keep them operating effectively. I think that what we are saying is that it is quite an expensive business.

Colin Beattie

I will flip to a different question. In response to Andy Wightman, the witnesses talked about local authorities and so on. Should local authorities be under a statutory duty to carry out the assessment and designation of heat network zones? What value is there in having ministers do that on their behalf? I am happy for anybody to respond to that.

Claire Mack

On ministers doing that work on behalf of councils, I go back to Eoghan Maguire’s point that we are talking about very large, critical, national infrastructure-type projects and the benefit of the weighting of resourcing. We are very aware that heat networks at scale are perhaps not something that local authorities have had to tackle in the past. That is not to say that local authorities will not ultimately grow and deliver those skills, but the need to maintain the pace, given the level of projects that we are looking at, is probably why the resource is set at ministerial level.

Colin Beattie

Okay. Are the timescales in section 38 of the bill adequate? Section 38 states that a heat network zone review must be carried out “as soon as practicable”, and at least every five years.

Nicola Mahmood

Every five years is a good start. I do not think that the review would require to be any more frequent than that after the first has been concluded. Even in the current circumstances, it can take a year to two years to agree on and sign new connections. It is unlikely that there would be significant change over a period of five years, so I would say that that is a satisfactory timescale.

Eoghan Maguire

I agree with Nicola Mahmood on the five-year timeframe, as these projects do not move at rocket pace. As I said, the pace is not quite glacial, but it is slow, so the five-year period is sufficient.

The Convener

Are you happy, Colin?

Colin Beattie

Yes, thank you.

10:30  



Alex Rowley

I go back to the role of local authorities. Part 5 places a duty on public sector building owners to assess the viability of connecting the building to a network zone and reporting to the local authority. Why does the duty apply only to public sector buildings and not to all non-domestic buildings? Would there be more potential if we were looking at all non-domestic properties in an area?

Nicola Mahmood

Public sector buildings are a good start. They often provide excellent anchor loads to build the district energy network around. We always envisaged that the heat network zones would be developed with a degree of partnership with local authorities; that was how the working group saw it rolling out. Therefore, it makes a lot of sense that public sector buildings would have a duty to assess their ability to be a catalyst for a heat network. It also makes sense to widen that out to other commercial buildings, but there is perhaps a view that that could take longer and might not give us the catalyst that is required to move forward more quickly with the initial schemes.

Claire Mack

We have identified that there is a need to improve the quality and use of information that is gathered from non-domestic buildings and to align that reporting requirement with the heat network zone assessment process so that we can try to develop them in tandem. Although the public sector provides an excellent opportunity for that anchor load because it takes very long-term views that sit on some of the same timelines as the larger heat network projects, it would also be helpful to demand aggregation and move to a place in which we get better-quality information about the non-domestic market and its viability. That is very important.

Alex Rowley

I am in Fife. I do not know whether any of the witnesses have come across the district heating system that takes gases from the Wellwood refuse dump and pumps them into the Carnegie leisure centre, the high-rise flats and a range of other places. That is a good example of a successful local authority district heating scheme.

In its evidence, Scottish Renewables states:

“It is important to recognise that local authority capacity to develop and operate heat networks is constrained at present and it will be vitally important that they are given additional resources and support from The Scottish Government to deliver the activities required of them”.

That rings alarm bells for most people, because we increasingly see new legislation being passed that puts more requirements on local authorities without giving them the resources or support.

In the current economic environment, and given that local authorities are being cut to the bone and are struggling to provide mainstream services, can we be confident that they will have the resources and capacity to do this? Witnesses keep talking about the benefits of a public-private partnership, but what would the private part of that bring? Are we expecting the taxpayer to pay the money out and the private sector to take the rewards, as so often happens in the renewables sector?

The Convener

That is a big question. I will go to Eoghan Maguire first and then to Claire Mack.

Eoghan Maguire

It is a big question, which I will unpick as it involves several areas. We think that local authorities’ resources have been cut back to the bone. If more obligations cascade down to local authorities, their capabilities and resources will need to be considered.

With regard to the deployment of heat networks and where the benefits do, or do not, flow to, a good example is Midlothian Council, which we are working with in a joint venture partnership to deliver a heat network across Midlothian from its Millerhill energy-from-waste plant. The benefits are twofold: it is a joint venture equity investment, so we and the council are investing the same amount of money; and our expertise from the continent brings in risk reduction. Knowing how to do that is a big thing. It is not a question of risk transfer—we are sharing risks, and our role is to manage and reduce them. We bring that experience—for business development, and the design and engineering—to build and manage those contracts in order to deploy the network. Ultimately, the investment is between us and the local authority, hand in hand.

That point goes back to Andy Wightman’s question. Heat networks are very different from an offshore wind farm. They are in the community and are the lifeblood of a community. The pipes go right into the heart and soul of people’s homes, so the concept is fundamentally different. We are aware of that, and without proper local engagement with people, local authorities and all the local stakeholders, it will not be successful.

On the question whether investment and profit flow just to private companies and risk remains with public authorities, I do not think that that is the case in any manner, shape or form. The incorporation of those partnerships with local authorities reduces risk, brings capital investment and offers the benefit that local authorities also invest with the same risk and reward as the partnership, so it is a true partnership in that sense.

Claire Mack

There is very wide engagement by the renewables sector on socioeconomic benefits—including in relation to community benefit and local supply chain use—which needs to be pointed out.

The UK Government has launched a £320 million capital fund for heat networks in England and Wales, through its heat networks investment programme, which seeks to leverage investment of more than £1 billion from the private sector over the next five years. That is one area where there is a return—the programme signals that this is a good opportunity and that the private sector can come in to work with it and bring its money.

As Eoghan Maguire mentioned, the investments are long term, so the revenue streams are not huge. Other infrastructure investments could be made that would potentially give more return over a shorter period of time, but they would not deliver the same certainty as this type of investment. For the public sector, there are wider potential outcomes. I have mentioned that a heat network can be a springboard for other economic growth opportunities. If you decide that you want to draw in the kind of industry that is very heat intensive, heat transfer between buildings, which we have just talked about, is a very attractive option.

Having the strength of the public sector in the partnership allows it to bring the outcomes that it wants, too. We are very aware that clear outcomes are sought for such issues as fuel poverty, and we can see the potential for wider economic growth that would springboard from a heat network.

Alex Rowley

I say to the sector that people in Scotland are increasingly starting to question the renewables sector because the jobs that were promised are not coming. The renewables sector should wake up to the fact that the public will not be on board when they see jobs going to every country but Scotland. The Fife offshore wind farms are a perfect example of that.

I expect that most local authorities will now have data on the energy performance certificates of their buildings. Is it likely that this process will rely on existing data in the EPCs? If so, what are the strengths and weaknesses of that? That is my final question, convener.

The Convener

Who wants to lead? Do not all volunteer at once. Nicola Mahmood, I will go to you to start.

Nicola Mahmood

To be honest, I do not have a view on that. The EPC data is useful and helpful, although sometimes it is not quite as complete as we would want it to be to enable us to make an assessment of heat demand. However, it is a good starting place.

The Convener

Does anyone have anything to add?

Claire Mack

I have a wider point about EPCs. In and of themselves, heat networks are fantastic at doing what they do, but one thing that will go hand in hand with the roll-out of heat networks is serious and significant uptake of energy efficiency measures. That is always the first port of call in any project of the size or shape that we are discussing, because the best kilowatt hour is the unused kilowatt hour. Making sure that our buildings are as energy efficient as possible is important, and having a certification system that reflects that and which rewards it in any way that it can is also important.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

I have questions about part 6 of the bill, which is on the powers of licence holders. Eoghan Maguire, you stated in your written evidence that

“it is difficult to see how the envisaged powers will help in securing connection to anchor loads”.

What reasonable changes to the bill are required to improve the viability of any new heat network scheme? Is it just an obligation to connect, as Claire Mack has mentioned?

Eoghan Maguire

Very simply put, we feel strongly that the obligation to connect would be of benefit for heat networks.

It is important to make a separation between new builds and existing buildings. New builds could be addressed through an obligation to connect in the planning process. There would be an obligation to connect or otherwise, with that “otherwise” being when a heat source that is both cheaper and lower carbon can be found. That would be the standard for not connecting, but the de facto assumption would be that new builds would connect to the heat network.

In relation to existing buildings, we think that the obligation to connect needs to be strengthened. We have touched on anchor loads and how that derisks investment, which allows for longer-term capital investment as well. The obligation to connect for existing buildings is currently not as strong in the bill as we would like it to be, although there is an acceptance that public buildings will, or should be, connected. One reason why we want to see that obligation to connect is that it allows for a bigger view to be taken of the whole heat network, which enables people to invest ahead of need, in different areas at different times. It also enables us to decarbonise.

We have touched on the issue of the public versus the private sector. The obligation on new builds would be the equivalent of the obligation on the public sector to connect, without there being too strong a mandate for retrofits to connect, just as there is not for the private sector. That allows for a balance of connecting between new builds and retrofits.

One of our networks is in Amsterdam. When it started over 20 years ago, 85 per cent of the projects were new builds—that was through a planning obligation—and 15 per cent of them were retrofits. Today the balance is about 50:50. The planning obligation is still in place, and we see that the obligation to connect is tightening in relation to existing buildings. For example, as boilers come to the end of their life cycles, buildings connect to the heat network. The obligation to do that is increasing, because there is a carbon tax, too, so people see connecting as beneficial.

An obligation is not a question of stating “thou must connect”; it should be a case of considering how we factor in the costs of delivering gas and ensuring a level playing field. That is something that should be addressed in secondary legislation.

10:45  



Gordon MacDonald

What changes need to be made to wayleave rights so that connections can be made?

Eoghan Maguire

As it stands, the bill has strong advocacy for wayleave access and rights, so we are happy with that. The bill gives heat network operators similar obligations and powers to the ones that water or electrical utilities have. That is a positive step.

Gordon MacDonald

My understanding is that heat networks are long-term investments—over 20 to 40 years. You suggested that an obligation to connect would derisk investments. Are you in danger of creating localised monopolies? What needs to be in place to ensure that pricing will continue to be competitive in the long term and that consumers will be provided with a minimum level of service?

Eoghan Maguire

I am happy to take that question; Nicola Mahmood will probably have a view, too.

Yes, there is a risk of creating monopolies. We advocate that there should always be a level of regulation to manage that. We are used to operating in Amsterdam, for example, which is a good example in relation to consumer protection on pricing. A price cap is put in place.

We try to ensure that there is an obligation to try to connect but not necessarily an obligation in relation to volume or pricing. Again, I think that the obligation in relation to service and standards will come through the consumer regulatory aspects, to ensure standards on pricing and service that are sufficient to protect the consumer. That is absolutely needed, too.

I suppose that the discussion is always about there being an obligation to connect or otherwise—by which I mean, in essence, that if there is another viable solution that the consumer can put in, which is lower carbon and cheaper, they should be able to try to do that.

I am happy to give Nicola Mahmood space to come in on this; I am sure that she has a view.

Nicola Mahmood

This is part of the beauty of having to hold a licence to operate. A licence might be removed if the heat price is not competitive or there is a failure to deliver the expected standard of service.

It is worth remembering that heat networks are not a regulated industry just now, but there are heat networks throughout the country—not just ours; there are other providers. Thousands of domestic customers as well as commercial buildings are connected to networks. We have contractual standards of service in place that cover all the commercial buildings, and we register all our heat networks that have domestic residences connected to them with the Heat Trust. That is a voluntary approach; we have chosen to do that because we feel that it is the right thing to do.

It is absolutely right that there will be monopolies, given the nature of how the investment is made and how the connections are made. That is partly why we welcome the bill: it should give confidence that appropriate standards are in place and that fit and proper people are operating heat networks. In some way, that should take the sting out of the tail of a network being a monopoly.

Gordon MacDonald

My final question is about provision for compensation. In evidence to the committee, a local authority expressed concern about compulsory purchase powers and the impact on green space, biodiverse areas and forestry that might need to be removed to make way for new district heating networks. Concern was also expressed about the impact on archaeological sites, scheduled monuments and listed buildings. Are there safeguards that would force developers to remediate in such areas?

The Convener

Is that question directed to someone, Gordon?

Gordon MacDonald

It is directed to whoever is willing to answer.

Claire Mack

One of the beauties of the planning system that we already have in Scotland is that it is very robust. All of the developers who have Scottish Renewables membership are aware of their requirement for a social licence to operate, as well as a regulated one. Whether on sites of special scientific interest, in forestry or in biodiversity, wider environmental considerations have always been part of projects. They are also part of the thinking when budgets are put together, in how developers make reparations and in how they work with—and not against—the environment they are working in.

As an industry, we do not want to be part of the problem, and we are very aware of our needs and responsibilities.

Nicola Mahmood

I want to point out that heat networks operate best in dense urban environments. Therefore, they are generally probably more of a pain to bus lanes and traffic than to green spaces. However, Claire Mack has covered the issue perfectly: from the perspective of reputation, we would absolutely want to avoid those types of issue.

Dean Lockhart (Mid Scotland and Fife) (Con)

I would like to ask the panel about what projections are available for the heat networks in Scotland for meeting heat demand. There are some estimates that heat networks might supply 6 to 7 per cent of heat by 2025. Are there projections available for what that percentage could look like in the longer term, over a 30-year period, by 2050?

Claire Mack

I do not have projections for percentages up until 2050. However, our commitment in Scotland is to reach net zero by 2045, and heat is a huge part of that.

We will have to apply different treatments to different areas in Scotland. As Nicola Mahmood said, heat networks work best in dense urban areas. We are used to working in those environments because of other roll-outs that we have done in which density of population has been a key variable to whether things have moved fast or slow; I am thinking about mobile networks. There will be different treatments and solutions in different areas. Heat networks will not be the entirety of what we will do: we will also look to other low-carbon heat solutions.

Some 55 per cent of Scotland’s energy demand is for heat. We have 113 existing heat networks that supply the equivalent of 1 per cent of Scotland’s total heat demand. The reason why there are so many networks, and why that quantum looks so unusual, is that the networks are relatively small because they have been built around the constraints. That is exactly what this bill is trying to unlock, and that is what is so good about it. It will unlock the constraints and allow us to get more bang for our buck.

Scottish Renewables did some research that has identified 46 potential heat networks across all of Scotland’s cities and towns. Another great aspect of heat networks is that they are very targetable to places where we might want to see development happening.

What is interesting about heat as a whole is that we can apply an industry—[Inaudible.]. There is that capability because we have manufacturing here, and because the bulk of the work is in civil engineering. That means it has a different supply chain profile to other renewables, which is one reason why it has such strong potential from a green economic recovery perspective.

Our research suggested that the 46 heat networks that we have already identified could provide 8 per cent of Scotland’s heat by 2030. That is a very rapid expansion and also a rapid decrease in carbon emissions. For 2030 and beyond, I am not sure. Perhaps Nicola Mahmood and Eoghan Maguire have projections from their companies that might be valuable here.

Eoghan Maguire

Thank you for the question. As a short response, how far we get ultimately depends on what stimulus the bill provides to give a framework and confidence for investment in the heat networks. Crudely, heat networks are the cheapest and best-value way to deliver low carbon heat in densely populated and urban areas, and we think that they could provide up to 20 per cent of low-carbon heat by the late 2040s. As I said, the change does not happen overnight. It builds up slowly, but you need to start making the investment decisions now and grow from there.

Dean Lockhart

Thank you for those helpful answers. I understand that projections are always subject to variability, but the targeted nature of the projects gives us hope that those projections have some degree of accuracy.

I would like to ask briefly about the just transition impact of the development of heat networks. Are there estimates of how many jobs could be created and of how many might be lost in traditional heating areas? What other impacts on the wider economy might we see from that just transition?

Claire Mack

The energy transition needs to be a just transition. That is absolutely clear, and people need to be at the heart of it. That has never been more at the forefront of our minds in renewables than it is right now, because of the difficulties that the oil and gas sector is experiencing and the potential for us to create further pipelines in that offshore space.

Renewable heat will still require maintenance. There will be the opportunity for people who currently work in heating to get a dual set of skills. They can work on both the electrical and the gas side while we make the transition and then change fully to the electrical side as we move into that majority-of-low-carbon space.

As a trade association, we would certainly advocate for the management of that transition. In the past, we have seen energy transitions that have not been managed, and we know the catastrophic effects of that. We now have an opportunity to manage the transition and perhaps to think about a renewable transition training fund to help people who are currently working in heating to pick up the dual set of skills that I talked about.

Lessons from continental Europe tell us that ahead of decarbonising heat we will need to switch our homes away from gas, and we will also need advanced insulation. The energy efficiency programme that I was talking about has a lot of near-term jobs in it. It can be kicked off relatively quickly and create jobs in the nearer term.

There is also an opportunity to transition our tradespeople to become all-round energy advisers—to widen their role and add higher-skilled opportunities such as working with homeowners to optimise their energy systems in order to reduce bills and micromanage their energy use, perhaps using solar power to charge electric vehicles and then using the vehicles to power heat networks. That is a really exciting prospect for the future, which will need to be supported.

Nicola Mahmood

The heat networks industry council has put proposals to the UK Government in the past few weeks that suggest that there could be 20,000 to 35,000 new jobs in the sector by 2050. I do not have the breakdown of how that would play through into Scotland, but presumably it would be proportional to the number of heat networks that we are able to develop here. Given that we are ahead of the curve in terms of the regulation and stimulus for heat networks, we hope that more of those jobs would appear here in the shorter term.

The Convener

Andy Wightman has a short extra question.

11:00  



Andy Wightman

It is on permits. The committee has to give Parliament a recommendation on whether we agree with the general principles of the bill, but it is still not clear to me how the permit system will operate.

As I read it in the bill, there is no explicit requirement for a permit holder to have a licence, or for consent to be in place, and yet those are grounds for a permit to be revoked. Can a permit be awarded, for example, to a person other than a licence holder who has sought consent over an area? What would happen there?

You all have experience of implementation. Is the model in which there is a licence holder, a consent process and a permit that operates in zones a novel one, or does it replicate systems that operate elsewhere? If it does, there are presumably no problems, but I am still a little unclear as to how the permit system will operate. Can anybody help me by illuminating that area?

The Convener

Who is an expert on how permit systems operate? Do not all volunteer at once.

I will start with Eoghan Maguire, and then work my way around all of you.

Eoghan Maguire

In short, I am no expert on permits, but I am happy to submit supplementary evidence to the committee if you wish on how systems operate in different countries—for example, in Sweden, Germany and the Netherlands.

Given some of the points that Andy Wightman raised earlier, there seems to be a slight disjoint with regard to clarity on permitting versus the situation with licensee awards. We perhaps need to form a better view on that in order to understand a little more what the issue is there.

The Convener

You can come back to us on that, or we can write to you. Does Claire Mack have any clear views on permits?

Claire Mack

That is one of the areas in which we think that there is scope for clarification and strengthening. Licences and permits need to work in tandem, as having the infrastructure in place and a licence to operate it without the permit part would introduce a potential barrier. The reasons for that, and the situations and circumstances around it, need to be clear.

We felt that, if local authorities decided not to issue those permits, it would mean that the network would not go ahead. It would need to be stated clearly why the specific circumstances meant that that was the case, because the process would be quite far down the road at that point. There is potential for further clarification and strengthening of that aspect of the bill.

Andy Wightman

Just to be clear, it is the Scottish ministers, not local authorities, who award permits.

The Convener

That is clearly an area that we need to get our heads around to ensure that we understand it, so that whatever ends up in the bill—if it is approved at stage 1—will make the situation clear and will not create a black hole or a gap that might raise problems down the line. Does Nicola Mahmood want to add anything?

Nicola Mahmood

Our understanding from the discussions was that those things should be aligned, but I recognise that the wording in the bill does not convey the intent. Such a system does not exist anywhere else in the United Kingdom, and there are always challenges in forging a new path.

The Convener

Absolutely. It may be that we need to revisit the wording to ensure that the intent is clear and that there is no lack of transparency in the way that the provisions are presented. Is Andy Wightman content with that for now?

Andy Wightman

Yes, but it is an area that we need to explore further.

The Convener

Absolutely.

Thank you, everybody—I have no other bids for questions. I am aware that we are quite time constrained this morning, and that we may well have other questions in the light of some of the conversations that we have had. We can potentially get back in touch with the panel with any further questions.

In the meantime, I thank the witnesses for their time today; the session has been a useful start to our inquiry into heat networks. We will now take a short break.

11:05 Meeting suspended.  



 

11:10 On resuming—  



The Convener

We continue to take evidence on the bill. I am pleased to welcome Michael King, who is director of Aberdeen Heat and Power. Unfortunately, Colin Reid is not with us, due to illness; Michael, I am afraid that you are on your own. As a panel of one, you will have plenty of opportunity to give us your thoughts on heat networks and the bill.

Alison Harris

Good morning, Mr King. I want to ask about projections for heat networks in Scotland over the next 30 years. What contribution can heat networks make to achieving net zero greenhouse gas emissions and tackling fuel poverty?

Michael King (Aberdeen Heat and Power)

Good morning, and thank you for your question. Earlier in the year, in March, the Scottish Government published a policy memorandum on the bill, in which it suggested that, in the absence of legislation, heat networks could grow to deliver about 4 per cent of delivered heat by 2050. It was suggested that with minimal intervention the proportion could grow to about 8 per cent and with stronger intervention, particularly by using waste heat and renewables, it could reach 12 per cent.

Aberdeen Heat and Power has a fairly secure forward pipeline of about 1,000 connections over the next three years, which will grow our network by approximately 30 per cent. I emphasise that that is the confirmed, secure pipeline; the likelihood is that the approach will snowball.

Alison Harris

In terms of financial investment, are there any investments—sorry, are there any estimates of what can be achieved?

Michael King

Will you clarify the question? What do you mean by “investments”?

Alison Harris

Just any financial investment. I am looking to find out whether there is any investment as we look to the next 30 years. Are there any figures in relation to that?

Michael King

I believe that there are, but I do not necessarily have them. The opportunity is there and there is a great deal of interest from investors in the sector. The problem has been how to address the risk. Indeed, that is one of the purposes of the bill.

Alison Harris

Yes, and in the context of a just transition, I am thinking about the impact of the development of heat networks. Could jobs be created? How many job losses are there likely to be among traditional heating professionals? Do you have thoughts or comments on that?

Michael King

I think that, in the earlier part of your meeting, Nicola Mahmood commented on an estimate from the heat networks industry council, which—if I recall—was in the region of 73,000 jobs.

There is a snowball effect. In Aberdeen, we created five jobs directly ourselves, but there is also a supply chain of local plumbers, for example, who are installing systems in people’s homes. More jobs are created outside the industry.

Alison Harris

Thank you. I appreciate your response.

Richard Lyle

Aberdeen Heat and Power is a shining example of what can be done. I have always believed that we can do more with heat networks, with developers and house builders promoting the approach.

We all know that a heat network is either a district heating network or a communal heating system. Could the definitions in the bill, and the bill as a whole, be future proofed to cover technologies that will emerge over the years?

11:15  



Michael King

Eoghan Maguire said this morning that heat networks are an infrastructure that is agnostic to the heat source. Consequently, they facilitate the development of new technologies. For example, the development of hydrogen is proposed to decarbonise heat, but the Committee on Climate Change has suggested that hydrogen will not be widely available until 2035. That would leave us only 10 years to hit the target that the Scottish Government has set, but if we expand the use of heat networks, it would be much easier to retrofit hydrogen plant into centralised plant rooms on heat networks than to visit each building. As a consequence, that would facilitate the advance of the new technology

Richard Lyle

Is the possibility of amendment by regulation adequate to ensure that we have the flexibility that we need?

Michael King

The definition as it stands is adequate. Other witnesses have referred to the issue of temperature, and the general move to lower-temperature systems throughout the heat network industry in Europe and North America would help in respect of connecting technologies such a heat pumps into the system. That will happen anyway, so I am not sure that it is necessary to define it in the bill.

Richard Lyle

Thank you very much for your answers to my questions.

Willie Coffey

Good morning. I will ask about your views on regulation. Nicola Mahmood, who was on the previous panel, said that the heat networks industry is not regulated. If you feel that there should be regulation, who might provide it? Ofgem is a UK body.

Michael King

It was said elsewhere that heat networks are a natural local monopoly, and monopolies need to have regulation to balance things out. The industry is unregulated at the moment, which can lead to instances of abuse. The industry is trying to address that through the creation of the Heat Trust, but that is voluntary and only goes so far.

The Department for Business, Energy and Industrial Strategy has proposed that Ofgem should become the regulator, which has tensions with what is proposed in the bill. First, consumer protection is a reserved matter, so that would need to be addressed through engagement between the Scottish and Westminster Governments. Secondly, the Westminster Government is taking a slightly different approach, so having the Scottish Government as the regulator is probably prudent. Nevertheless, as matters advance, it will be necessary for the two Governments to liaise closely.

The last point is about the pace at which those matters are moving. Although the Department for Business, Energy and Industrial Strategy has indicated that Ofgem will be the regulator, I understand that that is not likely to happen for another three or four years, due to the pace of change. What is proposed under the Heat Networks (Scotland) Bill will be much more rapid. Consequently, in the absence of regulation from Ofgem, it is appropriate for the Scottish Government to take on that responsibility.

Andy Wightman

Aberdeen Heat and Power is operating a heat network just now. If the bill is passed, are you clear that you will have to apply for a licence and comply with the bill’s laws, even though your organisation is already in existence? Is that your understanding?

Michael King

Yes, that is my understanding.

In respect of obtaining the required licence, permits or consents, our concern is that there will be a regulatory burden on us. We are a not-for-profit organisation. We aim to be a very lean machine, so we do not have large reserves. Our objective is the alleviation of fuel poverty. Any additional cost of such requirements will be passed through to end users, which we want to avoid as much as possible.

Andy Wightman

You mention that issue specifically in relation to your organisation as an existing provider, and there are issues with how existing providers can fast-track becoming licence holders, given—[Inaudible.]—schemes already have the consents. As a not-for-profit organisation that is focused on fuel poverty, do you think that that poses questions about the bill and the players that may or may not be able to come into the market and focus, as you do, on social ends?

Michael King

That is a very good question. I have raised concerns elsewhere about how the cost burden that I referred to earlier might impact not on existing networks but on new networks that are community based and serving small villages in rural areas. That is a concern.

Andy Wightman

I note that the bill contains provisions that allow regulations on the issue to be made, which could exempt or partially exempt certain organisations from the full rigour of the licensing regimes. However, that is not spelled out in the bill.

I will ask a bit more about the fuel poverty dimensions of the bill. The need for heat networks is being driven by a need to decarbonise heat and provide more affordable and reliable heat sources for people. What role can heat networks have in the alleviation of fuel poverty more generally across Scotland?

Michael King

Thank you for picking up on that point. I beg your pardon, but I did not pick up the second part of your previous question, which was about fuel poverty. It is a concern to us that it does not appear in the bill. The bill mentions decarbonisation but not fuel poverty. In order to lock in future Administrations, we think that it would be helpful if a reference to fuel poverty appeared in the bill.

In respect of your second question about how the bill can help to address fuel poverty, in the main, the focus has been against a benchmark of current fuels, such as fossil gas or electricity. However, studies by consultancies such as Element Energy and Fortec found that most pathways to the decarbonisation of heat will result in an increase in the cost of heat for the end consumer. The one exception to that is heat networks associated with waste heat, energy from waste plants and suchlike, where the cost is equivalent to business as usual, if not negative. Out of all of the technologies, that is probably the best one for addressing fuel poverty.

Andy Wightman

How many years has your scheme existed for?

Michael King

We were established in 2002 via Aberdeen City Council to address fuel poverty in the council’s high-rise blocks, of which it has 59. We have treated more than 50 of those. Starting from nothing, we now have 15km of pipe networks, approximately 7MW of combined heat and power capacity, 30MW of thermal capacity, five plant rooms, five employees and a turnover of £4.4 million. We hope that we are making progress.

Andy Wightman

So your company is wholly owned by Aberdeen City Council.

Michael King

No. We are a company limited by guarantee and, as such, we have a membership structure. There are five members, of which Aberdeen City Council is one. It is a minority owner of the company.

Andy Wightman

Presumably you needed planning consent to do a lot of the physical works that you have done. Is that correct?

Michael King

That question came up in the previous session. I think that there is a distinction, because heat networks are below ground, and that aspect does not require planning consent. However, the plant rooms, which of course are above ground, do require planning consent. I think that all the issues that you raised in the previous question would need to be addressed, in respect of environmental protection. I understand that the Scottish Environment Protection Agency is a recognised consultee for that, so hopefully that would address those issues. As a plant room is within the community, it is right that that should be addressed by the local planning authority to ensure that it beds into the local community.

Andy Wightman

Just to be clear, part 2 of the bill is about heat network consents. As it stands, it is the Scottish ministers who make decisions about heat network consents, which carry with them, as I understand it, a deemed planning consent. Would it be your view that, certainly for some schemes, if not all—you can maybe clarify that—those consents should be awarded by planning authorities rather than by ministers?

Michael King

No. With respect, I think that you have misunderstood me. The heat network is the bit that is below the ground, and that would be covered by the consent. It may be that no plant rooms are required because the heat is being drawn from some other source. For example, Aberdeen City Council, in association with the county council and Moray, is constructing an energy-from-waste plant, which we anticipate we would take a connection from. In that instance, we would not need to have planning permission to connect to that. That is a wholly different matter. It is only if the plant room was in our ownership that we would have to pursue consent. In that instance, it is probably most appropriate to go to the local planning authority.

Andy Wightman

Thank you. That is a useful clarification.

11:30  



Colin Beattie

On average, how long might it take to recover the capital costs of a heat network, so as to allow a transfer competition to take place?

Michael King

That is a good question, and I do not want to seem to be trying to avoid it but, often, the payback varies from project to project. There is no standard in that respect. It is about the size of the load, the number of buildings that are connected, the capital that is required to install the plant room and to connect the buildings to it, and how long the revenues from those loads will take to recover that capital.

In the main, it is not a short-term payback. At a minimum, it is around seven to eight years; at a maximum, it can be over 20 to 30 years.

Colin Beattie

Previous witnesses gave timescales that varied widely, from 18 to 40 years. From a planning point of view, if one is investing capital, that creates a lot of uncertainty as to when one will get it back.

Michael King

I absolutely agree. One of the purposes of the bill is to increase investor confidence, so that investors have some certainty about recouping that investment.

Colin Beattie

Yes; it is a very patient investment.

What do you think of the strengths—[Interruption.] Sorry?

Michael King

I beg your pardon; sorry; continue.

Colin Beattie

I was going to develop another question; if you have something to add, please do so.

Michael King

In many places, at the outset, the principal investor has been the public sector, either directly, as local authorities, or through grant programmes at national level—and now through the energy company obligation. We have benefited from free capital, if you like, from those. That has enabled us to move forward.

Colin Beattie

In reality, will 40-year capital investment come from the private sector?

Michael King

What will probably happen—in the general way that things happen in the UK—is that, at first, these things will be public sector led, or at least public sector influenced, through the development, construction and early operational phase. Once the project has been de-risked, the public sector will have the opportunity to refinance it. At that point, there will be appetite from institutional investors, such as pension funds, to come in, because it will fit their risk profile and give them the sort of stable, albeit low returns that they typically find helpful in their portfolio.

Colin Beattie

You used the term “de-risk”. Will you define that?

Michael King

Once all the costs and revenues have been stabilised and people understand what their costs are likely to be and what revenues are coming in—they have two or three years of understanding what those might be—at that point, a project could be refinanced.

Colin Beattie

What are the strengths and weaknesses of a transfer system, as set out in the bill, and how should a company be protected?

Michael King

We are concerned about that. Under the licensing regime, if a company or organisation is no longer considered to be fit and proper, its assets will need to be transferred to another company so as to provide security of supply to the end consumer—there will need to be a supplier of last resort. We do not quite understand that. Those assets actually belong to us as a company. Is it proposed that they would simply be taken away from us, or would we be compensated for them? How will that work? We do not know.

Colin Beattie

Assuming that we have reached the end of the period during which there is a concern about the stability of the revenue and the capital costs, surely whoever takes that over is in effect buying a source of revenue, which—[Inaudible.]

Michael King

That is the basis of refinancing, yes. There is no suggestion, however, that that will be paid for.

Colin Beattie

Would the public sector hand the assets across for free?

Michael King

One would need to address that.

