July 2012 Legal Frameworks for Sustainable Energy Infrastructure · 2017-09-27 · 8 Legal Frameworks for Sustainable Energy Infrastructure Types of network variations and schemes

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July 2012

Legal Frameworks for Sustainable Energy Infrastructure A UK-GBC Task Group report, in conjunction with the Zero

Carbon Hub

2 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure

About this report

This UK-GBC Task Group, in conjunction with the Zero Carbon Hub, was sponsored by the

following UK Green Building Council members:

This report was written by Colin Hall (chair), Winckworth Sherwood and supported by Robert

Tudway, Greater London Authority (GLA) with input from the following Task Group members:

Liz Turner - Barratt Developments

Laraine Phillips - Berkeley Group

Michael Barlow - Burges Salmon

Alasdair Young - Buro Happold

Peter Stuckey - E.ON

James Jeffery - Firstbase

Charlotte Parkes & Ramani Chelliah - Islington Council

Peter Ferguson - Johnson Controls

Derek Tadiello - Laing O'Rourke

Joanna Brown - Lend Lease

Tim Lunel - National Energy Foundation

A number of other organisations contributed towards the research for the Task Group. These

organisations are listed on the Legal Frameworks for Sustainable Energy Infrastructure Task

Group page of the UK-GBC website: www.ukgbc.org

UK-GBC would like to thank all of the Task Group participants for their valuable contributions.

© Copyright 2012

UK Green Building Council


The Building Centre

26 Store Street

London WC1E 7BT

T: +44 (0)20 7580 0623

E: [email protected]

W: www.ukgbc.org

http://www.ukgbc.org/


Contents

About this report 2

Introduction 5 Use of terminology in this report 6

Sustainable Energy Infrastructure 6 The promoter 6

Types of network variations and schemes 8 Single Site and Ownership Scheme 8 Single Site Multiple Ownership Scheme 9 Multiple Site Schemes 10

The role of planners 11

The role of the ESCO and MUSCO 13 Core obligations 13 Core obligations may be reciprocal 14 The future development of the ESCO and MUSCO role 14

Implementation and operation 16 Essential obligation 16 The economics of a scheme 16

Price increases 17 Certainty of consumer base 17

Modifications 19 Inter-dependency 20 Policy Constraints 20 Physical Constraints 20

Access to facilitate operation 20 A Single Site Scheme 21 Single site scheme with multiple ownership 21 Multi site scheme 22

Continuity of supply 22 Landowners 23 Promoters 23 Consumers 23 Operators 23 Registered Provider 23 Commercial Lessees 24 Operator’s Right to Assign 24 Electricity 25

Consumer Issues 25

Growth of networks and linking of schemes 27 Legal issues to be considered 27

Network access by prospective heat generators or suppliers and consumers 28 Consumer protection 28 Land rights and access 28

Conclusion 29

Appendix A: Case studies 30 Birmingham city council – District energy scheme 30 Southampton City Council - District Energy Scheme 31 Woking Borough Council – Combined Heat & Power 33 Islington Council - Crouch Hill 34 Islington Council - Bunhill Heat & Power 35


Argent Group plc – Kings Cross ESCO Development 36

Appendix B: Legislation schedule 37 Planning 37 Access 37 Residential Tenancies 37 Consumer Protection 38

Appendix C: Flow charts for developers 39 Single Site Scheme in more than one ownership – single operator 40 Single Site Scheme in more than one ownership – separate operators 41 Multi–site scheme – one operator 42


Introduction

National carbon and energy targets are driving a move to more decentralised energy solutions at

a community level. In March 2012 the UK Government published its Heat Strategy1. The strategy

envisages an important role for district heating and heat networks in densely occupied areas,

both in the domestic and commercial context. Whilst elsewhere in Europe there is a great deal

of experience in planning, delivering and operating community-scale networks of all kinds, and

for energy in particular, in the UK such experience is limited.

A previous UK Green Building Council (UK-GBC) Task Group (in February 2010) addressed the

barriers and opportunities around the implementation and uptake of sustainable community

infrastructure such as decentralised energy, water treatment, waste disposal and

telecommunications. Following on from this piece of work it was suggested that there was a

need to provide clarity and guidance around the legal landscape for those groups who are

typically involved in setting up and integrating sustainable energy infrastructure solutions into a

development.

This report therefore explores the legal issues relating to the set up of sustainable energy

infrastructure, specifically district heating schemes as this service is not currently regulated as

with power. The report considers a wide range of general legal issues from the set up of the

scheme through to consumer issues such as access to land, continuity of supply, and consumer

repayment. Currently there is a lack of guidance, and many groups involved in setting up district

heating schemes find themselves spending time and fees researching the same issues which often

makes the integration of sustainable energy solutions financially unviable. Typical groups include

local authorities, developers, operators, landowners, occupiers and energy services companies

(ESCOs) who are often involved in the installation, operation and maintenance of a scheme.

In the context of the Government’s Heat Strategy, this report is therefore timely. It is clear that

the size, scope and structure of these systems are continually evolving and with it, the legal

structures that underlie them will also change. This report looks to identify the legal structures

that are likely to form the basis of future typical schemes. The report sets out three different

scheme types which are seen as relevant and adaptable to whatever commercial and financial

framework is chosen for a particular project and therefore aims to support scheme developers in

finding the most workable legal structure for their project. It also looks at the mainstream

functions and role of ESCOs and MUSCOs. It is intended purely as a guide to issues that should be

considered when developing the legal agreements for a community energy solution.

The Task Group had initially planned to set out standardised legal arrangements for wider

community scale infrastructure projects (i.e. beyond just energy). However, having explored the

landscape which is presented in the interim report2 it was decided that the issues were too broad

to focus on them all in detail. It should also be noted that this report does not provide guidance

on commercial and financial structures for community energy schemes, or standardise a

technical or political solution. These issues are currently being explored by government and

industry groups to support the development of heat networks such as the CHPA3, GLA4 and

industry5.

1 http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/heat/4805-future-heating-strategic-framework.pdf 2 http://www.ukgbc.org/resources/publication/uk-gbc-task-group-interim-report-sci-legal-frameworks 3 http://www.chpa.co.uk/knowledge-centre_13.html 4 http://www.londonheatmap.org.uk/Content/home.aspx 5 http://www.arup.com/Projects/DENet.aspx

http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/heat/4805-future-heating-strategic-framework.pdf

http://www.ukgbc.org/resources/publication/uk-gbc-task-group-interim-report-sci-legal-frameworks

http://www.chpa.co.uk/knowledge-centre_13.html

http://www.londonheatmap.org.uk/Content/home.aspx

http://www.arup.com/Projects/DENet.aspx


In summary the report aims to:

Shed light on the basic legal arrangements – to assist those parties looking to implement

district heating, but who are unfamiliar with the legal process such as planners,

developers and consultants.

Establish current trends regarding the likely structure and scale of new district heating

projects that are emerging amongst those already involved in such schemes.

Suggest solutions to legal issues that are seen to arise.

In the case of schemes developed and to be operated on a single site, differentiate

between sites that are under single ownership, as opposed to being owned by two or

more different entities.

Differentiate schemes on single sites as apart from those operating on more than one

site, involving a wider range of heat users and possibly also heat suppliers, including

addressing issues surrounding the need for the heat infrastructure to cross highways and

land in separate ownership between the sites and premises connected to the scheme.

USE OF TERMINOLOGY IN THIS REPORT

Sustainable Energy Infrastructure

In this report we use the term Sustainable Energy Infrastructure which refers to the

infrastructure that is needed to distribute power or heat from one or more local generating

sources. This can encompass a very wide range of schemes, for example:

A building with its own energy centre, this could be a new development or a retro-fit of

an existing residential or industrial estate

An estate with its own energy centre

A community within a town or areas of sufficiently dense heat demand

An urban regeneration area within a town or city, including the provision of low or zero

carbon heat to existing buildings through retrofitting them with connections to an

expanding or newly developed community heating scheme

The latter two examples are likely to involve a decentralised energy scheme spanning two or

more sites in different ownership and the crossing of highways and privately owned land.

Community heating schemes may involve the supply of heat to commercial and industrial

buildings as well as domestic premises, the differing profiles of heat demand often being

important to the economics and technical functioning of the scheme. The legal frameworks

therefore contemplate heat being provided to a range of types of heat users and from a range of

differing sources, renewable and otherwise.

The promoter

It is assumed that every scheme (irrespective of size or complexity) will have one overseeing

body which will often have instigated the scheme. That body will have an interest in ensuring

that the scheme is procured and continues to operate, although that interest may be limited in

time or its scope. On a single site scheme the promoter will therefore be a developer or

freeholder. However, if that promoter assigns its interest in the development, the assignee will

become the promoter, the developer having no further interest in the scheme. Regeneration

schemes (whether on single or multiple sites) will usually have at least one body with an interest

in ensuring the scheme is procured and continues to operate – where more than one, the

promoter may form its own joint venture company or partnership. That body may be the local

authority or a development authority or both. In the case of multi-ownership schemes, for

example where a network is connected to other local networks in different ownership, it is


assumed that the constituent scheme owners will all be answerable to a body through the joint

venture or collaboration agreement.

The ESCO or MUSCO is not usually also the promoter, because its function is essentially different

from that of the promoter and the ESCO or MUSCO will often be an external contractor which

performs its role under contract from the promoter.

