Heat Networks – What Bidders Need to Know

With rising energy costs a pressing concern in the UK, the timing was appropriate for the Westminster Energy, Environment and Transport Forum: Next steps for UK heat and heat networks conference, held online on 12 January 2023.

Heat is the largest source of emissions in the UK; about 86% of energy demand is for heat and hot water in homes. Therefore, any real progress toward Net Zero goals is going to require decarbonisation of buildings, both residential and commercial. Heat networks will be a key technology for decarbonising buildings and reducing energy demand from buildings by 15% by 2030. We have been seeing significant procurement exercises to establish and run heat pumps and heat networks, whether as part of retrofitting existing buildings or for new developments. While the conference topics were wide-ranging, they provided many insights for bidders into this sector to keep in mind when preparing tender responses.

1. Try to make your costs competitive: Thus far, the transition to low carbon heat has been enabled by government funding, but the market will eventually need to be self-sustaining. The Department for Business, Energy & Industrial Strategy (BEIS) is working with the industry with the aim to reduce costs by at least 25-50% by 2025 so heat pumps are as cheap to buy and run as gas boilers by 2030.

The challenge is that the upfront costs of low carbon heat are currently higher than fossil fuels, meaning there is not a driver for change for consumers. The government is making available £6 billion of new funding between 2025-2028 towards decarbonising buildings, in addition to the £6.6 billion allocated this Parliament. This support is essential at this phase to incentivise the transition to low carbon heat. Currently, for example, a home developer can achieve better profit by putting in a lower cost but higher carbon technology. However, if they obtain the funding to offset the initial higher costs, they are more likely to be willing to install heat networks/pumps as opposed to gas boilers. Additionally, since heat networks can access sources of low carbon waste heat, that potentially decouples the cost of heat from the energy markets and the volatility we are currently experiencing, creating lower cost, sustainable heat for everyone.

Therefore, bidders would be wise to consider both capital expenditure and overall long-term costs carefully when bidding and look for ways to guarantee funding, which will make buyers feel that the bidders’ proposal is less risky.

2. Don’t neglect energy efficiency measures: The 2022 Russian invasion of Ukraine shifted public and policy focus more toward energy efficiency than decarbonisation. The UK’s low carbon heat goals are not achievable without focusing on energy efficiency, which is estimated to deliver about 15% of total emissions reductions in energy savings over time. As a key enabler of low carbon heat, therefore, bidders should be highlighting energy efficiency measures in proposals and emphasising how actions like improving insulation will support the efficient running of the heat network. Bidders should also stay updated on available funding such as the £1 billion in funding for the new ECO+ scheme (replacing ECO4 in 2023) to provide grants for insulation to reduce home heating costs.

3. Look for innovative approaches, remembering that all decarbonisation pathways are likely to play a role in the decarbonisation of heat: One area of investment is energy from waste (EfW), and many new heat networks are establishing partnerships to collect that waste heat. However, bidders should stay aware of other emerging technologies, such as using the excess heat from data centres, which can be enough to heat a small town. Hydrogen electrolysis plants also produce a significant amount of excess heat.

Hydrogen may also play a key role in decarbonisation in other ways, such as hybrid heat pumps and hydrogen-ready boilers. There is currently a hydrogen neighbourhood trial in place in Fife and a hydrogen village trial in Ellesmere Port, which will provide an evidence base as to how viable hydrogen is. Bidders should stay aware of these trials and results and consider where proposing such solutions could strengthen their bid.

4. Invest in related skills development and recruitment: The government target is 600k annual heat pump installations by 2028. Achieving this will require significant growth in the current workforce trained to install and run these measures. Bidders should be investing for the future by accelerating the upskilling and recruitment of qualified people. Look into funded training such as the accelerated installer training available through the Homes Decarbonisation Skills Training Competition. Proving to buyers that you have the skilled capacity already in place to deliver heat networks will make you stand out from the competition; and investing in apprenticeships and graduate training programmes will also strengthen your social value offering.

5. Play an active role in emerging regulation/legislation: As the future Heat Networks Regulator for the UK, OFGEM is currently planning an implementation consultation for Spring 2023. We strongly advise that bidders engage in this consultation to develop the regulatory framework as the implications for procurement will be massive. For example, requiring new developments to connect to heat networks is a topic of much debate – bidders should work to be part of this discussion considering the effect such legislation would have on them.

6. Have customer-focused strategies in place to support behavioural change: People are loyal to what they know, so encouraging a major change such as switching from a gas boiler to a heat pump is going to meet with resistance. Buyers will therefore want to know that bidders have a robust customer service offering in place with specific plans for outreach and education about the benefits of heat networks.

7. Show you understand the buyer’s needs: Decarbonisation is very much a local issue as different solutions work for different areas, so showing local authorities you understand their priorities and have the best solution is essential when bidding for these contracts. There is no one size fits all approach to heat networks!

Further information can be found at Westminster Energy Forum