Colin Beattie

I am assuming that the public sector will get a return, particularly as the repayment period goes through. Let us say that it is 40 years: at some point in that period, a surplus will be triggered, and either that surplus will be reinvested into the company or it will come back into the public sector in some way.

Michael King

Yes. Pardon me; we are talking about different issues. I think that you are correct on that point, but I wanted to say that more clarity is needed in cases where a licence is withdrawn.

Colin Beattie

Okay. We note the fact that you feel that. I am trying to explore how the actual transition will take place at the point at which the private company moves in. I am assuming that there will be a transfer of some value to the public sector.

Michael King

That would depend on whether the asset was being sold in its entirety. It might be that the public sector would sell only a percentage of the equity, which would be bought by a private investor, such as a pension fund, as I suggested. The management would remain the same, but the ownership structure would change.

Colin Beattie

So, the actual management of the company would not change; there would simply be a background change of ownership.

Michael King

Yes.

Colin Beattie

We do not know yet whether the public sector would hire someone from the private sector in order to run the business for it.

Michael King

That is a possibility. All sorts of options are open to the public sector.

Colin Beattie

My concern is to ensure that the public sector gets value for money in investing in those assets, and then in transferring them, in whole or in part, to the private sector.

Michael King

If the public sector invested in the asset, it could take the option to retain 100 per cent ownership, in which case it would get the revenue. It could decide that it wished to exit from it, in part by selling a share of the equity, or it could exit entirely by selling 100 per cent of the equity.

There is a great example in the city of Toronto, where the city council, in association with its pension fund, developed a heat network, taking heat out of Lake Ontario and cooling it. They developed the network downtown and then sold the whole lot to Brookfield Asset Management. In the process, the city council made a $300 million profit. There is the opportunity for the public sector to benefit from the approach.

Colin Beattie

Thank you.

The Convener

An issue that has come up is whether the licensee should be a person or a legal entity. The bill seems to suggest that it should be a named individual—a fit and proper person, as in the approach to alcohol licensing. Should the approach be extended or changed to make the licensee the legal entity, that is, a limited company or an organisation, rather than an individual so that, as individuals come and go, it is the company that has the licence to operate?

Michael King

Thank you for the question. I suppose that the approach is similar to the licensing of pubs; it is the individual landlord whose name is above the entrance but it is the company that provides the service. Our concern is that people in companies change; we wondered whether there would be a cost associated with reassigning a licence to a new individual.

The Convener

For alcohol licensing, an exam goes with the process, to show that someone is a fit and proper person. The applicant has to tick boxes in a mini-exam, to show that they know what is required and so on. We perhaps need to explore that issue.

Michael King

Yes. That would be helpful.

Alex Rowley

You talked about fuel poverty in response to questions from Andy Wightman. Should more be done to ensure that fuel poverty is considered when heat network zones are designated and permits are issued?

Michael King

As I understand it, that will be dealt with in the secondary legislation. In particular, in relation to the issuing of licences and consents, an applicant will have to demonstrate that they are a fit and proper person and come forward with a proposal and business plan that seeks to build a heat network over the whole area, while providing some form of price benefit for the end consumers. As that is not actually in the bill, I think that the bill should contain a reference to fuel poverty, which would hook seamlessly into the secondary legislation.

Alex Rowley

There will be the opportunity to lodge amendments to the bill, and your proposal is worth taking on board.

Michael King

In our submission, we suggested a particular point in the bill at which such a reference could be included.

Alex Rowley

Thank you. I asked the previous panel about requirements in relation to publicly owned buildings. I talked about the scheme in Fife that I know well, which links a community asset, the Carnegie leisure centre, with high-rise flats. Will you give us a feel for your scheme and how it works? Do you have an anchor building?

11:45  



Michael King

Our approach is to have a framework agreement with a city council that gives us exclusivity to build a combined heat and power plant in its buildings. It was initially focused on the high-rise estates that I mentioned, but it also includes administrative offices and schools.

The high-rise blocks tended to be in clusters, so we could develop a heat network island that was financially sustainable and viable serving just that island. The housing estates became our anchor loads, which we connected together and then picked up other buildings along the way. A lot were public sector but now, because new connections to the gas network will be banned from 2024, we are getting inquiries from private developers about how to connect to our networks.

Alex Rowley

You are saying that there is a potential opportunity, and we should not restrict the network to just publicly owned buildings. Section 38 of the bill says that each local authority must

“carry out a review to consider whether one or more areas in its area has the potential to be designated as a heat network zone”

and that that should be done “as soon as practicable” after section 38 comes into force, and at least every five years after that. Is that adequate?

Michael King

Yes, it is. A difficulty of rolling out heat networks in towns and cities across Scotland is that there has been no statutory duty. Aberdeen Heat and Power provides an example for lots of towns and cities, but not many have followed it. In the main, that is because, from a strategic point of view at the top of a local authority, it is not a statutory requirement, so why should the authority do it. Making it a statutory requirement would encourage authorities to focus on that area and I hope that they will understand the opportunities that it will bring to address climate change, fuel poverty and urban regeneration.

Alex Rowley

From what you have said, I am reaching the view that local authorities are absolutely key to the issue. To deliver heat networks, the local authorities must be totally on board and driving them. Do you agree? My second question is about where the expertise exists; some authorities have not driven renewables forward not for a lack of will but because they do not have the expertise. Where does that expertise sit?

Michael King

You are right. Commentators throughout the world have recognised that municipalities and local authorities are key to the development of heat networks. They have the vision for the whole of their area rather than just the edge of a development site. They are the planning authority and have the ability to shape the town in terms of the mix of use, the size of anchor loads and this, that and the next thing. The local authorities own a great many buildings that can be put into the mix to provide an anchor load and underpin a network financially and technically, and they tend to be at the centre of a web of relationships with people in their locality.

Local authorities are key, but the issue about competence and skill is a problem. People refer to heat networks as a new technology but it is not; it is very mature in other parts of Europe but not in Scotland. As a consequence, there is a lack of expertise here, particularly in the local authority sector. The bill has addressed that issue; if the local authority does not have the competence to develop heat networks, the Scottish Government can step forward and take over that responsibility. We would want to make sure that the Scottish Government had the requisite skills to be able to deliver that on behalf of the local community.

Gordon MacDonald

To continue on the theme of buildings—Alex Rowley is big on that—part 5 of the bill places a duty on public sector building owners to undertake an assessment of the viability of connecting their buildings to a heat network. Are energy performance certificates sufficient to assess actual performance as well as whether a building is suitable for connection?

Michael King

It is key that we are able to understand demand for heat in a building, not only in absolute terms, but in terms of the shape of demand—in other words, what demand is over the course of a day or a year. Owners of large buildings with EPCs will have derived the data that they need to generate that information from the current typical heat source, which is gas. Simply reviewing their gas bill would provide owners with the information that they would need to make an assessment of connecting their building to a heat network.

Gordon MacDonald

You have already mentioned that no new gas connections will be allowed from 2024 and that you are beginning to get inquiries from privately owned commercial properties. Have any of those inquiries come from customers who are already connected to your network? What length of contract would need to be entered into? What are the additional benefits that customers would get from Aberdeen Heat and Power?

Michael King

I will address your last question first. Aberdeen Heat and Power has been in existence for 18 years. Over that period of time, we have developed the competencies to be able to provide a good, reliable and secure service, which would be the attraction for potential customers. At the moment, no private developers are connected to the system, but we are in conversation with them. The responsibility for interacting with the end consumer is a very challenging area. In the main, my company would prefer to be able to sell bulk heat, and that it would be for the end consumer to establish a vehicle to manage the heat network on their development.

Gordon MacDonald

The bill places a duty only on public sector building owners. Should all private building owners have to carry out an assessment to encourage them to think about connecting to heat networks?

Michael King

The public sector is a good place to start, but I anticipate that the requirement would need to be rolled out to other major buildings as well.

Gordon MacDonald

Are any public buildings outwith the scope of the bill? Back in the 1980s and 90s, a lot of councils outsourced their services to arm’s-length external organisations. For instance, in Edinburgh, Edinburgh Leisure runs all the sports facilities. Would those buildings be included in the definition of publicly owned buildings?

Michael King

I guess so, because it is the management that has been outsourced, not the ownership. I presume that such buildings would still qualify as public sector buildings.

For all the reasons that I mentioned, and because of the public sector’s aims and objectives, the public sector can take a long-term view, so the likelihood is that these spine mains or putative projects will develop on the back of a public sector load. It makes sense that such projects would be extended to large commercial buildings—using the EPC definition of “large”. That would bring into place a heat network in most of Scotland’s towns and cities, to the point that when fossil gas was withdrawn, other, much smaller buildings would have the opportunity to connect to a heat network and get low or zero-carbon heat from that at a reasonable price. If we do not build up the networks now, those smaller buildings, including residential buildings—homes—would not have that opportunity. It is about building a platform now.

Dean Lockhart

In practical terms, is the bill likely to encourage your organisation to invest more in heat networks? If so, can you explain why?

Michael King

A barrier remains that I think has been referred to this morning, which is the obligation to connect. The wayleave right, as outlined in the policy memorandum to the bill that was published by the Scottish Government in March, indicates that it would be possible to build a heat network up to an anchor-load building. However, you would not be able to oblige that building to connect.

One argument is that while that extension was happening, a contractual negotiation could take place between the heat network operator and the anchor-load building owner. The fact that the pipework network was coming up to that point would facilitate that discussion.

Secondly, there could be a change of ownership. A new owner may want a low-carbon source of heat, which would then be available to them, because it had been built up to their doorstep.

Thirdly, there could be a change of boiler. If the current heating equipment expired, that would be an opportunity.

The difficulty with that is that I do not think that people—including Aberdeen Heat and Power—would invest money in such an open-ended scenario. If you or I were to take £100 out of our building society to invest in a project, we would need greater certainty—in this case, that the building was going to connect and provide the revenue stream to repay the capital investment that we had made.

Dean Lockhart

That is very useful.

I have a follow-up question. In the earlier evidence session, we heard about a fairly significant increase in provision from heat networks to meet heat demand. Are those projections optimistic, or are they realistic?

12:00  



Michael King

I think that they are realistic, but I would refine that. The figure that is quoted in the Scottish Government’s financial memorandum, which is based on Scottish Government research, suggests that provision could be 12 per cent of delivered heat by 2050 across the country as a whole. Because heat networks tend to be an urban technology, the percentage is likely to be higher in towns and cities.

Dean Lockhart

Is there anything that policy can do to help with the wider distribution of heat networks, or is it largely driven by the economics of the investment?

Michael King

Overall, that is largely driven by the economics, which is, in turn, driven by the density of buildings in a particular area, the mix of buildings, the presence of an anchor load, the presence of sources of waste heat, such as from energy-from-waste plants and power stations, ambient heat from rivers and the sea, and heat from the land through ground source heat pumps. All those things should be captured in the latent heat energy storage proposal for producing a heat network zone. You would have to encapsulate them all to define the heat network zone, and as the process begins to derisk the proposition, it makes it much more attractive for the investor, whether public or private.

I would like to follow up on one more point about the obligation to connect. There is a resistance among certain building owners because of competition law and other such things, so a softer option would be for the bill to include an obligation on those building owners to explain why they cannot connect to a network. That could force them to engage in contractual negotiations with the heat network operator to justify their position.

Dean Lockhart

That is understood. That is very valuable feedback; I appreciate it.

The Convener

Richard Lyle just has one more quick question to ask.

Richard Lyle

I am just trying to unmute my microphone.

The Convener

You are unmuted.

Richard Lyle

I am sorry; I was trying to unmute myself.

We have failed to exploit various opportunities to use waste because of environmental concerns. If we had more drive and determination, we could change that. Do you agree—yes or no?

Michael King

Are you referring to waste?

Richard Lyle

Yes. I will not bore you with the detail but there was a proposal for a waste-to-heat plant in my constituency and my constituents were against it. However, other cities and towns, and other countries, have waste-to-heat plants. Have we failed to tackle environmental concerns?

Michael King

I am afraid that I have to duck that question because I am a heat network person, not a waste management person. The decisions lie further upstream and are down to people who know about such matters. However, if we decide to go down the energy-from-waste route—and I believe that that is SEPA policy nowadays—that should be done as efficiently as possible, including through the provision of a heat offtake, if not immediately then within a certain amount of time, which I understand to be about five years. That would create the opportunity for a heat network operator to come in, capture the heat and distribute it to the local community. However, the decision on waste is not ours to make.

Richard Lyle

Yes, you mentioned that. Thank you very much.

Michael King

You are welcome.

The Convener

We are coming to the end of the session. We have asked a lot of questions and covered a fair bit of ground. Is anything missing from the bill that you would like to be in it?

Michael King

I think that I have covered that. First, we really want a reference to fuel poverty in the bill. Secondly, as I mentioned to Dean Lockhart, there is the issue about the obligation to connect.

The Convener

It is just those two aspects that you really want to be included in the bill.

Michael King

Yes.

The Convener

Okay. In that case, and given the time, I thank you for your time. It has been really helpful to speak to someone who has delivered and is running a heat network. We will decide what recommendations to include in our report to Parliament, but your evidence, both written and oral, has been helpful.

That completes our public session. I thank anyone who is watching, and I thank broadcasting for supporting the transmission of the meeting.

12:07 Meeting continued in private until 13:13.  



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Second meeting transcript

The Convener

Agenda item 2 is an evidence session on the Heat Networks (Scotland) Bill. I welcome our witnesses, who are Gavin Mowat, policy adviser on rural communities at Scottish Land & Estates; Tammy Swift-Adams, director of planning at Homes for Scotland; Sarah-Jane McArthur, a member of the Law Society of Scotland’s energy law sub-committee; and Professor Roderick Paisley, chair of Scots law at the University of Aberdeen.

Each member will ask their question and I will then go to the relevant witness for a response. Members may wish to follow up on those points, and I will then move to the next member. Please keep your questions and answers succinct and allow broadcasting staff a few seconds to operate your microphones before beginning to speak to ensure that everything is broadcast.

To start with the bill and the definitions in it, given that heat and other technologies are fast moving, both in their development and in the ways in which they can operate or become part of a heat network, are the definitions in the bill sufficiently future proof to enable them to relate to current and future technologies?

Gavin Mowat (Scottish Land & Estates)

Scottish Land & Estates considers the bill and its definitions to be flexible enough to allow for newly developed technologies to be added to heat networks. As you will be aware, the networks are quite agnostic, in that they can allow for the development of new technology. The bill is sufficiently flexible in that regard.

Sarah-Jane McArthur (Law Society of Scotland)

As Gavin Mowat has said, heat networks are technology agnostic, so many future generation technologies could be incorporated as they are developed. The definitions in the bill are incredibly broad. Although that is a good thing if you want to capture as many types of network as possible, there is potential for unintended consequences.

When Government comes to think about which types of networks could be exempted in future, it is worth considering, first, whether networks that are set up by an entity purely for self-supply should be caught by the licensing rules and, secondly, because of the broadness of the definition, whether generators of heat—operators of energy-from-waste plants, for example—would be captured within the licensing provisions. On the last point, as the bill stands, there is a risk that they would be.

The Convener

You have touched on something that I was going to ask about. For example, are the definitions in the bill adequate to include waste heat producers? How do the definitions in the bill need to be improved, if they do? Are regulations—statutory instruments—flexible enough to deal with issues that may develop once the bill is passed?

I ask Sarah-Jane McArthur to comment, after which one of our two other witnesses might like to comment.

Sarah-Jane McArthur

The definition of “network” is wide enough to capture waste heat users, in the sense that those will supply to a network. There are definitions in the bill that refer to “waste heat or cold”, but I would defer to people with engineering experience as to whether those will adequately capture the various producers of waste heat or cold in future.

Secondary legislation is probably the only way to retain the level of flexibility required to adapt quickly to future markets, given the constraints on parliamentary time to pass more primary legislation.

The Convener

Professor Paisley, do you want to share any comments on those issues?

Professor Roderick Paisley (University of Aberdeen)

My comment relates primarily to the issue of wayleaves through land. A landowner with a pipe or cable through his land will want to know the answer to a simple question: “What, physically, is being done on my land?” With regard to wayleaves, before the bill is suitable, a bit more work is needed on the definitions, so that someone operating a heating system will be able to get a specific order requiring work to be done or enabling him to do work.

The Convener

If witnesses feel that any aspects are not covered adequately or that they would like to comment further after the evidence session, the committee would welcome written comments on any of those issues.

Tammy Swift-Adams, do you want to comment on any of those matters?

Tammy Swift-Adams (Homes for Scotland)

Picking up on what Gavin Mowat and Sarah-Jane McArthur said about the definitions, Homes for Scotland members always look for flexibility in how different policy requirements or regulations can be met. Therefore, I welcome the comments that the bill’s definitions are technology agnostic and flexible.

On whether regulations are flexible enough to capture changes over time, that would be the preferred mechanism for our members for rolling out the policy, because they are used to using regulations for other technical aspects of building. Regulations are clear and familiar, so our members will be happy with that.

The Convener

We now have questions from Richard Lyle.

Richard Lyle (Uddingston and Bellshill) (SNP)

Are there any practical differences between a licensing authority, as is set out in the bill, and/or a regulator, as is set out in the policy memorandum?

Sarah-Jane McArthur

Again, there is a degree of flexibility in the bill on that point. To me, the regulator is the person who issues licences, determines who can get one, and then monitors the conditions of those licences, so, to my mind, it is just a difference in language rather than a difference in function per se.

Richard Lyle

Are there any comments from other witnesses? No.

The Convener

No. I say to our witnesses that, unless you are specifically asked by a member, do not feel that you must respond to every question, but if you wish to come in, please indicate by raising your hand, or by commenting using the chat function.

Mr Lyle, does that conclude your questions for now?

Richard Lyle

Yes—that is fine, convener.

The Convener

We will move on to questions from the deputy convener.

Willie Coffey (Kilmarnock and Irvine Valley) (SNP)

Do the witnesses support or welcome the proposed licensing regime? If so, should licence standard conditions be left to the licensing authority, or should those be in the bill? What are your views on each of those options?

Sarah-Jane McArthur

I welcome the licensing regime that will be introduced. People across the sector are supportive of the bill. It is a step in the right direction to ensure that standards for heat networks across the country will be sufficient, and there will be a degree of consumer protection through the introduction of the licence standards.

On whether those should be in the bill or introduced by a licensing authority, the problem with introducing them in the bill is that they would lose flexibility. In the current electricity licensing regime, licence standards are updated frequently to deal with new technology or issues as they arise, and that can be done quite quickly. If it is desired, it would be fine to include general principles in the bill, but having the flexibility to respond to scenarios and to impose licence conditions and standards to deal with those as the market develops separately from the bill would be the best plan.

Willie Coffey

Does any of the other witnesses have a view on that?

Tammy Swift-Adams

To concur with what Sarah-Jane McArthur said, home builders would agree that it is right that customers who get their heat from heat networks get the same level of protection through regulation as they would get when using other providers. At this stage, we probably do not have a comment on the level of detail that should go into the bill, but I am sure that house builders would be supportive of the general principle.

Willie Coffey

The committee has heard evidence that the lack of standards in the area could lead to a situation akin to the wild west, which is quite a thought. Is there work to be done to develop standards that will be adopted, embraced, observed and followed? Is that important work that should continue?

09:45  



Tammy Swift-Adams

Much as we would agree that there is a need for regulation, there is a need for clarity for everyone involved as to what standards are expected. How those standards are laid out would depend on the detail. We would always ask that, through Homes for Scotland, home builders are involved in any collaborative work to develop the standards, to ensure that they can deliver the policy intentions without unintended consequences for delivery ability or customer choice.

Sarah-Jane McArthur

I am not a technical expert in this area—I am a lawyer, not an engineer—but my understanding is that there are already voluntary customer protection standards through the Heat Trust, which operators across the market are signing up to. There are also standards developed with the Chartered Institution of Building Services Engineers. In contracts, we ask for networks to be built to those now well-established standards. Therefore, although I am sure that further development is possible, the industry is already moving towards a set of standards that it would be happy to sign up to.

The Convener

We move on to questions from Andy Wightman.

Andy Wightman (Lothian) (Green)

Thank you, convener. Most of my questions are directed at Professor Paisley, although Sarah-Jane McArthur might also have some observations. First, thank you, Professor Paisley, for submitting your detailed evidence, which is incredibly useful to the committee. Obviously, you are one of the leading experts in the area. In creating a new system of regulations around putting pipes under the ground, it is important that we get the drafting correct.

Your evidence is detailed, which is useful, but, in summary, are you essentially saying that, first, we need to create these wayleaves as real rights? As I understand it, “wayleaves” is not a recognised legal term, but it is, nevertheless, in common usage. Secondly, you say that there are drafting issues, and you point out various examples of those. For example, interestingly, you say that section 60 is “English inspired nonsense.” Thirdly, you say that we need positive prescription. In summary, are those the three key messages in your evidence?

Professor Paisley

Andy, you are absolutely right. On real rights, my view is simply that, if all you have is a contract or an agreement—in other words, a personal right—with the landowner, the strength of the right available to the provider of the energy is only as strong as the individual who is the landowner at the time. If he becomes insolvent, dies or sells his property, that right will come to an end, which is absolutely inconsistent with a network that is intended to be long term or perpetual. It is important that the right is a real right, because that will allow the right to be perpetual and enforceable against third parties. As I pointed out in my evidence, the only people who are specified in this English-inspired nonsense who are bound by these rights are the owner and the occupier. That does not include anybody who goes on to the ground with a digger. It does not include anybody who has a lesser right, such as a banker who goes on to the land and just rips it up or someone who just wants to cause trouble. All that is needed is for those rights to be specified as real rights, and then they are more secure and enforceable against the world or anybody who interferes with them. It is a simple procedure. The term “wayleave” is commonly used, but it is much better to be technically correct, because it will then fit the Scottish system of landowning perfectly and it will not be an import from England, which is like oil on water to Scots law.

Andy Wightman

Thank you. To clarify, would the wayleaves that a telecoms provider might have down a country road or across a field for underground cables typically be a real right in Scots law? Would those typically be registered in the land register?

Professor Paisley

The answer to the second question is no. Anybody buying the land would not have a clue that that is in the ground. There is no public notice of that. On whether it is a real right or a personal right, a personal right is just a contract between, for example, me and you. It is not enforceable against anybody else. The statute is so obscure that, for most of the wayleaves for telecoms, it is very difficult to know what the right is. The telecommunications legislation does say that it is binding on the person who grants it and on their successors, but it tries to identify every single individual and to make it binding on them by specific drafting. All you need is a general statement that it is a real right, and then that right to put a cable in the ground is enforceable against everybody as soon it is constituted. It is much better if it is constituted on the land register so that everybody can see that the right exists.

Andy Wightman

Clearly, you have expertise in the area, and you have a view on how the legislation should be amended. However, there are many utilities, such as water, gas, electricity, telecoms and so on, that have wayleave agreements. Is the statutory basis for those equally open to criticism and subject to the sort of critique that you have provided to us on their use for heat networks? Are all utilities suffering from the problems that you outline in your written evidence?

Professor Paisley

None of those statutes is drafted to a particular style. They are all drafted individually. Almost all the statutes that you refer to suffer from those problems, at least in part, and some are worse than others. That is a goldmine for landowners who want to employ surveyors who ask for compensation once the land changes hands. There is no real regulation of that aspect. We are not going to get into a general review of the law of wayleaves here, but the law of wayleaves is an absolute shambles in Scots law. It would not be a good idea to model what you propose to do in the bill on what is already in legislation, drafted by the Westminster Parliament, which has not got the foggiest clue about how Scots law works.

Andy Wightman

Thanks. Essentially, you are saying that this is a new statute that is being proposed and that a very important part of it is the law around wayleaves, so we should get it as good as it can be, particularly in light of the history of statutes and various case law, which have shown its deficiencies. Your position is basically that we should make this as good as it can be.

Professor Paisley

Absolutely right. I agree with that, yes.

Andy Wightman

Thanks. I think that you say in your evidence that there are no real rights created in the bill. Is that correct?

Professor Paisley

As far as I can see, there are no real rights created in the bill. The nearest it comes to that is the so-called necessary wayleave, which binds the owner and the occupier. However, that just binds the owner and the occupier and nobody else. It would be much clearer if it were simply stated that those rights could be real rights. It is possible that you might want just a temporary agreement with a landowner, to locate some equipment for a limited time, for example. However, it is much easier to have a simple statement, as has been done in other Scottish Parliament legislation, such as for the trams in Edinburgh. You simply have a sentence that states: “These rights are real rights.”

Andy Wightman

That is very helpful. To be clear, real rights created by statute do not necessarily have to be registered in the land register to be real rights.

Professor Paisley

You are correct. Parliament is sovereign and can do whatever it likes. Rights do not have to be entered in the land register of Scotland to make them real rights. You can say that they are real, and, like fiat lux, they just come into existence when they are constituted by being signed. However, that leaves the problem of where you go to find out the location of the rights. If I buy a piece of ground, how can I find out whether it is affected by a pipe or a cable or a wire or a duct? With most wayleaves, you have to phone up the various statutory operators, who say that they have lost the records or that the records are incomplete. It is far better to have an idea of who owns land in Scotland—the general policy is to make it as obvious as possible to the public—but also of what derivative rights there are, such as wayleaves.

That is not difficult to do if you are setting up a new system. I agree that it would be impossible now to go back and to try to have a registration of all ancient electricity wayleaves, gas pipelines and everything else. However, we are setting up a completely new system, and if we start from scratch and require those to be registered, it will not cost very much, and it will ultimately save a lot of money by allowing anybody who is buying land or dealing in land to know exactly what they are dealing with.

Andy Wightman

Yes, I understand that it is a long-standing problem with utilities that we cannot easily find that out, and that is probably not going to be solved by the bill. It would an added advantage if it could be.

Turning to Sarah-Jane McArthur, in the Law Society of Scotland’s evidence on Part 6 of the bill, you essentially say nothing. You say that you have nothing specific to add and that the powers seem similar to those for utilities. I do not know whether you have read Professor Paisley’s evidence, but he has identified what he believes are quite significant flaws in Part 6. Why do you think that you do not have anything to add on the matter?

Sarah-Jane McArthur

I have now read Professor Paisley’s advice, which I have no particular comment on. To explain, I am a contracts lawyer. I deal quite a lot in the delivery of such schemes, but I am not a property lawyer. Therefore, the Law Society would need to ask our property committee whether it had a view on that. I am happy to follow that up in written evidence, if you would like confirmation on that.

Andy Wightman

Yes, that would be helpful. I assumed that the Law Society’s evidence would have covered property rights, if it were commenting on Part 6. That would be useful. With all respect to Professor Paisley, he has specific concerns, which I do not doubt are probably valid, but it would be useful to get some other views on that so that the committee can come to its own view on the extent to which the bill may be amended. That is all from me just now, convener.

The Convener

Thank you. To follow up Mr Wightman’s questions, Professor Paisley, if I may put it in layman’s language, your point is that, if one makes these real rights and they appear on the land register, people then know where they are at, because someone buying a property sees it in the land register and they know what they are getting. Is that a fair summary?

Professor Paisley

That is a summary of about a quarter of it. Not only—

The Convener

I am sorry, I was not suggesting that your detailed submission could be limited to those two sentences. Is there a mechanism or have you proposed a mechanism whereby such rights, if entered as real rights on the title sheet of a property, will also be removed if they cease to exist? As you will know, the land register includes ancient rights and so forth that get carried over into the title sheet but which are completely irrelevant in the modern day. Would it also be useful to have a mechanism whereby rights are removed when they cease to apply?

Professor Paisley

Absolutely, yes. In my evidence, I give some idea of how that could be done. The creation of these as real rights and their availability to be seen by the general public are important, as is getting rid of those real rights in due course. However, critically, right at the core of it, is the enforceability of those real rights. In practice, wayleave rights are only enforceable against the other party, and they are as weak as the other party. If I enter into a contract with a man of straw, my contract is worthless, but, if I have a real right, it is enforceable against anybody else interfering with the system that is in the ground.

10:00  



The Convener

Thank you. One is a personal right, which is something that I can enforce against an individual, and the other is a real right, which can be enforced by anyone against anyone, as it were. Gavin Mowat, you have not had the opportunity to comment yet. Do you have anything to say on the issue of real rights and their appearing in the land register? Would that be useful to your members?

Gavin Mowat

I do not have a specific comment on the evidence from the Professor. I am not an expert in that area, but I am happy to go back to our legal group and come back to you with written evidence on that specific matter. More generally, the knowledge of where infrastructure is as part of the lie of the land would be very useful to our members. We have frequent issues with utility providers related to locating where infrastructure is in the ground, and we have a number of problems related to that. If there is a mechanism that can better determine those factors, SLE would support that. I would be prepared to submit some written evidence to support that.

The Convener

It would be useful to have written comment, if that is possible. We move to Rhoda Grant for the next questions.

Rhoda Grant (Highlands and Islands) (Lab)

We have heard evidence that there is little in the consenting process about fuel poverty. The process is about scale and about decarbonisation. However, we also heard that, if excess energy was produced, it would obviously have to be paid for and that it would be added to the bills of those energy customers. Is there enough emphasis on fuel poverty and how we could redress it?

Sarah-Jane McArthur

There is a large degree of flexibility within the licensing arrangements, such that, if policy makers wanted to put in place pricing restrictions, it would be possible to do that through the licensing regime. I do not think that anyone would disagree about the need to address fuel poverty. Delivering at scale tends to reduce the costs for everyone who can join the network.

Rhoda Grant

I see that no one else has a comment. Moving on, should there be a right of appeal? As well as the issues that I raised about fuel poverty, there is deemed consent. The bill is obviously designed to make it easier to get heat networks through the planning process, but are there enough checks and balances in the system?

Sarah-Jane McArthur

To my understanding, the legislation has been modelled on the approach taken to electricity projects, so a lot of the language is taken from the Electricity Act 1989. Under that regime, the right of appeal, in effect, is by judicial review, and that same right would apply in relation to the decisions of Scottish ministers to award consents. Therefore, if the ministers decided to award a consent but there had not been due process, there would be the right of judicial review.

That said, I understand that there is a desire among those in the sector to have a clear appeals process, so that the basis upon which the decision has been made and the factors that were taken into account in the decision could be challenged. However, I understand that that is not in the bill, and to include it would be inconsistent with the approach taken for electricity projects, for example.

The Convener

On that point about appeals, you mentioned judicial review. Am I right in saying that that can currently take place only in the Court of Session? Considering the attendant costs, what would your suggestion be for a better set-up for appeals or a review of the process, with regard to the ease of bringing the appeal, the cost and the accessibility for the parties?

Sarah-Jane McArthur

Forgive me, but I do not feel terribly qualified to give you an answer on that this second, with a design of a revised appeal process, but I can follow that up separately, if you would like further thoughts on that.

The Convener

Yes, it would be very helpful to have written comment on that. I will hand back to Rhoda Grant.

Rhoda Grant

I am happy with those responses.

The Convener

Thank you. Colin Beattie has the next question.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

Thank you, convener. To expand a bit on Rhoda Grant’s questions, on planning permission, to what extent should local authorities and communities—who we hope will be the customers for many of the heating systems—have a role in determining applications? Should a size of network be specified under which local authorities and communities have a locus in the process? Most of the heat networks will probably be of a reasonably small size. Could there be better or more input locally? Perhaps Gavin Mowat could comment on that.

Gavin Mowat

Given the growing expectations around involving communities when significant decisions are being made in relation to land, the consenting process should also do that in some way, not least because it is a good opportunity to have an engaged community that is informed about exactly what district heating is. There might be an element of naivety or people might not know exactly what it is and how it could benefit them.

The flip side of that is that we appreciate that adding a planning process to the licensing and permitting process will inevitably increase bureaucracy for any development, which could have an impact on the viability of a scheme, particularly a small scheme.

Colin Beattie

I take your point on that, but I would challenge one thing. We do not want bureaucracy—we want these networks to come on stream relatively quickly and without difficulty—but the communities will also be the consumers of the product and many of the systems will be very localised. Should there be more in the bill about bringing communities into the process? I am sure that we are capable of doing that without creating too much bureaucracy. If we just leave them out, are we not storing up problems?

Gavin Mowat

I tend to agree with you. The point that I was going to make is that, essentially, it is perhaps more realistic to apply the approach taken with electricity generation, where small developments up to a certain size can be given consent by the local planning authority and anything larger needs consent from ministers. Precisely as you have said, it is a case of trying to get the balance right between not leaving the community out and ensuring that people know what is going on and how the development process works. Just to give you an example—

Colin Beattie

Should there be more in the bill about that?

