Looking into the opportunities presented by heat networks, a new report published today paints a contrasting picture amongst investors and developers. Commissioned by independent UK law firm Burges Salmon, the research reveals that 69% of investors see heat networks as attractive prospects, and 61% are confident of the returns they can generate.
Conversely, the data suggests developers are more cautious in shaping up risk profiles, with only 45% believing heat networks to be attractive and just 41% expecting to see them generate sustained investment.
The report, Getting to Net Zero – The potential for heat networks in our communities, collates the views of 80 UK-based investors and developers, as well as in-depth interviews with Equitix, Related Argent, Hemiko, SSE and Asper, to gather insights and experiences of funding and developing heat networks projects in the UK and Europe.
The report comes at a time when the Government is preparing to publish the findings of its public consultation on heat networks zoning proposals in England, to attract investment and allow local communities to access, at pace, cheaper, greener heat.
New legislation putting investors at ease
With around one-fifth of UK carbon emissions coming from heating, the opportunities presented by heat networks to reduce emissions have formed an important part of the Government’s Net Zero strategy and new legislation introduced in the Energy Act 2023 has brought some much-needed clarity.
The changes have been welcomed by many and optimism about their impact is high among investors who are far more encouraged by the new legislation: 60% say that it will stimulate funding into heat networks and over a third say they view clean heat mandation (the requirement to connect certain buildings within prescribed zones to a new heat network) as the best way of ensuring success in the longer term, making investment into heat networks more attractive. The appointment of Ofgem as the new heat networks regulator is also a move that has been hailed as a positive step change.
Whilst Government mandates are boosting investor confidence, the report shows over half of investors, 53%, are seeing bigger government incentives and larger margins as the most effective ways of encouraging heat networks investment.
Charles Robson, a director at Burges Salmon and head of the firm’s Clean Heat practice, comments: “Successful low carbon heat networks projects in countries like Denmark, one of the world's most energy efficient countries, are well documented, and whilst these are nascent markets in the UK, our research highlights enthusiasm amongst investors for the use of this technology to unlock large-scale renewable energy opportunities. It’s important to recognise that the detail investors and developers need is still being developed, and government will use the responses to its zoning consultation to shape the regulations and get this right.”
Developers finding project delivery challenging
Whilst data points to high confidence amongst investors, developers have a more modest outlook on the potential for heat networks, with only 41% viewing it as good or excellent. This more cautious attitude may be influenced by their experience to date of getting projects off the ground as they’re having to navigate complex and time-consuming planning and construction pitfalls and upskill a workforce that lacks the design, mechanical and engineering know-how needed to deliver profitable heat networks projects.
60% of developers also cite a strong supply chain as vital to encourage investment and over half, 52%, claim that the UK’s current weakness in this area is the top risk for the development of heat networks. Developers’ first-hand experience of the fragmented nature of supply chains, which continue to feel the impact of labour and material shortages and higher inflation rates, may well explain their reluctance to take on the risks.
Charles adds: “The development of heat networks represents a tremendous opportunity – not just for investors and developers, but also for a workforce that needs the green skills necessary to take the UK into a low carbon future. While primary legislation is now in place, further work is needed on the detail of implementing the Energy Act framework, to bring greater clarity to investors and developers so that they can see their challenges and concerns are being recognised and addressed. Getting these issues right will allow heat networks to grow in a way that will make a really important contribution to driving down our overall carbon emissions while reducing our dependence on fossil fuels.”
Collaboration, the solution for success
As investors and developers weigh up their respective risk profiles, both agree that strong and effective collaboration is essential in navigating the intricate planning, financing, and execution issues involved in heat networks projects.
Pooling their resources, public and private sector organisations working together are better placed to successfully deal with technical complexity, mitigate risk and engage with communities as well as ensure alignment with national and local policies, such as net-zero targets.
Emma Andrews a director in the Clean Heat practice and part of Burges Salmon’s Net Zero Services, says: “Our dedicated Net Zero team specialises in providing strategic guidance to support our clients’ transition to a sustainable future. Our track-record in this area includes successful collaborations with local authorities, private sector partners, and community-driven initiatives and we’re proud to have facilitated the development of heat networks schemes and advised on funding models, ensuring compliance with evolving regulations.
“Our experience in clean heat and environmental law means we’re well positioned to assist investors and developers across both the public and private sectors on all aspects of heat networks project delivery, from legal structuring, planning, construction through to regulatory compliance.”