However, if the promoter also carries out the ESCO or MUSCO responsibilities, it could do so in

the same corporate vehicle and thus have the same legal identity. It is likely that will become

less common as networks increase in size and serve a wider range of premises and consumers on

sites in different ownership.


Types of network variations and schemes

This section of the report sets out the likely decentralised energy network variations that are

typically implemented or form part of a wide range of schemes. These are referenced

throughout the report in relation to the legal issues that should be considered.

Decentralised energy schemes can be categorised as falling within three types, however a

scheme may begin as one type but through growth or amalgamation with other schemes, change

its characteristics to become another type of scheme. Reference is made below as to how

schemes may develop.

The types of scheme outlined below are informed by the 2009 publication by the Mayor of

London, London First and others, called ‘Powering ahead – Delivering low carbon energy for

London6’. The types of scheme described are by no means confined to London but are equally

relevant in other parts of the UK and so can usefully be referred to in this context.

The Task Group’s Interim Report7, published in May 2011 suggested a wider variety of model

schemes and network variations, setting out a range of possible options for the types of schemes

that exist. However having reviewed the scale of the issues it was decided by the Task Group to

condense the options down to reference a smaller set of possible scenarios. These revised

scheme types are illustrated and described below and Appendix A – ‘Case studies’ gives some

examples of the sizes and types of schemes in the UK which are under development or planned.

All of them involve one or more of these land configurations.

Single Site and Ownership Scheme

These schemes are confined to a single site, the heat source being based in a building’s plant

room and typically serving residential units and perhaps also some small scale commercial

premises, normally all on a site in the same ownership. Many of these schemes are in the public

sector and serve to provide heat to

social housing and other convenient

heat demand on the same site. There

are numerous examples of such

schemes in local authority housing

estates and also in some new private

housing developments, particularly

where local authorities have required

the installation of district heating or

combined heat and power as a

condition of planning consent.

This scheme will typically be a closed

network, for example a network with

one operator directly in contract with

its consumers. Part of the network

could be off site and the scheme could

be a new development or a retro-fit.

6 http://www.london-first.co.uk/documents/Powering_ahead_DE_report.pdf 7 http://www.ukgbc.org/resources/publication/uk-gbc-task-group-interim-report-sci-legal-frameworks

Figure 1.1. Single Site and Ownership Scheme

Development site

http://www.london-first.co.uk/documents/Powering_ahead_DE_report.pdf

http://www.ukgbc.org/resources/publication/uk-gbc-task-group-interim-report-sci-legal-frameworks


Single Site Multiple Ownership Scheme

This is a collection of development sites all of which abut each other thereby creating a single

site, but where the sites are owned by different developers. The network connecting the

different parts of the sites could be under the operation either of one entity or more than one

entity operating or owning different parts of the network.

These schemes are larger, serve more than one site and might normally involve premises of

mixed use. Such schemes may serve in excess of 3,000 residential units, together with

commercial premises and may involve a mix of public and private sector heat users. These

schemes may benefit from a mixed heat demand profile which may reduce uneconomic peaks in

heat demand, be more insulated from loss of heat customers as a result of the larger number of

sources of heat demand and also benefit from some economies of scale. These schemes, if the

heat is sourced through a combined heat and power unit, may have significant quantities of

electricity to export. There may be some opportunity to supply electricity retail to users on site,

depending upon whether the site has a private electricity distribution system, but even if such

on site supply is feasible, it may at least at times fall substantially short of the total quantity of

electricity generated. There are a number of established or planned schemes including these

characteristics, for example in Sheffield, Southampton and Pimlico in London, some of which

involve combined heat and power and other being heat only schemes.

Figure 1.2. Single site Multiple Ownership Scheme

Site 1

Site 3

Site 2

Site 4


Multiple Site Schemes

This is a collection of sites which do not abut each other and are thereby connected into the

network through media which pass across public land or private land owned by somebody

completely unconnected with any of the schemes. The sites could be a mixture of new

developments and existing buildings. The network could be operated by a single operator or

multiple operators as above.

It is questionable whether as yet there are any truly area wide schemes in this country, but they

are a natural progression from the first two types of scheme. This type of scheme involves

extensive heat pipe networks connected to a range of different heat producers, including

renewable sources of heat and heat from large scale power stations. The capital costs of such

schemes are substantial, and could well exceed £100 million, with payback periods exceeding 15

years. If however, heat networks fill the role as outlined in the Government’s Heat Strategy,

such networks will need to be constructed, to enable the volume of heat supply and heat

demand implied by the strategy to be linked cost effectively. The challenge is financing and

installing the main heat transmission network. Once installed and linked with a range of heat

sources and a large number of sources of heat demand, these networks have the potential to be

stable long term investments, similar to the investment potential of established utilities. The

challenge is to grow the network to that scale in the first place.

The three different land configurations described above each require a different set of legal

relationships between the promoter and operator of the scheme; and land owners and occupiers,

to enable the assets to be installed, and rights of access to be obtained for the operation of the

network. It should be noted that the development could be part of a new build scheme or owner

of an existing site being retrofitted.

Figure 1.3 Multiple Site Scheme

Site 1

Site 3

Site 2


The role of planners

To assist local authorities and encourage the gradual increase in networks and schemes, the Task

Group initially looked to develop standardised planning conditions. However the group agreed

that it is currently difficult to standardise these while decentralised energy models are still

developing.

This section instead explains the role that planners and local authorities can play in supporting

the wide scale take up of decentralised energy networks in considering the strategic

opportunities of linking up networks and new developments. In many cases, such as single site

schemes or large redevelopment projects, all the planning can be prepared in advance and all

the legal relationships can be forethought and provided for. But the real benefit of

decentralised energy will occur if promoters, particularly local authorities can be more

opportunistic and enable an existing network to take on additional load if and when it becomes

available. A network should therefore be expanded when enough new loads are available.

We are starting to see planning policies are beginning to allow for these possibilities and are now

recognised in policy documents, such as the London Plan as highlighted below.

THE LONDON PLAN

The Greater London Authority (GLA) London Plan, published in July 2011 states that:

Policy 5.5

“… it is expected all boroughs will actively promote Distributed Energy in their London Development

Frameworks”.

The London Plan also states that the London Development Frameworks should have policies to:

- Safeguard any existing networks.

- Look for opportunities to expand existing networks or create new ones.

- Identify heat loads and heat supplies.

- Identify implementation options.

- Require developers to connect to Distributed Energy systems where feasible.

Policy 5.6

In planning decisions, major development proposals should select energy systems in accordance with

the following hierarchy:-

- Connection to an existing heating or cooling network.

- Site wide CHP networks.

- Communal heating and cooling.

The policy also states that development proposals should evaluate the feasibility for either connecting

to existing, or creating new, CHP systems and also to extending systems outside the site of the

proposed development.

The scope and design of a given scheme will depend very much on the type of requirements set

from the local authority in connection to planning conditions and accordingly the legal

relationships will vary too. For example:

If the multiple site scheme in Figure 1.3 were phased so that a fourth area, being the

last one to be developed, were also to include an energy centre intended for all three

developments, the arrangements for taking the first three energy centres off line (and

potentially maintaining them as reserve back up) would be required. Or, alternatively, a

network may be connected to another energy centre or extended on the basis of heat


being made available to it from existing heat sources at a stated price and level of

availability.

The decentralised energy scheme has to fit within the over-all planning and

environmental policies of the local authority and fit within their requirements – for

example the requirement for a scheme to serve a mix of commercial and residential

developments pre-determined by planning requirements; or to include a minimum

quantity of affordable housing, possibly accompanied by the local authority also being

driven by an agenda to combat fuel poverty.

Planning considerations may also influence technical issues such as the use of fuels - the

location or other characteristics of a site may, for example, make it unsuitable for the

use of biomass fuels or dictate that the site is not suitable for the installation of PV as a

significant energy source.

Conversely, the technical and economic requirements involved in building a network may

serve to drive planning policy, where for example the local authority has an energy

master plan which involves the installation of local heat infrastructure as the most

effective means of reducing carbon. An increasing number of local authorities are

developing energy master plans. These will drive decisions made in respect of the energy

sources for new developments, in the use of the Community Infrastructure Levy and,

subject to how government policy develops, the deployment of sums payable by

developers under an Allowable Solutions regime.


The role of the ESCO and MUSCO

This section clarifies the role of an ESCO (Energy Services Company) or MUSCO (Multi Utility

Services Company) in the delivery of a decentralised energy project.

Often the perception is that having such companies employed automatically secures the delivery

of a project. In fact the viability of a scheme and the contracted company’s ability to deliver an

energy centre depends on achieving the technical and economic feasibility of the project.

Projects need to be structured so that there are available funding options and contract

structures that reflect the functional delivery requirements and entitlements of each party on

the project; together with the distribution of risk in a way which makes that and the funding

deliverable.

This means the role and involvement of the ESCO or MUSCO can vary from delivering the whole

service of an energy centre through to one part of the project delivery being outsourced to

them. Such delivery vehicles may not necessarily be existing energy or service companies. In

some instances the delivery vehicle is formed specifically for the project concerned, its whole

business being confined to the requirements of that one project.

However, although the role of an ESCO or MUSCO will vary substantially according to all the

considerations referred to above, there are core functions often falling within the scope of their

activities as set out below.