Gavin Mowat

The difficulty is that there is an opportunity for the local heat and energy efficiency strategies and the zoning districts to involve communities quite a lot on where there could be district heating. It is a shame that the local heat and energy efficiency legislation is not coming in before this bill, so that we could know what sort of community engagement there will be in that process. There could be a need for more in this bill but it is difficult to say without knowing what the local heat and energy efficiency strategies might include.

The Convener

Does Tammy Swift-Adams have a view on that?

Tammy Swift-Adams

Yes, thank you—I have been waiting for a planning question as it is an area that I am comfortable in. I do not think that there is a need for anything specific on planning and community engagement in the bill because of what has already been put in place in the Planning (Scotland) Act 2019.

The 2019 act does a couple of things. First, it improves and expands on existing requirements for pre-application consultation with communities on certain types of development. I believe that the categories and scales of eligible development are set out in regulations. Therefore, if there was a need to revise those definitions to pick up anything on the heat networks, there would be scope to do so. Some of the networks might already be covered by that, depending on whether they are coming forward through their own planning permission or as part of a bigger strategic application, through master planning or the planning permission process. I am not entirely clear on what permissions would be needed. However, either way, there is scope there to bring them into the fold of community engagement.

Secondly, under the 2019 act, there is a strategy requirement on the planning minister to introduce guidance on how to involve communities more effectively in planning matters. Again, that requirement is all embracing in terms of the type of development to which it could apply.

Sarah-Jane McArthur

There is a practical point about how you would deliver the schemes. Often, if a heat network is being delivered alongside a new development, the network would be given consent as part of that development. The two would come together and the timing would be consistent. One issue with the framework in the bill is that all heat networks will require consent from Scottish ministers and there is no guarantee that the timeline for that would run alongside the planning permission for the development. Therefore, in practical terms, it may make sense for a heat network to be included in planning permission for new developments, without requiring a separate consent. That may address some of your concerns.

I have a personal view that it would seem to make sense that Scottish ministers would not need to give consent to particularly small schemes, which might be better left to local decision making, in the same way as happens with the planning system or, indeed, with consent under the Electricity Act 1989. Small schemes receive planning permission and larger schemes require consent from ministers.

Colin Beattie

One of the issues is how you specify the size of a scheme. When is it a small scheme that will fall within the remit of the local authority and local community engagement, and when will it fall within the remit of Scottish ministers? Do you exclude Scottish ministers from a certain size of project? You could get into quite a debate on that, and I am not sure how you would resolve that. Do you have any thoughts?

Sarah-Jane McArthur

It all comes down to definitions, I suppose. It is for policy makers to determine what they want to achieve and then for the legislators to try to define that as accurately as possible. I understand your point about the potential for local people to be more involved in the smaller schemes.

10:15  



Colin Beattie

Local authorities have duties on matters such as zoning, awarding permits and so forth. How does that fit in with the proposal?

Sarah-Jane McArthur

That is one of the areas in the bill that probably requires some clarification. This is very new—we have not regulated heat networks before—and the bill introduces four new concepts: there is a licence, a consent, a zone and a permit. It would be helpful to have a flow chart or a guide as to how it is intended that those four different concepts will flow together. For example, what happens if you get your licence at a different time to your consent? Do you need to have a licence in order to apply for a consent? Thought needs to be given to how those concepts interact.

On the duties around zones and permits, those make a lot of sense when you think about delivering heat networks at scale. It makes sense to strategically lay out a zone that is suitable for heat networks and then to give someone a permit to run that zone. However, once a zone is created, there is no requirement to issue a permit. Therefore, you might have decided that a zone is suitable for heat networks, but if there is then no requirement to say whether you are going to issue a permit or a timeline for that, that could create more risk of heat networks not being built in that area, while it is zoned but not permitted.

The other issue about the duty to consider zones is that it would be helpful if local authorities were given a bit more guidance on what they have to consider in order to set the zone. What factors do they have to take into account, and what areas are we expecting them to cover? Also, we should bear in mind that local authorities will need to be resourced and supported to enable them to complete that task.

The Convener

Thank you. Andy Wightman wants to come back in on one or two points.

Andy Wightman

Thank you for that last point, Sarah-Jane McArthur; it is an important one, because it is unclear how some of these things link together. For example, under section 18, “Exemptions from requirement for heat network consent”, regulations can be introduced to exempt certain applications. That could be based on size and so on, but there is no such exemption for deemed planning permission or for granting or modifying heat network consent in section 35.

Under section 11, “Revocation of heat networks licence”, there are no regulation-making powers, and there is no right of appeal. Ministers can revoke licences just as is set out in the bill. There are no regulations to modify or set out the circumstances in which revocation can take place, and there are no appeal rights. However, section 24, “Revocation of heat network consent”, is a very brief section, which just states:

“The Scottish Ministers may revoke a heat network consent in such circumstances and in such manner as may be specified by them by regulations.”

In other words, in revoking consents, we are giving ministers huge freedom, by regulation, to determine the circumstances of revocation, but there is no flexibility whatsoever on the revocation of licences, and there is certainly no right of appeal. Does anyone have a view on whether those two sections should be consistent?

Sarah-Jane McArthur

Again, I would draw a parallel with the position in relation to electricity licences. The Electricity Act 1989 is quite light on the detail of when Ofgem can revoke the licence, because the circumstances in which the licence can be revoked are set out within the licence conditions. The circumstances in which revocation might happen change over time, because, as new conditions are entered into the licence, breaches of some of those conditions may trigger revocation, while breaches of other licence conditions may not. Therefore, the process is outwith the legislation. I acknowledge that it is not clear whether that is the intention here. However, that would be a way to manage that issue.

Andy Wightman

That is helpful, because section 11(1)(b) states:

“has failed to comply with a condition of the licence.”

In essence, you are suggesting that, following the model of the Electricity Act 1989, it would be better to leave the circumstances of revocation to the licence or, as section 11(1)(a) states, to the circumstances where the person holding the licence

“no longer has the ability to perform the activities authorised by the licence”.

Therefore, you would not have any regulation-making powers or appeals but essentially leave that matter to contract law.

Sarah-Jane McArthur

You would leave it to the terms of the licence, because, over time, the licence conditions will change, and the conditions that may trigger revocation would therefore need to change as well.

The Convener

Thank you. We now come to questions from Maurice Golden.

Maurice Golden (West Scotland) (Con)

Thank you, convener. I am interested in the transfer of the schedule of assets when an operator ceases or is required to cease operating those assets. What are witnesses’ thoughts on the strengths and weaknesses of the transfer scheme set out in the bill?

Sarah-Jane McArthur

We made a point in our written submission about how you might capture existing assets. One of the purposes of the asset transfer scheme is to enable a replacement operator to be brought in to continue supply to customers who are already connected to a network. However, the way in which those assets are known to ministers is through the consenting process. Therefore, if infrastructure was not consented because it already existed, there would not be a list of key assets to transfer. If there are networks that are not being operated properly at the moment, the ability to use that transfer scheme to resolve that and to pass the network on to a new operator might be defeated. As it stands, the transfer scheme would not work as intended.

We know that the transfer scheme is trying to get towards an operator-of-last-resort-type function, but that is not what it actually does, because we would have to try to transfer assets to a new operator. It is not as easy as transferring contracts. I would defer to Professor Paisley—if he has also looked at that section of the bill—with regard to the property rights, how we would be able to transfer assets that belong to third parties and how that might affect the ongoing ownership of their property, if the network assets are being transferred without their control.

Professor Paisley

The transfer scheme in the bill would operate in a similar way to a transfer between a defunct local authority and a new local authority, or almost like a bankruptcy or insolvency scheme. It will work, but the regulations will require to be relatively generously phrased, because the assets will include not only rights in things that are corporeal, but incorporeal rights, such as rights to enforce contracts, rights to sue people and the like. However, that is perfectly manageable; even if it were to be the case that some of those rights would be in the land register, which is ultimately for Parliament to decide, the scheme can work.

Those involved in conveyancing will know and be familiar with that type of general transfer of assets that is used as a link in title. I like the scheme; it is a good idea and it will be capable of being a sweeper. I would like to see an express statement that the initial transfer scheme can get it wrong. It should be possible to make a supplementary scheme to sweep up things that are subsequently discovered. Beyond that, I am happy with the scheme.

Maurice Golden

Professor Paisley, do you have any thoughts on how assets that are already in existence might be dealt with under the legislation?

Professor Paisley

May I ask you a question before I answer that? When you say, “assets that are already in existence”, do you mean pieces of land or equipment, or something like that?

Maurice Golden

Yes. Existing—[Inaudible.]—scheme.

Professor Paisley

The critical thing here is identification. As long as we know that the material exists and can be identified, it can be identified in general terms—I do not think that you need a schedule of every nut and bolt. In a sense, it could be as general a transfer as, for example, a will. A will is a transfer, and you have a residue clause in a will, along the lines of, “I hereby convey all my property that I have not otherwise particularly disposed of.” A transfer scheme can work like that.

Maurice Golden

Given that the bill, in essence, creates localised monopolies, what are the likely impacts on consumers? How best would we regulate that to ensure correct pricing and a minimum level of service?

Professor Paisley

I had perhaps better let someone else have a go at that question. Sarah-Jane McArthur knows a lot more about that than I do.

Sarah-Jane McArthur

It will be possible to introduce a lot of consumer protection provisions in the licences themselves, although we all acknowledge—as did the Government when it promoted the bill—that the Scottish Government does not currently have the legislative competence to enact consumer protection provisions to the level that it would want in the bill. I am not going to suggest how best to resolve that devolved competence issue, but I understand that discussions are on-going as to whether ministers should be able to get competency in relation to heat networks to enable ministers to enact those provisions. However, it will be possible to achieve a level of protection through the licence conditions.

Maurice Golden

Do any of the other witnesses have comments on either of those questions?

Tammy Swift-Adams

Home builders would like that question to be resolved as well, because anything that reduces choice for the occupier of a new home, including choice about where, as a customer, they take their heat from, has a potential knock-on impact on demand for, or interest in, new homes. Those issues are combined; we need to maintain the market for new homes and the interest in them, and we need to ensure that the occupiers of new homes have similar rights and options to those of consumers in the second-hand market.

Maurice Golden

How can that be resolved? Clearly, the operator requires that demand to allow it to function. How can that be squared with consumer choice?

Tammy Swift-Adams

I will take that question back to the technical forum, because it is an area that moves on every time innovation or policy changes. I think it would be best for me to submit something in writing to you on that.

Maurice Golden

Thank you. I have no further questions, convener.

The Convener

Thank you. We now move to questions from Gordon MacDonald. Richard Lyle might also have further questions on the same area.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

Thank you, convener. I will follow on from Maurice Golden’s questions. To deliver heat networks, we need to ensure that there is enough demand within a proposed heat network zone to attract investors. Last week, the committee heard evidence calling for the bill to be strengthened by the introduction of an obligation to connect new buildings, public sector buildings and non-domestic buildings within heat network zones. Should there be a duty to connect all new buildings? What would be the advantages and disadvantages of adopting that approach? Tammy Swift-Adams might want to go first, given her planning background.

10:30  



Tammy Swift-Adams

The consideration that jumps out at me is whether any disbenefits or burdens that might result from making that a firm requirement on either the builder or the occupier of the home—whether the development must be a compatible development, or there is a requirement to be a customer, in effect—come with a good enough reward in policy outcomes. Given that new-build homes have fairly low heat demand, because of energy efficiencies that have been achieved through building standards, it might be that there is not enough gain from requiring occupiers of new-build homes to be customers of a heat network. Again, I can confirm that in writing and possibly add some detail. I understand where the question comes from, but new-build homes are unlikely to be the bulk of the users of the heat.

Gordon MacDonald

Does anyone else want to comment?

Professor Paisley

I would like to make a comparison with the existing duty to connect to services that lies on water authorities and electricity authorities, for example. Invariably, the statutory provisions are hedged about with a limitation that it is required that the obligation to connect be complied with only if it can be done at reasonable cost. In the majority of my experiences of dealing with operators, that is a complete get-out, because—to link back to what I said earlier about wayleaves—they simply say, “Because we require to obtain rights in land to put the system through to you, we’re not going to comply with any obligation to connect unless you, Mr Consumer and Ms Consumer, go and get those rights for us.” If you are going to put an obligation on the heat-transfer provider to connect to particular houses, you will need to draft the legislation quite tightly so that there is not the same get-out as already exists more widely for electricity and water suppliers.

Gordon MacDonald

Section 39 of the bill identifies key criteria to be considered in identifying anchor buildings. Are those criteria adequate or are changes to the bill required?

Professor Paisley

I would probably add to that that there is a presumption that the supplier will actively take steps to exercise its powers to connect. In other words, suppliers cannot shovel the responsibility to acquire the rights on to the person who wishes to receive the heat. There must be a presumption that the provider will exercise its rights and will basically try to make the system work and expand it, rather than put that responsibility on to the person who wishes to receive the heat.

Gordon MacDonald

Does anybody else have a view on that?

Gavin Mowat

On the first question—about the compulsion to connect new builds to a heat network—Tammy Swift-Adams touched a bit on technology development in house building. It is worth bearing it in mind that the energy efficiency of new-build homes is improving all the time, and is moving towards carbon neutrality. With developments such as passive houses, making those connect to a heat network would defeat their purpose by spending money for no effect. There will be instances when new-build houses will not need to be connected to heat networks because they are passive houses, or because some technology that is yet to be developed means that they already meet a very acceptable low-carbon energy-efficient standard.

Gordon MacDonald

Finally, given that part 5 requires that building assessment reports be carried out only on publicly owned buildings, is there a risk that community-owned assets will be missed? Does anybody want to volunteer?

Sarah-Jane McArthur

May I come back on the suite of questions that you just asked? The main policy intent of the bill is decarbonisation of heat in Scotland. The biggest prize in that sense, as Tammy Swift-Adams and Gavin Mowat have alluded to, is not suburban new builds but city centres, old buildings and dense urban areas. The creation of heat network zones and suggesting that that is where we will make great strides forward in decarbonisation, without there being some kind of compulsion that the core anchor loads that have been identified connect to the network, would defeat the policy aim of the bill.

I am not necessarily a supporter of requiring domestic consumers to sign up for anything like that. Also, identifying key anchor loads in an area then not having them connect effectively will mean that the zone that has been set will not be as effective as it could be. On building assessment reports, when, having done a report, it can be seen that a building is particularly suitable for connection to a heat network, not to require then that it be connected, or—at least—not to require an explanation for why it cannot or should not be connected, is a failing in the bill.

Gordon MacDonald

How would you change it? Would you just put that duty in the bill?

Sarah-Jane McArthur

Yes. I would ensure that the building assessment reports be required for more than just public sector buildings, for a start, and I would ensure that, if the building assessment report says that a building is suitable for connection to heat network, there would be a next step of having to explain any decision not to connect. If, for example, a building has had a new heating system installed in the past year, it might not make economic sense to rip that out and connect to a heat network, but it might make sense to do so in five or 10 years, which could be built into the report.

The Convener

Richard Lyle has questions on that.

Richard Lyle

Thank you, convener. I have two questions, one of which is for Sarah-Jane McArthur, who has given us quite a lot of good information, and one is for Tammy Swift-Adams.

Sarah-Jane, are you suggesting that we use the bill to retrofit old buildings, rather than to create new networks, as was done with water, gas and electricity many decades ago?

Sarah-Jane McArthur

Networks that have been rolled out recently in Glenrothes and Stirling are supplying buildings that already existed. The network is new, but the buildings are not. I appreciate that the Scottish Government has a fabric-first approach, which is correct from a decarbonisation perspective. It might make sense to put energy efficiency measures in those buildings, which would improve the efficiency of the heat network, as well. “Retrofitting” is perhaps the wrong word, but using heat networks to serve existing buildings in dense urban areas seems to make more sense from a decarbonisation perspective than does rolling out heat networks only to new energy-efficient suburban buildings.

Richard Lyle

In that way, we would get an instant hit, instead of waiting a long time for the benefit. Is that what you are saying?

Sarah-Jane McArthur

Yes. New build does not account for very much of our built environment.

Richard Lyle

Thanks.

This question is for Tammy Swift-Adams. How, from a planning perspective, could the designating and permitting process be improved to ensure a more strategic and joined-up approach to local implementation of national policy?

Tammy Swift-Adams

Perhaps more than the permitting process, it is the development and planning process that needs to be dovetailed with that policy area. Sarah-Jane McArthur mentioned earlier that local authorities and planning authorities will need guidance on how to support that. That is particularly true with regard to how to develop a 10-year local development plan that supports the roll out of heat network maps, which has spatial strategies and suites of site allocations that are compatible with emerging heat network zones, but which does not go down the road that planning sometimes goes down of having too-rigorous or too-blunt tools, in terms of planning policies.

Over the past few years, we have seen planning authorities and the Scottish Environment Protection Agency trying to use the planning system to start to roll out district heating policy. They did that by putting policy requirements on individual residential developments that asked, at that last stage—the permitting stage—that viability assessments be done on whether a particular development in itself could fund and incorporate heat networks. Of course, all that that resulted in was a series of viability studies that said that they could not support that, for the reason that I mentioned earlier—heat demands were too low, even with quite large strategic housing developments.

As Sarah-Jane McArthur suggested earlier, we must, for any area, identify a spatial strategy that is right, in terms of where it is possible and viable to achieve new development, but which also considers where the best gain is to be had from a heat network. Again, it is harder to do, but the gain will always come from aligning a heat network with where there is highest demand for heat.

The programme for government for 2019-20 states that emissions from buildings account for about 20 per cent of Scotland’s greenhouse gas emissions, which is obviously why there are policies and bills such as this. However, the amount of those emissions that comes from residential properties, whether from existing or new-build properties, will be relatively small compared to industry, education and buildings that are open all the time. Within that relatively small amount, emissions from new-build homes—those that are being built now and those that have been built in recent years—will be very small. I will see whether I can get a figure for that, although I am not sure that I can.

With planning, the task is not to take what, I guess, some would see as the easy option of saying that we will use new development as a trigger for asking for heat networks to be rolled out and funded, but to look at how the planning system could better achieve the policy outcome.

Richard Lyle

From a planning point of view—I am going to put you on the spot—we need waste heat plants, but most people oppose those, so how would you implement a waste heat policy, from a planning perspective? Do you have a view on that, or is that not possible at the moment?

Tammy Swift-Adams

I do not have a view on that specifically, but it is one of many examples of changes that can happen in the built environment that communities will not automatically welcome. That is why the planning reforms are focusing so much on pre-application consultation and community engagement. That is not about asking communities questions in a tick-box way; it is about bringing in more opportunities, whether you are a developer, local politician or a planning officer, to help communities to see how all the policies on net zero carbon, district heating, housing delivery and so on relate to what happens through the planning system.

I cannot comment specifically on the type of development that you are asking about, but it is typical of a range of challenges for communities in planning.

10:45  



Richard Lyle

From a planning point of view, can the bill work?

Tammy Swift-Adams

My understanding, from colleagues and home builders who have looked at the bill, is that there are questions to which we want answers before we can say whether it could work. I will try to look at that again and address it in writing after the committee meeting. The evidence session has been useful for me; I will look at previous sessions then come back to you with a fuller view.

Richard Lyle

Ladies—thank you both. Thank you, convener.

The Convener

Our final questions are from Alison Harris.

Alison Harris (Central Scotland) (Con)

Part 5 of the bill places a duty on public-sector building owners to assess the viability of connecting their building to a heat network. Why does that duty not apply to all non-domestic buildings? Should it be extended? I am happy for anyone to answer.

Sarah-Jane McArthur

As I said earlier, in order to make the building assessment reports really work as part of wider heat network zoning, it makes sense to expand the number of people who have to do that—certainly, to include big non-domestic buildings. However, that is ultimately a decision for Parliament and policy makers.

Alison Harris

Does anyone else have any comment on that?

Gavin Mowat

From the Scottish Land & Estates perspective, local authorities seem to be in the best position to develop the initial spine of the network, because they have, throughout their regions, large non-domestic assets that can provide anchor loads. Significantly, many of those tend to be—[Inaudible.]—domestic properties that are, essentially, near the demand.

It makes sense to start there, at least, but it is important to remember that it is not about ensuring that local authority buildings are assessed just for the sake of it; it is important that they are assessed in terms of the fact that they have demand next to them. The same should be true for private community assets and local authority assets. There is no point in assessing a building that is in the middle of nowhere and which is unlikely to be part of any network in the near future. We need to assess buildings that are near demand.

Alison Harris

Thank you. Is it likely that the process will rely on existing data from energy performance certificates? If so, what are the strengths and weaknesses of that approach?

Gavin Mowat

We think that relying on EPC data to predict demand for heat is not entirely sound. SLE has consistently called for review of the EPC methodology, which we consider to be flawed, particularly in respect of existing housing stock. We have a number of examples on which we can write to the committee in more detail. Essentially, our members’ experience shows that costly upgrades to properties often result in insignificant, if any, increases in EPC ratings.

That is largely due to a reliance on using model data—[Inaudible.] There is concern that if you start basing assessments on data such as that which is gathered in EPCs, systems might be oversized or undersized, which would result in people being either overcharged or not being supplied with adequate energy.

SLE suggests placing more emphasis on the environmental impact rating, which is a measure of a home’s impact on the environment in terms of carbon dioxide emissions. The higher the rating, the less impact it has on the environment. That rating is based on the performance of the building and its fixed services, such as heating and lighting, and it is potentially—[Inaudible.]—to this. I am happy to provide more information.

Alison Harris

Thank you.

The Convener

Thank you. We have a final brief supplementary question from Andy Wightman.

Andy Wightman

Thank you, convener. I will follow up on Professor Paisley’s evidence.

We discussed creating real rights and the land register, as did the convener. I want to be absolutely clear. Creating a real right in the bill would resolve many of the problems—not all of them—that you identify, but can you confirm that it is not necessary also to make those real rights registrable in the land register? Desirable as that might be, it is a separate question. The very creation of those real rights by statute would achieve much of what you want. Is that correct?

Professor Paisley

It is possible to create a real right without going anywhere near the land register. Such rights do not need to be registered in the land register. A statement in a statute that a right is real suffices.

Andy Wightman

That is helpful. Therefore, all the consequences would flow from such a real right in law.

Professor Paisley

That is correct.

Andy Wightman

Thanks very much.

The Convener

I will follow that up. The difficulty with that can be that people do not know that the real rights exist. The purpose of the land register, in public policy terms, is to have a public record of all rights that are real rights affecting land, is it not?

Professor Paisley

That is absolutely correct. It is possible to create a real right by a statutory declaration that, if an agreement is entered into, a real right will flow from that agreement. However, the agreement could be stored under somebody’s bed and no one would be able to see it. It is important for anybody who is not a party to that original agreement to be able to get a copy of that to see what its terms are, particularly about depth, width and the type of material that is going down a pipe.

If you are buying land, it is important to be able to get such information, not from a private person who might charge you for it, but from a state register that is open to everyone without the need to demonstrate an interest. That is the difference between us and England. In England, a person must show that they have a legitimate interest in order to be able to look at the register. In Scotland, everybody—this is very important—has the freedom to look at the land register to find out what the responsibilities and rights are in relation to a piece of land.

The Convener

I thank you very much, Professor, and I thank our other witnesses.

We will have a brief suspension before agenda item 3.

10:54 Meeting suspended.  



10:58 On resuming—  



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Third meeting transcript

The Convener

Agenda item 2 is an evidence session on the Heat Networks (Scotland) Bill. We have two witnesses, who are Gavin Slater, head of sustainability at Glasgow City Council, and David Armitage, roads policy and asset manager at Aberdeenshire Council, who is representing the Society of Chief Officers of Transportation in Scotland.

I will start with a general question about the definitions in the bill and whether those adequately include current and future technologies. Are the definitions future proof?

Gavin Slater (Glasgow City Council)

Thank you for inviting me to give evidence.

Yes, the definitions are more than adequate. I have no concerns that any of the definitions is not sufficiently future proofed.

David Armitage (Society of Chief Officers of Transportation in Scotland)

The definitions are adequate and potentially useful, in that I can see that the differentiation between a district heat network and a communal heating system might be useful in framing secondary legislation appropriately. I agree that the definitions are good.

The Convener

Maurice Golden wants to drill down into that a bit.

Maurice Golden (West Scotland) (Con)

In the past, we have seen the issue of incinerators that had planning consent for combined heat and power generation not being connected to a heat network. Are the definitions adequate to ensure that connections with waste heat producers are possible?

Gavin Slater

I do not have any concerns about that. The waste heat definitions are adequate.

David Armitage

My perspective is that of the road authorities, so I do not have any comment on the waste heat definitions.

Maurice Golden

Do you have any comments on the bill’s provisions for decommissioning and whether those are sufficient?

David Armitage

From the point of view of roads authorities, I have some concerns about decommissioning. More detail might be needed, which could be done later in secondary legislation. If apparatus were to be decommissioned, assurance would be needed that the roads authority would not be left with the liability for systems that take up space under the road and would potentially deteriorate. For other utilities, there is provision in other legislation for what happens if an organisation ceases trading. I am not sure that that is covered in the bill.

Gavin Slater

I second that. Likewise, local authorities do not want to be left with assets stranded. More detail is required on that and some other matters, but I imagine that that will come in secondary legislation.

Maurice Golden

Is what is set out in the financial memorandum sufficient or will additional resources be required?

David Armitage

Additional resources—[Inaudible.]—if they were landed with liabilities as a result of decommissioning, but the bill does not make that clear. That leaves scope for provisions to require organisations to insure against that in some way and to cover liabilities for apparatus left in the road.

Gavin Slater

I agree. That is a concern for local authorities, so more definition of that would be helpful for our understanding. More resource is required to support some elements of the bill.

Maurice Golden

Finally, you mentioned amendment of the bill by regulations. Is that adequate to ensure flexibility, or should certain aspects be included in the bill?

David Armitage

There is reasonable scope in the bill to pass secondary legislation and for licence conditions to be set by the licensing body, which would address a lot of the concerns.

Gavin Slater

I agree. That is definitely required because, although there is scope to allow for that, there is also scope for different interpretations of how to do these things, so secondary legislation is required to create uniformity across the country.

Richard Lyle (Uddingston and Bellshill) (SNP)

Are the witnesses content that the bill leaves licence standard conditions to the licensing authority, or should those be set out in the bill? What are the implications of leaving the standards to the licensing authority?

Gavin Slater

The bill is not sufficiently detailed, but that detail could be contained in supplementary legislation. The bill contains a good framework, and it aligns itself with the direction of travel, certainly from Glasgow’s perspective. However, the detail is still required, whether that is in the bill or in supplementary legislation.

David Armitage

My experience with previous legislation has been that having a lot of detail in a bill can cause problems when circumstances change. It is difficult to bring in new primary legislation, because that comes up relatively infrequently. With previous legislation relating to roads, I have found it better to have a lot of the detail in secondary legislation, which can be amended as required, provided that the main principles are set out in primary legislation.

Richard Lyle

Basically, you are suggesting that the bill needs to be flexible. Is that the case?

David Armitage

Yes. In my experience, that usually works out best.

Richard Lyle

To follow that up, what standard conditions would you expect to be included in a licence? For example, would you expect standards on consumer protection? Might any conditions be problematic to include or uphold? David, do those issues touch on any of your responsibilities?

David Armitage

My comments relate to the councils’ functions as roads authorities, but I expect licence conditions to include the statutory power to place and maintain apparatus in the road. Given the way that the bill is set out, with a distinction between heat networks and communal heating systems, it might be appropriate to have different licences. District heat networks might have statutory powers to place and maintain apparatus in the road, whereas communal heating systems would not have those powers. There are parallels with electronic communications licences, where public network licences normally come with the power to place and maintain apparatus in the public road, whereas private networks do not come with that power.

Those are the main types of licensing conditions that would impinge on my field of expertise. I cannot comment on consumer protection.

Richard Lyle

I understand that. Do you have any comments, Mr Slater?

Gavin Slater

I agree whole-heartedly with David Armitage. Access to the subsurface infrastructure is crucial.

On consumer protection, we are determined to see district heating as an environmental solution and a poverty solution. Therefore, it is crucial that there are conditions on pricing and on protecting people who are in fuel poverty as well as on maintaining market conditions to allow pricing to be competitive.

Willie Coffey (Kilmarnock and Irvine Valley) (SNP)

I have one or two questions on the consent process, which are probably more for Gavin Slater. The policy memorandum includes fuel poverty as an assessment criterion, but that is not in the bill. Should that be a core part of the consent process for heat networks in communities?

Gavin Slater

It is a core consideration. David Armitage’s earlier point about the bill’s flexibility is important. Not every heat network will be connected to domestic properties. Some networks will be more industrially and commercially driven. In Glasgow, we want domestic connections to be driven by alleviating fuel poverty and for there to be a control on the price for the sale of the heat. We hope that disbenefits to the operator of delivering heat at that cost will be recovered through commercial customers. Fuel poverty is a core consideration. As I said in my written submission, there is just a passing mention of it in the bill. I am not an expert in legislation, but the point has been made about the need for the bill to be flexible, and it seems appropriate for more detail to be in secondary legislation.

Willie Coffey

One would imagine that local communities must have a role in the process. Surely we are moving away from the idea of doing things to communities and towards doing things with communities. What should their role be in the process?

Gavin Slater

Absolutely. We have been working hard on the local heat and energy efficiency strategy process. By virtue of that, we are almost a step ahead of the bill in that we have already started to look at assigning district heating zones in the city. In doing that, we will be consulting communities on what that means. As you said, historically, district heating zones and other things have been done to areas, so we will be consulting with people in those zones to see what they want.

District heating is a fairly confusing subject, especially when it comes to pricing, because people are buying heat rather than a unit of gas, which is a very different thing. We have a few examples of successful schemes in the city, and we will use those and examples from places such as Aberdeen to look at how they have engaged with communities. A community engagement process is involved, but it is already wrapped up in the development of the local heat and energy efficiency strategies.

Willie Coffey

The granting of consent for networks will be done by the Scottish ministers. Do you see a role for local authorities—even if that is for smaller district networks—in determining whether networks go ahead in the communities that they serve?

09:45  



Gavin Slater

Yes, absolutely. We should be consulted on that and be part of the process.

Willie Coffey

Lastly, not everyone will be totally satisfied and happy with a heat network coming along—we are talking about the planning process, after all. Should there be a right of appeal for communities or authorities to raise objections?

Gavin Slater

There absolutely must be a right of appeal. That is part of due process, so it must be included. However, I do not envisage a situation in which district heating is imposed on people in such a way that they would appeal. All the evidence suggests that, where district heating has been installed, it represents improved living conditions and an improved heating situation and that people who live around the system tend to choose to connect to it. We have good examples in Glasgow of district heating systems growing because customers around the original system see the benefits and want to connect to it. Therefore, there should be an appeals process, but we hope that it would not be heavily used.

Willie Coffey

It is good to get that on the record.

David Armitage

The consent process is important from a roads authority point of view. The way that the bill is structured is helpful in that regard, in that there should be only one consent in any area, because the insulated pipes are a large piece of apparatus to accommodate in the road and it would be unsustainable to have more than one system serving the same area. It is not like telecommunications, where there are multiple sets of cables. The licensing system for the pipes should be exclusive, so that there is only one system in an area.

Willie Coffey

What do you mean by that? Do you mean there should be one consent process so that only the Scottish ministers have that power?

David Armitage

No. The consent would be for a local distribution monopoly, as we have for electricity companies. It will be important to have an exclusive consent for an area, so that there cannot be multiple pipes running through the same area, which would be technically inefficient and unsustainable, given the space in the road.

The Convener

We now have questions from Colin Beattie.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

Competition law indicates that network zone permits are not perpetual. Where an operator ceases or is required to cease operating a network, the bill allows for transfer schemes and connected compensation. What are the strengths and weaknesses of a transfer system, as provided for in the bill, and how might that be improved?

Gavin Slater

In the long term, a city will be keen to be in as much control as possible of how a network grows. The fact that ownership will revert to the council or whoever is involved at the end of a consent or a licence condition will help to control the planning and growth of the network. David Armitage spoke about having only one system for roads, which also helps, because you want to have one main distribution system connecting what are effectively various islands of district heating.

I do not think that ownership necessarily has to be transferred back to the council—it could be transferred to another operator, or the same operator could take on a new term of the licence. However, for a city to look at least at how the systems connect, will mean that it can maintain a certain standard and a level of holistic planning.

