In October 2018 the Department of Business Energy and Industrial Strategy (DBEIS) launched the Heat Networks Investment Project (HNIP). Delivering on its commitment to tackle energy costs using innovative, low carbon solutions, the DBEIS has launched an initiative for homes and non-domestic consumers, including schools, hospitals and council buildings, to participate in a new heat networks scheme.
Heat networks supply energy from a central source to consumers, via a network of underground pipes carrying hot water. They can cover a large area or even an entire city, or be relatively local, supplying a small cluster of buildings. This avoids the need for individual boilers or electric heaters in every building.
The intention of the HNIP is to encourage the development of the sector and is provided as ‘gap funding’ to grow the UK heat networks market and deliver the carbon savings required to meet the nation’s future carbon reduction commitments.
HNIP is investing up to £320 million of capital funding in heat network projects in England and Wales. The third funding round is currently open and the full application deadline will close on the 18th October 2019, with applications being consider at a committee meeting in late 2019. The application is a two stage process with the third round funding pre-application now closed. The project is funded for a three year period (up to 2021) and application windows are on a quarterly cycle.
Funding is available for both the public, private and third sector. With additional funding and support available to local authorities through the Heat Network Development Unit (HNDU). Funding is available as grants (between £0 and £5 million) and loans (between £25,000 and £10 million) or a combination of the two. The HNIP award must be less than 50% of the capital expenditure. Loan interest rates will vary but as at 1st October 2018 were 0.25% corporate loan and 4% for project loan.
HNIP funding cannot be used to fund costs for energy generation plants supported through the Renewable Obligation (RO), a Contract for Difference (CfD) or the Renewable Heat Incentive (RHI).
Projects must demonstrate that they:
- are viable financially (taking into account HNIP funding), technically and commercially,
- offer sufficient economic and social benefit,
- contribute to the HNIP wider goals of transforming the market,
- are a deliverable project,
- will deliver genuine carbon savings relative to a counterfactual scheme option,
- have a future proofed design to ensure that expansion and/or carbon savings can continue to be made during their expected lifetime.
Applicants will be asked to confirm that the network will deliver a minimum of 2 Giga Watt hours (GWh) per year of heat and/or cooling, when the project is built out. 2 GWh/year is the equivalent to heating around 70 homes or a couple of public swimming pools/leisure centres or a couple of large school sites.
All heat networks must meet one of the following heat source requirements: 75% of the heat from Combined Heat and Power (CHP) (which can include non-renewable fuels) 50% of the heat from a renewable source 50% recovered heat or 50% of the heat from any combination of renewable/ recovered heat and non-renewable fuelled CHP.
The project must result in a carbon saving when compared to appropriate counterfactual technologies for the project, over its first 15 years of operation.
Evidence has to be provided of a funding gap through an additionality test which is either due to economic/financial factors or technical/commercial factors.
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 heat.
- Costs for heat network infrastructure connected to the generation plant.
With the disappearance of the Feed in Tariff (FiT) for new hydro schemes and other renewable schemes, this is a new funding support option for the renewable industry sector assuming that the scheme meets the criteria.
As ever the devil is in the detail, and the interrelationship between funding, licensing, planning, tax, non-domestic rates etc. becomes critical. Similar to the FiT system, even though Government departments are giving financial incentive to help the industry, it still places a burden on the scheme through the implementation of non-domestic rates. Scheme design can play a critical factor in obvious areas such as planning but also in less obvious areas such as business rates, and reducing future liabilities.
Baileys and Partners are already exploring with clients the opportunity that this funding might deliver to a variety of landowners and businesses. Leisure sites and estates in rural areas are potential locations where the existing energy supply is from fossil fuel sources but would benefit from moving to a cleaner energy option.