HEAT NETWORKS INVESTMENT PROJECT SCHEME OVERVIEW

April 2018

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Table of Contents

1. Introduction ______________________________________________________ 2

Aims of this document _______________________________________________ 2

Policy Context ______________________________________________________ 3

Heat Networks Investment Project (HNIP) ________________________________ 4

Wider benefits ______________________________________________________ 5

2. Aims & Objectives of HNIP __________________________________________ 7

3. Scheme Administration & Delivery Partner functions_______________________ 9

Application process _________________________________________________ 11

Principles and methodological approach _________________________________ 12

4. Summary of HNIP scheme __________________________________________ 13

B. What will HNIP provide capital funding for? _____________________________ 13

5. Next Steps & Expressions of Interest __________________________________ 18

Annexes ____________________________________________________________ 19

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1. Introduction

Aims of this document

1. This document sets out a high level summary of the main features of the Heat

Networks Investment Project (HNIP) scheme, when the scheme is expected to open for

applications and how the programme will be delivered including through the

appointment of a Delivery Partner. The Heat Networks Investment Project is a

Government Major Project1 which will invest £320m of capital funding in heat network

projects through grants and loans.

2. You should read this document if you are:

A project sponsor or owner/operator thinking about applying for funding support

and produce the required supporting evidence to give your projects the best

chances of receiving this Government support.

An investor or supply chain company seeking to understand the types of

networks that HNIP is set up to support and/or seeking to make the most of the

growth opportunity this investment unlocks

Anyone seeking to understand why the Government is offering investment support

through HNIP, what we are seeking to achieve and how we plan to deliver this,

including overall scheme design and administration.

3. If you are exploring whether to enter the heat networks market, then you can find

further sources of information, including:

‘What is a Heat Network’ publication, available on our website at: https://www.gov.uk/government/publications/what-is-a-heat-network Investing in Heat Networks: https://www.gov.uk/guidance/heat-networks-overview#investing-in-heat-networks

1 https://www.gov.uk/government/groups/major-projects-authority

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HNIP Direct Applicants Participant Type Definition

Project sponsor Entities initiating development of a heat network and/or providing a source of funding. Includes property developers, Local Authorities, universities, business park owners, leisure centres, schools, commercial/social landlords, community organisations, charities etc.

Project owner/operator Public or private sector companies owning and operating heat networks. Includes Energy Service Companies (ESCos).

Policy Context

4. Heat accounts for around a third of UK carbon emissions and almost half our energy

usage2. Meeting our legally binding climate change targets will require the complete or

near-complete decarbonisation of heat. Heat networks have the potential to play a key

role in the long term decarbonisation of heating as they distribute heat from a central

source to a range of customers and so are able to utilise the cheapest forms of low

carbon heat that are available locally. In the future, networks can be progressively

decarbonised with the most cost effective solutions available to the market at any given

time.

5. The Clean Growth Strategy3 set out the Government’s strong commitment to

significantly expanding the heat networks sector. In each of the Strategy’s illustrative

pathways to 2050, heat networks are projected to meet 17% of heat demand in homes

and up to 24% of heat demand in commercial and public sector buildings.

6. By investing in heat networks the government is shaping this new market in line with

our ambitious, modern Industrial Strategy4. Heat networks represent a significant

2 Department for Energy & Climate Change - UK Government. ‘Emissions from Heat: Statistical Summary’

January 2012, P3 3 Department for Business, Energy and Industrial Strategy – UK Government. ‘The Clean Growth Strategy:

Leading the way to a low carbon future’ October 2017 4https://www.gov.uk/government/topical-events/the-uks-industrial-strategy

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opportunity to upgrade part of the UK’s energy infrastructure and seize the opportunity

for business that new technology presents. They support local growth and

regeneration, and generate new revenue streams for UK industry and local authorities.

As heat is generated and consumed locally, the benefits of more affordable heat

delivered through networks are felt by the communities they serve. Investing in heat

networks is a good example of how the government’s Industrial Strategy is creating an

economy that boosts productivity and earning power throughout the UK.

