carbon limited

In the previous post, I highlighted where innovation is taking place in the UK district heating market. In this post, I’d like to flag up some important areas where innovation isn’t happening – but really should be. Below are a few of the biggest blocks in the market, where change is desperately needed but so far not forthcoming.

Connect the dots

Most of the expansion in the UK district heating market is driven by regulations: planning requirements (like the GLA’s London Plan) and Part L of the building regs. This has resulted in lots of little heat networks scattered around the UK’s urban centres and is in stark contrast to the more joined up approaches taken in some European markets.

In order for district heat to fulfil its potential, all these little systems need to be interconnected as part of wider networks. This is necessary for two main reasons. First, to fully achieve the aim of stripping carbon out of the heat sector, the consumers on these little networks need to be connected to sources of lower carbon heat: e.g. CCGTs or waste heat from industry or waste incineration.

Second, to address the concern that small heat networks are (unavoidably) monopolies, we’ve got to break up the vertical (generation, distribution and supply) and allow multiple heat generators to compete to supply consumers on heat networks.

None of this is possible until the patchwork of small networks is integrated into a bigger whole. And yet, while work has been done on the technical requirements of interconnection, no one has come up with a good commercial basis for this to happen.

Big old gap in the market.

Whose pipe is it anyway?

Nearly half of the energy we use in the UK is for heat (most of the rest is for transport). To decarbonise heat and meet our emissions requirements under the Climate Change Act, DECC is relying heavily on the expansion of low carbon district heat networks. And yet there is no standard legal basis for a private company to own heat pipes buried in the ground.

A statutory electricity, water or gas company can happily own buried assets and has a right to dig them up if needed. But heat network operators aren’t a statutory authority. For heat networks, when you bury a pipe in the ground, it becomes the property of the land owner. You can try to apply workarounds like wayleaves or other legal acrobatics, but fundamentally the problem remains.

There are one or two exceptions: Pimlico District Heating Undertaking for one. But they’re an exception because they were formed by an act of parliament. For all companies not fortunate enough to have been formed in that way, and that would aspire to operate in a heat distribution market, there’s no reliable ownership model.

Resolve this problem and private investors are free to pour money into networks, knowing they’ll continue to own those assets and have a right to access them in the future. Without this certainty, investors are likely to be skittish and distribution network projects may be stymied.

You fellas have nothing to worry about. I’m a professional.

At the moment, there are only two commercial models for heat networks: ESCO and owner-operator.

In the first model, schemes of more than four or five hundred homes might attract a commercial ESCO player to come in, design, build and operate the heat network and central plant. The significant risk of maintaining high efficiencies is off loaded to the (profit-making) company that slots in between the landlord and the tenants. This model makes up about half of the district heat market.

Smaller schemes and those unwilling to adopt the ESCO route must go it alone. Under this model, the freeholder owns the central plant and provides heat to customers, taking all risk for inefficiency. This model makes up (roughly) the other half of the heat market. And the risks these operators face are potentially huge. I’ve worked on schemes over the past few years where the operator has managed to lose six, seven, even eight hundred pounds per flat in a year simply because the efficiency built into the tariff didn’t match reality.

So at the moment when it comes to outsourcing operational risk, it’s all or nothing. Either you’ve got to hand everything over to a profit making ESCO or you’re forced to go it alone.

All this would change if only someone would offer an energy performance guarantee (EPG), where they promise to achieve minimum efficiencies on behalf of the owner, putting a sufficiently beefy balance sheet on the line as collateral. The problem is, for such a proposition to be affordable, it must be low risk to the third party operator. And the only way to reduce risk is for the operator to understand the network and be confident they can achieve the efficiency targets.

At the moment, no player I know has the historical operating data needed in order to gain this confidence. There are a few organisations circling this space, including one or two large European contractors, but they don’t have the data or experience needed to make it work (loss leaders are fine, but they’re no foundation for a sustainable market). There are also some UK SMEs eyeing this space, but they haven’t got the balance sheet to give proper comfort.

What’s needed is an innovative data-based model to de-risk network efficiency, but so far nothing credible has emerged.

The above is a selection of areas that are crying out for innovation. I’m sure there are more. Let me know what I’ve missed.