Banner triangles

The Perfect Storm: What to do with your existing buildings

Switch2 Energy, Shoosmiths and BEIS have come together to provide an update on how regulation, rising energy prices and decarbonisation targets are impacting heat network operators and customers.

This second webinar, in a series of three, looks at what to do with existing buildings in relation to heat networks. It considers the problems with existing heat networks and solutions to help them operate more efficiently, including:

  • How to fix problems
  • Funding
  • Meeting carbon targets
  • Protecting residents

As a reminder, the last webinar in the series will cover:

  • How to approach new build developments.
  • The focus will be looking at new heat networks, looking at the ambition of low cost, reliable and low carbon heat networks and whether this is realistic. It will cover:
    • Design and build
    • ESCo
    • New technology
    • Managing costs

Key points from the second webinar

The Heat Network Tsunami

  • The current energy crisis and impending regulations have caused a paradigm shift in heat network management
  • The cost of gas has increased five times in the last 12 months. Gas is bought at commercial rates for heat networks which is not subject to a price cap, although the Department for Business Energy & Industrial Strategy is looking to try and bring in a similar form of protection to the retail price cap
  • With further energy prices rises anticipated, the position is set to exacerbate
  • There are also impending regulations – technical standards for better heat networks and regulations to protect customers on heat networks, with Ofgem as the regulator
  • In these circumstances building owners and asset managers can no longer ignore poor performing heat networks

Why are building owners in this position?

Gas price rises – the cost of gas has increased by over 5x, from 2p/kWh to between 7 and 8p/kWh

Poorly maintained heat networks – networks are not being maintained at their optimum efficiency

Lack of regulation and protection for residents with no consistent standards, those running heat networks have no rulebook to follow, but hope remains that this may change

How are residents affected?

  • Higher energy bills
  • Reduced system reliability
  • Higher sinking fund charges

The electricity cost of plant rooms are not factored into tariffs, but swept up by the landlord. If the heat network can be operated more effectively, it will reduce the pumping cost - meaning the service charge in buildings can be brought down.

What can be done?

  • Identify and fix the issues in your heat network – see further on this below
  • Buy better – the organisations buying gas for some heat networks often aren’t experienced at buying commercial gas so don’t get the best deals for residents
  • Specialist maintenance – often there is a plant room maintenance team with a different company looking after dwellings – recommend having one company looking after both so whole system can work in harmony
  • Improve governance and management – what does good look like for managing a building with a heat network in? The managing company should be ‘on the hook’ for efficiency and longevity of the heat network
  • Don’t forget the importance of final customer meters which can reduce demand by 50% - if you are flat rate charging demand is likely to be double as less responsibility by residents around managing heating

Common issues and the three levels of intervention

The following examples on how operators and asset managers can improve efficiency have been ascertained from Heat Network Efficiency Scheme (HNES) surveys carried out for clients by Switch2.

Property issues:

Lack of insulation (e.g. around terminal runs can contribute to overheating)

Poor control (e.g. radiators not being balanced)

Poor design

Energy flow ratio

Lack of balancing

Sticking valves

Distribution issues:

Lack of insulation – eg around valves

Thermal bridging – where pipes warm up the walls taking heat out of the system

System bypasses

Extended laterals/ terminal runs

Pipework too big

Lack of access

Energy centre issues:

Poor control

Fixed speed pumps

Plate heat exchangers

Mixing arrangements

Thermal store connections

High temperatures

Water treatment

Focus on return temperatures

What good looks like: Aim is to achieve is a temperature of 70°C coming out of the plant room, going through the HIU apartments and coming back at 40[degrees] C – this means low pumping costs, low losses on return leg and high generation efficiency.

This can easily be achieved with good maintenance.

The not so good: In heat networks which are not effectively maintained, the temperature coming out of the plant room is 70°C but some HIUs are not taking enough heat out of the system and sending the water back at 65°C – this means increased pumping costs, increased losses and boilers working less efficiently.