7. A range of barriers are impeding the development of good quality heat network projects

and therefore market growth. These include:

o a lack of information on the risk profile of heat network investment, which

adversely affects investor perceptions of risk

o a funding gap between hurdle rates and project internal rates of return

o lack of understanding of the technology by end users, and

o an underdeveloped supply chain.

8. The Government and industry are addressing many of these barriers to deployment by

driving up standards and consumer protections and through creating a set of exemplar

projects. These projects will demonstrate that affordable, reliable and low carbon heat

can be delivered with manageable levels of risk.

9. Government investment in this market is built on measures that the heat network

industry has already brought in to help address consumer protection issues. The Heat

Trust5, for example, is an independent customer protection scheme designed

specifically for heat network customers. A voluntary Code of Practice6 establishes

minimum standards for design, installation and operation of schemes. Projects being

supported through Government funding must meet these, or equivalent, standards.

Heat Networks Investment Project (HNIP)

10. The Heat Networks Investment Project7 is a Government Major Project which will

invest £320m of capital funding in heat network projects through grants and loans. This

is provided as ‘gap funding’ to grow the UK heat networks market, overcome the

barriers stated above and deliver the cost effective carbon savings required to meet our

future carbon reduction commitments.

11. Funding offered through HNIP seeks to leverage in around £1bn of private and other

investment, to support the design and construction of heat networks. The

5 The Heat Trust

6 CIBSE and Ade. ‘CP1: Heat Networks: Code of Practice for the UK’ July 2015

7 Heat Networks Investment Project

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Government’s investment will kick start the heat networks market, driving down costs,

improving skills and capability, and demonstrating to investors that heat networks are a

viable proposition in the UK context. The overall aim is for the market to be self-

sustaining without further direct Government subsidy post-2021, and to increase the

long term growth rate of the market.

Wider benefits

12. Heat networks can reduce heating bills by up to 30%8, providing competitive and

affordable energy for businesses and households. This reduction in the cost of heating

can reduce fuel poverty, provide consumers with more disposable income and improve

business productivity.

13. There are also clear benefits from supporting the wider supply chain. Highly skilled jobs

are required in a range of disciplines, with potential for export of high value products

and services in the future. The expected growth in the heat networks market provides

an opportunity to grow the heat networks supply chain including:

UK supply chain companies supporting the UK heat networks market;

Export opportunities for UK supply chain companies;

Opportunities for new entrants in the market; and

Opportunities for investment in the UK by international heat networks

companies.

14. Many heat networks can also improve the resilience and flexibility of the overall energy

system, through features such as combined heat & power, electric heating (e.g. heat

pumps) and thermal stores.

15. Further interventions beyond the period covered by HNIP may be required to deliver

the market growth needed to meet the UK long term carbon targets. We are examining

the measures necessary for the creation of a sustainable market framework, taking into

account the recommendations of the ADE Industry Taskforce9, published in January

2018.

16. We welcome the Competition and Markets Authority’s (CMA) announcement of a

market study10 into the domestic heat networks sector. This will help us develop our

understanding of the key issues facing the sector and how the consumer experience in

the market could be improved as we consider the appropriate future market framework.

8 AECOM. ‘Assessment of the Cost, Performance and Characteristics of UK Heat Networks’ March 2015

p36; comparing gas supplied heat networks with gas boilers in a small flat 9 The Association for Decentralised Energy. ‘Shared Warmth: A heat network market that benefits

customers, investors, and the environment – Industry Heat Network Task Force Report ’ January 2018 10

Competition and Markets Authority – UK Government. ‘Heat networks market study’ December 2017

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This builds on the result of the recent BEIS heat networks consumer survey11. This

showed that, on average, heat network consumers were just as satisfied overall with

their heating systems as non-heat network consumers. It also confirmed there are

issues affecting the sector that need addressing, such as more frequent service

interruptions than traditional heating technologies, overheating and poor transparency

in terms of pricing and billing.