Core obligations

From a legal standpoint, the delivery of a project will be embodied within a number of core

obligations as set out below, many of which are associated with an ESCOs or MUSCOs delivery. It

should be noted however, that some or even most of these functions may be subcontracted to

other parties; or the risk otherwise distributed to them, depending upon the technical, economic

aspects, and funding structure of the scheme, as described above.

The party legally or contractually responsible for the delivery of the energy services or

those specified. E.g. heat / energy efficiency services / maintenance, operation and

enhancement of the plant and distribution systems.

Refurbishment /renewal of the plant and accumulation of the associated sinking fund.

Maintenance of the financial viability of the scheme:-

o Balancing price and cost.

o Managing the customer base by replacing departing customers, obtaining

customers enough to achieve break even, and balancing the load mix.

Managing the relationship with consumers on matters such as billing and consumer

protection, in some instances accepting credit risk.

Managing the purchase of fuel, in some instances taking price risk.

In community regeneration schemes (most notably schemes not confined to a single site), there

may also be an obligation to secure the extension or modification of the scheme to accept new

consumers or sources of heat or power. However it is unlikely that the ESCO or MUSCO will

accept the entire financial and delivery risk that may flow from that, since it may not be able to

manage much of the risk involved.


Core obligations may be reciprocal

Core obligations go in two directions, an ESCO or MUSCO will be dependent upon subcontractors

to carry out its delivery functions; but it is also dependent upon the consumers, management

companies controlled by consumers, land owners and developers to carry out their functions.

For example:

If part of the system resides on land (or within a building) which is owned by the

consumer, then they will have to provide support and maintenance of the land and

building.

In some cases the scheme may be designed in such a way that some consumers (possibly

the commercial consumers) satisfy their heat load only partially from the scheme. In

that case the rest of their heat is satisfied from a secondary system which may be owned

and maintained by the consumer; and they will need to ensure that the secondary system

is maintained. The ESCO or MUSCO’s responsibilities will be limited accordingly, unless it

has accepted the maintenance responsibility.

In some cases a scheme might be joined by an existing building which has satisfied its

heat needs from its own boilers. The basis on which it joins the scheme might be that it

retains the boilers for use as a back up in various circumstances. For example, the back-

up might become necessary during outages of the scheme; or the operator and consumer

might have agreed that heat will be supplied at a certain capacity but then downgraded

in the future if, say, the operator is able to bring more consumers in to the scheme. In

the later instance the consumer would need to revert to partial use of its old boilers as a

back-up. By way of a further example, the arrangement between the operator and

consumer might be on the basis that the scheme will supply heat during certain periods

of the day but not others. In that instance, a commercial consumer might agree that it

will only take heat during the day time but not during the evening when the scheme has

more demand from residential consumers. Finally, a consumer might accept heat on the

basis that it will not demand peak heat during the winter months. In that case it would

need its back up boilers.

The future development of the ESCO and MUSCO role

As networks expand and become inter-connected, it may be expected that the role of the ESCO

or the MUSCO as the operating entity will change.

The linking of networks and the growth of networks to encompass multiple sources of heat and a

larger number of heat consumers, will tend to ‘unbundle’ the functions of the ESCO or MUSCO

and probably cause them to be more specialised in their functions; but that process of growth

will not substantially change the constituent functions involved. A good illustration of this is

provided in the core obligations of ESCOs and MUSCOs referred to later in this report.

Responsibility for the delivery of energy services

The ESCO may remain both heat supplier and distributor of the heat, but in the case of larger

networks those functions may be divided between a network owner or operator and heat

supplier. So for example, if a heat consumer changes supplier, the ESCO may remain responsible

for the distribution of the heat over the network or part of the network it owns, but not the heat

supply itself which may be provided by another party. Such prospective divisions of responsibility

are not inconsistent with the ESCO remaining responsible for other energy services.

Responsibilities for maintenance of heat generating plant and heat distribution systems

An ESCO may remain responsible for heat generating equipment and for parts or the whole of the

network, but that will depend more upon how the network has expanded and whether the heat

generating facilities the ESCO is responsible for are for instance de-commissioned. The ESCO may

also not remain responsible for the all the whole extent of the heat distribution system through


which the heat is distributed, depending upon the point on the expanded network at which the

heat is generated.

Refurbishment and renewal of plant

For the reasons explained above, the ESCO’s responsibilities may not extend to responsibility for

all the plant upon which the consumer’s supply of heat depends; or the ESCO may in some

instances confine its business to that of heat supply and related energy services.

Financial

The financial viability of the scheme may cease to be a single question, with its ownership and

control in different hands. For example, individual heat generating plant may become

uneconomic, but the heat distribution and transmission network as a whole may not.

Billing of consumers and consumer protection

This is the function of a heat supply business. ESCOs and MUSCOs may operate only as heat

suppliers, other entities owning and operating the heat generation and heat distribution or

transmission infrastructure, but the obligations to consumers will remain (see below – new legal

and regulatory requirements on page 14).

Purchase of fuel and energy price risk

Fuel cost risks and price risks may become divided between separate businesses of heat

generation and heat supply. The heat generator may quote a wholesale price to the heat

supplier, the generator must match the price quoted with its fuel costs and the heat supplier

must match the wholesale price at which it has purchased the heat with the retail prices charged

to consumers.


Implementation and operation

This section of the report covers the legal arrangements during the set up of a scheme, how each

subject is dealt with in agreements and how risks may be assigned between the participants

involved in the scheme.

ESSENTIAL OBLIGATION

The ‘essential obligation’ of each scheme is to supply and receive heat. The supply side agrees

to provide a service continuously and the purchaser’s side agrees to accept the service and to

pay for it.

If the core obligations mentioned previously are carried out entirely or partly by an ESCO they

will be collected together in a master agreement and the ESCO will agree to perform the

‘essential obligation’.

Any obligations that are not carried out by the ESCO will be set out in other agreements specific

to the activity in question. In addition to the agreements for the core obligations a normal

scheme will also have any agreements that cover the following:

Property agreements giving the ESCO access to the Energy Centre (the ESCO would

require this to be on an exclusive basis, subject to step in rights).

Agreements giving the ESCO the right to use the equipment in the Energy Centre.

Leases to the occupiers/consumers. These entities can be conventionally grouped in

three sorts:

o Private residential lessees or shared ownership lessees

o Registered Providers

o Commercial lessees8

Deeds of easements to allow for conducting media not otherwise covered in leases.

Agreements for the sale of electricity to consumers on site (if a private wire scheme or

otherwise to a licensed electricity supplier) produced by a Combined Heat and Power

plant (CHP).

Heat supply agreements to the consumers, which mirror the leases, ie:

o Consumers who are residential private lessees and shared ownership lessees.

o Registered Providers. If the lease is to the Registered Provider rather than the

ultimate consumer of the energy, there will be a further agreement between the

Registered Provider and the social tenant, under which the Registered Provider

agrees to procure and pass on or sell the heat and in some cases electricity, to

the social tenant.

o Commercial leases

Maintenance Agreements

THE ECONOMICS OF A SCHEME

Leaving aside the capital cost, the viability of a scheme is dependent upon its ability to generate

revenue. Also, in common with most other utilities, such as electricity and gas, it is convenient

to divide the revenue into two categories:

The price paid for the product (for example heat) for which the consumer pays for each

unit of heat consumed.

8 The agreements with these occupiers above will reserve the necessary rights for the conducting

media, notably in the case of community heating schemes the heat pipes, heat exchangers and

related equipment.


A contribution to the fixed costs of operating, maintaining and replacing the scheme.

This, of course, is paid whether or not the consumer is drawing any supply of the

product.

The viability of a scheme is affected by a number of constraints which are dealt with in the

following paragraphs.

Price increases

The ability to increase the price for heat and service charge is subject to constraints. One such

constraint is the competitive forces of other forms of space and water heating such as

conventional gas boilers. Heat schemes cannot afford to gain a reputation for being unduly

expensive otherwise prospective occupants will seek to go elsewhere. This market competition

is also sometimes reinforced by specific conditions imposed on schemes by planning authorities

or by developers. Although the price of heat is not regulated, it is common for schemes to be

subject to a condition that prices must remain in line with a benchmark, one example of which is

to require the prices to be benchmarked to the price a consumer would pay for the equivalent

heating of space and water from a conventional source such as a gas boiler.

Certainty of consumer base

Because of their small scale, the viability of decentralised energy schemes is much more

susceptible to the ebb and flow of consumer demand from individual buildings or sites; or in the

case of heat networks serving a range of buildings or sites not linked to development

agreements, loss of sources of heat demand – for example through the re-development or change

of use of commercial buildings. This is in contrast to national utility infrastructures which,

inevitably, have a much wider customer base. In the case of heat networks, this points to the

benefits of scale and diversity of sources of heat demand as an important factor in managing

revenue risks. Also new decentralised energy schemes are dependent upon acquiring sufficient

long term heat demand or load from the outset (often referred to as ‘anchor loads’). Once that

number has been achieved (or surpassed) the revenue risk associated with loss of a consumer

from an energy scheme will reduce but will still have a proportionately bigger adverse effect

than in the case of a utility network serving an entire region.

In the light of this, it is common to limit the absolute obligation to provide a continuous supply

of heat (i.e. to operate and maintain the system) until the revenue achievable will cover the

scheme’s operating costs. Or alternatively a third party (usually the developer of a site served by

the heat scheme) may guarantee a minimum revenue until the consumer base is big enough to

cover the scheme’s operating costs.

