Heat Networks: Moving from feasibility towards investment decision

Heat networks are a classic example of one size does not fit all. Unique local factors including heat sources, demographics, development density, urban history, civic partnerships, and risk appetite combine to mean that the right technical and commercial solution for one location can be suboptimal for another.  

This case study will explore how local factors have determined the preferred delivery approach for three different local authorities.  

This is a critical early step that helps move thinking from a technical study to a commercially deliverable project. Working towards a preferred delivery model shifts mindsets from ‘could we build a network?’ to ‘how do we build a network?’.  

The National Wealth Fund supported all three councils using a logical step-by-step approach across a series of face-to-face workshops. Sessions focused on agreeing strategic aims, identifying critical success factors (CSFs) and redlines, and an options appraisal to identify a shortlist of potential solutions. The shortlist was then challenged with decision makers and external parties to refine thinking and agree a preferred delivery model.

The solutions and the rationale for their selection are summarised below. 

A council in the East of England progressing a c£140m, 90GWh heat network which aims to connect 21 public sites while ensuring commercial viability and offering financial benefits to connected customers, versus individual heat pumps.

With our support, they identified with partners that their collective CSFs were to decarbonise their buildings using cost-competitive and reliable low carbon heat. This was driven by the volume of public sector partners with firm net zero commitments seeking to connect whole sites. Concession and golden share models were considered but rejected, as they felt that a public sector led and funded model would achieve lower cost of capital and hence lower heat charges.

The partners jointly selected a public sector led JV model, funded by low-cost debt and partner equity. The higher delivery risk is acknowledged and mitigated by experience across the partnership and commitment to bring in external technical, commercial and construction management expertise.

The unique aspect of this project was the considerable effort to assemble a strong group of potential customers. This resulted in a co-designed process from the outset,  generating confidence in the approach, securing strong customer commitment and co-investment in the JV from selected partners.

A Scottish council considering developing two heat networks to supply low-carbon heat to an airport and a town centre. The project includes an £8m extension of an existing network to the airport and a new £80m network supplying key public sector sites in the town centre.

Following guidance from the National Wealth Fund, they identified that the two potential networks were very different, While decarbonisation was a shared CSF; the town centre network prioritised reducing customer costs and addressing fuel poverty whereas the airport network prioritised reducing risk to the council versus customer savings.

This realisation drove different delivery models: a concession model for the airport and a council led approach for phase 1 of the town centre network, with the potential for a private partner to coinvest in later phases. This was selected primarily due to the lower cost of capital available to the council and the ability to set heat costs. The council is considering a blended technical solution using heat pumps, lower cost heat generation, heat storage and carbon optimised controls to deliver day one carbon savings whilst reducing heat costs.  

A London Borough planning low carbon heat networks in three priority areas, collectively requiring over £60m of investment. These areas were selected due to the presence of social housing, Council owned buildings and land, and key anchor loads including a hospital, university buildings, and planned new developments. As part of the first National Wealth Fund workshop, they identified that the three priority areas shared similar characteristics, so a single model was deemed appropriate and efficient.

The CSFs were to avoid cost increases using reliable and low carbon heat, whilst reducing risks to the council and avoiding impacts on the revenue budget. The council identified that they did not have sufficient experience to mitigate risks and financial exposure to the council, therefore ruling out council led approaches. Instead, they selected golden share as to allow them to leverage their physical assets and support services to secure a degree of control over delivery.  

Conclusions  

Putting effort into a clear-eyed assessment of local priorities early in the project lifecycle, using an open-minded assessment of all potential delivery models can kick start a project. Involving senior internal staff and partners can enhance understanding and buy-in to the project, and moving rapidly to select a preferred model helps progress the project towards construction. This decision should be reviewed at key project gateways, market tested and refined to ensure deliverability. 

All projects are progressing to the next stage, following formal National Wealth Fund support ending, including one seeking GHNF support for construction and commercialisation, potentially supported by low-cost borrowing from the National Wealth Fund.  

The National Wealth Fund has significant experience of supporting local authorities to consider potential heat network delivery models and to select a preferred model that suits the unique local circumstances. If you would like to discuss your project with us, please email us.