Box 1: Heat Networks Consumer Survey

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Department for Business, Energy and Industrial Strategy – UK Government. ‘Heat Networks Consumer Survey: consumer experiences on heat networks and other heating systems’ December 2017

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2. Aims & Objectives of HNIP

17. Our aim is to create the conditions for a self-sustaining heat networks market that contributes to the decarbonisation of the UK energy system at lowest cost to the economy by 2050.

We are working in partnership with industry to address the investment, supply chain and customer challenges identified as barriers to heat network deployment in the UK.

18. HNIP builds on the £15m Government investment and support in early stage project development to date to build a pipeline of good quality heat network projects. This is

delivered through the BEIS Heat Networks Delivery Unit (HNDU), targeted at Local Authority projects12.

19. The long term objective of the HNIP is to help create a self-sustaining heat networks market that does not require direct Government subsidy by:

Increasing the volume of strategic, optimised and low carbon heat networks built, by providing central Government funding which will draw in significant additional investment.

Improving the quality of heat networks that meet local infrastructure needs and consumer needs.

Building capability of project sponsors and the supply chain to develop systems of the right type and quality.

20. We define a self-sustaining market as a market where a sufficient volume of strategic, optimised and low carbon13 heat networks are economically attractive without direct Government subsidy and are operated with no consumer detriment14.

21. The HNIP pilot allocated £24m of funding in March 2017 to nine local authority projects.

The pilot scheme has enabled a wide range of lessons and learning that will be

incorporated when designing and delivering the HNIP main scheme. This learning has

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Heat Networks Delivery Unit 13

Strategic: future proofed networks that play an appropriate part in the energy system (heating, cooling, power, grid balancing) and can expand and interconnect over time to facilitate neighbourhood-wide networks and enable commercial aggregation.

Optimised: optimised technically, contractually, commercially and financially across the lifetime of the network, including via integration into wider energy system, ensuring there is no consumer detriment in comparison to alternative heating solutions.

Low carbon: lower carbon than the counterfactual heating solution, and able to be fully decarbonised in the future.

14 Consumer detriment: HNIP funded heat networks should operate with no customer detriment in

comparison to the likely alternative heat supply – a key project aim and characteristic of a sustainable market.

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helped us to understand how to maximise the benefits and value for money that can be

achieved through Government’s investment.

Box 2: Summary of HNIP Pilot Scheme Outcomes

22. We have already made a number of changes to the design and delivery of the scheme

in response to lessons learned and evaluation15 of the pilot scheme. The main changes

are:

o Widening scheme eligibility so all sponsors and operators can apply

o Added a “connection delay” feature to project loans to offer some flexibility if

heat demand issues occur beyond the operator’s control and project cash flows

are significantly impacted

o Utilising a third party Delivery Partner to manage the scheme and leverage in

third party investment

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https://www.gov.uk/government/publications/evaluation-of-the-heat-networks-investment-project-hnip-pilot-scheme

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3. Scheme Administration & Delivery Partner functions

23. BEIS is appointing a Delivery Partner to carry out the scheme set up, scheme support, funding allocation, and scheme administration functions identified in box 3. The Invitation to Tender for the delivery partner functions will be published on OJEU Delta procurement portal16 the week commencing 16th April.

24. The division of roles and responsibilities between BEIS and the Delivery Partner are essentially delineated according to who is best placed to manage and deliver the functions most successfully and cost effectively. The Delivery Partner will undertake all of the functions related to Scheme Set up, Scheme Support, Funding Allocation, and Scheme Administration. This marks a change from the arrangements on the pilot scheme where application and assessment processes were shared between BEIS and Salix17.

Box 3: Indicative timeline for scheme delivery and Delivery Partner functions

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https://www.delta-esourcing.com/ 17

Salix will continue to manage financial transactions, monitoring and reporting for the pilot scheme until the new Delivery Partner is in place, at which point these functions will transfer.