The concept of sustaining a new community heating scheme until there are enough consumers

can be handled in a variety of ways depending on the scheme. The following examples are for

illustrative purposes. The range of solutions is dependent on the precise details of each scheme

as described below.

A new build, single site scheme may be designed so that scheme viability occurs with the

first phase of plot-lease completions occurs. In that case the occupation of the buildings

and the operation of the scheme will commence at the same time.

In the case of a new build development comprising premises which will never be

intended to take their entire heat load from the scheme, for example a commercial

development, there will be a back-up to the heat supply. In that case the back-up could

be used until there are enough tenants occupying the scheme to cover the costs of

producing the heat; and any agreements with the promoters and the early occupants will

contain provisions which relieve the operator of the obligation to operate the scheme

until that point has been reached.


The scheme may commence operating and be financially supported before self-

sufficiency. Then the agreements will need to deal with the arrangements for financial

support in the interim and these will depend on the nature of that support. Again, the

following examples are for illustrative purposes only:

o In new build single site development, the developer might choose to subsidise the

operation of the scheme until self-sufficiency. There might be a claw back provision

under which the operator repays money to the developer once profit has been

achieved.

o The promoters of a single site regeneration scheme might be willing to provide a

subsidy.

o The subsidy might come from the operator in certain situations where the operator is

performing all or most of the core activities and is willing to rely on its own financial

strength to fund a scheme until it starts to break even.

The issues are likely to be more pronounced in the case of new developments or redevelopment

rather than a retro-fit scheme because in the latter case the consumers will, in many cases, be

able to continue using their existing energy supply arrangements until the scheme is ready for

them. In that case, the agreements will contain provisions enabling the operator to commence

the supply when it deems the revenues earned to be sufficient.

Once a scheme is operating, heat schemes (and indeed all decentralised energy schemes) are

more susceptible than national utilities to the question of consumer retention in view of their

small size and relative newness. In the case of new housing developments where the community

heating scheme is integral to the design and construction of the residential units, the physical

barriers to consumers obtaining their heat from an alternative source may be the most reliable

means of the heat provider ensuring that its revenue stream is protected. There is the possibility

of placing consumers under an obligation (for example as a term of their leases in leasehold

apartments) not to acquire their heat from any other source. However, there are legal issues

involved that are as yet not fully explored, regarding consumers’ statutory rights (for example

under the Competition Act) and how far such restrictions may be unlawful.

In the case of the provision of electricity, such restrictions were declared contrary to the

Electricity Directive under the ‘Citiworks’ case of 2008 and is now enshrined in proposed changes

to the Electricity Act9 and the licensing exemption regime consulted upon by the Department of

Energy and Climate Change in 2011, to ensure that consumers are entitled to obtain their

electricity and gas from a third party.

In addition to the strict legal position however, the opportunity of placing consumers under legal

restrictions is also limited by consumer perceptions of fairness and by commercial realities

militating against arrangements that rely upon legally structured monopolies.

In commercial leases occupiers often require flexibility and are only willing to sign leases of

between 5 and 15 years, thereby leaving the scheme without a long-term commitment. This is

not normally an issue in residential leases given that they are normally long and can be expected

to provide a long and productive income. There is always the risk of the sudden insolvency of an

important or “anchor load” consumer.

Consumers cannot be forced to use the heat service, but in some circumstances it may be

possible to prevent consumers from gaining access to alternative heat sources – for example by

restrictions in leases preventing lessees from installing individual gas boilers.

The financial self-sufficiency of a scheme is affected not only by customer retention but also by

its ability to obtain the necessary reimbursement of the running costs from its consumers.

Where schemes contain an element of residential consumers who occupy their homes under a 9 Described in Appendix B


lease, those leases are within the scope of the regulatory regime for residential lessees under

which the ability to recover costs from residential lessees is restricted unless certain procedures

are followed. That regime does not generally concern the supply of electricity from major utility

companies, where supplies are provided under contracts that are separate from the lease

between the residential lessee and his/her landlord. Heat schemes, however find themselves

part of the residential leasehold regulatory regime where the provision of heat is part of the

services provided under the lease. The effects of this are that the lessees have a right to be

consulted on service charges and also can decline to pay service charges that are regarded as

“unfair”. Until district heat schemes have been more widely adopted there is insufficient

evidence as to what is “fair” to give residential landlords (and the operators of their schemes)

confidence that they will be able to make full recovery of their costs. Therefore, there is a

tendency to try to arrange schemes in such a way as to avoid their coming within the scope of

the regulations but this is difficult and clarity in some form of legislation would assist.

The regulatory regime also gives some residential lessees the power to group together to require

their landlord to sell the freehold to them. The possibility of that power being exercised also

reduces confidence because under a forced sale the price and terms of the purchase are

regulated.

MODIFICATIONS

The legal structure of a scheme can be very difficult to modify once the agreements are fixed.

That is a result of the large number of parties involved in a scheme and the fact that they are

interdependent. Consequently it is necessary to foresee as many modifications as possible

during the planning stage.

The easy instances to deal with are those which can be foreseen at the planning stage, such as:

When a scheme is being built in phases, the subsequent phases will be allowed for in the

legal arrangements that are made at the outset.

On all schemes, it is not uncommon to allow for the scheme to connect to the initial

development plus a potential future building, such as a community centre or leisure

facility. Again, that additional load can be allowed for in the initial arrangements.

During the planning of the scheme, it is sometimes possible to identify an existing

building for inclusion in the scheme at a later date, possibly when that building’s existing

boilers reach the end of their useful life. Again, provision can be made in the

agreements for the inclusion of that extra load.

The less easy situations are where the future changes cannot be included in the planning, such

as:

The addition of a new network, as envisaged by the London Plan.

The inclusion of a new load. The London Borough of Islington has, for example,

consulted on its implementation of the GLA’s London Plan policies. The proposals

require (subject to some qualifications which can be seen in the extract of the policy on

the GLA website10) that a proposed major development within 500 metres; or a proposed

minor development within 100 metres, of an existing or planned Distribution Energy

Network (DEN) must be connected to the DEN if reasonably possible; and where there is

no suitable existing or future DEN, that major developments should aim to create or join

an existing Shared Heating Network (SHN), ie a network which links neighbouring

developments or buildings.

Modifications that may become desirable during the lifetime of the scheme. These

possibilities are endless and they could include upgrades to the scheme to make it more

efficient or changes to fuel.

10 http://www.london.gov.uk/priorities/planning/londonplan

http://www.london.gov.uk/priorities/planning/londonplan


The constraints that arise when modifications are identified after all the legal agreements have

been concluded fall into three very broad categories which are dealt with in turn below.

Inter-dependency

By their nature decentralised energy schemes are based on a series of agreements. It is

impractical to expect any of the participants to permit changes that might affect them, unless

those changes are within agreed boundaries. Typical boundaries are identified by the following:

Modifications might be permitted provided they do not increase the price of the service

beyond the benchmark level.

The operator might be permitted to reduce the amount of heat available within fixed

parameters, thereby permitting it to extend the scheme or to alter the load mix. In

cases where the consumers have a back-up system (particularly in the case of some

commercial buildings) they will find it feasible to reduce their heat demand, thereby

freeing up the scheme to alter the load mix. The altered load mix may then allow

greater carbon reduction.

Policy Constraints

The local authority might require schemes to be built with and retain certain features so as to

contribute to the local authority’s achievement of specific policies. For example, a scheme may

be required to be fuelled by biomass and it may not be within the bounds of the local authority’s

policy to permit the fuel to be altered subsequently.

Physical Constraints

There could be a very wide range of physical constraints which make it either impossible or

uneconomic to make modifications, for example, where a modification requires more land than

is available.

ACCESS TO FACILITATE OPERATION

Rights are needed to enable the operator of a decentralised energy scheme to place the

equipment on the land and keep it there indefinitely. Rights are needed to permit the following:

The initial construction.

The continuous supply of heat through the pipe.

The maintenance of the equipment.

The renewal of the equipment.

This access is needed for the energy centre, the conducting media and the consumption

equipment.

It follows that the operator needs to have the necessary permission from the land owners of

every piece of land which is occupied by the system. The agreements must also bite on every

person with an interest in the land. This means that when the operator is obtaining permission,

they will also need to ensure that the rights cannot be withdrawn by anybody taking a new

interest in the land. Therefore, the landowner needs to agree that if he grants a lease of the

land, the incoming leaseholder will not be able to object to the existence of the system.

Similarly, the same will apply if the freeholder sells the land.

The concepts set out above are well established in existing standard arrangements for the

granting of such rights already so, when a scheme is based on a site, the freeholder will ensure

that the rights are reserved in the leases. If the freeholder then brings in a third party to

operate the scheme, they will grant the rights to the operator. They will also ensure that, as

between each of the lessees on the site, the necessary rights are granted and reserved. If a part

of the scheme is off-site then easements over third party land are granted. If the scheme passes


through public land then the type of agreement will depend on whether it is passing through a

highway or other publicly owned land. If it is a highway then the standard Section 50 Agreement

will be used and if it is other land then a typical easement agreement will be used.

All of the above scenarios are sufficient to cover all types of scheme as can be seen below:

A Single Site Scheme

In Figure 1.1 the developer owns virtually the entire site but not quite all of it. For the

construction phase, the developer grants to itself the right to build on its own land and obtains

the right to build on third party land.

