The intersection between Local Government Reorganisation and Heat Networks

There is a lot of change happening in local government, and the recent local elections are likely to lead to significant changes across the country. At the same time, a lot is changing in the heat network sector, so how do these changes intersect? Kirtpal Kaur-Aujla, Carrie Davies, and Gemma Glasspole recently conducted a webinar investigating this, which this article follows up on.

With the Energy Act and the Heat Networks Market Framework, the government has set the stage for heat networks to take their place as major contributors to decarbonising building heat and helping the country reach net zero. 

Local Authorities have been taking a leading role in decarbonisation and have, to date, been key drivers of the development of heat networks.

For Local Authorities in England, the forthcoming heat network zoning regulations are likely to lead to significant changes, including designation of local and/or regional authorities as “zone coordination bodies”. There are still questions about how heat network zoning will operate in England and we await the forthcoming regulations and supporting guidance with interest. However, it will be important for Authorities to prepare for the upcoming changes and the additional resourcing requirements these will bring and it is also important for those Authorities that have existing or proposed heat networks within their administrative boundaries to consider how these heat networks fit within future zones.

It is also important to consider the multiplicity of roles Local Authorities currently play in heat networks including as owners, landlords, operators and customer, as well as the statutory development and oversight role they may be expected to play when zoning is introduced.

Understanding Local Government Reorganisation

At the same time Local Government Reorganisation (“LGR”) and devolution are taking place across much of England. LGR involves the restructuring of local government and can involve the adjustment of geographical boundaries or the combination/creation of existing and new Local Authorities. As a result of LGR there will be:

• Strategic Authorities
• Principal Authorities or Unitary Councils

Strategic Authorities will be responsible for cross-boundary local growth including infrastructure and spatial planning (e.g. Strategic Energy Partnerships which are often underpinned by heat networks) and with areas of competence such as:

• local infrastructure,
• strategic planning, 
• economic development and regeneration,
• environment and climate change,
• housing, and
• skills and employment 

all of which are relevant to the development of heat networks and are likely to be affected by, and to affect zoning. 

Principal Authorities are likely to include Authorities who have, or are in the process of developing, heat networks so there are a number of areas touching on the heat network sector that are likely to be affected by LGR and the intersection of LGR and zoning. These include:

• Heat network systems (including the physical pipework but also customer management and metering and billing systems)
• Companies (whether Authority owned, outsourced, SPVs or other)
• Property assets (including Authority property connected to or due to be connected to a heat network)
• Procurement (of new contracts for existing networks or for creation of new networks, and contracts to connect to and take supply from existing networks)
• Customers
• Heat sources (including energy from waste, waste water, public transport, leisure centres, data centres)

and of course, contracts of multiple types in respect of all of these.

Heat network zoning and the role of local authorities

Heat networks are generally complex long-term projects of 25 – 40 years or more. They often comprise significant public infrastructure and involve large investments. While the intention of zoning is that the private sector increasingly finances and delivers heat networks, that is not currently the case and a number of Local Authorities are heavily invested in (and rely on revenue from) heat networks that they have developed or to which they have contributed.

Heat networks often supply a variety of public buildings and run under public land, so various Local Authority sectors are potentially affected by changes being brought about by LGR and that will be brought about by zoning. Under the LGR process, contracts and liabilities are likely to be subject to a statutory transfer to a successor authority meaning there are critical issues that need to be considered including:

• liabilities – ranging from funding already invested in or committed to the network to customer debt;
• impact on core services – including heating and hot water to an Authority’s residents;
• resourcing – heat network projects can be resource-intensive requiring time, specialist knowledge and dedicated teams; and
• political implications given the type and nature of services provided by heat networks. 

Authorities will want to consider heat network projects in the round as well as the specifics of them when preparing for LGR so where one of more Authorities affected by LGR has one or more heat networks in play, there are two broad levels of preparation: strategic and contractual. 

Strategic considerations begin, at their most basic, with assessing what already exists, what is already planned, and what the future might look like. This includes mapping out the structure of existing arrangements, who is involved, and any corporate structures, as well as planned developments in the short to medium term. It is also important to consider longer-term goals for decarbonisation, and services to residents and public buildings. Critical aspects include: land and other assets – what is being used, by which entities, on what basis; and funding – what has been committed and what terms apply to it, and what, if anything, is needed or already budgeted for. Aspects affecting individuals such as transfer of employment, protection of customer data, and communication with anyone affected also need to be factored in.

A further strategic consideration is what will wider heat network zones look like and what aspirations do Strategic Authorities have, whether for Strategic Energy Partnerships or region-wide zoning, and how will this be achieved where various Unitary Councils have disparate heat networks.

Managing the change and opportunities ahead

Alongside the strategic preparations and framed by them, detailed due diligence is needed at contract level. The general approach under LGR is that a predecessor authority will collate all relevant information for the successor authority though in reality, this process is likely to run in parallel with the strategic thinking mentioned above.

For a complex, long-term infrastructure project like a heat network, there are likely to be multiple relevant contracts, and, particularly where a network has been in existence for some time, these may have been varied (sometimes multiple times) and / or practice may differ from what is set out in the contracts. This means there is likely to be a piece of work required to understand what is happening on the ground, what is provided for in contract, and what needs to be brought up to date.

At the same time, the network is likely to need to continue to operate so all the information and knowledge needed to make that happen, needs to be captured and available. This includes operational information, details about billing, payments and debt, and it will also be important, as the supervisory body changes, to ensure that institutional knowledge is not lost in the process.

An Authority which is to become responsible for a network is also likely to want to know what condition it is in, if there are any matters of concern such as disputes and how the service performs. This may mean that an independent survey is needed.

The nature of heat networks means that there are often multiple stakeholders with interests in how they operate. This ranges from the Energy Supply Company itself (where there is one) through any shareholders (for example in an SPV or JV), sub-contractors, funders and to end recipients of the heat and hot water that the network provides. These may include some of the Authority’s most vulnerable residents.

Arguably even before the strategy is finalised, and the due diligence is complete, it will be important to start communicating with stakeholders. In some cases, there will be a statutory obligation to do so, in others a contractual one, but in all cases to allay concerns and to ensure that the network continues to run smoothly during any transition process, communication will be key. 

All of this said, LGR and zoning, operating together, offer an excellent opportunity to accelerate the pace of decarbonisation across large geographical areas – something that heat networks are ideally placed to achieve.

In summary, there is unlikely to be a single, uniform solution or approach applicable to all Local Authorities. We appreciate that the levels of uncertainty, the number of unknowns and the amount of work potentially required is daunting. However, there are also a lot of important opportunities and benefits from zoning, LGR and the crossovers between the two. The combination provides the chance for a refresh of approaches to heat networks, greater resilience through expansion and diversification of heat sources and customers, as well as potentially stronger levels of strategic support for ESCOs, more investment and the chance to revisit business plans with a new strategy in mind.

Specialists across our teams are already putting our heads together to come up with ways to deliver LGR and zoning in ways that can create resilient, low-carbon solutions for future generations and we always welcome the opportunity to discuss these. 

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