–

–

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Box 4: Key roles of the Delivery Partner in delivering HNIP

25. BEIS will work with the Delivery Partner to deliver the scheme:

Transferring knowledge to the Delivery Partner including lessons learned on the pilot.

Setting strategic ambition and overall direction of the scheme and providing high level shaping of scheme design.

Providing the delivery partner with an Investment Mandate.

Sitting on final decision making Investment Committee with a voting role.

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Application process

26. The application and assessment process will be agreed with the Delivery Partner. It is expected to be broadly based on the system used in the pilot phase18 with the exception of additional measures to bring in 3rd party finance.

1. Pre-application submitted

2. Pre-qualification assessment, including basic eligibility check

3. Full application submitted

4. Determination of investability for third party funds

5. Deliverability assessment, scoring against scheme objectives & ranking

6. Decision on funding by Investment Committee

7. Feedback to unsuccessful projects

8. Issue offer letters and draft funding agreements to successful projects

Box 5: Expected key steps involved in the application process for potential bidders

The table below sets out some of the previous and forthcoming events and indicative timings for the scheme. Anyone interested in attending one of our workshops is welcome to contact us at heatnetworks@beis.gov.uk

EVENTS

Delivery Partner Supplier Day, London 14/03/2018

Commercial Value in Heat Networks Event 13/04/2018

HNIP – South East Regional Workshop 10/05/2018

HNIP – Wales Regional Workshop May 2018

HNIP – North West Regional Workshop June 2018

HNIP – Midlands Regional Workshop July 2018

HNIP – North East Regional Workshop July 2018

Application Training Workshops Oct-Dec 2018

Box 6: Indicative timeline for application and assessment

SCHEME TIMINGS

Delivery Partner Contract Award July 2018

HNIP Scheme Launch Autumn 2018

First Applications Received Autumn/Winter

2018

First round of successful bidders announced (subject to contract) Spring 2019

Funding allocated to first batch of projects Spring 2019

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Department for Business, Energy and Industrial Strategy – UK Government, and Salix. ‘Heat Networks Investment Project Pilot: Application guidance’ October 2016

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Principles and methodological approach

27. When projects bid for HNIP funding, they will be evaluated both on an individual merits

basis and a relative merits basis. Projects receiving funding are required to meet the

criteria, parameters and metrics set out below. This is ensure that HNIP delivers value

for money by supporting strategic, optimised and low carbon schemes of the highest

quality.

28. The high level principles that have guided our thinking and which underpin the design

and evaluation parameters are:

1. Projects must demonstrate financial viability

2. Projects must demonstrate sufficient economic and social benefit

3. Projects must demonstrate that they offer genuine carbon savings relative to a

counterfactual scheme option

4. Projects must design a future-proofed offer to ensure that carbon savings can

continue to be made during their expected lifetime

29. Project-level data requirements will be developed by the Delivery Partner and agreed

with BEIS in order to meet the project objectives. Applicants will be required to submit

project data.

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4. Summary of HNIP scheme

A. Who will be eligible to apply directly for HNIP capital funding?

The scheme will be open to all applicant types - public, private and third sector, except central Government Departments.

B. What will HNIP provide capital funding for?

The scheme is for Strategic, Optimised, Low Carbon District Heating projects which create no consumer detriment and meet the definition set out in the Heat Networks (Metering and Billing) Regulations 201419 to be eligible. These heat networks must be located in England and/or Wales.

Investment costs eligible for support under the HNIP scheme include:

The building of new heat networks (generation, distribution and customer supply)

Development of existing heat networks including expansions, refurbishment or the

interconnection of existing networks where additional carbon savings can be

demonstrated (which can include refinancing or acquisitions)

Commercialisation phase and construction costs

Works to access recoverable heat20

Applicants can apply for HNIP and combine funding with other Government or EU funding schemes if this is allowable under relevant scheme rules and compliant under State Aid obligations.