For the operational phase, the operator is granted a right to operate either from the freeholder

or from the third party owner. The rights in question are (i) to continuously pass the steam

through the pipes, (ii) to enter the land to maintain the pipes, and (iii) to enter the land to

renew the pipes.

When the freeholder then grants leases to the occupiers, if any part of the scheme is within the

demised part, the freeholder reserves the same rights as set out in the paragraph above on

behalf of the operator. The agreements that may be made for this type of scheme are illustrated

in diagrammatic form on the first page of Appendix C below.

If a third party leases or sells his land, then the incoming lessees or buyers are bound to maintain

the operator’s rights because that obligation has been reserved in the original agreement.

The freeholder might sell all of its land in which case the buyer will be bound by the operator’s

rights.

The freeholder might be required (under the residential tenancy legislation) to sell only part of

the land. This prospect would be taken into account during the planning stage by giving

consideration to the physical location of the energy centre if the promoter wanted control over

it for the use of the remaining parts of the development.

Single site scheme with multiple ownership

In Figure 1.2, although there is a single site which is owned by multiple landowners there is

physically one network. The network may be owned either entirely by one entity or in separate

parts by different entities. Although the ownership of the network could sit separately from the

ownership of the land, it is assumed that the landowner will also own the network.

For the construction phase, where the entire network is within one ownership, that network

owner will obtain the right to construct from each of the landowners (including the third party

owner(s) of the land occupied by Energy Centre 4) and there may be a series of private

agreements.

In the case of a part ownership network, each landowner will grant itself the right to build its

part of the network on its own land and one of the network owners will obtain the right to build

on the land of the third party, and to keep the network on the land if the land is sold.

At Appendix C, there are illustrations of the agreements that may be made for a single site

scheme in multiple ownership, where (i) the network is in single ownership (the second page of

Appendix C) and (ii) where the network is in multiple ownership (the third page of Appendix C).

For the success of the scheme, each of the network part owners will have to agree to keep their

part of the network on their own land. They will have to bind their successors in title.


For the operational phase, if the network is operated in its entirety by one entity, the network

operator will secure the right from each landowner to:

continuously pass steam through the pipes,

to enter the land to maintain the pipes and

to enter the land to renew the pipes.

If there are part operators of the network, each of the landowners will grant to the operator the

same rights mentioned above for their part of the network; and will also collaborate with the

other part owners by agreeing to permit the operator to maintain their part of the network and

to contribute steam. There may also be revenue and cost sharing agreements.

The lease to each occupier of dwellings or commercial premises will reserve to the freeholder

the rights to (i) continuously pass steam through the pipes (ii) to enter the demised property to

maintain the pipes and (iii) to enter the demised property to renew the pipes.

If a third party leases or sells his land, then the incoming lessees or buyer are bound to maintain

the operator’s rights because that obligation has been reserved in the original agreement.

If one of the freeholders sells all of its land the buyer will be bound by the rights granted to the

operator(s).

The level of complexity in the arrangements may be dictated by the scale of the site. It is

envisaged that these arrangements could apply to a development site sold in lots to, say, four

developers; or to a major regeneration site covering part of a city centre.

Multi site scheme

Under a Multi Site Scheme there is physically one network. Although there is nothing to prevent

a network being owned in parts, our assumption is that it will be owned by one entity. For the

construction phase that owner will obtain the right to build the network from the owner of every

piece of land on which it will sit (or through which it will pass).

For the operational phase the network operator will obtain the same operational rights for the

other schemes ie to continuously pass steam through the pipes, to enter the land to maintain the

pipes and to enter the land to renew the pipes.

The fourth illustration at Appendix C shows the agreements that may be made for a multi-site

scheme with one network owner.

As in the previous examples, if any third party or tenant leases or sells his land, then the

incoming lessees or buyers are bound to maintain the operator’s rights.

CONTINUITY OF SUPPLY

Given the importance of decentralised energy schemes to the welfare of the community, it may

be argued that there is justification for a consumer’s right to terminate use of the heat

infrastructure to be severely restricted. That also goes for restrictions on the ability of

operators to interrupt the service or deny it to consumers. Restricting the right of consumers to

obtain their heat from elsewhere may be thought justified in supporting the viability of the

scheme for the reasons mentioned in on page 17.

However, although it may be thought that in admitting such restrictions, heat provision is simply

following the path already trodden by other utilities owning monopolies of gas and electricity

distribution infrastructure; such utilities operate within a tight regulatory framework to protect

consumers from the adverse effects of the monopoly. Whether a similar approach is justified


now or in the future in respect of heat distribution networks and heat supply is examined below

in relation to consumer issues.

Landowners

Quite clearly there would be serious disruption if the landowner could terminate the scheme’s

right to be on the land. Consequently any third party landowner should agree not to terminate

those rights, except in exceptional circumstances.

A landowner who has nothing whatever to do with the scheme would be caught by this. In

addition, in multi-ownership schemes each of the owners should agree with all the others that

none of them will terminate those rights.

That those landowners who have nothing to do with the scheme may be reluctant to grant a

permanent right is hardly unexpected. The statutory powers would be available to a statutory

utility seeking those rights. Heat, however, is not treated in the same way as statutory utilities

and is therefore not able to insist on placing pipes in third party land. It is therefore left to

commercial negotiation.

Promoters

Although promoters of a scheme are unlikely ever to want to see it terminated, there is the issue

of whether or not they should be restricted in terminating the various agreements that they have

entered into in order to make the scheme work. The entities affected by this issue are not only

the suppliers but also the consumers.

Schemes that involve ESCOs very often involve an element of investment by the ESCO and, for

them, it is important that the agreement granting the concession to the ESCO is not terminable

before the end of an agreed fixed period, except in the case of serious default and other

circumstances referred to below. If the promoter is effectively operating as its own ESCO but

sub contracting the core activities, then such issues may not arise. The ESCO would be looking

for a level of commitment from its contractors more normally obtained from subcontractors

rather than from a party integral to the scheme.

Therefore an ESCO Master Agreement will contain provisions which only permit the promoter to

terminate in limited circumstances. Typical ones are, if the scheme is no longer complying with

the Section 106 requirements; if the ESCO wishes to assign the contract to an operator that is

not technically competent or financially stable; or if the ownership or management of the ESCO

changes for the worse.

Consumers

Consumers have a high level of dependency on the continuation of the scheme and consequently

it is normal for the promoter and operator to be placed under agreements that do not give them

the right to terminate except under very prescribed circumstances. (“Termination” is used here

in the sense of bringing the scheme to an end as opposed to termination or temporary suspension

of a service for operational reasons.)

Operators

The real issues concerning Operators are less to do with their rights of termination as opposed to

controlling their rights to transfer their obligations to another operator (who might not be

suitable) and dealing with the consequences if the Operator fails through insolvency. These

issues are considered in the section operators right to assign on page 23.

Registered Provider

A Registered Provider can be the freeholder or the developer; and although they can, on some

developments, conduct all of the core activities (thereby eliminating the need for a separate


ESCO) there are schemes in which the Registered Provider is more in the role of recipient rather

than provider of heat. In such schemes, the Registered Provider will be interested to ensure that

heat is provided to the units, for the benefit of their social tenants.

Given that the Registered Provider is not conducting the core activities, it follows that a third

party is supplying the heat to those units. If the scheme is set up in this way, the Registered

Provider sits between a heat supplier and the consumers of those units. Under the

arrangements, the Registered Provider agrees to be obliged to pay both elements of the service,

see ‘The Economics of a Scheme’ on page 15 i.e. the price of the heat consumed and the service

element. Although the Registered Provider agrees to pay, the consumer receives the heat and

the Registered Provider is therefore at risk of being out of pocket unless the consumer

reimburses them in full. To alleviate some of the risk, the heat suppliers will sometimes agree

to an arrangement under which the Registered Provider’s obligation to pay for the heat

consumed is disengaged whilst there is an occupant in a unit. Instead, the heat supplier collects

the payment for heat consumed directly from the consumer under a separate agreement (made

directly between the supplier and consumer.

It follows that a Registered Provider’s right to terminate needs to be considerably restricted.

They would not normally have the right to terminate at will. Instead:

As between themselves and the heat supplier they would be permitted to terminate if

the supplier is in breach.

As between themselves and the consumer (their own tenant) they would not normally be

able to terminate.

By virtue of the normal arrangements for supply of electricity and gas, we are generally

conditioned to the idea that the consumer has a direct contract with the supplier. In other

words there is no intermediary standing between supplier and consumer. The concept of a

Registered Provider standing as intermediary is therefore different. The concept does not have

to end at Registered Providers. Developers in private developments are also known to engage an

independent operator (ESCO) and to accept an obligation to pay the operator for the service

supplied to the units; and to reimburse itself from payments made by the consumers occupying

the units.

Commercial Lessees

The position of commercial lessees is dictated by the fact that the majority of commercial

occupancies are on the basis of 15 years duration or less. The significance is that any

commitment from a lessee will expire with the lease. Commercial lessees, therefore, are not

going to provide the same sort of continuity that comes from residential lessees or Registered

Providers. Added to this, commercial lessees are generally reluctant to restrict their commercial

flexibility. This includes their flexibility to switch energy providers when they wish to. If a

district scheme is heavily dependent on one commercial lessee this degree of flexibility will be a

problem. However, in schemes which have a greater number of consumers the disappearance of

one will be less problematic. In general commercial lessees are not required to commit to take

their energy for a fixed period. Instead, they are permitted to terminate but may be required to

pay an early termination fee, the level of which is fixed by commercial negotiation. Moreover,

they might require some control over changes in the operation of the Scheme. So, for example,

if an ESCO providing the core activities wishes to assign or change its ownership or management

or if a promoter suggests a change in the way the service is provided, the Commercial Lessee

may have a right to vet them or to terminate if the changes are to their disadvantage. The level

of intervention permitted will depend on the level of influence of the Commercial Lessee.