Colin Beattie

Is the assumption that ownership goes back to the council? That might not happen. There are many different options, and the bill seeks to create a competitive situation, on the distribution side and/or on the production side. How does that fit with what you are proposing?

Gavin Slater

I am sorry; I did not mean to give the impression that it would automatically transfer back to the council. The bill mentions the establishment of key performance indicators on what a city would look for with regard to environmental conditions and improvements and with regard to quality improvements. Those indicators would control certain aspects of the performance of the network. A change of ownership may provide an opportunity to revise the KPIs, to improve the performance or to change certain aspects, such as what is acceptable as an input fuel for the network. It would create the opportunity to refresh and improve the consent, if the KPIs or standards are not sufficiently strong.

Colin Beattie

I will take a slightly different angle on that: evidence to the committee indicates that the business case for a heat network might be for up to 40 years, and it could be 15 years before key infrastructure is paid off. Therefore, in effect, the bill creates localised monopolies. What will be the impact of that on consumers?

Gavin Slater

District heating is a monopoly; that is unavoidable. Customers are connected to one source. Transfer of ownership helps to break that up. I would lean on the KPIs and the licence controls, set by the licensing authority, to control the monopoly in some way, to ensure that the conditions in place were not allowed to escalate to the point where an operator could take advantage of consumers.

Colin Beattie

The two key areas of concern are, first, pricing and how to keep it competitive and, secondly, what the service levels should be and how to maintain them. How will those concerns be addressed?

Gavin Slater

The control for pricing would be monitored more on the domestic side. The major concern is to protect domestic customers from having to pay for a utility at an inflated price. If district heating is to act as a fuel poverty alleviation measure, we must ensure that the cost is competitive with other utilities, and KPIs would be set to ensure that.

With commercial or industrial customers, the feeling is that there would be a bit more flexibility, to allow the operator to compete. If an operator has a licence and consent to operate on its own, given that it would have to deliver to domestic customers at a specific price, it could try to get commercial or industrial customers at a different price, to compete with gas or other fuels in the market.

Colin Beattie

Who would decide whether a price is competitive and fair?

Gavin Slater

Perhaps that would have to sit—

Colin Beattie

Would we have price caps?

The Convener

I wonder whether we might bring in David Armitage on some of the questions. That might give Gavin Slater a breather to think about the answer to that question. Does Mr Armitage have comments on the issues that Mr Beattie has been raising?

David Armitage

Yes. To go back to the transfer schemes, from a roads authority point of view, the bill is good in that it envisages transfer schemes so that the apparatus would not be just left but transferred to a new operator. Once the apparatus is in the road, it should be used for its full service life by somebody, although—[Inaudible.]—in the bill.

On the question of monopolies, there should be a local monopoly on the distribution apparatus, which is basically the case with most other utility companies: there is one set of gas pipes, with somebody maintaining them; one set of electricity transmission and distribution equipment; and one set of water and sewage pipes. There can be elements of competition on the other aspects. You could have competition on who sells the energy to consumers, which is a parallel of what happens with other utilities, but it would be chaotic if competition resulted in multiple sets of apparatus being installed in the road.

It is important to get the right balance between competition and monopoly. With utilities, that balance means a managed, strongly regulated monopoly for the apparatus in the road—obviously, good regulation is needed—plus competition for the supply of whatever people are buying. That is probably the way to go.

Colin Beattie

Does Gavin Slater want to add anything?

Gavin Slater

On the price cap question, it is difficult to predict how that would work, because each district heating system is unique. The length of pipe, the type of energy generation system—whether that is combined heat and power, a heat pump or something else—the cost of the apparatus, equipment and installation, which depends on where it is, how much soft ground you can use and the extent to which roads have to be dug up, are all different in every case. Therefore, a price cap would have to be determined individually for each network built. As to who would determine the price, there would have to be a calculation to manage that.

The Convener

Maurice Golden has a follow-up question.

Maurice Golden

On the pricing and maintenance of assets, who would have visibility on an operator’s costs? Would that be the regulator, or would there be a role for the council or competitors? Prior to a transfer, how do we ensure that the operator is pricing heat at the right levels and maintaining the assets? Who would have knowledge and visibility of its operations?

Gavin Slater

I am not entirely sure, if I am honest. There are enough district heating networks to make it possible to compile a database of cost for assets, networks, pipes and everything else—that is achievable. On how to create the visibility of operations and where that responsibility sits, I am not entirely sure.

David Armitage

As far as I can see in the bill, that is a role for the regulator, which is equivalent to the way in which other utilities operate.

The Convener

I will bring in Andy Wightman with another follow-up question.

Andy Wightman (Lothian) (Green)

David Armitage implied earlier that there should be no more than one consent in any one area, but the bill makes no provision for that. I want to be clear on whether you think that that should be the case, or whether you were stating what you think is the case in the bill.

10:00  



David Armitage

It should be the case, and I interpreted the district licensing model that is set out in the bill as meaning that that would be the case. However, if it does not mean that, I hope that it would be operated in that way.

Andy Wightman

I think that that would be the case in the zones, but that the bill would allow for more than one consent in an area outside the zones. However, we will clarify that.

David Armitage

The important thing is to not have multiple pieces of apparatus in the same road.

Andy Wightman

That is clear; I understand that, thank you.

Gavin Slater implied that councils will have a statutory role in heat networks, but the bill gives no role to councils in licensing. Consents will be granted by Scottish ministers by default. Councils will not be able to issue permits; that will be done by Scottish ministers. The only substantive power in the bill for councils is to designate a zone. Should councils have more statutory powers?

Gavin Slater

No, I do not necessarily think that that should happen. I may have misinterpreted the bill in thinking that licensing could be done by the Scottish ministers or the licensing authority and that the licensing authority may be the local authority. Local authorities might struggle to take on all those statutory functions, given the resource that would be needed to do that. I am not trying to place more requirements on local authorities.

Andy Wightman

I am not suggesting that councils should have more powers, but I want to be clear about your understanding of the influence that councils would like to have and whether the bill enables them to have that influence. Even in the consenting process, deemed planning consent can be given by Scottish ministers, ignoring local planning authorities.

Gavin Slater

Yes, we would absolutely prefer to be included in that discussion and not have that happen to us. We interpret the process of the local heat and energy efficiency strategies as pre-empting where those zones should be, and that Scottish ministers should agree with that and not seek to put zones in places where councils do not want them.

The Convener

Thank you. We now come to questions from Gordon MacDonald.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

Thank you, convener. The bill places a duty on public sector building owners to assess the viability of connecting their building to a heat network, but, in considering the viability of a heat network zone, should there be a duty to connect for all non-domestic buildings, regardless of ownership? Following on from the discussion with Colin Beattie about competitive pricing, are there any other ways in which we can encourage owners of older commercial buildings in city centres or dense urban areas to include their properties in a heat network zone?

Gavin Slater

There should be a compulsion to connect, and there are certain times when it makes sense to do that, such as when a building is being refurbished, re-leased or sold. To date, one of the difficulties with district heating has been the lack of a surety with regard to customers, which is critical for the success of any district heating network, so there must be compulsion to connect.

For owners of older buildings, ultimately, it will come down to the cost of the heat and the improvements that it makes to their buildings. If we cannot compel building owners to connect to the network, a simple way to get them to connect is to make it good value for them to do so.

Gordon MacDonald

How could the designating and permitting process be improved to ensure a more strategic and joined-up approach to local implementation of national policy on heating new and existing buildings?

Gavin Slater

Honestly, I am not sure.

Gordon MacDonald

David, do you have a view on that?

David Armitage

No, I am afraid that I do not.

Gordon MacDonald

Section 39 of the bill identifies key criteria to be considered in identifying anchor buildings. Are those criteria adequate or are changes to the bill required?

David Armitage

I cannot really comment on that.

Gavin Slater

At the level that the bill is pitched, that is probably adequate. I cannot immediately think of anything that is missing, and it follows the thinking through from the creation of the Scottish heat map and everything else that we are looking at in having regard to the amount of thermal energy required but also ensuring that the use of renewable sources is considered. Therefore, the bill covers that well.

Gordon MacDonald

Finally, part 5 requires building assessment reports to be carried out. Is there a danger in the way that the bill is written that community-owned assets will be missed? When a building assessment report is carried out that shows that a building is particularly suitable for connection to a heat network, should there be a requirement for an explanation for why it cannot or should not be connected?

Gavin Slater

Yes, there should be an explanation given for that. There could be a number of explanations, including a building’s proximity to a heat supply. However, if a building is known to be suitable, every effort should be made to connect it to the network, if not immediately then certainly strategically in plans for the growth of the network.

David Armitage

I do not have anything to add to that.

The Convener

On the local heat and energy efficiency strategies—LHEES—there have been a couple of pilot projects by Glasgow City Council and Highland Council. Gavin, what has the experience been and what lessons have been learned from the LHEES pilot projects? Does the bill adequately take account of those lessons?

Gavin Slater

In Glasgow, we took a significantly different approach to the other authorities. Most of the LHEES pilot projects were done in a small area, whereas our LHEES was for the whole city from the outset. That has been a significant undertaking, which follows on from our previous energy master planning work. It follows a consistent line of thought throughout the city on how we deal with these matters strategically.

On the lessons learned, the LHEES process is still quite loose and not well defined, so a lot of that has had to be established internally in the council. We have concentrated on two issues, one of which is the creation of zones for district heating. Before the bill was produced, we looked at the concession model approach that we see across Europe of getting in operators to deliver district heating networks. The bill covers the same approach that we were adopting. We are happy that the work that we have done to date has not been in vain and will not be changed by the bill. Section 38(1) of the bill sets out that assessment of the zones should be reviewed, and section 38(2)(b) states that it should be repeated every five years. As I set out in my submission on the bill, we want to ensure that, if a LHEES had been undertaken close to the time of the legislation coming into effect, that work would not necessarily have to be repeated. For Glasgow City Council at least, the LHEES process has echoed what is set out in the bill. We are pleased that the bill is following the same thought process that we have been following.

The Convener

Thank you. Before I come to David for his comments, is the approach that you adopted in Glasgow what some refer to as a “whole-system approach”? You hinted at your approach being different to that of other local authorities, so how does it distinguish itself from other approaches? What are the advantages and disadvantages of the different approaches?

Gavin Slater

We interpreted the LHEES process by taking a holistic approach to district heating planning for the city and to designating zones across the city that would work. Other authorities have taken a similar approach, but they have focused on a specific area. I understand that they will then replicate that approach for other areas in the cities. The end point will be the same, but the approach has been slightly different. We did not want to have to develop several strategies for several areas. We have tried to create one large strategy, which is tied into our housing strategy to ensure that we have a whole-system approach, as you said, to housing development, housing management, asset management, public buildings and heat supply to those buildings.

The Convener

To follow on from that, should any changes be made to the statutory system in the bill, on the basis of the pilot project? Have you been given enough time for planning and implementation, once the bill is enacted?

Gavin Slater

The work that we have done on LHEES puts us in a good position. Once the bill is enacted, a good bit of time will be required for local authorities to understand the impact on them, if they have not already done a considerable amount of work in that way. However, most local authorities have been doing that in some form and have been consulted on the bill, so it should not be a surprise when it goes through. Some local authorities are in a better position than others in resource terms and with regard to how they have aligned energy and planning resources to work on these matters. It will be different for each area.

David Armitage

I do not have anything to add to that. I do not have direct experience of it.

The Convener

We now come to questions from Alison Harris.

Alison Harris (Central Scotland) (Con)

Thank you. On the building assessment reports, I want to explore further the duty and why it does not apply to all non-domestic buildings. Should it be extended?

Gavin Slater

I cannot see a reasonable justification for not extending it.

David Armitage

I do not have anything to add on that.

Alison Harris

Is it likely that the process will rely on existing data from energy performance certificates? If so, please expand on the strengths and weaknesses of that approach.

Gavin Slater

Energy performance certificates are lacking in certain areas, and better building assessments can be done. Energy performance certificates have some value and give an indication of a building’s performance, but the recommendations that they contain are not always appropriate. The data collected as part of that process will be of use, but the assessment needs to be done in a different way.

10:15  



The Convener

Finally, we come to questions from Andy Wightman.

Andy Wightman

The provisions in part 6 of the bill relate to wayleaves and the compulsory purchase of land to install heat network systems. The Government is consulting on whether to provide heat network operators with licences to operate under roads and, if so, how. David Armitage, in your evidence, you point out that that might be appropriate to provide the same sort of statutory powers available for utility companies but that smaller operators in particular might be better to ask for permission under the New Roads and Street Works Act 1991. Are you confident that the conversation is going to lead to a place that you are comfortable with, or do you want amendments to the bill?

David Armitage

I hope that it will lead to a place that I am comfortable with. My concern is that, under existing legislation, there are two ways that companies can lay and maintain apparatus in the road. One is by having the statutory power to do so; the other is by having permission from the roads authority. I am very concerned that the bill should not create a third way, and it is not clear from the bill whether it would. I think that it probably would not, but that would need to be addressed.

On the two ways that do—[Inaudible.]—statutory powers—[Inaudible.]—responsibilities as well. To exercise statutory powers to place and maintain apparatus in the road, it is necessary to comply with quite a lot of legislation and codes of practice, and people need to know how to do that. Therefore, it might be better for a small operator to have a process whereby it asks for permission from the roads authority, which can then help. For example, the works must be registered in the Scottish road works register. Roads authorities have a statutory duty to co-ordinate works of all kinds, which is done through the register. However, to use the register, an organisation must sign up to it and have trained people who know how to use it. That might be difficult for some, and it is easier to do that through the roads authority, which would register the works for the operator. It is just a matter of getting the right legislation, but my concern is that the way that the bill is drafted could be interpreted as saying that an operator might get a wayleave through a road, which is not what would happen. The bill might need to be tightened a bit to make it clear that, if an operator is working on the road, that must be done in one of those two ways—through statutory powers or through application to the roads authority.

Andy Wightman

Your concern about the possible third way that the bill could create of laying apparatus in a road is linked to whether the term “land” includes roads. Is that correct?

David Armitage

Yes.

Andy Wightman

In law, I think that the term “land” would include roads. In that sense, I read the bill as creating a third way. You do not think that that is helpful.

David Armitage

That would not be helpful. The two ways that exist are more than adequate.

Andy Wightman

Have you had any discussions with the Scottish ministers about that question?

David Armitage

Yes. I am a member of a Transport Scotland group that advises on road works legislation, so I have some input to that.

Andy Wightman

Yes, but have you had specific discussions about the Heat Networks (Scotland) Bill and the provision of wayleave powers and roads in that respect?

David Armitage

Yes, that has been an item on the agenda for the road works policy group, of which I am a member. However, that is just an advisory group.

Andy Wightman

Your preference would be to make it clear that the definition of “land” should not include roads and that there should be a separate section or subsection in the bill that deals with roads and which makes it clear that wayleaves under roads should be dealt with under either of the two existing legal avenues. Is that correct?

David Armitage

Yes, that is correct.

Andy Wightman

That is helpful. Are you aware of how advanced Scottish Government thinking is on the question of getting authority to work under roads? The Government said that it will table an amendment at stage 2. I do not know when stage 2 will be. It could be this December; time is ticking. Do you know what the timescale is?

David Armitage

I am afraid that I do not. Transport Scotland members of the advisory group have direct contact with ministers on the timescale.

Andy Wightman

Thank you for drawing that matter to the committee’s attention. Other witnesses have pointed out potential legal complexities with wayleave powers, which is useful. Most people are broadly content with the general policy framework of the bill, but the devil will be in the detail, so thank you for your evidence.

The Convener

Thank you. As there are no further questions, I thank our two witnesses for speaking to us today. I will suspend the meeting briefly to allow for a change of witnesses.

10:22 Meeting suspended.  



10:34 On resuming—  



The Convener

Welcome back. We will continue with agenda item 2, under which we are taking evidence on the Heat Networks (Scotland) Bill. I welcome our next panel of witnesses. Stacey Dingwall is policy lead on energy efficiency and fuel poverty for the Scottish Federation of Housing Associations; Aoife Deery is senior energy policy officer for Citizens Advice Scotland; Scott Restrick is technical and training manager for Energy Action Scotland; and Ken Brady is programme manager for the district heating loan fund at the Energy Saving Trust.

We will start with questions from Maurice Golden.

Maurice Golden

Are the definitions in the bill adequate to include current and future technologies?

Scott Restrick (Energy Action Scotland)

Is that question to anyone in particular?

The Convener

It would help if witnesses type the letter “R” in the chat function or raise their hand so that I know to bring you in, unless the committee member wishes to address the question to a specific witness.

Scott Restrick

I am happy to kick off.

At this stage, the definitions need to be relatively wide in their scope; aspects of them can be sharpened in secondary legislation. It is important to ensure that we capture the main aspects of a heat network in the bill and through its transitions.

I think that there was a question earlier about the difference between a district heating scheme and other schemes, such as combined heat and power schemes, and whether there needs to be a lengthy list of definitions. In the bill, the definition of a heat network seems to come down to two categories—district heating and community heating. It is important to keep those two categories and to work with them, rather than having an endless list.

From the point of view of housing providers, which may well be the operators of community heating schemes that serve only their own buildings, there might be a need in the bill for separate provisions that are appropriate for a commercial district heating scheme.

Ken Brady (Energy Saving Trust)

In our written submission on the bill, we referred to a particular hybrid shared loop heat pump system that is now operational across the United Kingdom and which will become more prevalent. That system should be included in the bill because, strictly speaking, it is neither community nor district heating. It ties householders into a sort of monopoly supply agreement. Although they are free to choose their tariffs, they have to rely on the operator for maintenance provision, which is important in a shared loop system. There is not time to go into detail, but the system has two or more heat pumps that are shared in a communal loop system, so there is not a central heat source. We feel that that should be included in the bill, and I think that the Scottish Government is considering that.

Maurice Golden

I see that none of the other witnesses has any comments on the definitions in the bill. On waste heat in particular, does the bill adequately define and capture waste heat?

Scott Restrick

That question delves into quite a technical issue about ambient emissions and whether a commercial or industrial process within a zone should be tied into being an energy source, although its processes and its waste are, in effect, a heat source that could be connected to a network. A witness in the previous evidence session referred to the need to provide an explanation for why such a heat source would not connect. The assumption is that, when it is technically possible for such a process to act as a heat source, it would be up to the owner of a plant or building within a heat network zone to state why it should not do so.

Ken Brady

One of the issues is the lack of compulsion on operators to sell the waste heat. That brings us to the question of anchor loads. There is an issue to do with the lack of compulsion on anchor loads within zones to connect to a heat network. That is a slightly different debate, but it ties into the waste heat issue. One way around that is the Danish system, in which there is a standing charge on anchor loads, regardless of whether they connect to the network. That incentivises the anchor loads and the big operators to connect.

Maurice Golden

Do you have any specific information on what else should be included in the bill to better address that issue?

Ken Brady

There are legal complexities. We are on the heat networks regulation working group, and we have raised that matter. Within zones, we would prefer more compulsion on anchor loads—particularly large anchor loads—to connect, otherwise it will be difficult for people to invest in the zones. However, there are apparently legal complexities that make it difficult under Scots law to make it mandatory for big operators to connect. It is a grey area, but the issue is important. We must incentivise anchor loads and residual and waste heat generators to connect to heat networks. A standing charge is one solution.

Maurice Golden

What are the potential downsides of implementing a standing charge?

Ken Brady

There are caveats with regard to a standing charge. An independent operator with a large renewable generation plant obviously would not expect that. Obviously, the downside is the cost to the operator. The idea behind the standing charge is to incentivise people to connect to the network. The pipes would go up to the curtilage of a building. A small standing charge is an incentive for an operator. Although you cannot legally make it mandatory to connect to a network, you can legally impose a standing charge as part of the licensing concession.

Richard Lyle

Are the witnesses supportive of the proposed licensing regime? How might that be improved to ensure that consumers are protected and UK developers have the confidence to invest?

Aoife Deery (Citizens Advice Scotland)

[Inaudible.]—so it is good that—[Inaudible.]—in the bill. That provides some indirect consumer protection, by introducing a fit-and-proper-person test to ensure—[Inaudible.]—are able to do so in the best way. We would like to see some improvements to the proposed licensing process. There should be a greater role for community engagement in the licensing process and potentially in the consenting process, as well. That will ensure better consumer outcomes for heat network consumers.

Richard Lyle

Are the witnesses content that the bill leaves licence standard conditions to the licensing authority, or should those be in the bill? What are the implications of each approach?

Stacey Dingwall (Scottish Federation of Housing Associations)

On behalf of our members, I want to say that we support the licensing regime that is set out in the bill. Our members who are heat network providers would like a bit more clarity on the transition to the licensing system for existing providers, with regard to what cost and other burdens that might involve.

Richard Lyle

Lastly, should addressing fuel poverty be included in the standard conditions of a heat network licence, or would it be more appropriate to include that as a factor in consenting or zoning?

10:45  



Aoife Deery

We want fuel poverty to have a more central role in the bill. Potential heat network providers are asked to produce an impact assessment, including on fuel poverty, but we think that that could be strengthened.

As the committee is aware, we are in a strange situation in that consumer protection is not devolved. It is difficult to reduce fuel poverty if there are no powers over pricing, which is one of the consumer protections that are reserved.

We would like there to be a more overt reference to fuel poverty in the bill. I will defer to my colleague Scott Restrick on that, because he referred in his written submission to the need for the process to have a greater link to the impact on fuel poverty.

Richard Lyle

We all know that fuel poverty must be addressed and that doing that is very important but, as you have said, consumer protection is reserved.

Stacey Dingwall

I echo Aoife Deery’s comments. We would like to see a much stronger link between fuel poverty and other policies in the area. Fuel poverty is a particular concern for our members in remote and rural areas, who are already disadvantaged by being in off-gas-grid areas and having to pay higher prices. Therefore, it is a fundamental concern that equity of pricing is achieved through the bill. However, as Aoife Deery said with regard to pricing, consumer protection is a reserved matter.

Scott Restrick

There are provisions in section 5 and possibly in section 6, where the purpose of the bill could be made more explicit. We need to go back to the question why we need more heat networks in Scotland. Is it purely about meeting climate change targets, or are we trying to use heat networks in a more socioeconomic way to address the issue of the cost of heat, so that we have more local control over the unit cost of heat supplying specific areas? If we are designing heat network zones specifically to tackle fuel poverty, we need to have provision for that in the bill that allows us to measure the success or otherwise of any proposals by licensees for what they would do for the occupants of an area in the zone. There must be a metric for that, which must be in the bill, rather than something that might be brought in under secondary legislation.

Ken Brady

To add to what Scott Restrick has said—[Inaudible.] We have asked for transparency on pricing and tariffs so that it would be part of the licensing arrangements that operators must publish their tariffs, including standing charges.

Maurice Golden

What impact could divergence from a UK-wide system of regulation have on investment and prices?

Aoife Deery

I will comment on the previous point and then, in more detail, on that question. I totally agree that there should be transparency on tariffs. The committee will be aware that, as was discussed in the previous evidence session, heat networks create monopolies, which means that consumers have less choice. In the gas and electricity market, consumers who feel that their bills do not represent a good deal can switch to a better deal. Heat network customers are not afforded that opportunity, so consumers should at least be able to see what operators are charging, in the spirit of transparency.

On the differences between the UK system and a Scottish system, what is being proposed on a UK level is a system of general authorisation, with a special licence if a heat network provider wants specific rights and powers. That throws up some interesting questions for the committee and for the bill. Providers and operators might be more likely to want to operate in the rest of the UK, as opposed to in Scotland, because there are fewer obstacles in the sense that they do not need to get a licence, as they would have to do in Scotland. That does not mean that we do not support the licence, because, again, it is a form of a fit-and-proper-person test.

Another important point is that, when it comes through in the rest of the UK, the heat network market framework will put in place consumer protections, such as pricing and redress. We are a wee bit concerned about the timing, because, if the Heat Networks (Scotland) Bill is enacted and implemented before the market framework is embedded, consumer protections will not have caught up, so consumers will not be protected as the heat network market starts to grow.

The Convener

Do any of the other panel members wish to answer the supplementary question?

It would appear not. Oh, sorry—I beg your pardon. Scott Restrick wants to come in.

Scott Restrick

There was a slight delay there—we will blame that on the internet.

There might be contention between the two systems. Aoife is right about the legislative timelines moving at different paces. In energy terms, there is the issue of consumer protection, which is a reserved matter. In Scotland, we are looking to have a proper framework for expansion of heat networks as a heat service. It is right that we consider what the Scottish Government can do to protect consumers. Obviously, the rest of the UK will be able to do more, because consumer protection is a reserved matter.

On pricing, there is a precedent with gas networks and independent gas networks and how regulation and pricing work for those. There is something called special condition 18, which has a long history that I will not go into. That limits the price of gas supplied through independent networks by limiting it, in effect, to the average price that you would expect to pay on the mains network. Lessons could be learned from that, if we are looking at a light-touch approach to price capping.

Aoife Deery

It would be—[Inaudible.]—to get some clarity on pricing and whether it is something that Scottish Government can do anything—[Inaudible.]—what Scott Restrick alludes to. I highlight a report published by the Competition and Markets Authority in 2018, which showed that many heat networks provide really good value for money and that they can reduce fuel poverty. However, the CMA also found that there was a huge variance in prices charged, so we know that some heat networks are charging more than gas and electric equivalents. That should be borne in mind, and if the committee can get any clarity on pricing, it would be appreciated.

The Convener

Thank you. We move to questions from the deputy convener.

Willie Coffey

I will continue the discussion on fuel poverty. I understand that the policy memorandum includes the impact on fuel poverty as an assessment criterion. That is as far as it goes. Our previous panel of witnesses all seemed to agree that that should be strengthened and that it should be in the bill. Is that your view?

Scott Restrick

Yes. That was our main argument in our response to the call for evidence. It seems to be the elephant in the room that we have a bill on heat networks that does not seem to have a provision to tie a licensee or network operator to an assessment of the network’s impact on fuel poverty as part of the licensing process. We must look at this from the point of view that the heat network is there for a reason. We hit on environmental targets, but we want to do something more useful about the cost of energy and limit the potential for fuel poverty to be an issue in certain areas. We support the view that something is needed in the bill, in section 5 or 6, that specifies impact on fuel poverty as that type of test and as an aspect of licensing.

It is fine to ask for an assessment. It would probably need to be in secondary legislation, but it is important to define that assessment. Often, we rush to utilise what is available, so things such as energy performance certificates might, on the face of it, appear to be a useful way to gauge the impact on fuel poverty, but we would warn against using something like an energy performance certificate for an assessment, unless it is significantly amended and made fit for purpose.

Aoife Deery

We agree that that aspect could be strengthened in the bill. We would like to see more emphasis on reducing and alleviating fuel poverty. I agree with Scott Restrick’s comments. He makes an interesting point about defining the assessment. Yes, an assessment needs to be carried out, but what are the components of the assessment? Community engagement could fit well here, in that it would allow a potential heat network provider to properly understand how people experience fuel poverty and their view on what might help. It would also be interesting to know what weight the assessment would carry.

Stacey Dingwall

We support strengthening the focus on fuel poverty in the bill. The committee will have seen the evidence from our member Lochalsh and Skye Housing Association, which has run its own heat network for 12 years for 20 per cent of its stock—the other 80 per cent is on electric heating. Even though it can achieve lower prices for that 20 per cent of its stock that is on the heat network, the price is still higher than it would be if it were on gas. It is important to take that situation into consideration for remote and rural areas, and reducing fuel poverty is a fundamental concern, especially for such areas.

Ken Brady

EST would also welcome a strengthening of the bill’s provisions on affordable warmth and fuel poverty. I would go further and say that, as part of the concession agreement to operate within a zone, there could be a provision that providers must offer a price that is less than that of a counterfactual heat source. That is the case in Denmark, where a prerequisite for the granting of a licence is that providers must offer a fair price that is either comparable to, or less than, that of the counterfactual heat source.

Willie Coffey

The views on fuel poverty are clear. Turning to the matter of deemed consent, which is in the gift of Scottish ministers, should there be a role for local authorities in the process? What should the community role be? How is the community’s voice given effect in any aspect of the process?

11:00  



Aoife Deery

I will leave my colleagues to comment on the local authority aspect, but it will be no surprise to the committee that we want greater community involvement at the very early stages, not just through consultation but through genuine involvement throughout the process. It should not be a case of being consulted just once online, which, it is fair to point out, is inaccessible for many people. I think that there—[Inaudible.]—wide range of consultations that involve the public in different ways should be encouraged.

To demonstrate what happens when community engagement does not take place and providers do not know their consumers well, we can look at the heat network that was set up in 2012 in north-west Glasgow, which the committee might be aware of. The area is in the top 1 per cent of deprived areas in Scotland. In 2018, more than 90 consumers were disconnected from the heat network due to high arrears, which was due to a price rise. Those households included vulnerable households and households with children. In practice, that meant that households were left without heating and hot water. The arrears were also due in part to low awareness of how to use the new system to best effect. Another barrier was that the provider was charging a reconnection fee of over £270, and a proportion of debt had to be repaid before reconnection was possible. Obviously, that was not possible for many in the area. Had better community engagement happened beforehand, the providers would have better understood the needs, incomes and characteristics of the consumers and the situation could have been resolved more quickly or avoided.

Ken Brady

[Inaudible.]—so you could theoretically designate a heat zone based on heat loads, but without the end users you do not have a heat network.

Willie Coffey

That begs the question of whether we could find ourselves in a situation where a community had no say in whether a heat network was granted permission and no say in the pricing policy applied to them, and it could be more expensive than the previous system because people would not be able to switch supplier. Is that possible?

Aoife Deery

That is why we are so keen for community engagement to be embedded earlier in the process and for the Scottish Government to work very closely with its colleagues in the Department for Business, Energy and Industrial Strategy on consumer protection issues, including pricing, to ensure that consumers are protected.

Willie Coffey

How can we achieve that, if consumer protection is a reserved matter? How can we get elements of that in the framework of the bill to get the sort of assurance that you seek?

Aoife Deery

That is a difficult question. The Scottish Government is working closely with colleagues in BEIS to—[Inaudible.]—this committee to ensure that the bill makes space to embed consumer protections properly, such as in the licensing system, so that, when the consumer protections are developed in the market framework, the bill is ready to receive them, so to speak. It is a really difficult question to unpick, but I must emphasise that consumers should be at the heart of the process. As my example demonstrated, there have been poor outcomes in the past, and we want to see better outcomes for consumers.

Willie Coffey

Do any of the other witnesses have any other views on that issue?

Ken Brady

A bad operator should have its licence revoked.

Scott Restrick

Obviously, we are not a local authority, but many of our members are, and we consulted our members on that in order to provide evidence to the committee. Witnesses in the previous evidence session reflected on that—and they would be better suited to answer questions about the operations of local authorities—but I want to underline the idea that the granting of licences will be a duty on Scottish ministers, and not necessarily local authorities. However, there is a clear role for local authorities in the nuances of operations in areas that they are very familiar with.

We are concerned about the issue of market failure and the question of what happens if an operator is deemed to have failed either on the provisions of its licence or otherwise. Who will pick up the operation of the scheme and will there be a cost to the public purse, or does something need to be built into licensing to provide an assurance and cover the cost of market failure? It would not be a good outcome if it is left to local authorities to pick things up where there has been a market failure.

The Convener

We move to questions from Colin Beattie.

Colin Beattie

Thank you, convener. To comply with competition law, heat network zone permits will not last in perpetuity. There will be a point at which others can apply to operate the network in future, once the capital costs of the infrastructure have been recovered. It is proposed that, in order for that to be done on a competitive basis, it might be necessary to invoke a transfer scheme to ensure that the incoming operator has full rights over the assets that it is taking over. What are the strengths and weaknesses of the transfer scheme that is set out in the bill, and is there a way to improve it?

Scott Restrick

I alluded to that a moment ago. It is not particularly clear how a transfer would be paid for, regardless of whether the transfer was because of market failure, because the licence had come to an end, or for another reason. Would that be a cost to the public purse, or should the cost be reflected in the licensing system? We do not want the end users to have to pay for the cost of a transfer. The process should be completely transparent to the end user—the householder in this case—and that should not create a situation where householders or users of the system are in effect paying more than they were previously. Protection is needed in the transfer process.

Colin Beattie

Do others have a view on that?