You can use meters to find out which properties are not being maintained properly and significantly reduce costs by putting better maintenance measures in place. On current gas costs savings of £74k - £93k can be made with just a few basic interventions such as insulation or paying a little more for maintenance.

Running a heat network properly – what you need

  • Good heat network governance and accounting
  • Best practice operations and maintenance
  • Plan improvements based on paybacks
  • Consider available funding to make improvements
  • Install final customer meters

Heat Network Efficiency Scheme (HNES) Overview

  • Need to increase the number of heat networks providing heat supply across the country from 2% to 18% to meet net zero targets by 2050
  • BEIS is looking at ways to do this including the HNES, the Heat Network Investment Project and Green Heat Network Fund (GHNF) grants
  • Where is the scheme at? The HNES Demonstrator ran from October 2021- March 2022 and there is on-going monitoring and reporting from that which will feed into the Main scheme
  • The HNES Demonstrator is about deploying funding to improve performance of existing District and Communal networks. The primary aims are (1) efficiency (fuel/ carbon saving) and (2) improving customer outcomes, with secondary objectives around (3) performance data and (4) supporting HN policy areas – such as those in the HN transformation programme
  • HNES Demonstrator – involved two types of grant:
    • Revenue grants – for optimisation studies identifying issues and recommending solutions
    • Capital grants – for delivery/ installation measures to deliver those required changes
  • Pathways for existing networks: HNES (delivering network performance improvements) and GNHF (for decarbonisation of heat supply source) - these are complementary schemes
  • HNES Demonstrator data so far shows:
    • applications from local authorities and housing associations were more weighted towards revenue grants rather than capital grants, whereas in the private sector the majority of applications were for capital grants
    • geographical spread – vast majority of applicants in London, with clusters in the north west around Manchester/ Stockport. Just a few in other regions. None in Wales and Scotland and N Ireland were not included in the Demonstrator
    • wide spread of project issues at application stage with no one issue standing out
    • good range of funded activities across primary, secondary and tertiary networks and the energy centre/ plant room – slight bias towards the latter which could be down to the timing of the applications
  • Changes to aims and objectives of HNES Main scheme following the Demonstrator: given current energy/cost of living crisis, primary focus is now improving consumer confidence and performance data has been dropped
  • HNES Main Budget: £30 million for capital grants and £2 million for revenue grants (with multiple funding rounds). Timing: Over two financial years 2023/24 and 2024/25.
  • Scheme launches Spring 2023 and will close March 2025
  • To register for regular updates from BEIS on the scheme, email [email protected]

Alignment of priorities and contract structure

Building owner (Client) priorities:

  • Improving efficiency and reliability of existing infrastructure
  • Outsourcing responsibility and risk for operation and maintenance and customer interface
  • Having an experienced, skilled and robust operator

Operator priorities:

  • Operating an efficient and reliable energy system
  • Assuming and managing risks that it is best placed to manage
  • Having a happy client and happy customers

End-user (Customer) priorities:

  • Efficient and reliable supply of energy
  • Visibility and security of energy costs

Contractual structure:

  • Concession Agreement – long term outsourcing agreement between Client and Operator
  • Supply Agreements – governing supply of heat (and electricity, if relevant) by Operator to Customer
  • Other agreements – Leases (between Clients and Customers) and Management Company agreements

Key issues for existing buildings

Handover and defects

  • Surveys and handover process
  • Responsibility for defects in existing system

Improvements to energy system

  • Responsibility for works
  • Costs of works and recovery from tenants (including LTA considerations)

Debt management and risk – historic and future debts

Cost and energy pricing controls

  • Factors causing increases in standing charges and unit prices
  • Ability to limit or restrict increases – gas comparator and Heat Trust

Management and sufficiency of sinking fund

  • Transfer of responsibility to operator but what if funds insufficient?
  • Protection of sinking funds between schemes
  • Change in law risk – particularly with net zero

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2022.

Listen to the webinar

Download the webinar slides

Insights

Read the latest articles and commentary from Shoosmiths or you can explore our full insights library.