However, HNIP funding cannot be used to fund costs for energy generation plant supported through the Renewables Obligation (RO), a Contract for Difference (CfD) or the Renewable Heat Incentive (RHI). However, funding can be used to fund costs for heat network infrastructure connected to the generation plant21.

C. What funding mechanisms will HNIP offer?

All HNIP funding mechanisms will be open to private, public and third sector applicants. These are:

Grants

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The Heat Network (Metering and Billing) Regulations 2014 20

https://www.gov.uk/government/publications/the-potential-for-recovering-and-using-surplus-heat-from-industry

21 Department for Business, Energy and Industrial Strategy – UK Government, and Salix. ‘Heat Networks

Investment Project Pilot: Application guidance’ October 2016; Section 6.3 and Annex C

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Corporate loans

o Lending to a credit worthy project sponsor organisation.

o Up to 25 years.

o Below market rates:

The interest rate on any loan will be set at a discount to the EU State

aid rules market rate. The interest rate discount is the aid that is being

provided to the projects.

o Fixed rate annuity repayment.

o Principal Repayment starts when the project becomes operational.

o Ranked equally with other lenders.

Project loans which have the following additional features:

o Secured lending direct to a project company without recourse.

o Project Loans will include a Connection Delay feature such that, in the event

a number of key customers or off-takers fail to materialise for reasons

beyond the operator’s control – and project cash flows suffer, the borrower

may annually request an interest and repayment Grace period up to a

maximum 3 years.

o The project Debt Service Cover Ratio (DSCR)22 must be below 1.4 to trigger

this feature.

o If the Connection Delay feature is used then repayments are recalculated to

recover the money owed, but over the remaining loan life.

o This Connection Delay feature can only be triggered within the first 10 years

of the loan.

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A measure of the cash flow available to pay current debt obligations.

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D. What decision-making criteria will be used to assess the capital funding applications for HNIP?

Applicants will need to demonstrate that their projects satisfy the minimum eligibility criteria including, but not limited to:

The heat network is of an eligible type (i.e. heat generated from 75% gas CHP or

from 50% renewable, recovered heat or a combination23)

The heat network meets the technical and customer requirements (including CIBSE

ADE Code of Practice CP1:201524, Heat Trust25 or equivalent, and metering and

billing regulations26)

Only eligible investment costs are included

The heat network demonstrates carbon savings and the heat price will be no more

than the counterfactual

Evidence provided of a funding gap at full application and passing at least one of

the ‘additionality’ tests

If projects pass the minimum eligibility test, applicants will be asked to demonstrate that their project would not have gone ahead without Government funding through one or both of the two ‘additionality’ tests:

1) Economic/financial additionality route (for new networks): The sponsor could not

raise the capital, and/or the project financials (i.e. internal rate of return), whilst

positive, are not attractive enough to enable funding on the open market or through

other available means alone.

2) Technical/commercial additionality route (for existing networks and networks

directed through planning requirements): Funding for additional technical or

commercial features where capital cost is currently a barrier to deployment and for

additional features not required through planning obligations.

The full list of supporting documentation required to underpin applications is likely to be similar to the pilot, however the ongoing application requirements will be developed in conjunction with the Delivery Partner. The Pilot guidance currently published on the Salix website is a good starting point for potential applications considering the project information and evidence requirements likely to be required for any HNIP application 27.

The following criteria are expected to be used to score projects for HNIP funding:

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Efficient district heating and cooling: A district heating or cooling system using at least 50 % renewable energy, 50 % waste heat, 75 % cogenerated heat or 50 % of a combination of such energy and heat. [Article 2(41) of the Energy Efficiency Directive of the European Commission]

24 CIBSE and Ade. ‘CP1 : Heat Networks: Code of Practice for the UK’July 2015

25 The Heat Trust

26 The Heat Network (Metering and Billing) Regulations 2014

27 Department for Business, Energy and Industrial Strategy – UK Government, and Salix. ‘Heat Networks

Investment Project Pilot: Application guidance’ October 2016; Section 7

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Carbon savings

Volume of heat delivered

Deliverability assessment.