Aoife Deery

I echo Scott Restrick’s point. I also emphasise that there should be continuity of supply during a transfer, so that consumers who are connected to the heat network that is being transferred should not experience disruption to supply. We see the transfer scheme as a supplier-of-last-resort mechanism, as Scott alluded to. There should be provision for that in the bill in case of market failure, but I defer to Scott on the detail of that.

Colin Beattie

Do you think that the detail of that should not be left to secondary legislation?

Aoife Deery

I do not take a strong view on whether that should be in primary or secondary legislation. I defer to my colleagues on that.

Ken Brady

We have looked at that on the working group. A supplier-of-last-resort mechanism is an issue. Obviously, the arrangements are transitional. It is the role of the regulator to play an aggregator role. We totally agree with Scott Restrick that end users should not be penalised. Like Aoife Deery, we do not have a particular view on whether the detail should be in primary or secondary legislation. It is an issue that must be resolved. The supplier-of-last-resort approach is the elephant in the room, particularly given that, at the moment, there are a lot of existing schemes that could, under certain conditions, cease to trade and operate.

Colin Beattie

I will take a different angle on that question. The evidence that the committee has heard so far indicates that business cases for existing heat networks can be for up to 40 years—to me, that is a lifetime—with perhaps 15 years before key infrastructure is paid off. In effect, that creates localised monopolies. What are the likely impacts of that on consumers?

Aoife Deery

As we have said before, localised monopolies will lead to a lack of choice for consumers, which is detrimental, compared to the choice that is afforded to their counterparts in the regulated gas and electricity markets. It is, therefore, very important to have robust consumer protection in other ways. There was a conversation about price caps earlier in the meeting. Once the regulator has been appointed, we believe that it would be their role in the market to ensure that prices do not rise disproportionately. The regulator should have the power to impose price, if that is deemed to be getting out of control and not providing good value for money for consumers. Again, I emphasise that those consumers would not have the choice to switch to another provider. It is extremely difficult to leave a heat network.

Colin Beattie

The biggest issue would be pricing. We have had a fair discussion already about the different options, and it is obviously one of the biggest concerns. However, other aspects could be a concern, such as levels of service and—if you are looking at a 40-year window—reinvestment in the system. How do we handle those aspects? How do we ensure a minimum level of service?

Ken Brady

It is quite normal for operators to have a sinking fund set aside for on-going maintenance, capital replacement costs and so on. That should be part of the business planning for the life cycle of the scheme.

Colin Beattie

Should there be anything in the bill about that? There could be substantial reinvestment in the project.

Ken Brady

I think that most business cases are presented for consumption by funders and investors, and a business case without a sinking fund would probably be dismissed as not practical, to be honest. It is a fairly standard operational requirement for a business case.

Colin Beattie

I assume that the sinking fund would be part of the formula for the transfer.

11:15  



Ken Brady

It should all be included, yes.

Colin Beattie

How do we maintain service levels? We have talked about pricing, which is important, and different mechanisms can be brought in for that, but how do we ensure that, in a captive market, levels of service are maintained?

Ken Brady

I think that you would hold the operator to account through the heat supply agreement, which a service level agreement should be part of. If the operator contravenes that, the end user should be able to take action against the operator, not only through the complaints process but through third-party moderation. However, no one has mentioned the Heat Trust so far. It is a UK-wide body that looks after consumer interests. The code is voluntary, but it is a great model that could be replicated, particularly for third-party arbitration.

Colin Beattie

Is there a case for something stronger in the bill on that?

Ken Brady

The difficulty is enshrining consumer protection in the bill. We have considered that throughout our discussion and, unfortunately, that matter is reserved. That is one of the problems with enshrining consumer protection.

The Convener

Aoife Deery and Scott Restrick have comments on Colin Beattie’s last point, before we move to questions from Gordon MacDonald.

Aoife Deery

I echo Ken Brady’s thoughts. I was just about to mention the Heat Trust, which does great work in spreading good service standards and facilitating the sharing of good practice. I flag its work as a precursor to what should be embedded in the regulations. However, as Ken pointed out, it is a voluntary scheme, and there is very low uptake in Scotland, to our knowledge. We want to see more heat networks becoming registered participants in the Heat Trust to share good practice and learn from the community ahead of regulation.

Ken Brady is completely right to say that consumer protection is a reserved matter, which makes the conversation a bit complicated. Otherwise, we would look at whether, in relation to service standards, a regulator should have a role in enforcement, such as revoking licences in severe situations or taking any other such action it deemed proportionate and appropriate.

I also echo the comments about having a robust and independent route for complaints. Only Heat Trust members’ consumers have access to the energy ombudsman to resolve complaints. It would be a quick win to just expand access to the energy ombudsman for all heat network consumers to deal with complaints.

Scott Restrick

To pick up on Aoife Deery’s last point, there are good lessons that we can learn from the way in which the renewables industry grew up, running alongside the Renewable Energy Consumer Code. People who made the choice to invest in renewables can take complaints about installation or operation of renewables to that independent body. The Heat Trust is a similar body. It is a voluntary system, similar to RECC, but RECC, although not mandatory, has become part and parcel of the growth of the renewables industry in the UK. I do not know whether a similar approach for heat networks could be explicitly supported in the bill. I do not know whether it is possible to direct that operators must be members of a body, but I am sure that there are ways through the licensing system that that could be scored or valued in some way.

Gordon MacDonald

Ken Brady, you indicated earlier that there should be more compulsion to connect to a heat network, and I think that it was also you who said that there is no heat network without end users. How would you improve the bill to make heat networks more viable? Would that include expanding the duty to connect to all non-domestic buildings?

Ken Brady

We have explored that option but, as I said, there is a legal impediment to making it mandatory for anchor loads. We think that there is a gap and a mismatch here, because investors will not come in unless you have anchor loads. It is an issue, because you can identify, in theory, where the zones should be, but without the big anchor loads, you will not get investors and you will not get a viable heat network. Therefore, it could be an issue going forward. The plan is to install the pipes up to the curtilage of the buildings, so that there is the potential to connect, and then people are incentivised to connect on price. If you can offer the heat at a lower price to the end user, the chances are that they will connect. That is where things are disjointed, and where there could be a gap, so that some of the zones may not be viable without the anchor loads.

Gordon MacDonald

I can see that nobody else wants to come in on that. Bearing in mind what Colin Beattie said about the fact that operators could be responsible for a heat network zone for up to 40 years, should there be regular reviews of individual heat networks, to allow for analysis of their performance and success? What criteria should be used to assess them?

Ken Brady

I believe that there is a proposal for reviews every five years. I would be in favour of an annual review, but the industry has pushed back a bit on that. All the metrics that we have discussed should be included: affordable warmth provision, levels of complaints, technical standards and service provision standards. Those should all be KPIs.

Aoife Deery

We support independent reviews taking place every three to five years. How consumers have experienced the heat network and how prices compare to regulated market prices should be central to the reviews but, above all, how consumers are truly experiencing the heat network should be at the heart of the reviews.

Gordon MacDonald

Finally, should building assessment reports be carried out on all potential anchor load buildings, including community buildings? If a building is suitable for connection to a heat network, should there be a requirement for an explanation as to why it cannot or should not be connected?

Ken Brady

Absolutely. Owners of suitable buildings should have to explain why they cannot or should not connect.

Scott Restrick

Yes, that should happen in the designated zones. To take a blanket approach across all parts of the network, building owners should have to explain why they should not connect. If it is technically feasible, they should have to explain why they do not want to do that. Witnesses in the first evidence session picked up the point that there could be perfectly reasonable explanations for that.

Alison Harris

The duty to assess the viability of connecting a building to a heat network does not apply to all non-domestic buildings. Should the duty be extended?

Scott Restrick

It is not something that we have a view on. Non-domestic buildings are slightly outwith Energy Action Scotland’s remit although, obviously, we recognise that buildings do not exist in isolation and that there could be an anchor load that made a network more economical but also one that was a heat source. There are many examples of non-domestic heat sources being utilised to heat other buildings, in effect. However, we do not have a view on how non-domestic buildings would interact with the network as a contributor or a load. I am afraid that it is not something that we have any expertise on, and I would not want to go into that.

Ken Brady

The only thing that I can add to that is that there may be an issue with NHS estates, where they need their own security of supply, so there could be provision for those.

Alison Harris

The process relies on existing data from energy performance certificates. What are the strengths and weaknesses of that approach? Scott Restrick mentioned EPCs earlier.

Scott Restrick

It is a pet subject of mine. Energy Action Scotland did a report for the Scottish Government, which was published at the beginning of 2019. It is a technically heavy report, but it is a technical subject. It covered domestic and non-domestic EPCs and their usage. It also suggested various things that could be done to both sets of EPCs to provide a degree of sharpening, increased accuracy or improvement in the information in an EPC. I suggest that we do not utilise the EPC to design heat networks. It was mentioned in the earlier evidence session that there are tools that have been designed specifically for that purpose. An EPC can probably be useful for very early stage feasibility assessments, when looking at building loads, but not for the design stage. Similarly, we have issues with using the EPC as a measure of fuel poverty. That is not its purpose. Its purpose is to provide a relative indicator of energy efficiency, not to assess whether individuals are able to afford energy in their homes. There are aspects of the EPC process that could be improved and which could provide some useful data, but that would necessitate a change in the process.

Alison Harris

On the exemptions from the duty to prepare a building assessment report, where and to whom might those exemptions apply? Is there a risk that potentially high-value anchor buildings could be missed?

The Convener

Aoife Deery wants to come in on that, and perhaps on the previous questions.

Alison Harris

I apologise—I did not realise that.

Aoife Deery

That is fine. I cannot comment on exemptions, but I echo Scott Restrick’s views on EPCs. To put it from a consumer perspective, CAS has looked at consumer awareness and understanding of EPCs, which is quite low. As they are currently set out, the EPC reports that all households should have are not particularly consumer friendly. If EPCs were to be used to a greater extent, they should be redesigned to make them more consumer friendly.

Ken Brady

On exemptions, we need to be clear about why a particular building is exempt, because an opportunity could be missed. We want to capture anchor loads as much as is possible.

Andy Wightman

I will go back to a point that Ken Brady made about an obligation to connect and anchor loads. You said that legal impediments had been identified by the expert group and that it is a grey area. Can you say more about that? What exactly is the impediment? Is it a reserved matter? Is it a human rights issue?

11:30  



Ken Brady

Unfortunately, that is privileged advice from Scottish Government lawyers, so we cannot comment more on that. It was raised in the working group, and we asked some questions but, as I said, it is privileged legal advice that was given to Scottish Government ministers, so we were unable to question that.

Andy Wightman

Do you know what that advice is?

Ken Brady

We do not.

Andy Wightman

You have no idea what the legal impediment is.

Ken Brady

No.

Andy Wightman

You have no idea at all. You are completely blind on that.

Ken Brady

We were not privy to that information.

Andy Wightman

You were told that there is a legal impediment, but you were not told what it is.

Ken Brady

Yes.

Andy Wightman

Part 6 is a substantial bit of the bill, which gives powers to heat network licence holders on compulsory purchase and wayleaves, which will be critical. The explanatory notes make it clear that folk can run into problems in relation to utilities and getting access to land and that the costs can rise. Part 6 is designed to ensure that the relevant powers are available to network licence holders. Do any of the witnesses have views on the powers in part 6 of the bill and whether those are appropriately framed?

Scott Restrick

That is a pass from me, I am afraid. It is not an area that we have any expertise in. I think that the issue was mentioned in the earlier evidence session, but that is pretty much the extent of my knowledge.

Andy Wightman

Does Ken Brady have any insights?

Ken Brady

Could you repeat the question, please?

Andy Wightman

Do you have a view on whether the provisions in part 6, which is to do with compulsory purchase and wayleaves, are appropriately framed?

Ken Brady

Generally, wayleaves should work in the same way as they do for any other utility. We want to incentivise the extension of heat networks. We do not get involved in the minutiae of that, and we have not been involved in the working group on that. There may be some exceptions—we have issues with railways, for example—but, generally, wayleave rights should be the same as for any other utility.

Aoife Deery

I was going to make exactly the same points as Ken Brady. There should be parity with the wayleave rights that are afforded to utilities providers in the regulated energy market.

The Convener

I see that there are no further questions from committee members to our witnesses. I thank all four witnesses for attending virtually today. Thank you for your evidence.

11:33 Meeting continued in private until 12:30.  



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Fourth meeting transcript

The Convener

Agenda item 2 is an evidence session on the Heat Networks (Scotland) Bill. We should have on screen a number of witnesses who are joining us remotely. They are: James Lambert, who is a director at the Competition and Markets Authority; Charles Wood, who is the head of new energy services and heat at Energy UK; Marcus Hunt, who is the head of commercial services and investments at SGN Commercial Services; and Donald MacBrayne, who is a business development manager at Scottish Water Horizons.

The witnesses should indicate when they want to come in by raising their hand or typing in the chat box. Either I or one of the clerks will see that, and I will bring you in. Once the question has been asked, you should wait a few seconds for broadcasting staff to turn on your microphone, so that we do not miss your first words.

Are the witnesses satisfied with the definitions in the bill, or do they need to be tweaked or altered? For example, section 1 defines a “heat network” as

“a district heat network, or ... a communal heating system.”

What are your views on that?

James Lambert (Competition and Markets Authority)

We are happy with the definitions in the bill. It is important to retain flexibility on, for example, future technology, and the bill does that.

The Convener

Thank you.

I am sorry—I am having a slight difficulty with the technology. If witnesses simply raise their hand, that will make it easier for me to bring them in. Would anyone else like to say something on that question?

Charles Wood (Energy UK)

Good morning. That definition in the bill is adequate. It gives enough leeway for future technologies and for the wide range of technologies that can be used for heat networks. We are broadly happy with that. As secondary legislation is put in place, there may be a need for more clarity.

The Convener

What about the definition of “thermal energy”? What will that mean in practice? How will it work?

Donald MacBrayne (Scottish Water Horizons)

It may be useful to include ambient loops in the definition and the scope of the bill. That is an emerging area of heat networks, for distributing ambient temperatures that can then be boosted in individual buildings. It may not be adequately covered at the moment.

The Convener

Do you consider that the definitions are flexible enough to work with future changes—for example, in technology? Are you all satisfied with the definitions?

Marcus Hunt (SGN Commercial Services)

We are very happy with the definitions in the bill. However, it is important to make sure that the language is consistent, and that communal heating systems, which could mean other types of heating system, are not in effect considered to be heat networks. The distinction needs to be clear, so that there is no confusion for consumers. Other than that, we are happy that the bill gives flexibility for the future.

The Convener

Does anyone consider that there needs to be provision for consultation on future changes? I will take the silence as a no.

We move to questions from the deputy convener, Willie Coffey, who joins us remotely.

Willie Coffey (Kilmarnock and Irvine Valley) (SNP)

I want to get a flavour of what the witnesses think about licensing. I will roll together a few questions, to see whether I can get a little discussion going.

Do you support the proposals for licensing? What could we do to ensure that consumers are adequately protected on, for example, pricing, quality, and the maintenance of standards? Should prior experience be a factor in the granting of a licence? Should the licence standard conditions rest with the licensing authority, as is proposed?

In addition, heat regulation is devolved to the Scottish Parliament. Who should regulate the industry? Should the Office of Gas and Electricity Markets provide that service for us, or should we set up our own regulator?

A little discussion about that would be very helpful. I would like to hear first from Marcus Hunt and Donald MacBrayne, and then from James Lambert and Charles Wood.

Marcus Hunt

We support a licensing regime for heat networks. We need to ensure that any regime is proportionate and balances consumer interests with investor interests, so that heat networks deliver for all stakeholders.

On the question of who should govern the licensing regime, there might be some benefits to giving that role to an authority such as Ofgem, which has experience of regulating energy networks and is well placed to regulate heat networks.

The licence conditions must be prescriptive enough to give consumers protection in the heat networks space; they must also give investors protection to ensure that, given that this is an emerging market, the networks can be successful and deliver as we hope that they will do.

Donald MacBrayne

We see some real benefits to the licensing regime in driving consistency. Such a regime is important not only for consumer protection, but in providing consistency in how networks are developed. Bringing in industry standards would be useful. For example, different standards for something as simple as water quality in a district heat network are being promoted by designers at the moment. That can lead to delays and debate while the standards that are to be adopted in the network are worked through. Getting that clarity is important for designers, developers and contractors.

It is important that standards also support the longevity of the networks that are developed. We want to have long-term assets in the ground that will stand the test of time, so specifications and standards are really important in that regard.

Willie Coffey

I see that Marcus Hunt wants to come back in.

Marcus Hunt

I want to add one point, to build on Donald MacBrayne’s comments. One of the questions was whether previous experience should be taken into account when deciding who is provided with a licence. It is important to have competent and credible entities delivering heat networks, to ensure that consumers and other authorities have confidence. However, given that the heat networks market is an emerging one that has the potential to grow and to gain interest from new entrants, we should be careful that the bar is not set too high on previous experience, so that licences are not, in effect, restricted to a small number of players with a proven track record.

Although there is a need to ensure competence, there is also a need to ensure that the regime does not restrict new entrants but recognises skills, such as those found in other utility networks, that might be quite similar but not specific to those for heat networks.

James Lambert

We very much welcome the proposal on licensing, which is an important way of ensuring that the requirements on getting proper persons to operate the heat network are met and of ensuring technical standards so that consumers are protected from poorly designed and potentially expensive heat networks.

09:45  



On who the regulator should be, we noted in our 2018 report that a number of stakeholders identified Ofgem as being potentially suitable on the basis that it has experience in the electricity and gas sectors, it operates across Great Britain and it has an office and staff based in Scotland. I think that similar views were echoed in the working group convened by the Scottish Government last year. However, we recognise that heat regulation is devolved to the Scottish Government, so we did not make any firm recommendations about who the regulator should be. There are some areas of inconsistency across Great Britain but, having spoken to officials, we are pleased to hear that dialogue is taking place between United Kingdom Government and Scottish Government officials and that progress in reaching an agreement is being made.

Charles Wood

Thank you for the questions—they are very good ones. There are many points to cover. On licensing, I agree with everybody who has already spoken. It is critical that this part of the industry be brought up to the same standards that the rest of the industry is being held to, and taking this step forward on licensing seems sensible.

On whether experience should factor into applications, my answer is no. The quality of the application should be the factor. Those more experienced companies will, of course, be able to submit a higher-quality application, but if a new competitor comes into the market, they should be able to compete on a level playing field with the other providers.

On how to establish consumer protections, we should put some of that in the licensing arrangements and make those a requirement. However, it is likely at this point that the energy ombudsman—Ombudsman Services—would step into that consumer protection role. We need to make sure that there is co-ordination across the Scottish and UK Governments on the approach and that the consumer protections are at least held to the same standards, regardless of who eventually takes control of them.

Finally, on who the regulator should be, I agree that it is likely to be Ofgem, which we consider to be the sensible approach—again, that is about keeping things consistent. Indeed, this is about having consistency in all things.

I am, effectively, just echoing everybody else’s points.

Willie Coffey

Thank you, everybody, for that. On the point about the regulator, I have looked at the UK Government’s draft market framework for heat networks, which came out around the start of the year. It recognises the different responsibilities in Scotland and the rest of the UK. For example, in Scotland, we control building regulations, but the UK controls fuel standards and fuel specifications and so on, so there is a distinction to be made. If we go for a single regulator such as Ofgem, does that imply that we must have a single set of regulations, or can we have different regulations to reflect the needs and aspirations of both Scotland and the rest of the UK and enshrine that in whatever arrangement we reach?

Marcus Hunt

I will build on the point that James Lambert and Charles Wood made about consistency. My experience of how the water retail market for non-household customers evolved in Scotland and England is that having a level of consistency in how a licence is applied for, evaluated and provided, and in the conditions that accompany that licence and the obligations that it places on providers, is quite important.

For any new entrant who is looking to get into the market, different licensing regimes create challenges. In effect, that creates cost and a potential administrative burden that are eventually passed on to consumers. Therefore, from a new entrant’s perspective, consistency—where possible—across licensing regimes in Scotland and England would help a lot. It helps if they do not have to navigate different regimes, which can cause complexity.

Donald MacBrayne

Building on Marcus Hunt’s point about competition in the water sector, it is important to think about the potential failure of operators and the supplier of last resort in the heat sector. In the water sector, competition evolved effectively from city incumbents, which created a backstop and meant that a supplier of last resort was already in place. That is not necessarily the situation for heat networks, which is an evolving new market. It will be interesting to see how the supplier of last resort is dealt with as the bill evolves.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

I will explore some issues around the consenting process. Fuel poverty is included as a proposed assessment criterion for consents in the policy memorandum. It does not appear in the bill, although decarbonisation does. Does the consenting process take fuel poverty and decarbonisation into account adequately?

Are there any volunteers for that question? Does the silence mean that our witnesses are happy with the consenting process, or that they have no opinion on it?

Charles Wood

We think that the bill’s coverage is adequate at this stage. The process is recognised and fuel poverty and carbon reductions are included. However, as secondary legislation progresses and we get into the detail and some of the transitory requirements for moving from the current market to the new one, the bill will have to get into further detail about how fuel poverty is addressed. That will be critical to making sure that consumers’ needs are addressed first and that reductions in carbon are included as a consumer need.

Colin Beattie

Should fuel poverty appear in the bill along with decarbonisation?

Marcus Hunt

To reinforce what Charles Wood has said, the bill at this stage is quite high level. It talks about fuel poverty, but the next evolution or stage of the bill needs to bring that out in more detail to ensure that consumers who are suffering from fuel poverty are adequately catered for and that the bill takes decarbonisation into account. However, that needs to be balanced to allow enough flexibility for different solutions and heat networks that will help to move the bill forward, rather than being too prescriptive about a single technology. The bill caters for some of that at this stage, but the secondary legislation and the detail that needs to sit under it still needs to be established so that we can have more visibility on how it is catered for.

Colin Beattie

We talked briefly about future technologies. Should the benchmark for carbon emission comparisons be current or future technologies? Is there a danger in using one or the other?

Does the silence mean that I am asking all the difficult questions?

Donald MacBrayne

The word “flexibility” was used earlier, and it is key that we have that ability. Sitting here today, we cannot know what is going to happen in 10, 15 or 20 years’ time as a result of innovation, so it is important that the system that is put in place is flexible enough to take account of whatever happens and enable us to bring those future technologies into play.

Linking back to the previous questions, there will be a balance between lowest carbon and lowest cost, which will be relevant when you consider fuel poverty. That will always be a tricky one.

Colin Beattie

Is there any way to future proof the consenting process to take into account emerging technologies and fuels? What kind of flexibility could be built into the process? How do we do that? Clearly, it cannot just be wide open.

Charles Wood

To a degree, there must be some openness in the terminologies and we must ensure that the approach is technology neutral. However, within that, you can set requirements for fuel poverty, decarbonisation, the amount of allowable emissions made by a heat instalment and so on. You can restrict what you do to the question of what you want the outputs to be rather than what you want the input to be. There are ways to get around that, using wide wording and allowing flexibility to make adjustments to the legislation at a later date.

Colin Beattie

[Inaudible.]—changes in terminology and so forth be in the bill at this point.

Marcus Hunt

We believe that heat networks provide a good insurance policy for decarbonisation. Although the heat network might originally have been constructed using a specific technology, you can change that technology over time without disrupting the heat network that has been established. If a new technology emerges over the course of time, you can change the underlying fuel source that powers the heat network but keep the heat network in place.

There is a risk in trying to future proof the process too much at this stage, in that it might not allow heat networks to emerge as quickly and efficiently as they could. There is a trade-off, and it is difficult to strike that balance. However, it would be a shame if future proofing the system prohibited things happening.

Rhoda Grant (Highlands and Islands) (Lab)

Is deemed consent the right way forward or do we need more checks and balances in the system?

Donald MacBrayne

From a developer’s point of view, deemed consent is helpful because it provides certainty. However, there might need to be some checks and balances in there—perhaps some sort of appeals process.

Rhoda Grant

Does anyone else have any thoughts, especially about the role of local authorities and communities? If communities might be impacted by the heat network, should they have a role in determining the application?

Charles Wood

That is an important question. The decarbonisation of heat across the United Kingdom, and particularly across Scotland, is reliant on getting consumers to understand what is happening, and to understand that the existing method of heat might be high carbon so they should be moving to another source. We need to engage with consumers and explain the options to them, what the process would be and how they would operate their heating within a heat network. We need to give them an understanding of the issues and some ability to consent and agree to the process. If we do not do that, there will be a higher number of complaints and the issues that consumers will have with the networks might be more problematic, which might cause further headaches for MSPs, local authorities and developers.

It is vital to get ahead of that by engaging at the local level, getting local authorities involved and using their reach into the community to state what is going to happen and how people can input into the process. Getting people on board, getting them to understand and to make the most of the new assets is critical—they must have a say and some sort of input to the process.

10:00  



Rhoda Grant

Are there any other comments on that? Should communities be convinced of the need for heat networks? Should it be a grassroots move from communities that want to engage to build heat networks rather than something that is imposed on them by somebody outwith the community?

Charles Wood

Yes, there should be a degree of that. When we are decarbonising things such as public buildings or spaces using heat networks, it makes a lot more sense for a larger developer to come in, but when something is at community level, getting the community involved, giving them understanding and getting their consent is helpful in pushing forward the agenda. Consumers understand climate change and decarbonisation and want to contribute to that as well as to efficiency and low cost for their neighbours. They are looking forward to being able to do that. However, the statistics also show that about 60 per cent of consumers do not even recognise that their boiler is an emitting technology. Getting the understanding and getting consumers engaged is the first step, regardless of whether a community wants to progress something themselves and apply their own approach to the heat network or they want to go to a third party and say “Our area would like a heat network, please apply here”. As long as there is leeway and flexibility in the bill between taking the two approaches, and there is a consenting approach overall, that is fine. There should be a mix of solutions.

Marcus Hunt

I will add to something that Charles Wood said and reflect on the level of engagement that consumers sometimes have with energy. In order to promote heat networks there needs to be more consumer engagement and communication about heat networks and their benefits at a macro level. That would mean that when such schemes emerge in a local authority or a particular region, people would have some understanding of them and could distinguish between a heat network and other types of energy sources. At the moment, as Charles Wood said, people do not even realise that their boiler is carbon emitting, so it is quite a big step to move towards a situation in which they understand heat networks in their totality. Some form of consumer engagement and a communication programme would support the bill and help the wider public to understand the benefits of heat networks.

James Lambert

Our report identified several issues with the lack of consumer engagement with heat networks that could lead to poor outcomes for consumers, for example, when people move on to a heat network, if they do not understand the terms and conditions or there are issues around transparency and billing and so on. Any initiatives to help consumers engage with heat networks would be positive.

The Convener

We now have questions from Maurice Golden, who joins us remotely.

Maurice Golden (West Scotland) (Con)

I am interested in the transfer scheme, particularly in relation to Scottish Water’s evidence about the potential omission from the bill with respect to how existing heat networks will be treated, and what happens if they fail to get a licence. How would they be transferred and how would any valuation be done? Donald MacBrayne, will you clarify your concerns, and suggest how the bill could be improved?

Donald MacBrayne

The point is about the need for further detail, as has been said about previous questions. There are schemes in place already, and if we are talking about areas becoming heat network zones, those zones could have existing projects in them. How would the process of allocating one consent deal with existing schemes? It is really a request for more detail around that, so that we know how our existing schemes that are operational would be dealt with.

Maurice Golden

Do any of the other panellists have comments on how the transfer schemes would best operate and how that should be reflected in the bill? James Lambert, from a consumer protection angle, how would the transfer provisions affect existing customers, and how could that be addressed?

James Lambert

Heat networks are natural monopolies, and we note with interest the transfer requirements as a way of ensuring that, after a period of time, there can be competition for heat networks. It is important to ensure, as the bill already seeks to, that incumbency advantages are removed in the process, so that there can be a genuine, fresh competition at the right point in time. In turn, that gives a bidder the opportunity to come up with proposals that include pricing and service quality for customers, and could allow innovation to be injected into the bidding process.

Maurice Golden

[Inaudible.]—the market at the moment, how likely is competition for any transfer of assets to occur?

James Lambert

It is difficult to say at this stage. We did not specifically gather evidence on transfers in our market study, because it pre-dated the bill. From the evidence that we gathered, there is certainly interest in the heat network sector across the UK. However, we heard consistently from potential investors about the issue of scale, and whether there would be sufficient demand and schemes of sufficient scale to justify bringing the larger investors into the market place. There is already some commentary on the bill about the use of zoning to provide a baseload and network connections that would lead to an assured base for a bigger investor.

Maurice Golden

If a UK-wide market developed in which consumers and the operators face the same costs and prices, as opposed to two markets—one in Scotland and one in the rest of the UK—would there be a trade-off between the price that the consumer receives and the attractiveness of investment? If there are two markets, how likely is it that they would function in exactly the same way, such that any trade-off would be avoided?

James Lambert

That is a good question. It is quite difficult to answer, because there is such heterogeneity among heat networks. Based on our engagement with and visits to various heat networks across England and Wales, and across Scotland, there is such a wide variety in their cost bases and their prices that it is quite difficult to imagine separate Scottish and rest-of-UK markets. In many ways, it is more of a continuum of schemes, albeit that there are some specific factors in Scotland, such as in some policies and the higher prevalence of smaller schemes, for example.

We saw a close link between the cost of networks and the prices paid by customers. If there is efficiency in the process, particularly at the design and build stage—for example, in scale or attractiveness to investors, such as would draw competing bids for a network—that could, in turn, help consumers through lower prices, as long as consumers were able to benefit from the design.

Charles Wood

The current level of competition is not going to be reflective of the level of competition that we will see once the legislation is in place and we have got into the further detail. That is one of the reasons why we enjoy the fact that the bill has been introduced: it gives that confidence to investors. It will reduce the risk of investment and increase the number of people who want to participate in this area.

Heat networks are not a new technology. They are not a brand new thing that everybody is trying to wrap their heads around. They have been in place across the UK for a long time. The market is fit for moving forward and expanding greatly, and the bill will help with that.

The level of competition in the early years might be slow and it might involve a lower number than you would like. However, the fact that the legislation will be in place means that competition will improve and grow as the market develops.

You should certainly not hesitate about Scotland moving faster than the rest of the UK. For Scotland to be moving at pace is an absolute boon to the rest of the market. Given Scotland’s specific decarbonisation targets, it is necessary to move forward at such a pace. The rest of the market can catch up, but Scotland should absolutely move forward. It will increase competition and deliver some of those benefits to consumers very quickly.

Marcus Hunt

Although this does not specifically address Maurice Golden’s question, one thing that helps to attract investors is clarity about the pipeline and long-term opportunities. One of the challenges of heat networks is having visibility of that pipeline, and an understanding of the projects and when they are likely to come to market. If we were to establish that, some of those other issues might well fall away and that might be more important.

The Convener

I will follow up on some of those questions.

James Lambert, if heat networks come in, how exactly is that going to assist the consumer, when it comes to differences in competitiveness, or, to word it better, value for money? As things are currently set up, individual customers can simply change provider—in theory at least, once they have gone through the various difficulties that may arise in doing that. How are the proposals going to provide individual consumers with an ability to ensure the best quality of delivery? I have put it that way—best quality and effective service—rather than in terms of simply the lowest price.

James Lambert

If the tender is well constructed, that will enable a range of factors to be taken into account in the bidding process. That would include price, but also, for example, service quality and technical expertise. In some other markets, all those factors in the scoring system count towards selecting the winning bidder. It will be important not only to ensure the initial price, but also that consumers are able to benefit over the life of the contract, for example, through the terms of the contract and the quality insurance that will be in place.

10:15  



The Convener

The individual consumer is not going to have flexibility with regard to the provision of services. How does the individual consumer ensure that they get value for money? I am not saying that this proposed system cannot provide that, but how does that happen? Surely it is more inflexible than it would be if individual consumers were simply deciding.

James Lambert

The role for individual consumers is a challenge for the heat networks sector because, once someone is on a heat network, contracts are long and it is difficult, if not impossible, to switch providers, either because they are in a contract or they have to continue to pay a standing charge even if they were to install their own electric heating, for example.

To empower the consumer as much as possible, we recommended that there be transparency prior to moving into a heat network and that, once someone is on a heat network, billing standing charges should be transparent, so that consumers will have the ability to go to an ombudsman to raise complaints or challenge their bills.

The Convener

I am not sure that going to an ombudsman will make a difference to the service that the consumer receives.

