We recently attended the Department of Business, Energy and Industrial Strategy (BEIS) Heat Network Delivery Unit (HNDU) Workshop to explore their newly drafted Detailed Project Development Guidance. This is the latest documentation by the Delivery Unit aimed at supporting standardisation of the process for developing local authority (LA)-initiated heat networks. Sustain Senior Manager Ben Lynch and Anthesis Associate Director Jono Adams provide reflections of relevance to LAs and the wider range of actors currently playing in the market.
The workshop was an informative session, and we believe that the new guidance provides a useful compilation of the current thinking, supported by some helpful materials, tools and templates. However, while the guidance provides a useful introduction and framework for project developers, we have observed several emerging themes that act as consistent barriers to project installation. We have been exploring some of the outstanding areas where further insight is now needed.
Firstly, there is an unfortunate misalignment between the expectation on LAs to catalyse and deliver heat networks and the current austerity agenda. LA revenue budgets and their ability to borrow is coming under increasing pressure from Treasury; this pressure on LA budgets means that many projects are largely under-resourced, particularly where the preferred or necessary business model is LA led. We can’t realise the potential from heat networks while LAs are fighting these conflicting demands and many viable projects will simply stall pre-construction. HNDU needs to act to unlock this conflict and provide the relevant steer.
Secondly, the LA market’s understanding of, and exposure to, developing heat networks varies greatly. For those starting on the journey, this guidance is valuable in giving them an initial insight into the broad range of considerations, whether technical, strategic or commercial. However, it is questionable whether it leads these authorities out of the inertia of the business modelling cycle. With so many project internal rates of return landing in the economic / sub-economic range of project investment, the requirement on the LA to take a leading role in project development is likely to remain. The guidance does little to provide a defined road map for these projects, linked to the LA approval process, which gives the reader a clear understanding of timelines and resource requirements needed to get to implementation.
For more experienced authorities, the document – at 550 pages – is somehow both inaccessible and lacking in the necessary detail required to answer esoteric, project-specific questions. The lead-in strategic section meanders through project roles, drivers and policy, but does little to unpack and explore some of the key issues that are faced by LAs in this phase of development. It may help an LA to move towards a preferred governance and ownership model but it does little to answer the questions that then follow. The old paradigm of risk and control remains, but without any substantial material that will allow LAs to make confident decisions on how to manage these. Rather than simplify and streamline the decision-making process, the guidance instead poses more questions that can often only be answered by external parties. Creating a reliance on the consultant market will not support the growth in internal expertise that is needed to deliver at scale.
What is now needed is to build on the documentation so that LAs can make more informed decisions on a preferred business model. In our view, the key barrier in unlocking the huge pipeline of projects the HNDU is supporting LAs with are the detailed (and often fairly specific) hurdles identified from well-developed feasibility assessments. Making the decision-making process clearer and more immediate would be helpful, enabling LAs to focus resource on the questions that are unique to their projects.
Given that many projects exhibit similar characteristics in terms of lead technology, financial performance and connecting building typology, some more direct guidance on governance and financing for these projects would catalyse a large proportion of the market. In this respect, further standardisation within the well-established contracting structures would expedite the procurement process and reduce transaction costs – two key stumbling blocks in project development.
Furthermore, direction is needed on developing projects that are practically deliverable. Too often the scale of projects adds complexity that makes them impossible to deliver within the constraints of many LA skills and resources. There has been a consistent pattern in the projects that we have seen delivered. They have been well-defined, properly resourced and developed as part of a longer-term vision. It is successful delivery and operation that engenders confidence in a LA to meet the needs of customers and investors alike.
We’ll be continuing to work closely with HNDU to input our market insights and work towards achieving the ambitions that our collective climate and energy targets require.