The scoring criteria will be developed in conjunction with the Delivery Partner, taking on board lessons learned from the HNIP pilot.

The Delivery Partner and Investment Committee will in their absolute and sole discretion assess, score and rank projects when considering eligibility for funding and making funding decisions.

Any HNIP funding will be determined by the HNIP Investment Committee, at its sole discretion. This committee will be formed by the Delivery Partner. BEIS will be a voting member and any funding awarded will be subject to the delegated authority set out in the Investment Mandate which will forms part of the appointed Delivery Partner’s contract. The Investment Mandate sets out the parameters on which the Delivery Partner has delegated authority to act on behalf of BEIS to award HNIP funding. These parameters are outlined below. These do not necessarily constitute scheme rules, but constitute the boundaries of the Delivery Partner’s delegated authority for funding decisions.

The Delivery Partner will have delegated authority to award HNIP funding within the following parameters:

Grants between £0 and £5 million;

Loans between £25,000 and £10 million; and

If a combination of grant and loan is awarded, in addition to complying with the

above two points the total award must also not exceed a Gross Grant Equivalency28

of £5 million.

HNIP awards must constitute less than 50% of the capital expenditure to be

incurred for the construction of the project29.

Forecast investor returns must be limited as follows:

o Any individual investor return, in any form, may not exceed the HNIP IRR

Ceiling;

o Where alternative financing structures are proposed for an application, the

HNIP Investment Committee must choose the structure that leads to the

lowest Gross Grant Equivalent contribution by HNIP.

The Delivery Partner cannot provide an award where the Project Social Net Present

Value30 plus the project’s contribution towards the HNIP Portfolio Social Net Present

Value is less than Zero31.

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For loans, this is calculated as the equivalent of a grant for state aid and value for money assessment purposes.

29 To ensure BEIS does not take control of assets by being the majority funder.

30 Social Net Present Value (social NPV) looks at the value of a heat network project to

society as a whole by quantifying a wide range of benefits and costs 31

As HNIP is seeking to transform the heat networks market the benefits from the project are wider than those of individual projects. These wider benefits (for example, the benefit of reducing costs through leaning

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For Local Authority controlled projects where the project capital expenditure is greater than £2.4m the project must be off the National accounts, such as through the use of an ESCO.

No award can be made for transactions which are novel or contentious32.

E. Monitoring of HNIP

A number of metrics will be monitored at both project and market level in order to understand the impact of individual projects and track the development of the market that HNIP is helping to create. The details of the monitoring requirement guidance and templates will be worked up by the Delivery Partner once appointed. Please refer to the Pilot Monitoring guidance for further information at this stage.

by doing) will be estimated using an established methodology. Projects will apportioned an element of these wider benefits based on their volume heat demand served.

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Please see Managing Public Money, HMT Link

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5. Next Steps & Expressions of Interest

Alongside publication of this document, BEIS is launching an expressions of interest (EOI) process for potential project sponsors and owner/operators so that we can keep them up-to-date with developments in advance of the scheme launch, expected to take place in the autumn. We will also be collecting details of potential projects, and the timing and scale of funding requirements to help the Delivery Partner plan the management and administration of the scheme. For more information please email: heatnetworks@beis.gov.uk

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Annexes

A. Learning from the HNIP Pilot:

https://www.gov.uk/government/publications/evaluation-of-the-heat-networks-

investment-project-hnip-pilot-scheme

B. Evaluation of the Heat Networks Investment Project (HNIP): Pilot Process Report

https://www.gov.uk/government/publications/evaluation-of-the-heat-networks-

investment-project-hnip-pilot-scheme

C. Evaluation of the Heat Networks Delivery Unit

https://www.gov.uk/government/publications/evaluation-of-the-heat-networks-delivery-unit

D. Estimating the cost reduction impact of the HNIP on future heat networks: Carbon

Trust

https://www.gov.uk/government/publications/estimating-the-cost-reduction-impact-of-the-heat-networks-investment-project-on-future-heat-networks