I should also say that, if you feel that you have not had the opportunity to cover matters properly during this session or if you want to go into specific detail that we do not have time for, you are welcome to write to the committee.

I invite Marcus Hunt to come in, and then we will move on to questions from John Mason.

Marcus Hunt

How you ensure that consumer interests are protected when we are effectively creating natural monopolies, as James Lambert has said, and how you ensure that consumers are not disadvantaged without some level of safeguard or economic regulation are issues that we felt were not addressed as fully in the bill, although it could be too early to address all of that at this stage.

We would like to see regulation in an economic sense evolving over time that is proportionate to the size and the scale of the market but gives consumers protection and ensures that those natural monopolies are not exploited.

The Convener

How would that be achieved in the bill? That might be something that people want to think about and perhaps write to the committee on—it would be useful for the committee to have some idea about that.

Marcus Hunt

Yes. It feels as though it is another consideration that is not specifically addressed in the bill and may be outside the jurisdiction that the bill was intended to cover. We can pick up the point after today.

John Mason (Glasgow Shettleston) (SNP)

I am interested in Mr Wood’s point that we should be encouraging pace and that we want to move the bill forward.

In some of the evidence that the committee has received, it has been suggested that there should be more of an obligation to connect new buildings to heat networks both in the public and non-domestic sectors. What are your thoughts about whether there should be more of a compulsion or an obligation to do so?

Charles Wood

When it comes to new build, in particular, there should certainly be an obligation at least to consider the lowest-carbon option. If that is not a heat network, it should be another technology that can reduce the building’s carbon emissions further than a heat network could do.

That brings us back to the point about community and local engagement. There is a need to co-ordinate local industry and attract new industries to come into an area, because if, for example, an area has a data-processing centre or heavy industrial processes such as steel manufacture, the excess heat that comes from them can be used. If we can attract such organisations to join the local community and use otherwise wasted heat to help to heat homes and public buildings, we create a stronger sense of a community decarbonisation effort and the ability to move on to local area energy planning.

Scotland has been leading in that regard, in its approach to local heat and energy efficiency strategies and the ability to start examining how local areas’ assets can be connected and brought together in a co-ordinated decarbonisation plan. Heat networks are critical in that regard, and if new buildings can be obliged to be either net zero at the point of the build or connected to a heat network and contributing to decarbonisation of the local area, that would be a positive development.

John Mason

Who should drive that? Should it be the local authority, the community, the business or whoever is coming in, or the development company? For instance, the Commonwealth games village is in my constituency, and it was very much agreed that a heat network would be the way forward for that project. Who should drive that approach to new projects?

Charles Wood

That is a difficult question. It depends on the local circumstances. In circumstances such as yours, where there is an existing heat network, it makes sense for the council to regard that as the option and to push any new connecting party to connect to the heat network.

However, there is a significant role for the Scottish Government in ensuring consistency at a higher level, so that people are told, “This is the approach that should be taken; and if you want to connect in an area that is right next to a heat network, full consideration should be given to connecting to that network.” It should not be just a matter of people saying, “Oh, there’s a heat network here, but we’re not going to connect, because we don’t feel like it.” People should have to do the cost benefit analysis and consider the impact of their approach on decarbonisation, fuel poverty and their ability to contribute to the local economy. Those issues should be factored into the decision about whether to connect. There should be a consistent approach across the Scottish Government, but there is a role for local authorities in enforcing and pushing the approach.

John Mason

Mr MacBrayne, did you want to come in?

Donald MacBrayne

Yes. On the point about large local authority anchor loads, I think that there is merit in compulsion to connect, because big loads help projects to stack up and become viable. Once there is, in effect, a heat island, it is possible to build out from that and connect more and more properties. Having that baseload from local authority-type buildings, where there is consistent, long-term demand, is the sort of thing that makes investment and projects stack up—it is then possible to grow further.

John Mason

If the other witnesses do not want to come in on that point, I will move on.

SGN suggested in its submission that heat network zone permits should last in perpetuity. That is interesting; it sounds like not just a monopoly but a monopoly for ever. I would have thought that the capital costs would be recovered after 15 or 25 years. Surely, after that point, the permit should not last in perpetuity. Can you comment further on that?

Marcus Hunt

We suggested that the licence should effectively last in perpetuity, in the same way as other regulated licences. That view is really about protecting the interests of consumers in the event that a licence was removed. If some form of supplier-of-last-resort regime or another framework to protect consumers was established, it would perhaps be less of an issue, but the position is not entirely clear in the bill. If the licence of a heat network licensee was revoked for some reason, perhaps for non-performance on another network, what would happen to consumers? That was the angle that we were coming from on that specific point.

In addition, there is a question around what the right timeframe would be. For investment to be certain and established, a scheme needs to be time bound to an appropriate point at which, as you say, the investment would be recovered. Different schemes will have different profiles, and therefore a one-size-fits-all approach would not work. That is where we were coming from in our submission.

John Mason

Presumably, something such as the pipework to convey the water around would have a fairly predictable lifespan—perhaps 30 or 50 years, or something like that; I do not know. The generation capacity might be more unpredictable and more short term.

Although you argue that granting a licence in perpetuity would protect consumers, there is surely a risk that consumers would be exploited if somebody had a permit forever.

Marcus Hunt

We would expect them to have it forever as long as they were delivering on, and not in breach of, their licence conditions and contract. We were commenting in that context, rather than simply talking about awarding a licence regardless of how people performed against the conditions.

John Mason

I do not know whether any of the other witnesses want to come in on that point.

James Lambert

As I mentioned, we saw advantages in having a tendering process set with a certain point in time in order to allow fresh competition to take place and to allow innovation.

My understanding from the policy memorandum is that a supplier-of-last-resort process would be introduced. I am not close to the detail of that, but with regard to the point that Marcus Hunt made, it is obviously important, from a consumer protection perspective, to have that sort of process in place.

Charles Wood

To go back to John Mason’s point, if a contract is to run for a certain period of time, the organisation that first set up the heat network should be allowed to get a reasonable return on the established network. However, once that tipping point has been reached, there should be a competitive process. Competition is a positive measure across energy markets; it reduces costs and encourages companies to have better customer service and create efficiencies. It would make a lot of sense to have a tender process after the initial investment is recovered and some reasonable revenue is brought back into the company, so I absolutely agree with John Mason’s point in that regard.

10:30  



John Mason

My final point is for Scottish Water. I understand that you have a joint situation with the council in Stirling, with Scottish Water producing the heat and the council distributing it. You raised a point about whether that would be a complication for permits and licences. Can you expand on what you think the problem might be?

Donald MacBrayne

It is around the definition of a network and whether the network includes the energy centre aspect. There are a few linking points on this. The energy centre that we have developed at the waste water treatment works uses heat from the waste water—it is a circular economy, low carbon-type approach—and that heat goes out into the network that the council owns. What does the licence cover, in terms of that definition? Does it cover the two operators who are, effectively, within that one contract? The question is how the energy centre aspect would be handled in the next stage of the bill. Over time, as the council’s network grows—which it intends that it should—there could be other forms of heat from other generators coming into that same network, so it might not be only our energy centre that is supplying heat. How would the bill handle that situation?

Linking back to previous points about asset longevity, you are right that we would expect the network to last 50-plus years if it is properly looked after, taking into account some of the previous points around requirements for and specifications of things such as water quality within the network. However, the energy centre technology will last for a much shorter time, depending on what it is. Combined heat and power may last for 15 years, fuel cells 20 and heat pumps perhaps 20-plus years. There is a misalignment in terms of asset life. That is, however, good in relation to the other query that was raised, which was about future flexibility for innovation. Once the initial project has been created, the network will naturally look to the latest innovation as the energy centre technology comes to the end of its much shorter asset life. I hope that answers your question—it was a bit of a waffle.

John Mason

Do you think that the detail of situations such as yours in Stirling needs to be included in the bill or can it be left until further down the line and put into regulations?

Donald MacBrayne

It can be left until further down the line in regulations, as long as it is recognised that such situations currently exist within the market.

Alison Harris (Central Scotland) (Con)

Following on from that line of questioning, how can the interests of the consumer be best represented and enforced in projects with no single responsible person or body?

Charles Wood

The interests of the consumer need to be protected. I point to examples of how the existing energy sector has been taking care of consumers throughout the past year. Throughout the Covid pandemic, Energy UK has taken on a convener role in relation to all the pressure points and issues that the industry has encountered during the past six months. We have seen a lot of examples of companies making sure that their consumers are still connected, that they are able to top up their prepayment meters and that no one is going cold. We will continue to do that.

It is important that that approach is reflected in heat networks, so you are absolutely right to ask how consumers’ needs are to be protected. It is important that organisations such as the CMA—James Lambert may want to come in on this point—and Citizens Advice Scotland step into that role, give advice and provide understanding to consumers. It is also important that consumers on a heat network understand who they should call if something goes wrong. They should have a direct route of recourse if they are unhappy or uncomfortable with anything. It is important to get those processes right from the get-go and the bill is a useful tool for making sure that that is in place for licensees.

Donald MacBrayne

I will apply Alison Harris’s query to the example that I gave of Stirling Council. We are contractually bound to the council, which is contractually bound to its end users, and obligations around price and service are bound within that. It is not a mish-mash of different people; there is a clear line of sight to the end consumer.

James Lambert

We consider that a sector regulator will play a key role in protecting heat network customers. In advance of regulation coming in, we recommended that networks get on the front foot and adopt the best standards that they can. For example, the Heat Trust has guidance on consumer protection.

Charles Wood was right to raise the point about consumers having information about heat networks, knowing who to call and recognising the role of organisations such as Citizens Advice Scotland when seeking advice if there are concerns about the operation of the heat network.

Alison Harris

Are the key criteria set out in section 39 adequate for the designation of all possible and/or relevant anchor buildings? What do you think about that?

James Lambert

Is your question directed to me?

The Convener

It is for anyone who is able to comment on section 39. James, do you want to come in on that?

James Lambert

No. I am afraid that I do not have a strong view on that—it is not an area that was reflected in our report or in our subsequent engagement with the Scottish Government.

Alison Harris

Okay. I will move on to my final question. Given that part 5 of the bill requires building assessment reports to be carried out only on publicly owned buildings, is there a risk that community-owned buildings and other potential anchor buildings that

“require considerable and consistent use of thermal energy”

will be missed? Does no one want to come in on that?

The Convener

Does no one wish to comment? I will take that silence to mean that all four of the witnesses have no comment.

We will move on to questions from Richard Lyle.

Richard Lyle (Uddingston and Bellshill) (SNP)

Like Alison Harris’s last question, my questions are on part 5 of the bill, which covers building assessment reports. It places a duty on public sector building owners to assess the viability of connecting their building to a heat network. I will ask each panel member a question, which I hope that they will answer.

Does Marcus Hunt have an opinion on why the duty does not apply to all non-domestic buildings, and whether it should be extended?

Marcus Hunt

My connection is breaking up a bit and I am not sure that I caught that. Apologies, Richard.

Richard Lyle

That is okay. Do you have an opinion on why the duty does not apply to all non-domestic buildings, and whether it should be extended?

Marcus Hunt

No, I do not have an opinion on that, I am afraid.

Richard Lyle

Okay. My next question is for Donald MacBrayne. How could the information used by local authorities in designating heat network zones be improved to ensure that the most suitable areas are designated?

Donald MacBrayne

That is a good question.

Richard Lyle

I am looking for a good answer.

Donald MacBrayne

Obviously, the LHEES work is on-going, which will help with that. The industry uses the helpful heat maps that the Scottish Government has created. There is resource potential in reusing waste water for heat recovery, so there is potential to overlap those kinds of asset layers to make sure that systems and potential projects have considered all the opportunities and solutions for providing low-cost low-carbon district heat networks. It is a case of making sure that all the relevant aspects—whether from Scottish Water or whoever—have been taken account of in the LHEES work that is on-going.

Richard Lyle

My next question is for Charles Wood. Is it likely that that process will rely on existing data from energy performance certificates—EPCs—and if so, what are the strengths and weaknesses in that approach?

Charles Wood

There is a degree to which the process will rely on EPCs and the existing data. The EPC is the most commonly available bit of data that we use to check out the housing stock and the capabilities and weaknesses of the local building stock, but it is not the be-all and end-all—it can be improved on. EPCs do not necessarily take into account everything that could be factored into heat, for example, but it is a useful basis on which to begin the process.

Additional issues will have to be considered. What other local information can be gathered from networks, such as the gas or electricity networks? What capacity is available? What would be the best solution in terms of the lowest-cost option that requires the least investment in new network capacity? What workforce is available locally? Are the right number of installers, engineers and construction workers ready to take part in the process? Is the required manufacturing available locally? Is there a local supply chain that could be bolstered by a heat network? What industry is there locally that could get engaged in the process and could be offering waste heat or, as Donald MacBrayne said, waste water that could be used in heating?

A lot of different factors come into that. EPCs are part of it, but they are not the whole picture. New technologies should be explored as well—those that give a better understanding of where the energy efficiency issues may be across the housing stock and that potentially provide more granular data on where interventions should be targeted. That should certainly be considered as the approach to local deployment and local heat zones is progressed.

Richard Lyle

My next question is to James Lambert, who is, I notice, a director of the Competition and Markets Authority. You know as well as I do—better than I do—that heating is a cost to people and that sometimes there is a choice between heating or eating. We have to try to get a better cost for heating. How should information for consumers be presented to ensure that they fully understand the cost and implication of living in a property with a heat network? Is there a risk that that might not be adequately conveyed by property agents and landlords?

James Lambert

We see a risk for somebody who moves into a property, either through an estate agent or a landlord, and there being insufficient information about the heat network. That view is partly based on consumer survey work and partly on our survey.

Most of the feedback that we had was that the energy performance certificates alone were not sufficient. That was partly because the information that they include is limited—on heat networks in particular, there is insufficient information on the on-going cost of the network, especially on standing charges and operation and maintenance costs.

Once someone has moved into a property, there are sometimes issues with there being no contract, the frequency of billing and the way in which bills are presented, particularly with regard to the breakdown between usage and standing charges. Therefore, the recommendations are for improved transparency prior to people moving into a property—which would require engagement across Government—and for more regular and detailed bills for consumers, with a role for a regulator in overseeing that.

Richard Lyle

Thank you. That is all from me, convener.

The Convener

Finally, we have questions from Andy Wightman.

10:45  



Andy Wightman (Lothian) (Green)

I want to return to Rhoda Grant’s question about local engagement. Under the consenting regime set out in part 2 of the bill, consent would be granted by the Scottish ministers. Local authorities—as local authorities or in their capacity as planning authorities—have no role in the system, which contrasts strongly with, for example, Denmark, where the 98 municipalities are responsible for approving projects, within a national framework, of course. Is it right to exclude local government from any role in the consenting process?

Charles Wood

To answer your question directly, no, it is not right to exclude local authorities, which typically have a better understanding of local attributes, including housing stock, the public buildings that they have access to and their plans for decarbonisation.

Various local authorities across the UK have come up with their own net zero targets, plans and intentions. If we look just at Scotland, we have the examples of Dundee’s initiative on electric vehicle charging and Fife’s heat network. There are ways in which local authorities can progress the agenda much faster. Therefore, including them is critical to ensuring that the local community is on board.

However, we understand the desire to allow ministers to have that overarching co-ordination role, to bring together local authorities, industry and other stakeholders who may want to feed into the process. That will help to reduce the amount of divergence between local authorities, and we hope that it will enable better co-ordination across local authority borders, to ensure that, if a heat network crosses borders, or if there are complementary schemes nearby, it is possible to co-ordinate across those, rather than taking completely different approaches to planning from one area to another.

Donald MacBrayne

Charles Wood answered that question really well. Opportunities for cross-boundary co-ordination and collaboration should not be missed, so I thoroughly agree with his answer.

Andy Wightman

Part 6 of the bill provides licence holders with powers for compulsory acquisition of land and wayleave rights, with Scottish ministers’ consent. Broadly speaking, as I understand it, utility companies require those powers, so there is no real dispute about their being in the bill as a matter of principle. Are the powers appropriately framed? In particular, SGN’s written submission states:

“alternative methods should be fully explored before compulsory action is taken.”

I do not dispute that, but is there something behind that statement that Marcus Hunt wishes to elaborate on?

Scottish Water Horizons states that compulsory purchase and wayleave rights could have a

“deleterious effect on Scottish Water’s ability to develop or operate assets”.

I ask Donald MacBrayne to expand on what that “deleterious effect” might be.

Perhaps Marcus Hunt could start.

Marcus Hunt

Our point is that compulsory purchase could be viewed as a fairly extreme measure, and it could effectively disenfranchise consumers if it was involved in a heat network scheme, which could be detrimental to the overall scheme. If compulsory powers were to be part of the bill, that could have an impact on consumer engagement, which could undermine the objectives that the bill seeks to achieve. That is our angle on that.

I do not think that we had given any consideration as to what specific alternatives might be available.

Andy Wightman

Before I move on to Donald MacBrayne, I want to come back on that point, Marcus. SGN has access to compulsory purchase powers, does it not?

Marcus Hunt

That is a good question, but it is probably one for the regulated business, rather than for SGN Commercial Services. The regulated business will have powers for certain rights relating to its network. I honestly do not know whether that extends to compulsory purchase, although I know that the business has wayleaves and rights over land where it has its assets. That is part of the regulated business; it is not something that I am so familiar with in the non-regulated business, I am afraid. I can confer with my colleagues and come back to you on that.

Andy Wightman

Donald MacBrayne, you are not part of the regulated business either, but perhaps you can say more about your comment on the “deleterious effect”.

Donald MacBrayne

You are correct that I am not part of the regulated business, either. If I may, I will first return to the matter of compulsory purchase powers. The regulated business currently has compulsory purchase powers, but they are very much viewed as the last resort, as well as being a necessary tool if there is a scheme that is in the public good and there is no other way to overcome some barriers. Some clear guiding principles have been established on consultation and engagement and all the various steps before reaching that stage.

On the “deleterious effect”, I will come back to you in writing, if I may, with more detail on that, given that it is the regulated business that has responded on that point. However, my understanding is that we want to be clear that there is no order of precedence under which heat networks could potentially impact on our regulated business. If we need to do something in a particular area, the heat network could take precedence over that. We need to ensure that the relevant utilities are aligned. As I say, that is not my part of the business, so I would like to come back to you on that in writing.

Andy Wightman

That is fair enough. I assume that all the utilities—electricity, gas and water—face the same issue, that each of the others may be operating mostly underground and may potentially impact on the others, and that established protocols are in place to manage that. If that is not the case, and if Scottish Water has particular concerns in relation to water—it might, as heat networks will involve the conveyance of hot water—it would be useful if you could return to that point, too.

Scottish Water also says in its written evidence that some

“thought should be given on how to secure decommissioning costs.”

Is there evidence from existing utilities on how that process is managed, or is that not really relevant? We are still living with a Victorian sewerage system, for example, and decommissioning has not become an issue there.

Donald MacBrayne

Again, I will jump back slightly. We have recently come across a particular aspect to do with different utilities in close proximity to one another. A concern, which we are working our way through, is the potential for overheating where a pipe is close to a water main; there could be heat transfer into the water main, which we would not necessarily find useful. My colleagues might provide information on that when I get back to the committee in writing; it is the subject of a project that we have been working on.

With regard to decommissioning, it is really about the licence. If it comes to the point at which the definition of “heat network” includes energy centres, for example—we talked earlier about the definition—it will be important to think about decommissioning before projects start, rather than have someone lock the door and walk away, which does not feel right to me.

We need a debate about what will happen when a project comes to the end of its life. It might be that the system will be decommissioned; the incumbent might be allowed to continue with a new contract, in a competitive environment; or a new contractor might come into place to take over the project. It is about considering, right at the outset, what will happen when a licence or contract comes to its end.

Andy Wightman

Can you say what the situation is with the Stirling project in which you are involved? Was that question considered at the outset? Who is responsible for decommissioning?

Donald MacBrayne

That one is slightly different, because it is on a Scottish Water asset. Let me use another example: in Campbeltown, we are doing an energy centre that recovers heat from waste water next to a local authority asset, and some of the infrastructure is on the local authority asset. We have built in different options. From memory, I think that, within 12 months of the conclusion of the 20-year contract, the two parties must come together and agree whether the asset will transfer to the local authority, whether we will continue for a given time beyond the negotiated contract, or whether we will decommission. If the parties do not agree one of the first two options, the obligation will be on Horizons to decommission the energy centre and deal with the associated costs.

Andy Wightman

Does the decommissioning involve decommissioning the network—the pipes underground—or does that remain in place?

Donald MacBrayne

It involves that, yes.

Andy Wightman

Does anyone else want to comment on the points that I asked about?

Charles Wood

It is useful to note that this is an issue with electric vehicle charging points, too. For some time, wayleaves and compulsion have been pushed for with EV chargers, and getting rapid chargers in has been problematic, because there is no power of compulsion.

The word “compulsion” has the same negative connotations as “mandating” has. It is important to get people on side and to go through the entire process and all the options first; it is equally important that, where there could be a positive net benefit from a heat network, people are able to push forward with the project. It is difficult. We do not envy the politicians who have to get the balance right, which is critical.

Andy Wightman

For clarification, the electric vehicle charging network is not a regulated network, which distinguishes it from what we are talking about here.

Charles Wood

Sorry, yes. If heat networks are regulated, there will be greater capacity to move forward with them than there is in relation to EV charging.

Andy Wightman

Yes. That is an important point. In a regulated industry, it is easier to have a backstop power.

The Convener

I thank the witnesses for joining us. The committee clerks might write to you to summarise the points on which we want to invite further comment in writing.

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Fifth meeting transcript

The Convener

Welcome back. We are now on item 3 on the agenda. We welcome Paul Wheelhouse, Minister for Energy, Connectivity and the Islands, and James Hemphill, heat networks team leader. We are joined remotely by Gareth Fenney, head of heat strategy, Urszula Kasperek, senior policy advisor and Norman MacLeod, senior principal legal officer at the Scottish Government.

The minister will make a brief opening statement.

The Minister for Energy, Connectivity and the Islands (Paul Wheelhouse)

Thank you for the opportunity to reiterate the Government’s thinking on the bill and to begin to respond to the issues that have arisen in recent written and oral evidence to the committee.

The primary purpose of the bill—notwithstanding the limits on our powers—is to accelerate the development of heat networks in Scotland in order to help drive down emissions and to tackle fuel poverty while providing some protection to users of those networks.

The bill seeks to do that by creating a new licensing regime to ensure that operators are solvent and are fit and proper persons. It establishes a new process for consenting, zoning and permitting to ensure that networks are developed where they will have most benefit and are tailored to the needs of an area as well as providing certainty for long-term investment. The bill levels the playing field with other utilities by creating new infrastructure rights for heat network developers and operators. Finally, it puts in place arrangements to protect network users by enabling a transfer of operational rights to occur to ensure a sustained supply.

The bill as introduced was informed by extensive consultation, by the recommendations of an expert working group of stakeholders and by engagement with communities, including those on Scotland’s islands. I am keen to maintain that collaborative approach with stakeholders as the bill progresses through Parliament. I look forward to working with the committee to secure passage of the bill: it is one that I hope that the committee will agree is important for Scotland’s future.

The bill also responds to a recommendation by the Competition and Markets Authority that regulation is now required. As the committee has already recognised, there are limits on what we can do in Scotland, particularly with respect to consumer protection, which remains reserved to the United Kingdom Government. As I have said, the bill already provides some safeguards. As I have set out in the accompanying documents, I am working with the UK Government to secure the powers needed to implement comprehensive consumer standards in Scotland.

With that in mind, I can confirm that I have today written to Kwasi Kwarteng, Minister for Business, Energy and Clean Growth at the Department for Business, Energy and Industrial Strategy, with a proposed solution.

We have listened to the calls for more explicit requirements on fuel poverty and on the role of local authorities in consenting to new heat networks. I can confirm that, in advance of stage 2, I will look seriously at those issues and will consider how we can ensure a more explicit focus on fuel poverty, as well as ensuring that we strike the right balance for local authorities so that they have the right powers to drive forward heat network developments in their areas.

The bill will transform the Scottish heat networks market, but it is only one piece of the puzzle. Other actions are required to grow our heat networks sector. Those include strengthening wider policy frameworks and ensuring that financial and project support is available to help get schemes over the line. To do that successfully, while ensuring that the bill is delivered safely and on time, I am happy to work with committee members to consider non-legislative solutions to those wider issues so that we can put in place strong foundations on which the sector can build.

I am sure that the committee will have many questions, which I will endeavour to answer in what I hope you will find to be a helpful manner. Please let me know at any point if supplementary written evidence would be useful. I look forward to working with you all as the bill progresses and to answering your questions today.

The Convener

I have asked a number of committee witnesses, who have all agreed that the definition of heat networks in the bill is an adequate one, both for current technologies and for future ones. I presume that you will agree with that. Will you explain, with reference to the provisions of the bill, why that is the case?

Paul Wheelhouse

Certainly, convener. It is important that any definition is clear about who the regulation will apply to, but it is also important that it has the capacity to capture both existing and emerging technology and infrastructure, as you indicated.

We believe that the definition in the bill as introduced does that. I note that of the 23 responses to the committee’s call for evidence that commented on the definition, 16 indicated that they broadly agreed with the current definition, although I recognise that there are some caveats within those responses. Of course, the bill is not the only place where heat networks are defined in law; a definition is also provided in the Heat Network (Metering and Billing) Regulations 2014. The definition proposed in the bill aligns with that definition in order to avoid confusion for operators about what legislation applies to them and to provide for a clear regulatory framework.

On keeping up to date with technology as it develops, I recognise that the definition does not explicitly reference ambient or shared ground loop systems, which I know have come up in evidence to the committee. We anticipate that there will be more of those networks in the future, but the bill as drafted allows for that. We believe that section 1(7) provides for any need for the definition to be amended in the future.

I note that the Law Society of Scotland said:

“We agree that the definition of a heat network should be sufficiently neutral to cover as many types of heat networks as possible.”

We have tried to take our approach forward in that spirit. I hope that that is helpful to the committee.

The Convener

Section 1(7) gives the power to modify definitions by regulation, but there is no provision in that section for consultation prior to such regulations. What is the Scottish Government’s position on that? Would there be consultation on future amendment of definitions? Where do we find a commitment to that?

Paul Wheelhouse

I agree that a change in a definition would require consultation with stakeholders to ensure that it was drafted appropriately. I will bring in Mr Hemphill to address what consultation mechanism we would use to undertake that action.

James Hemphill (Scottish Government)

Any changes would be subject to regulation, and we envisage being required to undertake public consultation on that. We have made a commitment to the heat networks working group that we will work with it on the development of the regulations. The group consists of a broad range of existing network providers, local government and others who can inform how those regulations will work.

The Convener

You said that you would be required to consult. Where is the commitment to that if it is not in the bill? Is it a commitment to this committee or the Parliament?

Paul Wheelhouse

We can certainly look at giving a commitment in an appropriate way to reassure you, colleagues on the committee and, indeed, the wider Parliament, if that would be helpful.

The Convener

Thank you. Section 1(1) defines a “heat network” as a “district heat network” or a “communal heating system”. We know that, as you indicated, there are other types of systems. I appreciate that, as you set out, the definition is meant to be inclusive rather than narrow, because how the systems operate will change and develop in the future and there will be new systems. However, why does the bill not have, in addition to the general definition, a list of specific systems? Is there a list that could be included?

Paul Wheelhouse

I will bring in my Government colleagues on that point in a second. However, having a list would fall into the territory of being potentially overprescriptive. If such a list was enshrined in the bill, the primary legislation would have to be amended to include in the list any changes in technologies. That is my understanding of why the bill is drafted as it is. We are looking to take account of technological change that happens over time and the bill is trying to replicate the complex legislative framework for electricity and gas supply.

In this case, we are trying to create an appropriate licensing and regulatory regime for heat networks in Scotland from scratch and we would not want to have to keep amending primary legislation if a list were present in the bill.

The Convener

I was suggesting a list by way of example as opposed to by way of definition, which we sometimes have in an act. If you were to come back to the committee, it might be interesting—

Paul Wheelhouse

We can absolutely come back with our knowledge of the existing systems in play and ones that we understand are under development, if that would be helpful. I have referenced the ambient or shared-loop systems—already referenced in evidence to the committee—as two examples of potentially new systems.

Colin Beattie

Looking to regulatory issues, can you give us an update on what dialogue has taken place between the Scottish Government and the UK Government on the development of a single UK regulatory system?

Paul Wheelhouse

Mr Beattie raises an important point, which has clearly exercised a number of witnesses around areas such as consumer protection. As I indicated in my opening remarks, we are in a position wherein we have had good dialogue with BEIS officials, UK minister Kwasi Kwarteng and predecessors such as Claire Perry O’Neill on the potential for some degree of either devolution or administrative devolution of consumer protection to the Scottish Parliament and to Scottish ministers.

A number of options were put to us. We have written back to Mr Kwarteng to indicate that we would welcome a Great-Britain-wide framework, which would apply to consumer protection and provide some certainty—we understand that UK ministers might introduce such a framework in a bill early next year. We seek from UK ministers the ability for Scottish ministers to appoint a licensing authority to oversee the implementation of those consumer protection powers in Scotland. We understand that the solution that we have sought is one that BEIS favours, but we will wait for a response from Mr Kwarteng.

That response should allow us to go forward with the ability to appoint a body such as the Office of Gas and Electricity Markets. If UK ministers were to appoint Ofgem to undertake that activity in England, we could equally apply for it to be the appropriate body in Scotland.

Section 4 enables Scottish ministers to

“by regulations designate ... the licensing authority”

whose main function will be to administer the licensing system. UK-wide legislation established Ofgem as a statutory body so it is not within devolved competence to appoint it as our licensing authority at present, which is why the measures that Mr Kwarteng might be willing to take would be enormously helpful.

We are aware of the risk that two organisations—Ofgem and the licensing authority that the Scottish bill would create—could operate under two separate pieces of legislation, so we want to avoid any confusion that that might cause for consumers and the industry. We also want to deploy public money in as efficient a manner as possible.

We have written to Mr Kwarteng with a suggested solution and we are optimistic that an agreement will be in place in the near future during the passage of the bill. We are keen to keep the committee informed of that.

I stress that it is sensible in the meantime for the bill to retain flexibility for either Scottish ministers or a body in our gift to execute the important functions of the licensing authority, in the event that UK legislation does not come forward in that area. At present, we expect the UK Parliament to introduce such a bill, but should that not happen, the flexibility in this bill gives us a fall-back position from which we can ensure the bill’s compliance with legislative competence. I hope that that clarifies the matter for Mr Beattie, but he can fire back to me if I have not addressed what he was looking for.

Colin Beattie

While we await the outcome of your proposals, and given where you stand at the moment, how do you see the proposed Scottish regulatory regime differing from the wider UK one? What differences would you like to feed in there, and what effect would a divergent licensing regime—if it came about—have on investment and consumers?

10:45  



Paul Wheelhouse

Both those points are important. You asked about the essential differences between our approach and that of UK ministers. They take a different approach by proposing an authorisation mechanism, whereas our approach is more in line with what the Competition and Markets Authority’s report recommended. It is probably no surprise to hear that we fed a significant amount into the CMA’s exercise and had engaged throughout with stakeholders before the CMA undertook its investigation. The CMA’s recommendations align well with our proposals.

The UK Government’s authorisation approach is valid, but our proposals will give the industry more investor certainty and will put in place a robust and proportionate system. I am confident that what we are doing is right for Scotland—for our proposed use of heat networks and for our stakeholders—given our extensive engagement with stakeholders in the run-up to producing the bill.

UK ministers decided to take a different approach, which is valid but is not what we chose. Our approach will provide more investor certainty. We have learned a lot from how our colleagues in Norway and Denmark have developed heat networks, and our approach is more consistent with what has been done elsewhere in Europe.

With the convener’s permission, I ask Mr Hemphill to add any points about our understanding of the UK’s proposals.

James Hemphill

I echo what the minister said. It is important to remember that the market has gone unregulated for so long, so the licensing approach will allow us to make the fit-and-proper checks on, for example, the solvency of existing operators and to establish with the sector dialogue, which is not quite as we would like it at the moment. That is an advantage of a more proactive licensing system.

Colin Beattie

We await with interest the results of the UK Government’s consideration of the proposals.

Will the requirement for a licence apply to existing, as well as new, heat networks? How will existing heat networks and their operators be assimilated into the licensing system?