Operator’s Right to Assign

Because continuity of supply is vital, it goes without saying that the scheme must be operated by

people with technical competence and financial stability. The importance of this is as its

maximum in a scheme where the core activities are handled by a single operator, diminishing

where the core activities are spread amongst different entities. Even then, however, the entity


which coordinates all of those providing core activities must itself be technically and financially

competent.

For these reasons, there are restrictions on rights of operators to either assign their obligations

or to change their ownership or management. These restrictions comprise a requirement for the

operator to seek approval before making such changes and to have their contract terminated if

they proceed with changes without approval. The interested parties from whom approval must

be obtained are:

The Promoter

The Landowner who may have an interest as lessor or as occupier.

Developer

Some commercial lessees (see above page 23)

Where Registered Providers are also the developer and/or landowner they will have an interest

in intervening. Residential Tenants generally do not have power to intervene in proposed

changes.

A question arises as to whether this all makes a case for distributing the core activities amongst

a variety of operators. On the face of it, there is greater safety for both the operators and the

consumers if the operators do not have all their eggs in one basket. However, this creates a

trade-off against the benefits of a single organisation’s ability to control and manage the scheme

to the best advantage. In particular, over the 25-50 year concession period that is typically

granted to an ESCO, it is highly likely that all concerned would benefit from modernisation and

technical innovation, which will be easier to arrange if one party has control.

Electricity

Community heating systems may also produce electricity where the heat source is a combined

heat and power plant. Electricity sales can significantly enhance the financial viability of

schemes, through the revenue earned by operators supplying electricity to consumers linked to

the system. However the risks costs and complexities of supplying electricity in the electricity

market system have tended to limit the opportunities for retail sales to heat consumers to

smaller single sites where the electricity supply can take place under the class exemptions from

electricity supply licensing. However, as schemes grow in size and scope, the value of the

available licensing exemptions will diminish, in addition to which there is at least the prospect of

scheme operators having to compete with licensed electricity suppliers in supplying their heat

consumers with electricity, since competing suppliers can now demand access to private wire

networks. This is because the ‘Citiworks’ case referred to above requires private wire system

owners to grant access when requested; so in time it can be expected that private wire

electricity supply will become less appealing to community heating operators.

Given the possible benefits to community heating operators and investors of being able to gain

revenue from the retail sale of their electricity to their heat consumers and others, work is being

done to find a means of enabling small electricity generators to become licensed to supply under

rules that enable them to manage the costs risks and complexities involved. The arrangements,

which were formally put forward by Ofgem in proposals of February 2009, are now being

developed by parties interested in developing CHP and community heating, notably by the

Greater London Authority and some London boroughs, with the support of the Department of

Energy and Climate Change and Ofgem. The process of implementing Ofgem’s proposals (known

as ‘Licence Lite’) is a demanding one, but work is proceeding on delivering it.

CONSUMER ISSUES

Heat distribution systems are natural monopolies. In addition, in the case of most community

heating schemes where there is only one heat supplier, the supply of heat is also a monopoly

business.


Protecting consumers under such circumstances is likely to be a growing issue, as the number

and size of heat networks grow. If the Government’s Heat Strategy published in March 2012 is

followed up by heat networks growing in number and size to attain the potential described in the

strategy, the issue can only increase in prominence.

Currently, there is little evidence of consumers being disadvantaged by the monopoly status of

their heat supplier in community heating arrangements; and in addition, more is being done by

scheme operators to introduce codes of conduct which provide consumers with some re-

assurance that their reliance on a single heat source will not be abused.

That may be a tolerable position for the present, because currently the number of consumers

receiving their heat through community heating systems is relatively small and a high proportion

of those who do, are tenants of local authorities or housing authorities that can provide some

protection to consumers.

The alternative is some form of mandatory regulation to protect consumers against monopoly

suppliers. The more the industry does for itself to self regulate, the more distant is that

prospect. What is more, unnecessary regulation introduces complications and slows up network

development, so there is a case to be made to government that mandatory regulation should be

resisted until or unless industry self regulation is not seen to be working.

For the long term, it may be argued that the more heat networks grow in size and diversify their

heat sources, the more the supply monopoly disappears, as consumers may have access to more

than one supplier through the same network. In logic, that may happen, since if community

heating systems are to develop, as illustrated above, that will occur more easily if the risks to

the developers of the networks are lower. Risks are reduced through the growth of networks and

growing diversity of heat consumers and heat suppliers – so in principle at least, the protection

of consumers from monopoly suppliers could be self fulfilling as networks feature more in heat

supply.

That looks like a promising scenario although it needs testing in practice. Namely industry self

regulation providing adequate protection for consumers until the growth of the networks

provides its own protection through the advent of competition between heat suppliers – a

broadly similar scenario to that seen in other utilities.

However, although that prospect may at least provisionally, provide an answer to consumer

protection in the context of heat supply, it does not in relation to heat distribution. Heat pipes

are naturally monopolistic and would remain so, in the same way as electricity and gas

distribution and water supply have done.

Although barely relevant now, if and when networks expand as described above, we may expect

the prospect of economic regulation of heat networks to arise, as it did on the privatisation of

the existing utilities. Regulation might cover similar areas, for example the right of consumers to

be connected to available heat networks with the capacity to supply them; the right of heat

generators to be connected to a network and supply their own customers through it; the

regulation of the charges made by a network owner for carrying heat along the network.

Such economic regulation is some way away. There is currently no or very little inter-connection

between networks or heat sources connected to the same network to justify regulation and

regulating unnecessarily would be damaging. However, looking to the future, it is likely to be the

price (if such it be) the industry pays for its own expansion and success.


Growth of networks and linking of schemes

This section looks to the future and explains how, as networks develop, the operation of the

network, heat generation and supply will become more specialised and ‘unbundled’, as heat

networks take on more of the characteristics of traditional mainstream utilities such as piped

natural gas and electricity.

A major challenge in developing heat networks at scale is the risk of heat infrastructure

becoming a stranded asset. This can happen as a result of either planned sources or demands of

heat not being delivered as planned or ceasing to be available before alternative sources are

available. A fully developed ‘Multiple site scheme’ network may be a relatively safe investment,

since it has the range of heat sources and points of demand to moderate the risk. The question

arises as to how a network can be developed to that point, when expensive transmission

infrastructure is required before the required range of heat sources and heat demand can be

established? Some of the answer lies in securing an initial number of sufficiently secure long

term heat sources and heat users; but much of the answer lies in interconnection, in effect

linking schemes so that they migrate from single site through to multiple site schemes. That does

depend upon the engineering and design characteristics of the schemes being compatible with

interconnection, but if they are, then the risk of new heat transmission infrastructure being

stranded can be substantially reduced.

LEGAL ISSUES TO BE CONSIDERED

When determining the legal structures required with delivering schemes, we have to be aware of

how the change in scale and range of heat sources and sources of heat demand will affect the

relationships between heat generation, supply and distribution and with it, the role of the ESCO

or MUSCO appointed to operate the scheme.

As explained above, the extensive roll out of heat networks in line with the Government’s

strategic proposals and inter-connection between networks are likely to go together, but there

are significant legal and regulatory issues that should be considered with inter-connection, such

as:

One network owner may ask for connection to another network. That connection should

take place if practical, but commercial terms have to be reached and there is no

regulatory mechanism to mandate connections or regulate the terms upon which they

take place.

Heat generators may be dependent upon reaching a connection agreement with a heat

network owner so that heat can be transported to consumers. As decentralised energy

networks grow and join up with each other, there is the potential for a local heat market

to develop, with new heat sources offering heat to their own heat consumers, connected

to the same network. Although it may be in the public interest for that to happen, there

is no legal or regulatory framework to enable it to do so.

This raises several issues that should be addressed by those designing legal structures for

decentralised energy schemes, particularly around connection between networks and their use:

The costs of physical connection and any risks attached to it

Use of system charges to be levied by the party through whose network the heat flows

will pass

The rights of heat consumers to switch suppliers where alternative sources of heat are

available

Common engineering standards to ensure connection is physically possible

Cost transparency, whereby the network owner must separate the costs of operating the

network from the costs of its own heat supply or generation business.


These requirements will not remove any of the functions currently associated with ESCOs and

MUSCOs, but it may mean the functions take on a new form in some instances or are divided

between different ESCOs or MUSCOs carrying out differing functions on a network, for example:

Network access by prospective heat generators or suppliers and consumers

This is area is not currently regulated. If and when it is for the reasons described above, it will

become an obligation of the ESCO or MUSCO owning or operating the heat network, not an ESCO

or MUSCO whose business is confined to heat supply and other energy services.

Consumer protection

These obligations may be split, as between heat supplier and network owner. The network owner

will be distributing heat to consumers who are depending upon the network continuing to

operate and at a price which remains competitive, as explained above in ‘Price Increases’ on

page 16. We may expect the operation of the network to be regulated as a monopoly asset, like

an electricity or gas network. However, the heat supplier will owe obligations to consumers to

protect them against abuse by the supplier of its position. Whether this is confined to self

regulation by the industry or becomes a matter for statutory regulation is currently being

reviewed by government, see consumer issues above on page 25.

