Funding and financing heat networks in Scotland

Over 72% of buildings in Scotland still rely on mains gas as their primary heat source. Scotland must further decarbonise heating in homes and buildings to achieve its climate change targets. 

The Scottish Government’s 2021 Heat in Buildings Strategy identified clean heat networks as a strategic decarbonisation technology. However, given the high cost of transforming Scotland’s buildings and limited public sector budgets, additional investment is needed from the private sector.

This study examines existing and potential future financing models for Scotland’s heat network sector and identifies suitable levers and actions to incentivise private finance. Findings are based on a series of interviews with stakeholders, including operators, funders, advisors and public sector representatives, as well as desk-based research. The report draws comparisons and insights from other relevant utility sectors and from other countries (the Netherlands, Germany, Finland, Sweden and Estonia) as well as England and Wales.

Summary of findings

Challenges facing the sector

• The most impactful barriers in the sector are demand uncertainty, revenue instability and the evolving regulatory environment.

International comparisons

• Scotland, the rest of the UK and the Netherlands have a developing heat network sector. Germany is expanding its market. Sweden, Finland and Estonia have mature markets where the sector is tried, tested and trusted.  
• Many of the developed and mature markets are unregulated: they use self-governing frameworks and technical codes. This is coupled with high levels of local governance, greater pricing transparency and consistent contractual delivery and routes.
• The more developed markets (including Sweden, Finland and Estonia) have a mixed degree of public ownership. More mature markets are likely to have a higher level of private finance penetration.
• Most of the studied countries have adopted a range of financial levers. Many have applied a similar approach to Scotland, including the continued use of capital grant funding, project development funding or individual grants for expanding and upgrading heat networks.

Utility sectors

Examples of regulatory regimes and financial support mechanisms used successfully in the UK utility sectors to stimulate private sector investment in new infrastructure:

• Contracts for Difference could support heat networks that use decarbonised heat sources (e.g. heat pumps), which are likely to have a higher cost than conventional gas boilers or heat networks using waste heat.
• A Regulated Asset Base model can protect consumer prices whilst also encouraging ongoing capital investment, supporting asset maintenance and providing predictable revenue streams. It would involve significant administrative and resource cost.
• The Renewable Heat Incentive is a well understood revenue support mechanism used in the energy sector. This model would subsidise the cost of heat for consumers if it was based on the amount of heat generated, as opposed to consumption of heat.

Market feedback

To facilitate private investment, stakeholders highlighted the need for:

• Continued grant funding support to de-risk project cashflows
• Clear regulation on key topics such as heat zoning, mandatory connection policies, planning and building regulations and phasing out gas boilers
• Greater clarity on the development of future regulation

If you require the report in an alternative format, such as a Word document, please contact info@climatexchange.org.uk or 0131 651 4783.