Paul Wheelhouse

The point is important. Between 800 and 1,000 heat networks are estimated to be up and running in Scotland, so you raise a pertinent point. We understand that concern might be felt about new technical standards being introduced that might apply to existing networks. I assure Mr Beattie and the committee that, in that event, we will work with all the existing networks to understand the implications for their operations and to identify appropriate solutions, which might be exemptions from such requirements or a special set of technical standards for existing networks. To avoid disproportionate impacts on such networks, we will not introduce requirements to replace apparatus that is in good working condition.

We are working with the Department for Business, Energy and Industrial Strategy to develop a common technical standard for Great Britain. We will be happy to provide the committee and other MSPs with further information about that in due course, so that we have as much visibility as possible for the work on technical standards that might have an impact on existing networks. We are avoiding being overly prescriptive in the bill and trying to retain scope for innovation.

I hope that that addresses much of what Mr Beattie was looking for on the impact on existing networks.

Colin Beattie

Thank you—you have answered a question that I was going to ask on technical standards.

What standard conditions on important issues such as consumer protection, service quality and access to an ombudsman might be included in a licence? Will such issues be incorporated in the licensing process?

Paul Wheelhouse

I apologise for not addressing that in my previous response. We are following closely the approach that the CMA set out on the regulatory needs for existing heat networks. Consumer detriment has most commonly been found in smaller networks, particularly those that are privately owned. We have therefore tried to avoid being overly prescriptive, as I said.

On existing schemes, we are trying to ensure that the bill enables exemptions. Obviously, we are in the early stages of developing the regulations, but there are a range of factors in that regard. For example, the ownership structure could be considered in exempting networks. Exemptions might also be time limited to allow certain schemes to meet regulatory requirements if necessary. Section 6(5) enables the licensing authority to exclude or modify any of the standard licence conditions that it considers appropriate in the circumstances of a case. That provision could be used to enable existing networks to gradually adapt to any regulatory requirements, as needed over time.

We have noted the suggestion from committee members that the requirement to hold a licence should not apply to networks that serve only the owner’s buildings or premises. We agree that that would be sensible.

On the conditions, which Mr Beattie was trying to probe, I will bring in Mr Hemphill.

James Hemphill

I will perhaps defer to my legal colleague Norman MacLeod on the consumer licence conditions but, as the minister touched on, we certainly anticipate that GB-wide consumer standards will be introduced in the not-too-distant future. It looks as if we are working towards a solution to implement those fairly coherently in Scotland in a way that would see the consumer standards body for GB and Scotland’s licensing authority being one and the same.

In the event that that GB-wide legislation does not come forward, we will continue to work with the Heat Trust, which is a consumer standards scheme to which many of the larger operators in the UK are signed up and which includes things such as transparency, quality of service and responses to outages. We are confident that the GB-wide legislation will materialise but, if it does not, there are other routes that we can take that are within our competence.

However, I will defer to Norman MacLeod on that point.

Norman MacLeod (Scottish Government)

I would observe only that, as many witnesses have said, consumer protection is of course a reserved matter, so any licence conditions, standard or otherwise, that are imposed will have to be introduced under the powers in the legislation and therefore will clearly be constrained by the limits of the current legislative competence of the Scottish Parliament. None of that is news to the committee. As far as possible, I am sure that the licensing conditions will look to build in protections for consumers or businesses but, ultimately, the bill will set the power for those conditions to be imposed rather than set out the substance of the conditions.

Paul Wheelhouse

As a general principle, we have tried to avoid putting the conditions in the bill. The bill has been drafted to allow the conditions to be set out in more detail in secondary legislation, which we propose to bring forward through affirmative instruments, I believe, which will allow for appropriate consultation with Parliament and stakeholders on the nature of the conditions as they emerge.

I hope that that gives the committee confidence in the context. I realise that it is a technical bill and that you are being asked to look at a lot of detail. We know that there are a substantial number of delegated powers to be dealt with if the bill receives royal assent. However, to give the convener and other committee members confidence, such matters will be brought forward in secondary legislation under the affirmative procedure, which will give the Parliament the chance to scrutinise the provisions.

Colin Beattie

Thank you for that comprehensive response. You have brought me neatly on to my last questions, which relate to discussions between the Scottish and UK Governments on the devolution of consumer protection. Do you have any update on that?

Paul Wheelhouse

I addressed much of that in my earlier remarks. I confirm that we have formally written to Kwasi Kwarteng to set out our view on the options that have been presented to us. If a GB-wide consumer protection framework is to be delivered through legislation that the UK Government introduces for its own heat networks bill early next year, we would welcome the proposed option that seeks to give the Scottish ministers the ability to appoint the licensing authority. As I have explained, and as Norman MacLeod indicated, the current reservation of powers places constraints on our ability to appoint Ofgem as our licensing authority. We would need the UK Government ministers to take measures to allow us to do that.

We have kept flexibility in the bill in case the UK Government does not introduce the legislation in the timescale that its ministers have suggested. However, our preference, which would avoid confusion, is for us to have that power to allow us to appoint Ofgem, for example. We have had discussions with Ofgem in principle about appointing it as the licensing authority for Scotland. As we understand it, it would be the licensing authority in England, too. That would create simplicity in the system. Having common technical standards being applied across both jurisdictions would create a propitious market opportunity for the development of the supply chain, too. Those are all factors in our thinking. I hope that that is helpful to Colin Beattie and to the committee.

Colin Beattie

Yes, that is helpful. How will the Scottish Government encourage existing and potential developers and operators to move away from gas in favour of renewable sources?

Paul Wheelhouse

That is a hugely important question. We have learned a lot from other jurisdictions, particularly Denmark. We have collaborated closely with the Danish Government. The country has achieved high levels of heat network utilisation through, initially, creating heat networks with fossil fuel engines in the 1970s, which was in response to the oil and gas price crisis in the early 1970s. We are in a different situation. We are trying to develop heat networks in the context of the climate emergency and avoid the step of going through a phase of building networks that are dependent on fossil fuels. We have exciting opportunities, with the potential for the deployment of hydrogen.

All those aspects are in our thinking. We are looking at how we can utilise renewable energy where possible to ensure that that is in our scope.

We have, obviously, kept the definition of heat networks sufficiently broad so that, as I said in response to the convener, they can adapt over time as new technology emerges. I am happy to give more detail on that, if that would be helpful to Mr Beattie and to the committee.

Colin Beattie

This is my last question. Will you require, or perhaps encourage, heat networks to publish their tariffs, so that consumers can compare what they are paying, as other gas and electricity consumers can? I hope that any comparison would be better than that for gas and electricity supplies.

Paul Wheelhouse

One of the big advantages of introducing the legislation is that heat networks have huge potential to address fuel poverty. In our modelling for the bill, we believe that, by 2050, the networks could save £80 million a year for consumers. We appreciate that heat networks, operating effectively and efficiently, can save up to 36 per cent on consumer bills. Mr Beattie is right: we need to ensure as much visibility about the benefits of heat networks. We also need to monitor and evaluate the performance of heat networks as they are constructed. Appropriate monitoring and evaluation data from heat networks that are established under the legislation will inform that.

We will have to see how the UK Government’s legislation on consumer protection lands in terms of the requirements for reporting on the pricing of the networks, for example.

However, the Scottish Government and UK Government ministers are conscious of the need to ensure that where heat networks go on is identified through local heat and energy efficiency strategies and heat zoning. We are seeking to ensure that they are developed in the optimal locations where they can impact on fuel poverty and make a substantial impact on socioeconomic benefits for communities. That can then flow through into, I hope, good results, with data that affirms the positive reasons why people join the heat network and encourages others to join the network.

11:00  



Colin Beattie

Thank you, minister. Back to you, convener.

The Convener

I thought that we were already back with me, but I thank Mr Beattie for the clarification.

Minister, you talk about the Danish system, for example. First, what discussion has the Scottish Government had or is it having with other countries that have successful heat networks about public information on these matters, including responsible use of the system? We tend not to be familiar with shared systems in Scotland, apart from in one or two places. I am not referring to some people needing to keep their homes warmer than others because of health issues or for whatever reason; I am referring to responsible use of the system so that there is not wastage.

Secondly, how can it be ensured that such systems are 100 per cent reliable so that everyone can be certain that, if the system goes down, it will immediately be made to operate again or there is a back-up system?

Those two points are crucial for the success of any system or public acceptance of any system in Scotland.

Paul Wheelhouse

You have hit on a couple of very important points. Obviously, with our desire to develop heat networks as a contributor to tackling climate change and addressing fuel poverty, we want to ensure that we have a robust system that protects the consumer and gives the consumer confidence that, in joining a heat network, they are not setting themselves up for a fall. Therefore, it is essential to learn from Norway and Denmark—particularly Denmark, with which we have had a lot of engagement on a Government-to-Government level in developing our earlier thinking about heat networks—about how their success has benefited people.

Unlike boilers in domestic properties, which people have all the disadvantages of having to maintain themselves—they have potential fire and carbon monoxide risks—heat networks have a number of direct consumer benefits in not involving those responsibilities. With the wet systems that tend to be created by heat networks, those risks are all taken away from people. However, people will be concerned about what will happen if the system fails. Heat networks tend to have back-up systems in place. At present, someone might have an entirely renewable system that has a gas or other form of back-up engine to kick in should it fail. Obviously, we need to give individuals confidence about what will happen if a developer falls into financial trouble.

We and the UK Government are taking slightly different approaches. The UK Government is pursuing step-in powers, but we have set powers relating to transfers in the bill to enable an alternative operator to take over an established heat network if a developer gets into financial difficulty or decides to dispose of the network for whatever reason.

The bill provides legislative certainty in those areas. However, if you want to probe specific points, convener, I am happy to try to address them.

The Convener

A key point is about public awareness of responsible use of heating. The minister may want to come back to the committee in writing on that and set out what steps have been taken to see how other countries work that into their approach.

Paul Wheelhouse

I take the point, convener. We will certainly come back to you in more detail on the thinking about that.

I appreciate that we are talking about a new market and that it will perhaps take a lot to educate consumers about what is involved in a heat network, the benefits to them of participating in a heat network, and the importance of tackling the emissions that are created by heat.

As committee members will know, over half of the energy that we consume in Scotland is in the form of heat. It is clear that, if we are to be serious about tackling the climate emergency, we need to make far greater progress in that area. I am very proud of what we as a country have done on the electricity supply, but I am less proud of where we are on heat. However, that is a common problem across most of northern Europe, which is still very dependent on fossil fuel systems. Eighty-one per cent of premises in Scotland are still dependent on gas central heating as their primary source of heat.

This will be a big transformation in the way in which we undertake our heating. It will not apply to every premises, because of heat zoning, and the LHEES process will identify those areas of Scotland where it is most appropriate—in many communities, it will not be an appropriate approach or an economically viable alternative. However, where it is happening, it will be done through a system that leads to networks developing where they are most appropriate to support communities. That should give confidence to communities that it will only happen where it will be an efficient technology to provide them with their heat.

That said, I take the point. We will come back to the committee with some more information about communication and what we can do to build the market in terms of engagement with communities.

The Convener

The next question is from Rhoda Grant, who joins us remotely.

Rhoda Grant

I welcome what the minister said in his opening statement about fuel poverty. What form does he think that the consideration of fuel poverty will take in his amendment at stage 2?

Paul Wheelhouse

I thank Rhoda Grant for raising an important point. We are aware of concerns that have been raised by committee members and witnesses that the bill should be strengthened with regard to fuel poverty. I hope that we can provide assurances today that contributing to the eradication of fuel poverty has been an absolute priority for the Scottish Government as we have developed the bill. That was reflected in the evidence of witnesses such as Energy Action Scotland, which said:

“We are encouraged to note the focus on fuel poverty ... This appears to be an encouraging commitment to co-design this policy alongside the Scottish Government’s commitment stated in its fuel poverty Act.”

Heat networks have an important role to play in tackling fuel poverty. The CMA noted that the vast majority of heat network customers face costs that are similar to or lower than gas, and the business and regulatory impact assessment that accompanies the bill estimates that, in the right circumstances, heat networks can provide savings of up to 36 per cent for households compared with gas heating. We are keen to put that beyond all doubt and to respond to the concerns that have been raised, so, over the coming months, my officials and I will be happy to work with the committee, as well as with individual members of the committee such as Ms Grant and also with the fuel poverty partnership forum, to put those reassurances in the bill. I am happy to engage with Ms Grant and others who have an interest in the area.

Rhoda Grant

I also welcome that local government will be involved in consenting. What form will that take and will it impact on deemed consent?

Paul Wheelhouse

We are certainly keen to ensure that, as Ms Grant indicates, there is appropriate involvement of local government. I know that that has come up in a number of evidence sessions to date. Obviously, we are engaging with members of local government around the development of LHEES and the heat zoning mechanisms that are being taken forward by Zero Waste Scotland, which is handling engagement with stakeholders. We are trying to maintain as much flexibility as possible in the system that we have put forward in the bill around the licensing activities and the consenting process.

We are aware that a number of local authorities might have relatively little heat network activity in practice, and we are trying to keep things in proportion. However, we are keen to engage with local government colleagues around the development of the consenting powers in the bill.

On the engagement with local authority members, Mr Hemphill can say more about how we propose to take that forward with COSLA and individual local authorities.

James Hemphill

As the minister mentioned, we have commissioned colleagues at Zero Waste Scotland, which has the necessary technical expertise, to give us a first draft of a process for identifying heat networks. We expect that that first draft will be completed towards the end of the year or in early 2021. With the minister’s agreement, I am sure that we would be happy to share that with the committee.

On how we would bring that forward, we will develop that further in the working group that I referred to earlier, which has energy officers from three local authorities on it. In the longer term, we would envisage consulting publicly on that, and we would work with COSLA in particular on it, as the minister said.

It is possible that we might do that in conjunction with the planned introduction of local heat and energy efficiency strategies. We expect that the process for identifying a heat network zone would be captured in the development and preparation of a local strategy.

Paul Wheelhouse

I will add one further point for clarity’s sake and to assist Ms Grant. With regard to heat network zones, both James Hemphill and I have referred to section 40 of the bill. That section is not intended to enable Scottish ministers to overrule local authorities—some sensitivities in that regard have arisen in evidence to the committee—or to disregard local views in any way. However, we must remember that we are living through a global climate emergency, and we need to be confident that we are fully able to identify all potential heat network opportunities in order to address that.

As I mentioned earlier, where a local authority is unable to do that, or where we have evidence that particularly good opportunities may have gone unidentified, there needs to be an opportunity for Scottish ministers to carry out that function. I reassure Ms Grant that that would of course be subject to consultation with the local authority and with other relevant persons, including the public locally, prior to the implementation of a zone.

We urgently need to stimulate our economy in the context of the green recovery. Heat networks, for which the bill provides a legislative framework, very much fit the profile of the type of project that can make a near-term contribution to the green recovery, given that they are large-scale infrastructure projects with high up-front capital costs. Local authority colleagues to whom I have spoken very much welcome that approach, and they recognise the local economic impact that there may be from those projects. Once the networks are constructed, they will be long-lived assets that we hope will create long-term jobs in those communities.

That is a positive reason why the legislation is framed in the way that it is—in order to allow for circumstances in which a local authority needs support to take forward heat network zones.

Rhoda Grant

I would like some clarity on that. Local government will be involved in zoning, and you said—I think that I heard you right—that communities will have a role in that but not in consenting to individual development applications. Is that correct?

Paul Wheelhouse

We are aware of the demands that have been put on the committee as a result of the evidence sessions that have taken place so far. With regard to the consenting process, we have tried to put in as much flexibility as possible to allow for circumstances in which a local authority—perhaps a smaller local authority—may not wish to take on that responsibility itself. If projects are only occasionally appropriate for its area, it may not want to have to staff up and tool up for a function that is only rarely required.

We can come back on the issue around responsibility that has been raised in evidence to the committee. Larger local authorities may be keen to take forward consenting; I know that there has been some debate around the thresholds at which that would potentially kick in. I do not know whether James Hemphill wants to add anything further on that.

James Hemphill

I would simply echo what the minister has said.

Rhoda Grant

I want to ask about the appeals system for developers. There is no right of appeal in the bill. What is the thinking behind that? Will that position change?

Paul Wheelhouse

The situation at present is complex, given the way in which legislation is currently drafted in respect of the identification of the licensing authority, and I recognise why Ms Grant is asking about it. We are getting into a position in which we will—we hope—be able to provide more clarity on the potential options for the licensing authority.

However, we recognise that there are situations in which an appeal would be necessary if a business was unhappy with the outcome of a licensing decision. The legislation currently provides for that role to sit with Scottish ministers. Normally, there might be another body that would appeal up to the Scottish ministers to receive clarity on a position. Section 11(5) makes clear the provision for licence holders to

“make representations ... to the licensing authority”

if a licence is to be revoked.

It is important to remember that, in exercising functions under the bill, including those that relate to licence revocations and other appeals, the licensing authority must act lawfully. If it does not, it would be open to challenge in the courts.

I am interested in the committee’s views on to which body, over and above the licensing authority, appeals could be brought, given that the bill currently designates Scottish ministers as the licensing authority in the first instance. We would like to be in a position where Ofgem, or another body as recommended by Parliament, would be the licensing authority and could therefore appeal to Scottish ministers in that scenario. It is important that appeal mechanisms are clear. We will work with the committee and take forward any recommendations that it has on the drafting of the bill.

11:15  



The Convener

Do you have anything to add to that, Mr MacLeod?

Norman MacLeod

I would reiterate what the minister said: there are various processes in the bill that require licences or consent and, to a large extent, those have mechanisms built in—some in the bill and some by regulation—whereby a developer or someone making an application for a licence would have an opportunity to make representations to the Scottish ministers as to the determination of those decisions. The question is, once the decision is made—at the moment, in the bill it would be made by ministers—what form of appeal there might be. Appeals could either be an administrative appeal where someone gets to make the decision again but can alter the decision that ministers have already made on the substance of the issue, or, as the minister said, an appeal on the legality of the process and whether ministers have properly considered all the matters that they were due to consider. Such an appeal would go to the courts, and that route is available under the bill as it is drafted.

Paul Wheelhouse

We recognise that judicial review is not a cheap process for any party. If the licensing authority were the Scottish ministers and the UK legislation was not enacted in the timescale that we estimate, we would have that fallback whereby Scottish ministers would effectively be the enforcement authority. However, we are clear that if we were able to designate another body as the enforcement authority under section 32(2), which enables appeals to be made to a third party, which in those circumstances might be the Scottish ministers themselves, in practice, it would be likely to be administered by the Scottish Government’s energy consents unit in the form of recommendations to ministers. I hope that that answer is helpful to Ms Grant.

The Convener

You refer to judicial review, minister. Is that the ultimate court form of review that is contemplated in relation to the bill?

Paul Wheelhouse

We would want to avoid that if we could get the clarity that we seek in relation to the role of the licensing authority and enforcement authority functions. Ultimately, judicial review is the course that will be available in circumstances where Scottish ministers found themselves to be the enforcement authority and there needed to be an appeal because there was nobody above to appeal to, other than the courts. That would be the fallback in that scenario.

The Convener

Why is there not a statutory right of appeal set up in the bill, which could be exercised in the sheriff court, for example, rather than having to use judicial review in the Court of Session, which is more expensive and more difficult for individuals and organisations?

Paul Wheelhouse

I will bring in Norman MacLeod to give us the legal perspective on the question of the respective courts.

Norman MacLeod

Those choices are open under the bill. It is worth noting that appeals of enforcement notices in planning legislation would be made to the Court of Session and not the sheriff court, so it would be the equivalent of those types of enforcement provisions.

The Convener

Are you able to shed light on why section 32 says that

“Scottish Ministers may by regulations make provision for or about appeals”,

meaning that the provision is not specified in the bill? It would make things clearer if it was specified in the bill, as has been the case historically and often still is.

Norman MacLeod

The minister has already alluded to the fact that section 28 sets out the “enforcement authority” as

“(a) the Scottish Ministers, or

(b) such other person as ... Ministers”

may

“by regulations designate”.

The regulation provisions are included to enable appeals to be put in place where the enforcement authority is not ministers.

Paul Wheelhouse

I do not know whether this will help—it may confuse things further. We will come back to the committee in writing if it would be helpful, but there is an important point to be made. As Norman MacLeod indicated, under section 28 the enforcement authority may be the Scottish ministers or they may designate another body. In either case, assuming that the decisions made by that enforcement authority were reasonable and lawful, the appeal would have to go to a body or person of greater authority. That is why, if the decision was lawful, the appeal would potentially have to go to the courts to be overturned.

The Convener

So, basically, the scheme is trying to align with or is modelled on planning legislation in terms of rights of appeal.

Paul Wheelhouse

I can see the similarities, but I will ask Norman MacLeod to confirm whether that is the case, given that I am not an expert on planning law.

Norman MacLeod

Essentially, that is correct. There is equivalence between the planning systems. They both regulate and help consents to be enforced. There is merit in the two systems being broadly equivalent.

Maurice Golden

I am interested in the transfer schemes and how the Scottish Government will address the risk that existing heat network operators may not obtain a licence for their network, potentially leaving customers without heat.

Paul Wheelhouse

Mr Golden raises an important point about the transfer schemes. It is essential to give consumers the confidence to embrace heat networks as an option—not just individual consumers but business consumers, who have to factor risks into their on-going business activities. We are taking a subtly different approach to the arrangements around transfer schemes from that taken by UK ministers. As I understand it, they are proposing step-in rights; that is how they have determined it.

It is important to provide for scenarios in which heat networks are no longer able to operate with the original developer for a number of reasons, which could include insolvency of the operator. There are circumstances in which the Scottish ministers could potentially take responsibility for the operation of the scheme until such time as an alternative provider was identified. We want to make sure that the process is as smooth as possible for the consumers and that there is as much certainty as is possible. We believe that the approach that has been taken is appropriate. However, we will have to wait until we have further clarity about the GB-wide consumer protection standards that may apply in terms of understanding the wider framework in which we would be taking it forward. Mr Hemphill can set out the technical aspects of the transfer scheme.

James Hemphill

In the bill as drafted, the transfer schemes would apply to new networks on the basis that the transfer would be agreed at the same time as the heat network consent is granted or considered. That is probably useful, because it is helpful for all parties to understand what transfers and changes would occur, in the worst-case scenario, to ensure that the supply of the heat continued. We understand that provisions that relate to the supplier of last resort and the step-in rights to which the minister referred were included in the original UK Government consultation on a market framework for Great Britain, so consumer standards in that regard would apply GB wide.

Norman MacLeod can comment on the relevance of compulsory purchase rights and how they might be used for existing schemes, should that be needed to ensure continued supply.

Norman MacLeod

I am not really sure where to start. Compulsory purchase is an option in the bill, but it is not a quick process. Protection for existing schemes is not directly covered by the bill; as James Hemphill said, the part 7 provisions on transfer schemes apply to networks that will be obtaining consent for either new or modified schemes after the legislation is in place.

Paul Wheelhouse

Let me add a point that might help committee members and indeed a wider audience to understand the difference between what is proposed in the bill and the supplier-of-last-resort arrangements for gas and electricity markets. We view the provisions in the bill as being more akin to asking what would happen in the event that gas or electricity asset owners failed or lost their rights to operate—I am thinking about Scottish Gas Networks, Scottish and Southern Electricity Networks or Scottish Power Energy Networks, for example, as infrastructure owners. Assets are owned by a small number of companies, but in future there will potentially be a large number of owners of heat networks in Scotland.

The approach is different, in that the gas and electricity supply markets system is about replacing a company that is responsible only for purchasing energy and then selling it to consumers through its customer-facing functions, whereas heat networks have infrastructure assets, as well—there is the service, and there is the infrastructure. That is why the approach that we have taken in the bill is modelled more on what would happen—and we hope that this would never happen—in the event that SGN, SSEN or SPEN had difficulties.

Professor Paisley, who is chair of Scots law at the University of Aberdeen, very much welcomed the approach that we took in the bill—I will not read out his submission in full.

Maurice Golden

Thank you, minister. For clarification, is it the case that the 800-plus existing heat networks are not directly addressed in the bill? Should they be?

Paul Wheelhouse

Let me just clarify that point with James Hemphill. Are the existing networks addressed?

James Hemphill

No. The bill applies to new schemes. We understand that there are 800 to 1,100 schemes out there at the moment, which is a big number, but it is worth saying that, in practice, that equates to about 1 per cent of Scotland’s heat demand. Therefore, if the bill meets its objective of the percentage of heat demand being met by heat networks getting into a projected range of 7 per cent to the high teens, the vast majority of schemes in future will be captured by the transfer provisions, with the safeguard of GB-wide standards and step-in rights to support the existing schemes.

Paul Wheelhouse

The point about step-in rights probably requires us to understand and take account of the interaction between what the UK Government will bring forward next year—we hope to see it during the passage of the bill—and section 7 of the bill. James Hemphill makes an important point about the fallback of the GB-wide consumer protection framework, which I hope will have a role in appointing the licensing authority that oversees the process, to ensure that consumer protection is delivered in Scotland.

11:30  



Maurice Golden

I just want to clarify this. You are confident and comfortable that existing customers of the existing heat network would be able—either through secondary legislation or by some other means—to ensure that they are still provided with that heat, one way or another.

Paul Wheelhouse

Every indication that we have is that UK ministers will introduce a bill applying GB-wide consumer protection standards that would give some protection to consumers on existing heat networks. We have no reason to doubt UK ministers’ willingness to do that.

With Covid-19 and other factors, there is a possibility that the UK bill will be delayed, but I hope not. We have certainly not had any indication so far, through engagement with officials, that there is any intention to delay the bill. The proposed UK measures would hopefully provide a safety net for those on existing networks, and our legislation would deal with the new networks, as Mr Hemphill has outlined.

Maurice Golden

I have a final question on the overall regulation of the localised monopolies of heat networks. Do you see a potential conflict between ensuring the lowest possible price for the customer and ensuring the best rate of return, and therefore the most attractive investment market, for companies and others to run heat networks?

Paul Wheelhouse

With your background, you will have a strong interest in regulatory matters, and you will understand the nature of creating natural monopolies in this situation. That is something that we have been very mindful of, and we have tried to ensure—both in the presence of any GB-wide consumer protection framework and in the steps that we are taking on LHEES, zoning and applications for consents—that the consenting process takes account of the underpinning of the case for the heat network, with the benefits that can potentially be provided locally.

We are also considering the impact on fuel poverty and the contribution that the network will make to tackling fuel poverty in the community as a part of the process that will be taken into account and that will hopefully be formalised, bringing us an understanding of how the natural monopoly will contribute to the achievement of our fuel poverty goals and targets.

We have made provision for the natural monopoly to last only as long as the payback of the infrastructure investment. Thereafter, other operators could potentially take over the operation of the network should there be a potentially more attractive proposition. We would welcome the committee’s views on that aspect and on the approach that we are taking to avoid higher costs for consumers.

In practice, most heat networks have demonstrated an ability to be at least competitive with gas—and, ideally, cheaper than gas. If they are well designed and situated in the right place—hopefully LHEES and heat zoning will ensure that—they could potentially contribute to reducing bills by up to 36 per cent. I hope that it will be extremely rare for there to be any suggestion that the natural monopoly was leading to higher costs for consumers. I hope that, in practice, there would be either small or big decreases in cost, depending on how well the heat network is run and designed. I hope that, with the approach that we are taking, we will enshrine those principles right from the start of the process.

Maurice Golden

Has any analysis been conducted on consumer confidence issues around people not having a boiler in their homes and moving to a district heat network? I know that there are some existing heat networks in place. Is that consideration a barrier, or is it not something to be concerned about?

Paul Wheelhouse

Anything that represents a significant change in someone’s day-to-day life will probably make people pause for thought, and they might be nervous before they commit. However, to address the convener’s request for us to come back to the committee with more information on public engagement and on how we would build the case for heat networks—which is an important point—we can hopefully come forward with a way in which the benefits of the heat network can be communicated to the consumer in an explicit, transparent and understandable way, so that they can make informed choices about whether to join the network.

As you know, we are not proposing to compel consumers to join networks, for a number of reasons, including issues around the European convention on human rights. However, it would be in the interests of everyone, including the investor and the licensing authority, to ensure that we have clarity about the benefits to the consumer of a heat network, so that people are able to make an informed choice that we hope will help the environment as well as their bottom line. A key part of providing that clarity will be information about the costs of the network—whole-life costs and the costs that consumers will have to pay.

The Convener

I am conscious of the time. We are grateful for everyone’s enthusiasm on the topic, but I would like to get to all committee members.

Minister, a point was raised with you about existing heat networks and the requirement for heat network consent, which I think are covered in sections 17 and 18 of the bill. Under section 18, the Scottish Government will presumably be looking simply to issue either exemptions or licences to existing heat operators, subject to their maintaining certain standards. I do not want an answer now, but perhaps you could clarify that point in writing to the committee.

Paul Wheelhouse

I am happy to do that, convener. I appreciate that it is a technical point, and we can come back to you with the in-depth answer that you require for the report.

Richard Lyle

We might be under time pressure, but there are many questions to be asked and many answers to be given. How much of a game changer will the bill be, minister?

Paul Wheelhouse

As I alluded to earlier, and as Mr Lyle is right to identify, more than half of the energy that we consume as a country is in the form of heat, which is not unusual for countries in northern Europe. In recent years, heat has accounted for between 51 per cent and 54 per cent of our energy consumption. If we are serious about tackling climate change, we absolutely must hit our goals in that respect. Tackling fuel poverty is a statutory obligation for the Government, and we have statutory fuel poverty targets. We are all aware of the rising energy costs for consumers, and there will be opportunities to provide people, and particularly those who are dependent on electric heating alone, with lower cost heat supplies through heat networks. We also need to decarbonise by finding alternatives to our gas networks over time.

The estimates that we have are that, by 2050, heat networks in Scotland will provide 9.7 terawatt hours of heat annually, which is about 12 per cent of what we need—that is in the middle of the range of 7 per cent to 17 per cent that Mr Hemphill referred to earlier. That would reduce energy bills by about £18 million a year by 2050, saving about 0.3 megatonnes of CO2 equivalent in annual emissions. That would be a significant, though not definitive, contribution to meeting our climate targets. That 0.3 megatonnes might offset something more difficult for society to contemplate in reducing our emissions.

There are also consumer benefits to take into account, including removing the risk, almost at a stroke, of carbon monoxide poisoning, the hassle of replacing a boiler every 10 or 15 years, boiler maintenance and the potential to be left without any heat at all. Heat networks have a back-up supply, so there would always be a means of providing an alternative heat supply to consumers. That is not to say that the system could not break if there was a leak—if it was a wet system—but, in most circumstances, there would be a fallback arrangement so that, if the principal heat engine of the network went down, there would be a back-up supply. There are multiple benefits, but primarily it is about tackling fuel poverty. In the best networks, we can save up to 36 per cent of someone’s heating costs, which will be a huge benefit to a family that is struggling to make a living, allowing them to have a warmer home, which we know helps with health and education. There is a range of associated benefits from that investment.

Richard Lyle

I totally agree. We hear the comment that some people have to choose between heating and eating, so heat networks could be good for consumers and for the climate.

Is there a risk that the duty on local authorities to consider undertaking the designation of zones will lead to

“a lot of studies but very little action.”—[Official Report, Economy, Energy and Fair Work Committee, 23 June 2020; c 6.]?

That is my concern. What action will the Scottish Government take to ensure that zones are designated and networks are built, and that we really mean what we say in the bill?

Paul Wheelhouse

We do mean what we say. Earlier questions alluded to powers in the bill for Scottish ministers to undertake heat network zoning if that was not being delivered properly or if an opportunity had been identified but had not been captured in the local heat and energy efficiency strategy. We want to work very closely with local government colleagues. Smaller local authorities, or even larger local authorities, might decide that they do not want to take on that responsibility, so Scottish ministers would perhaps have a more direct role in ensuring that that information was provided.

There is a big economic prize to be won in the development of heat networks in terms of investment and the potential for local employment opportunities. The local authorities that I have spoken to are keen for heat networks to be developed in their areas and, because of the nature of the projects, they see the potential for long-term sustained jobs in their communities. There are a number of reasons to believe that local partners will be very enthusiastic about heat networks.

Smaller local authorities, or local partners for whom this is a new area, may need support, and we have made commitments to resource some of the costs that would come with developing the LHEES and the heat zoning. We want to work with individual local authorities, if they are struggling to deliver those functions, to ensure that they get the support that they need.