Land rights and access

As described in the previous section, the growth of district heating schemes and the extension of

their infrastructure is seen to occur primarily through the linking of schemes through their

mutual extension and the installation (when the required heat demand can be connected) of

heat transmission infrastructure, linking networks. The result is that the characteristics and land

ownership issues associated with single site schemes, single site schemes with multiple

ownership and multi site schemes are likely all to be comprised in a single larger scheme. The

heat sources may change as a result of smaller single site schemes being absorbed into larger

schemes, but the ownership and control of the network, land rights and access requirements on

that site need not change. What may change is the interface between the operator of the now

linked single site or multi-site network and the consumers connected to such networks, since the

linking of networks offers further possibility of more than one heat source being available to

consumers and the prospect of competing heat sources (see the role of the ESCO and MUSCO and

the legal and regulatory considerations referred to later in the report).


Conclusion

This Task Group set out with a goal to provide standardised legal agreements for the setting up

of sustainable community infrastructure. In reality, that proved highly ambitious due to the

sheer volume of potential issues that could be considered. The group decided that the needs of

stakeholders would be best served by focusing on the delivery of district heating and CHPand

that it would be of most value to provide guidance that is accessible by non legal practitioners

who will be involved in the setting up of district heating schemes but who may have limited

knowledge in this area.

In terms of the longevity of this piece of work, the Task Group found it encouraging that despite

the expected growth of decentralised energy infrastructure, the legal issues will still revolve

around the three basic land ownership configurations referred to at the beginning of this report,

while the planning and operational considerations outlined throughout the report will all remain

relevant. The changed context arises in particular as larger networks develop into recognisable

utilities and their internal functions become more specialised and unbundled.

Decentralised energy infrastructure has a key role to play in creating sustainable communities.

We hope this report is a useful contribution, which helps provide some clarity and guidance on

these often complex legal issues and structures.


Appendix A: Case studies

The following section sets out a range of case studies that have integrated energy centres in a

development or multiple developments.

BIRMINGHAM CITY COUNCIL – DISTRICT ENERGY SCHEME

The Birmingham District Energy Scheme is playing a pivotal role in Birmingham City Council’s

climate change strategy, which aims to reduce CO2 emissions by 60% by 2025.

The Birmingham District Energy Scheme is owned and operated by COFELY District Energy

working in partnership with Birmingham City Council – under the name of Birmingham District

Energy Company Ltd (BDEC). The scheme features tri-generation, producing heat, electricity and

chilled water. The scheme makes extensive use of highly efficient large-scale combined heat and

power (CHP) technologies, and uses conventional boilers for ‘top up’, standby and increased

resilience. BDEC’s three core schemes initially involved the supply of energy to 10 prestigious

users from both the public and private sectors. However, due to the scheme’s significant

delivery of financial and carbon savings to its consumers, it has already expanded to supply

several third party private developments.

The Birmingham District Energy Scheme was conceived in 2003 and the first 25 year energy

supply agreement with Birmingham District Energy Company Ltd (a wholly owned subsidiary of

COFELY District Energy) was signed in 2006. The first phase (the Broad Street scheme)

encompassed a range of buildings in the central business district served by an Energy Centre at

the International Convention Centre (ICC), and was launched in October 2007. Further phases

began operation at Aston University during 2009 and Birmingham Children’s Hospital in 2010. The

schemes are also being extended into several regeneration areas across the city and, ultimately,

all of these ‘sub-schemes’ will be linked together to improve resilience and maximise energy

saving opportunities.

The Birmingham District Energy scheme has enjoyed rapid growth since its inception, enabling

the on-going expansion of the scheme and its combined low carbon plant capacity, as more

customers have come on stream. As the scheme evolves, COFELY District Energy’s innovative

approach ensures that low carbon technologies are applied to maximum effect.

For example, the Birmingham Children’s Hospital scheme (which includes a connection to

Birmingham City Council’s Lancaster Circus) features a low carbon energy centre housing a

1.6MWe CHP, designed and built by BDEC and is expected to save 3,500 tonnes of CO2 emissions

per annum. Overall, the Birmingham scheme is saving over 12,000 tonnes of CO2 per annum

compared to traditional systems.

Key statistics:

Over 41,000MWh of heat per annum

6,700MWh of electricity from the CHP

plant

More than 4,900MWh of chilled water

4km of insulated distribution pipe

Electricity supplies synchronised with

the National Grid

Just 0.5°C temperature loss per km of

pipe

Hot water flow/return temperatures of

approximately 100°C/60°C

Over 12,000 tonnes of CO2 saved per

annum


SOUTHAMPTON CITY COUNCIL - DISTRICT ENERGY SCHEME

The Southampton District Energy Scheme (SDES) is a pioneering project that has led the way in

the delivery of sustainable supplies of heat, chilled water and power in the UK. For over 25 years

SDES has pushed the boundaries of district energy and tri-generation and continues to expand

into new areas. The scheme now encompasses over 45 energy users in the public and private

sectors.

The SDES is operated by COFELY District Energy working in partnership with Southampton City

Council – under the name of Southampton Geothermal Heating Company Ltd (SGHC). It is

currently saving around 10,000 tonnes of carbon dioxide emissions per annum, utilising heat from

a large scale combined heat and power (CHP), supplemented by geothermal energy and

conventional boilers. It also incorporates a district cooling system.

Users include TV studios, a hospital, a university, a shopping centre, a civic centre, residential

buildings and a hotel - as well as public and private sector residential developments.

Since its launch in 1986 the

Southampton District Energy

Scheme has grown into a thriving

and expanding multimillion

pound, multi-source heating and

cooling system, saving over

10,000 tonnes of carbon dioxide

emissions per annum.

Initially, the scheme served a

core of consumers from the

geothermal well and this is now

supplemented by large-scale CHP

and absorption cooling, using

conventional gas-fired boilers for

‘top up’ and standby. The heat

from central plant is distributed

through a 14km district heating

network.

Key statistics:

Saves 10,000 tonnes CO2 annually

Over 40,000 MWh of heat per annum

26,000 MWh of electricity from the CHP plant

More than 7,000 MWh of chilled water

14km of insulated distribution pipe

Serves buildings within a 2km radius of the energy centre

Just 1°C temperature loss per km of pipe

Hot water flow/return temperatures of approximately 80°C/50°C

The Southampton scheme was developed on a low temperature, low pressure basis to reduce

heat losses and maximise the life of the network. The network is operated using a flow

temperature of approximately 80°C and a return of 50°C, with distribution pressures of

approximately 5 Bar. This enables direct connections into most buildings, removing the need for

heat exchangers, further reducing capital costs and energy losses.

Associated British Port Connection

2009 marked the Scheme’s electrical synchronisation with Southampton’s Port, The connection

enables the Port to consume, under a 10 year Power Purchase Agreement, all the electricity

generated by the scheme’s 5.7MWe and 1MWe CHP’s located at the Harbour Parade Heat Station.

SGHC and Southampton City Council had long sought a commercial partner to locally consume

the 23.5 million kWe of electricity generated by the scheme, which was previously exported to


the UK national grid. Both parties were delighted when Associated British Port Southampton

recognised the considerable benefits associated with the proposed connection.

To deliver the project, engineering history was made when during December 2008 COFELY

District Energy’s projects completed the final ‘pulling’ of a 25 ton “private wire” 33kV cable

through underground ducts of over a mile in length across the city. Never before had such an

ambitious engineering feat been attempted (and successfully delivered), a testament to the

commitment and willingness of all parties to collaborate to deliver this remarkable project

within the city.

The link enables SGHC to supply the port with initially 55% of its total annual electricity

consumption, although future increases to this figure are planned. The electrical connection will

now aid and facilitate further expansion of the heat network and greater utilisation of the

Scheme’s CHP engines.

This truly is a mutually beneficial project, which has only been able to evolve through the

Scheme’s close collaboration and partnerships.

Southampton District Energy Scheme Continued organic growth is a key feature of the success of

the Southampton scheme. Following the connection of the Civic Centre, the first commercial

customers was ASDA in 1987 and more recent commercial participants include IKEA and

Carnival (UK) Ltd. Chilled water supplies were added in 1994 and, again, demand for this service

has grown rapidly.

More recently, in 2009, a cable was laid to the Port of Southampton, where electricity from

SGHC’s CHP engine is supplied under a 10 year Power Purchase Agreement. This enables the Port

to consume all of the electricity generated by the 5.7MWe and 1.0MWe CHP engines at the

Harbour Parade Heat Station.

Heat Station and Consumer Connections

The Scheme’s main energy centre, located in the heart of Southampton’s retail quarter, houses

the core energy generation plant which provides heating, power and cooling to the consumers on

the Scheme. The Energy Centre building was constructed in 1986 to house the geothermal well

heat exchanger, district heating pumps and small scale CHP plant. Since that time the buildings

have been expanded to include a 5.7MW CHP engine in 1998 as well as the district cooling plant,

and in 2008 a reconditioned 1MW CHP was installed. This continued organic growth is one of the

key features of the success of the Southampton scheme.


WOKING BOROUGH COUNCIL – COMBINED HEAT & POWER

The Woking Town Centre Combined Heat and Power (CHP) station is believed to be the first

commercially operating energy station of its kind in the country. It was the first project of

Thameswey Energy Limited, a joint venture company of Thameswey Limited (a company wholly

owned by Woking Borough Council) and Xergi Limited of Denmark.