Richard Lyle

Could an obligation to require local authorities to state whether they intend to issue zone permits or publish a commercialisation plan help to provide further certainty? In what circumstances does the Scottish Government expect to designate a heat network zone under section 40, and does it expect that that will be a regular occurrence?

Paul Wheelhouse

I would hope that it would not be a regular occurrence. As I said earlier, it is our intention to avoid overruling local authorities or disregarding local views, which would cause ill feeling. Insensitivity to local views would not be helpful.

Mr Lyle referred to section 50. If a local authority was unable to perform the function, or if we have evidence that particularly good opportunities have gone unidentified—an error of omission rather than a deliberate objection to something being in the zoning—the Scottish ministers would need to carry out that function. With reference to Ms Grant’s remarks, I emphasise that that would take place in consultation with the local authority. If we had to step in in that way, under section 40, we would not ignore the local authority in performing that function; indeed, we would also consult other relevant local persons, such as the local community, prior to the implementation of the zone.

In practice, though, I think that it would probably be very rare that we would have to do that. Local authorities seem to be genuinely enthusiastic about the local employment opportunities and how heat networks integrate with their local development planning process.

Richard Lyle

Lastly, does the timing of the bill, before the local heat and energy efficiency strategies become statutory, allow for adequate planning and preparation? Should statutory provisions for LHEES have come first? What role will communities and local authorities have in relation to the planning and dissemination of heat networks outside the local heat and energy efficiency strategies? As you know only too well, minister, it all comes down to how local communities and local authorities ensure that they get what they want.

Paul Wheelhouse

Mr Lyle, you are absolutely right. We need heat networks to happen in the right places, according to properly evidenced LHEES. All 32 Scottish local authorities have been engaged in piloting LHEES in their local area, and we are learning a lot from that about the resourcing that local authorities have, their ability to deliver LHEES, and the technical aspects of delivering LHEES at a local level. We are hopeful that the final nine that are piloting will report back in early 2021. In theory, all 32 local authorities will feed back to us any challenges that they face in delivering LHEES, which they are mostly piloting on a sub-area basis, to see how they work.

11:45  



Our proposal is to introduce a statutory duty to underpin LHEES. That will be largely to provide further investor certainty and give some standing to the LHEES to inform investor decisions. As they will be on a statutory footing, things will be done in a consistent way across all 32 local authorities. That will form an important piece of evidence to underpin their business case for putting together a heat network and going to finance to get the funding. It will give a bit of confidence to investors.

Our aim is to try to achieve what has been done in Denmark and Norway, where LHEES are seen as low-risk investments in those markets. Therefore, they can attract finance at a low cost of debt and allow the sector to grow.

We propose to put that statutory duty in place through secondary legislation under the Climate Change (Scotland) Act 2009. Obviously, that would be subject to approval of Parliament.

John Mason

You have previously said that you did not want to use compulsion or an obligation to connect to a network. Can you explain your thinking on that? If I replace my boiler, that is an individual decision that does not affect anyone else, but a heat network, by its very definition, is a community asset—a community thing—so is there not an argument for a bit of compulsion and a bit of an obligation to connect?

Paul Wheelhouse

From the outset, in the expert working group and the heat networks group, which we established more recently, there has been some debate about the degree to which we can mandate connections to a network. That has featured in the evidence to the committee.

We are taking forward the discussion about the obligation to connect in the context of the fairly complex legal landscape that we have, not only with reserved powers but with the European convention on human rights and other considerations that we have to take into account.

I appreciate that time is tight, convener, but it might be helpful if I set out a bit of detail, because this will be an important area of debate as the bill is considered. I cannot disclose legal advice—I hope that the committee will appreciate that—but I will try to outline some of the legal issues that arise in relation to mandatory connection to heat networks.

With mandatory connection, the reduction of demand risk is likely to involve more than just the power of a heat network operator to carry out works when they install equipment in order to connect a building to a heat network, their ability to keep that equipment in place and their right of access to maintain, replace and renew the equipment. It is more fundamentally a requirement on the owner or occupier of the building to use and, indeed, pay for the heat from that network. That would also appear to require obligations on a heat network operator to supply heat.

The power to carry out works to alter another person’s property without their permission and, indeed, in the face of objection, which is a situation that might arise, clearly involves an interference with that person’s property rights. Therefore, it has the potential to engage the provisions of the European convention on human rights. A requirement to use heat from a heat network is also likely to engage the provisions of the ECHR, as there would be an on-going interference with property rights, in relation to not just maintenance of equipment but the compulsory imposition of obligations by the terms and conditions of the arrangements for supply of heat.

I know that that is a bit legalese, but the convener will be very comfortable with that. We are trying to work within a very complex legislative landscape. The engagement of ECHR provisions is not, of itself, a bar to mandatory connection. It is possible to both interfere with property rights and comply with the ECHR, provided that it can be shown that interference is fair, proportionate and justifiable when balancing the impact on the individual against the public interest.

Indeed, part 6 of the bill already includes provision for the imposition of mandatory “network wayleave rights” by means of “necessary wayleave”. Those rights are framed in sufficiently broad terms to enable installation of

“heat network apparatus on, under or over any land”,

which would include buildings.

We have tried to put as much in the bill as we can to enable the efficient delivery of the infrastructure, in order to keep the capital costs to a minimum. We have also tried to allow for the possibility that, even if the original occupier of the building that is being connected is not interested in being part of the heat network, it will be as low cost as possible for the next occupier or owner of the building to say, “Yes, please, I would like to be connected to the network.” We are trying to be as proportionate and balanced in our approach as possible.

I apologise for taking so long with that answer, convener, but I thought that it would be helpful to set out to the committee the concerns that we have around ECHR.

John Mason

I appreciate your answer. I will let the legal brains that are greater than mine go through it in detail.

On the practical side, I accept that there are legal impediments—and yet. It is different in a new area. In the Commonwealth games village, which is in my constituency, everybody is on the network. That is fine, but I presume that we are focusing on existing buildings. In a lot of networks, some kind of anchor tenant, user or load is wanted.

If we cannot go down the route of a network being openly mandatory, are there other options, such as a carrot-and-stick approach? For example, in Denmark, there is a standing charge for people who are in a building in which they could connect but they choose not to. I wonder whether we could use the rates system or something like it to penalise people who choose not to join for no good reason. We cannot tell them to join, but we could tell them that they will have to pay more if they do not.

Paul Wheelhouse

I might invite colleagues to come on to the issue that you raise in that example from Denmark.

We recognise the point about anchor tenants. We have looked at, for example, requiring potential public sector anchor tenants to undertake building assessment reports. For example, Fife Council is playing an important role in the delivery of the project in Glenrothes, which originated with Fife house and some other key premises where Fife Council operates, including a leisure centre and a care home, being connected to the network. That has provided investor certainty and a demand load on the network, and we hope that it will grow from there into residential areas and other business premises.

The point that you make about anchor tenants is critical to making a viable case for a network investment at a local level. We are looking at how we can work with the public sector, initially by seeing how building assessment reports can inform the decision as to whether it would be sensible to connect a building to a heat network.

When it comes to individual consumers, there are the ECHR aspects as well as the issue of reserved powers. The most likely landing point is that there will be a GB-wide consumer protection framework, under which we will have a role in appointing a licensing authority to oversee in Scotland and to take on that responsibility. There will be some interactions with reserved legislation as well, which makes it difficult in terms of the points around standing charges and other issues that you mentioned. I invite James Hemphill and his colleagues to comment on that.

James Hemphill

That has been the major issue that we have grappled with internally, as well as with our working group and other stakeholders. I hasten to add that it is not just the developers that have advocated for that; there has also been support from public sector organisations, and it is worth mentioning that for balance.

That said, the working group that we ran last year could not come to a consensus on exactly how we should deal with the issue of demand risk and create the demand needed to make the business case stack up. I will give a few examples that we heard. The range of suggestions included heat networks having the sole right to operate a network within a certain zone; Scottish planning policy more strongly encouraging connection to heat networks for new buildings; and the public sector considering the total life-cycle costs of heating systems to support the commercial case for heating networks when it considers how it will heat its buildings in future. It seems that a range of opinions exist on the matter. The bill has delivered on at least one of the working group’s asks in part 4 of the bill, with regard to permits.

As the minister has said, part 6 of the bill also provides network wayleave rights, which could be useful in practice and provide an opportunity, if one can establish that connection, when a change of tenure happens or when a heating system needs to be replaced. The heat network provider could properly engage with the building owner and come to some sort of commercial agreement for the heat offtake.

My colleague Urszula Kasperek can talk more about the European aspects of the matter. I point to the fact that national planning framework 4 is coming up, that we have our existing commitments to non-domestic rates relief until 2032 and that new powers under the Non-Domestic Rates (Scotland) Act 2020 could be employed, so we can hopefully keep considering the issue both in and out of the bill in a lot of potential ways.

Urszula Kasperek (Scottish Government)

We have considered different European examples of the mandatory connection. We were told that the Danish model had worked over the years, so we examined it quite closely. It works on the basis of a compulsory standing charge—one needs to pay a standing charge to contribute to the communal infrastructure even if one is not using a heat network. We considered that option, but it poses a lot of different complex questions, such as whether that additional charge is fair when we already talk a lot about fuel poverty here, and how we can manage that challenge when we do not have the consumer protections that we can now provide through the bill.

In some of the German municipalities, there was a mandatory connection but no consumer protection, which led to some significant challenges for consumers. We wanted to avoid a situation wherein we would mandate someone to connect while being unable to sufficiently protect them. Another example is—I believe—Norway, where the planning system was used. As James Hemphill has previously mentioned, that system could be set up outside of the bill through the existing legislation.

Different options exist, but none of them was a perfect match for us and, as was previously outlined, all of them carry some risks.

Alison Harris

I would like to explore the question of multiple parties. How will projects where there are multiple parties—Scottish Water in Stirling, for example—be regulated? Will there be a degree of flexibility in the consents and regulatory frameworks to accommodate projects of that nature?

Paul Wheelhouse

I can perhaps duck all the difficult questions and get James Hemphill to address Ms Harris’s point.

James Hemphill

I might defer in turn to my colleague Urszula Kasperek. Our starting point is that the regulation applies to the licensed party. We would subsequently expect those obligations to apply to any subcontractor and the licence holder to be held accountable for the subcontractor’s actions and the need for the latter to meet those obligations. Urszula might be the best person to comment on that.

12:00  



Urszula Kasperek

In the example from Stirling that was given in one of the evidence sessions, Scottish Water Horizons operates the energy centre and Stirling Council is responsible for the supply of heat to the properties. That is quite a common model. One party is responsible for heat generation and another party is responsible for moving the water around and monitoring the business, for example.

As James Hemphill outlined, we would license one major party and, as set out in the bill, it would be the one that is responsible for the supply of heat. We would then need to ensure that any subsequent parties that were involved in the heat network complied with the conditions in the licence. It would be the responsibility of the licensee to oversee that.

We do not want to hinder any business models, because they are evolving. As we said, it is an emerging market and there will be different models, some of which involve a heat network that is fully vertically integrated, even with the production of the fuel. That might happen with a biomass boiler, for example. We do not want to hinder that if it is the most efficient way of delivering heat. However, we recognise that, if there are multiple parties, one of them has to be the responsible one. It will have to subsequently be bound by the conditions, and all the contractors will have to be bound by those conditions as well.

I hope that that answers the question.

Alison Harris

How can the interests of the consumer be best represented and enforced in projects where there is no single responsible party?

Paul Wheelhouse

The example from Stirling has been outlined. As James Hemphill alluded to, with a single licence holder and subcontractors, they will be bound by the conditions of the licence and, if they were failing to deliver on those conditions, including that of acting responsibly in relation to consumers, that would potentially be territory in which the licensing authority would have to take action. If there was a failure to protect the interests of consumers, the potential ultimate sanction would be revocation of the licence, subject to appeal, of course.

Obviously, we are slightly in the dark on consumer protection. We know the general direction that the UK Government is going with regard to the consumer protection framework that will apply across GB, and we are comfortable with the general thrust of what is being proposed, although, as with any legislation, the devil is in the detail. I hope that the consumer protection framework will provide a sound underpinning. We will also have the role of the licensing authority and enforcement authority in ensuring that licence conditions are met.

I do not know whether that, in a single bullet, addresses Ms Harris’s point, but I hope that it gives confidence that, as James Hemphill outlined, where multiple parties are involved in a single licence, ultimately, the top tier of the project will be responsible for those working underneath, and there will be protection in that regard.

I do not know whether James wants to add anything to that.

James Hemphill

It might be worth mentioning that, when we come to deal with specific sites, obligations could be attached to the heat network consent and, if there was a change in the consent holder or the person with primary responsibility for the site, that consent would transfer to the subsequent person, as would the obligations attached to it.

It might also be worth mentioning that we could use the consumer advocacy powers that were devolved to us in 2016 to dig into the issue a little more if more schemes started to move away from the vertically integrated model and it became a little less clear for consumers exactly who they were speaking to or how they could have their voices heard. We could look at that.

Willie Coffey

I want to ask the minister about one of the more exciting parts of the bill: building assessment reports. Part 5 is about local authorities assessing the viability of connecting their existing buildings to heat networks. Does that mean that only public buildings will be covered? Will privately owned or community-owned buildings be within the scope of the bill?

Paul Wheelhouse

I have not heard that part described as exciting before; that is very positive.

We place a duty on public sector owners of buildings to assess the viability of connecting their buildings to a heat network. The aim is to ensure that sufficient and reliable data is available to identify and sustain robust heat networks and network zones.

There are two reasons why the initial focus is on public sector buildings rather than private and community buildings. First, there are many public sector buildings: we estimate that there are about 20,000 in Scotland. The approach will not only create a substantial data source but help public sector building owners to identify whether connection to a low-carbon heat network is an option to help them to comply with their duties under the Climate Change (Scotland) Act 2009.

Secondly, public sector buildings are considered to be optimal buildings around which to anchor heat networks. I referred to that earlier in an answer to John Mason. That is because they usually have secure, long-term owners or tenants and they often have a substantial and predictable demand for heat, which helps with modelling for the heat network. That gives greater confidence that heat will be used and about when that will happen, enabling the efficient design of networks.

The bill provides for the duty to be extended to other non-domestic buildings, should heat networks find it challenging to identify other suitable anchor loads through commercial negotiations. At present, if we are focusing on building assessment reports only for public buildings, there would be a need for negotiation between heat network developers and local, non-domestic, commercial building owners.

There is the power to extend the duty, but, given the economic and financial challenges that Scottish businesses currently face, our view is that care must be taken not to add to that burden now. There is scope to do so in future, should that prove necessary. Currently, under the Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016, owners of larger non-domestic buildings—those over 1,000m2—are required to undertake an assessment of energy performance when the property is sold or rented to a new tenant. That assessment contains much of the information that would be required, should building assessment reports be extended to such buildings. I hope that it would not be too onerous for owners of such buildings to take on that responsibility, should we choose to extend it to them in future.

Willie Coffey

That was very thorough.

Energy performance certificates have been in place for a number of years—indeed, since 2007. What will be in a building assessment report that is not already in an energy performance certificate report? Surely we already have something pretty similar.

Paul Wheelhouse

With your permission, convener, I will ask James Hemphill and Urszula Kasperek to address that question about the differences in content between the EPC and the building assessment report.

James Hemphill

Energy performance certificates have come up a few times in the evidence that the committee has heard. It is worth clarifying that nothing in the bill or the policy memorandum says that we will be using or relying on EPCs as part of the methodology for the building assessment report.

Our colleagues at Zero Waste Scotland are currently developing the methodology for how to undertake a building assessment report. With the minister’s agreement, we will be happy to provide that to the committee in due course.

We do not expect preparing an assessment report to be a resource-intensive exercise. We envisage it as something that can be done by a building manager or a facilities manager. It will contain information that is readily available to those people, such as the heating bill or anything that is part of their climate change reporting duties, such as their annual energy consumption, or whether the building uses a wet system with radiators. Those are important things for the developer to know so that they can understand how efficiently a building can be retrofitted and how much that would cost.

Willie Coffey

I have a final question for the minister. I think that you said that about 81 per cent of residential premises depend on gas central heating systems at the moment. I have not had the chance to read all the report that we have received from Denmark, but it suggests that two thirds of Denmark’s households are connected to district heating systems, so Scotland is on quite a catch-up journey. Are you confident that we can close that gap? How soon might we do that?

Paul Wheelhouse

That is a very good point. Based on our discussions with colleagues in Denmark and the evidence of what they have achieved, I think that a large part of the surge in the establishment of heat networks across Denmark happened from the mid-1970s onwards. As I mentioned, Denmark used natural gas to create heat networks at a very low cost, in effect removing the need for someone to have an individual boiler in their premises. That is probably a big reason why Denmark has rocketed ahead in relation to the percentage of premises that are covered by heat networks. It then migrated those systems over to renewable fuels such as biomass and other sources, over time.

We will have to do that in a different way, in a different era and without the advantage of having a very cheap source of fuel—natural gas—to do so. That will be a challenge for us. James Hemphill and I have referred to various estimates ranging between 7 and 17 per cent, which does not sound very high in comparison to Denmark, but that reflects our rurality and the nature of the communities in which it is felt that local heat networks might provide a viable and competitive alternative heating system.

I hope that, in practice, we might be able to overachieve on those figures. If we were to identify through local heat and energy efficiency strategies that there was a viable and attractive opportunity to use heat networks with, ideally, a renewable heat source in a larger share of Scotland’s communities, I would be enthusiastic about pursuing that, as I am sure that my successors would be. We are trying to be realistic in the range that we have provided. We have provided costings and benefits based on the mid-point of that range—about 12 per cent—but I hope that, in practice, we will be able to overachieve on that.

As Mr Coffey rightly says, Denmark’s achievements are extremely impressive, but the country benefited from using fossil fuels to help to make the networks cost competitive to start with. In the context of the climate emergency, we are not able to do that. Who knows where we will be able to go? Hydrogen might be a useful fuel in the future, so that might provide us with an attractive opportunity. In the context of our wider work on heat decarbonisation, we will look at the role of hydrogen and other biogases in providing alternatives. I hope that that answer is helpful to Mr Coffey.

Willie Coffey

It certainly is. Thank you.

Andy Wightman

I have some questions about governance. The Delegated Powers and Law Reform Committee’s report says that the Government has 45 regulation-making powers in the bill. In total, the bill contains somewhere in the region of 60 to 70 ministerial powers, which include important ministerial powers relating to licensing and consenting. In contrast, local authorities have five such powers.

There has been quite a bit of discussion about Denmark. Denmark has 98 municipalities, which are the heat planning authorities. Why is there such a contrast between Denmark and Scotland in relation to the degree of decentralisation that is proposed?

Paul Wheelhouse

I should say from the outset that we have not aimed to take a radically different approach from that taken in Denmark in that respect. Based on the work of the heat networks regulation working group, we have landed where we have done in relation to the consensus around the powers that are needed and their distribution.

Mr Wightman is right to identify that we will rely heavily on delegated powers. We expect that there will potentially be a couple of years’ worth of work through the Delegated Powers and Law Reform Committee to address the fact that the bill is regulating a market from scratch. We are trying to create, as simply as possible, the appropriate framework for developing a regulated market.

12:15  



We looked at other markets, in particular in utilities such as gas, electricity and water. Those regulatory systems have developed over a number of years through multiple pieces of legislation, but we do not have that luxury in this case—as I said, we are starting from scratch. We are dealing with a complex technology—or rather, technologies—and our view is that flexibility is needed to adapt the regulatory regime over time as the market in technology matures in Scotland.

That can be achieved only through the creation of powers in primary legislation through the bill, with detailed regulations being determined through secondary legislation. As I understand it, the DPLR Committee, in its response, raised only one question with us on the use of delegated powers in the bill, and overall it seemed to be comfortable with that approach.

We are happy to see and engage with the committee’s recommendations on the balance of responsibilities between the Scottish ministers and local authorities. I recognise Mr Wightman’s point—I have not totted up the numbers in the way that he mentions, but I recognise that he is probably right in his assessment of where the balance lies.

In response to questions from Ms Grant and other members, we have tried to set out how we want to engage with local authorities and local communities. We are trying to create a consistent approach across Scotland. It is possible that heat networks will cross local authority boundaries; there are a number of different permutations in urban settlements and suburban areas in particular. We have struck a balance, but if the committee feels that the balance is wrong, we would be keen to hear about that.

James Hemphill might want to comment on comparisons with what has been taken forward elsewhere, including in the countries that Mr Wightman mentioned.

James Hemphill

Norway is another example that we have looked at. It started, at least initially, with a more Government-led, or centrally led, approach but gradually, over time, responsibility for the system has devolved to local authorities. The bill allows for regulations to change the enforcement authority from the Scottish ministers to another person, so the door is not closed to that option in the long term.

Andy Wightman

In Denmark, the heat distribution networks are owned predominantly by municipalities and consumer co-operatives. There is also a legal not-for-profit requirement in operating a network.

The model that we are discussing looks very centralised, with ministers consenting and large multinational corporates coming in. Was any consideration given to imposing a not-for-profit rule on the operation of heat networks?

Paul Wheelhouse

I will ask James Hemphill to comment on that and say whether it was looked at by the working group. However, I stress that I would not necessarily agree with Mr Wightman’s characterisation of potential investors. Yes, there may well be larger investors—I would be surprised, given the environment that we are creating, if there was no interest even from outside Scotland, with larger corporates wanting to come in. However, we have also created the space to enable community-led projects to be taken forward, and we have considered ways in which we could potentially support such projects. For example, it would be at ministers’ discretion to decide not to impose on community projects a requirement that certain costs, such as licensing and application costs, must be offset.

We are looking at how we can encourage diversity of ownership, and we are aware that in Scotland there will potentially be a larger number of small networks. We would clearly want those networks to be properly regulated, but in our engagement with UK ministers we are keen to ensure that any consumer protection framework reflects the nature of the smaller—potentially even island—projects that might have to be delivered in Scotland. We would want to ensure that the regulations and frameworks are proportionate and do not apply the same rules to a large corporate and to a smaller locally led project that is struggling to be viable.

We are trying to get the balance right, and I would certainly welcome the committee’s thoughts on those aspects of the bill. Nonetheless, I emphasise that we are certainly not going at it purely from the point of view of attracting large multinational-type investors, which was part of the thrust of Mr Wightman’s question—

Andy Wightman

My point was that in Denmark, heat networks are operated almost exclusively by municipalities and consumer co-ops.

Paul Wheelhouse

It has obvious potential. I would hope that some local authorities might be interested in running their own heat networks. In those circumstances, the powers for Scottish ministers to be the consenting authority could be helpful, because that would enable such a project to be brought forward on an objective basis, without any conflict of interest.

I would certainly be enthusiastic about local authorities that want to bring forward projects. I agree with Mr Wightman in that respect. However, we have not ruled out larger investors, which I think may be the point that Mr Wightman is looking for.

Andy Wightman

On part 6 of the bill, which deals with compulsory purchase and wayleave rights, did I catch you correctly earlier when I think I heard you say that Professor Paisley had welcomed the approach that had been taken in part 6?

Paul Wheelhouse

I was referencing specifically the transfer scheme, when I mentioned that Professor Paisley—

Andy Wightman

We have had evidence from Professor Paisley, which you have no doubt seen, in which, for example, he criticises section 58 as being “oddly drafted”, in that it does not confer the primary right to transfer thermal energy. He is critical of the fact that there are no powers of positive prescription in the bill. He is critical that wayleaves are not being created as real rights in law, bringing everything that a real right would. He considers that section 60, in particular, is poorly drafted, for example in its reference to

“parties bound by the wayleave right as the ‘owner’ and ‘occupier’”.

He says that that is “English inspired nonsense”.

Will you assure us that you are going to take seriously those observations from Scotland’s pre-eminent expert on the law of wayleaves and servitudes? When a lot of pipes are being put underground, all sorts of legal complexity could arise, and it is really important to know who has what rights. Central to Professor Paisley’s criticism seems to be the fact that the bill creates a novel framework for doing that, when in fact the existing system of servitudes, real rights and positive prescription is well tested and well understood, and gives far greater certainty.

Paul Wheelhouse

I am very aware of the value of Professor Paisley’s evidence to the committee. I know that he has outlined, as Mr Wightman has said, a number of areas involving the creation of real rights, as he put it, so that they run with the land—I think that that was the term he used—and bind successive landowners, given the long-term nature of those heat networks, which may take anything between 15 and 40 years to recover the investment costs. They are unusually long-term investments, in that respect, and not unlike large-scale wind sites or other major energy investments.

The provisions in part 6 largely follow those that are contained in electricity legislation, and provide equivalent rights to those that are available to other utilities. One difference is that network wayleave rights would bind any subsequent owners of and tenants on the land.

As I have said, I am aware of the evidence that Professor Paisley has provided. We are open to discussions on the matter, if the committee recommends it as an area that needs to be tightened up, especially if proposed changes would ensure that the bill does not repeat any issues that are occurring at the moment in the utilities sector. I am aware, when it comes to broadband, electricity and other investments, that there are occasionally real difficulties in delivering services to consumers, when landowners put their feet down and do not allow that to happen.

Following the introduction of the bill, we have also become aware of the potential to augment part 6 to ensure that the rights are recorded transparently and are accessible, as Professor Paisley alluded to in his evidence. We would be happy to consider, alongside the committee, how that can best be done. We are open to suggestions from the committee on that point. I hope that that is helpful.

Andy Wightman

Thank you; it is.

I want to follow up with a few detailed questions that have arisen from comments that have been made. First, a question has arisen from a response that Ms Kasperek gave a minute ago, in relation to the Stirling project with Scottish Water Horizons. Section 2(1) of the bill says that

“A person must not supply thermal energy by means of a heat network unless the person holds a heat networks licence”,

and that it is an offence to do otherwise. From that language, my understanding is that the person who is “supplying” is the person who is delivering it to the householder. Is that not the case?

Urszula Kasperek

Yes, that is the case. It is the organisation that is responsible for transferring the heat.

Scottish Water Horizons is operating the heat generation; it is making sure that the water is warmed up. However, as far as I am aware, when it comes to legal responsibilities, Stirling Council is legally responsible for the delivery of the thermal energy. The pumps may be in the energy centre, but the legal responsibility for delivery will lie with Stirling Council, although—[Inaudible.]

Andy Wightman

We seem to have lost Ms Kasperek there. A question arises, in any case. We have Mr MacLeod with us—I do not know if he wants to say anything.

Norman MacLeod

Only to observe that each individual set-up will have its own managerial or company structure. I am not sure that it is possible to delve into those matters in such a level of detail. The general proposition that Mr Wightman is making is correct: that the legal entity is responsible for supply, it must be licensed, and the person operating the network must have consent. Who that person is in an individual case would have to be based on consideration of the management and legal structure of the particular heat network.

Andy Wightman

I understand that, but I am concerned that we are clear about what section 2(1) actually means: that I, as a householder in receipt of heat from a heat network, will pay someone for that heat, and they are the supplier who requires the licence. If that is clear in the minds of government and there is no ambiguity in that, that is absolutely fine.

Returning to our earlier discussion about appeals, section 24 and, I think, some provisions around section 70 or so, cover appeal rights that could be created by regulation. However, that is in relation to enforcement. There are no appeal rights in relation to section 11, which is about licence revocation—that seems to rest wholly with the licence giver. Presumably, revocations would be based on a clear breach of the legal terms of the licence.

Paul Wheelhouse

I think I may have been referencing appeals around the revocation of licences earlier on, in passing. I can come back to Mr Wightman on the detail if that was not clear at the time. The complexity that I was presenting, which may be the source of any confusion, concerned the position under the current drafting, and in advance of knowing exactly what is in UK consumer protection legislation. We have created space for Scottish ministers potentially to be the enforcement authority, or alternatively to appoint some other body to be the enforcement authority. I appreciate that there is a little bit of confusion about the appeals mechanism, so we can go on to a discussion of the role of the Court of Session and the sheriff courts in that context. In an instance where there was a revocation of a licence and a subsequent appeal, who would that go to?

We can come back to the committee, if that would be helpful, to make clear our exact expectations on revocation of licences and the appeal mechanism, and on how that might be different if we get the clarity that we are seeking from UK ministers on the appointment of a licensing authority and other measures.

Andy Wightman

Thanks—I was just a bit confused.

On transfers of assets and transfer schemes under section 74, what happens if no one is willing to take on an asset? As a sort of sub-question of that, what about the decommissioning of schemes?

I would ask you first to address the question of what happens if no one is willing to take on an asset owned by an entity that has gone bust or that cannot operate for other reasons.

Paul Wheelhouse

I will check with James Hemphill in a second to see if my interpretation is correct, but ministers ultimately have powers to step in and take on responsibility for a heat network in that situation. We would hope that, if we have gone through the process properly and new networks have been established under the LHEES and the zoning for heat networks, we will have identified that a competitive technology in the locality concerned is providing a good outcome, with appropriate use of the technology in the area under a well-designed scheme, so there should clearly be a strong market underpinning for that network, which would allow someone else to take on responsibility for it.

To answer Mr Wightman, I ask James Hemphill to confirm that Scottish ministers could, if there is no commercial interest in that site, ultimately step in to take on responsibility for it until such time as an alternative provider could take it on.

James Hemphill

That is correct.

12:30  



Andy Wightman

I do not see that in section 74. The minister talked earlier about a contrast with the UK approach, where there are step-in powers, and here, where there will not be step-in powers, so I am a bit confused.

Paul Wheelhouse

[Inaudible.]—and the relative interaction between the two pieces of legislation. I hope that I have not misled Mr Wightman in that respect. We set out our transfer schemes in part 7 of the bill, which potentially could have Scottish ministers stepping in to take over responsibility of a network should there be no commercial interest in it.

Andy Wightman

Convener, I am not sure if the broadcasting team were broadcasting the early part of that answer and, therefore, the Official Report will not have captured it. Would it be appropriate to ask the minister to repeat it briefly?

The Convener

Which part precisely?

Andy Wightman

The minister had earlier said that the UK was taking an approach on step-in powers whereby ministers and Government would step in as a last resort whereas the Scottish Government was not taking that approach, and I was querying the fact that, in answering my question about who would ultimately own those assets if there was not anyone willing to take them on, the minister had said that the Scottish Government was not going to take a step-in power.

Paul Wheelhouse

I will repeat the point. I hope that I have not caused any confusion and I apologise to Mr Wightman if I have. We are aware that the UK Government is proposing to take forward legislation in the early part of next year that would set out its step-in powers, which would certainly include, in response to Mr Golden’s point earlier, the ability to provide for a situation where an existing network failed. We just need to understand how that interacts with part 7 of our bill, where we set out transfer schemes that could include Scottish ministers taking over responsibility for a heat network in a similar situation—for example, for a new network. We need to understand the interaction between the two pieces of legislation; it is not a fundamentally different approach that the UK minister is taking, but it is different legislation and, therefore, we need to understand the interaction between the two.

Andy Wightman

Given that, if it passes at stage 1, the bill will be enacted before the UK Government’s bill, am I right to presume that, therefore, the regulations under section 74(5) will enable you to make those necessary adjustments and adaptations to anything that arises at a UK level?

Paul Wheelhouse

I will check on that point with James Hemphill, if I may, convener. Certainly, in relation to the timing of the bill, I hope that we will have sufficient foresight, in collaboration with BEIS ministers and their officials, about what they are proposing to put in the bill. It could of course be amended as it passes through the House of Commons—I appreciate that point—but we will do as much as we can to try to design out any risks that could undermine our legislation. On the section 74 point, I will hand over to James.

James Hemphill

That is correct. The powers there have been left relatively broad to enable us to, as the minister said, understand how the bill will interact with what the UK Government intends to do.

I will get back to the committee to clarify the earlier point in relation to the obligation on Scottish ministers to step in. I will clarify where that is set out. It is set out in the bill but—I apologise—I do not have the section number to hand.

Andy Wightman

Thank you.

The Convener

I thank the minister and his team for coming in today. We now move straight into private session.

12:33 Meeting continued in private until 12:50.  



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23 June 2020

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6 October 2020

What is secondary legislation?

Secondary legislation is sometimes called 'subordinate' or 'delegated' legislation. It can be used to:

  • bring a section or sections of a law that’s already been passed, into force
  • give details of how a law will be applied
  • make changes to the law without a new Act having to be passed

An Act is a Bill that’s been approved by Parliament and given Royal Assent (formally approved).

Delegated Powers and Law Reform Committee's Stage 1 report

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