Thameswey Energy Limited aims to finance, build and operate small scale CHP stations (up to

five megawatts) to provide energy services by private wire and distributed heating and cooling

networks to institutional, commercial and residential customers.

The Woking Town Centre CHP station is just one of a range of

sustainable and renewable energy projects delivered by

Thameswey Energy Limited, helping to meet the Council’s

Climate Change Strategy objectives. Projects outside the Borough

are also investigated, of which profits can be used to improve the

environment within the Borough of Woking and benefit its

residents.

Local customers include Holiday Inn, Quake Nightclub, Big Apple

Entertainment Centre, Metro Hotel, H.G.Wells Conference and

Events Centre, Victoria Way Car Park, the Lightbox Gallery

and Museum and Woking Borough Council’s Civic Offices.

Brockhill is an ‘extra-care’ sheltered housing scheme operated by Woking Borough Council for

elderly residents which receives sustainable energy from the CHP plant as well as photovoltaics.

This approach makes a positive contribution to the Council’s Climate Change Strategy target of

purchasing 20% and 100% of the Council’s electrical energy requirements from renewable energy

resources and sustainable energy resources respectively by 2010-11.

As the development provides a local community energy system and because of the way it

functions, Woking has managed to avoid charges and costs which are imposed on power

generators and suppliers accessing the national grid. The charges to residents are set in

accordance with the Council’s Climate Change Strategy, which provides heat and electricity

within the Government’s affordable warmth targets of 10% of income for heating only.

This has positive effects on Woking’s strategy to tackle fuel poverty (addressing the affordability

of both heating and electricity) and energy conservation.

The combined system of photovoltaics and CHP will save around 4,734 tonnes of CO2 emissions in

its lifetime and provide a 100% renewable and sustainable energy source. Brockhill uses 81.5 kWp

of photovoltaics and, together with a 30 kW CHP station, has a total generation capacity of 111.5

kW.


ISLINGTON COUNCIL - CROUCH HILL

Islington Council is regenerating the Crouch Hill Park, to build a new primary school and nursery

and refurbish the existing youth centre building. The youth centre will house an energy centre

that serves the building with heating and hot water via a site wide heat network and the school

with electricity. In addition to serving the site, the scheme includes the first ‘Shared Heat

Network’ in Islington via heat network connection to the neighbouring homes existing Coleman

Mansions Estate.

The Energy Centre includes a Biomass Boiler and Gas CHP engine

The shared heat network supplies heating and hot water to the school, nursery, youth

centre and 40 existing flats

Most of the electricity generated will be used in the school

The development is designed to be zero carbon

Islington council will initially operate and manage the energy centre and heat network


ISLINGTON COUNCIL - BUNHILL HEAT & POWER

Bunhill Heat and Power is Islington Council’s first community scale heat network serving over 700

homes and 2 leisure centres. The heat network and energy centre will be completed in

September 2012 and will be serving cheaper greener heat to Islington residents for the winter.

Bunhill energy centre will house a 2MWe gas CHP engine and 100m3 thermal store

Three estates will be connected serving over 700 existing homes

Two leisure centres and Ironmonger Row Baths will be served by the network

Remote peak and back up gas boilers will be located in each of the connecting buildings

Final stages of agreement to supply an addition three new build developments

Fully grant funded scheme

Initial operation and management will be undertaken in house by Islington Council with

specialist external support for maintenance (10 year maintenance contract).


ARGENT GROUP PLC – KINGS CROSS ESCO DEVELOPMENT

At 67 acres, King’s Cross is the largest site in single ownership to be masterplanned and

developed in central London in over 150 years. Despite the phenomenal transport links, the site

itself had very little in the way of existing services, offering the developer, the King’s Cross

Central Limited Partnership, a blank canvas to create infrastructure suited to the 21st century.

Working with the Camden planning team, a series of targets were set including the reduction of

carbon emissions by at least 50% relative to 2005 levels. This required a number of energy saving

and efficiency measures, with a significant part being played by the energy centre and district

heating network.

Working with its utility partner, Metropolitan, KCCLP created Metropolitan King’s Cross (MKC) to

deliver all of the low-carbon heat requirements on

the site. Following the model of other utilities and

the likely requirements of future regulation, an early

decision was taken to separate the generation and

the distribution of heat. The heat network is

therefore adopted separately, facilitating the future

extension of the network off-site, and the potential

for new heat generators to feed into the network and

serve new customers.

MKC operates the energy centre under a concession

agreement, balancing the commercial needs of an

independent ESCO with the security required to serve

a long term regeneration project. Under this

agreement, one of MKC’s key responsibilities is

compliance with the code of practice. This sets out

how the ESCO should deal with all customers and

includes requirements for prices to be benchmarked

and at least competitive with heating through other

traditional means, such as gas boilers. It is hoped

that this will be redundant once regulation is in

place.

Construction started on the site in 2008 with the

majority of occupiers expected to be connected

before 2020.

Key statistics

Peak heat demand – 45MW

Three gas fired 2MW (pink) CHP

engines

66% of all heat generated by CHP

5MW of available local absorption

cooling

Estimated carbon savings of over 45%

©Paul W

est

on

©John S

turr

ock


Appendix B: Legislation schedule

This schedule refers to the main legislative instruments referred in the body of the report.

PLANNING

The London Plan

The Mayor of London published the London Plan on 22nd July 2011. The London Plan gains its

statutory power through the Town and Country Planning Act 1990 and the Greater London

Authority Act 1999. It replaced the former Spatial Development Strategy for Greater London,

from 22nd July 2011.

The Community Infrastructure Levy (CIL)

The CIL was introduced under the Part 11 of the Planning Act 2008 and amended in the Localism

Act 2011. It is operated under the Community Infrastructure Levy Regulations 2011 (as amended

by the Community Infrastructure Levy (Amendment). It came into force on 6th April 2010 but its

actual operation depends on local authorities taking steps to implement it and they are taking it

up at different speeds. The CIL permits local authorities to impose a levy on those carrying out

new developments and the funds raised are to be used for a range of infrastructure projects

including district heating schemes and other community infrastructure projects. Useful guidance

on the CIL and changes to it included in the Localism Act can be obtained from the Department

for Communities and Local Government.

Section 106 Agreements

Section 106 (s106) Agreements which are made under s106 of the Town and Country Planning Act

1990 are the long-established way in which local authorities have imposed obligations on those

carrying out developments to (a) contribute funds to local infrastructure and (b) incorporate

specific features into the planned development. Their use will survive the introduction of the

Community Infrastructure Levy because they will continue to be used by local planning

authorities to require specific features. These features will include such things as the

incorporation of district heat schemes or the flexibility to allow for future district heat schemes

to be connected together. Section 106 Agreements are legally binding agreements and may be

capable of the providing a partial solution to the difficulties of allowing for a service charge

sinking fund that is compliant with the landlord and tenant legislation.

ACCESS

Section 50 of the New Roads and Street Works Act 1991

Many schemes will depend on part of the network crossing land owned by a third party and

where that land is a highway the scheme owner or operator will need to enter into an agreement

under s 50 of the New Roads and Street Works Act 1991 unless they already have statutory rights.

Consequently whereas large utility companies will have statutory rights, many district heat

scheme operators and owners will need to make s50 Agreements.

RESIDENTIAL TENANCIES

Sections 20 and 20ZA of the Landlord and Tenant Act 1985

Under Sections 20 and 20ZA of the Landlord and Tenant Act 1985 there are restrictions on a

landlord’s freedom to charge for services in that they are required to consult with the lessees

(and to charge their costs) where they carry out work above a certain value or enter into long-

term agreements for services.

Leasehold Reform, Housing and Urban Development Act 1993

Under the above Act residential tenants with long leases of over 21 years can have the right to

collectively require their landlord to sell them the freehold of their apartment block. If the

block is part of a district heating scheme the heat source, such as the CHP plant, may well


occupy land that is separately let to a management company under a business lease. Under the

terms of the Act, the business lease would be excluded from the land transferred under the

collective entitlement and consequently a landlord will need to take care to ensure that part of

the scheme is also provided for on such transfer.

CONSUMER PROTECTION

Electricity Act 1989 (as amended by the Utilities Act 2000)

Many schemes may comprise combined heat and power sources of energy, in which case they are

generating electricity in addition to heat. Generally, most activities surrounding electricity are

regulated and operators are required to have an appropriate licence for the generation,

distribution or supply of electricity. Some exceptions are permitted under the Electricity (Class

Exemptions from the Requirements for a Licence) Order 2001 and these exemptions may be

available to operators of a scheme.


Appendix C: Flow charts for developers

SINGLE SITE SCHEME – ONE OWNER, ONE OPERATOR


SINGLE SITE SCHEME IN MORE THAN ONE OWNERSHIP – SINGLE OPERATOR


SINGLE SITE SCHEME IN MORE THAN ONE OWNERSHIP – SEPARATE OPERATORS


MULTI–SITE SCHEME – ONE OPERATOR


The Building Centre

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London WC1E 7BT

T: +44 (0)20 7580 0623

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July 2012 Legal Frameworks for Sustainable Energy Infrastructure · 2017-09-27 · 8 Legal Frameworks for Sustainable Energy Infrastructure Types of network variations and schemes