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Green Heat Network Fund: Accounting officer assessment summary 2022 (HTML)

Updated 12 June 2023

Introduction

It is normal practice for Accounting Officers to scrutinise significant policy proposals or plans to start or vary major projects, and then assess whether they measure up to the standards set out in Managing Public Money. From April 2017, the government has committed to make a summary of the key points from these assessments available to Parliament when an Accounting Officer has agreed an assessment of projects within the Ggvernment’s Major Projects Portfolio.

This Accounting Officer Assessment was made for the Green Heat Network Fund, following its Full Business Case stage. I have made the assessment as the Accounting Officer for the Department for Business, Energy and Industrial Strategy (BEIS).

Background

Strategic Context

Low carbon heat networks are a crucial part of the critical path towards achieving heat decarbonisation and delivery Net Zero and future carbon budgets in the UK. Heat networks currently provides 3% of UK heat, and the Committee on Climate Change estimates around 18% of UK heat will need to be provided by heat networks by 2050 in order to meet carbon targets cost-effectively, reflecting significant market growth potential.

The Green Heat Network Fund (GHNF) is a three-year, £288 million capital grant programme supporting new and existing low-carbon heat network projects. The fund launched in March 2022 and is open to both public and private sector developers.

Early market growth came from mostly gas fuelled heat networks, as low-carbon heat networks face barriers in terms of attracting investments. Low-carbon networks are likely to deliver less return on investment than gas networks due to higher costs and provide less alternative revenue opportunities. They are also more likely to be perceived as higher risk investments due to the use of nascent technologies, which reduces investor confidence.

Existing market failures such as:

• greenhouse gas emission externalities
• information asymmetries from uncertainties in less tested technologies
• underdeveloped supply chain
• co-ordination challenges and customer preferences

mean that without government intervention, the heat network market is likely to continue to favour high carbon, gas networks.

The government has demonstrated the value it places on building a sustainable heat networks sector by providing focussed project support since 2013. The Heat Networks Delivery Unit (HNDU) and Heat Networks Investment Project (HNIP) represent approximately half a billion pounds of investment into the sector and have been successful in encouraging the development and growth of the heat networks market.

The Heat Networks Transformation Programme (HNTP) forms the next step towards creating a sustainable heat networks market. This collection of projects includes GHNF alongside the Heat Networks Skills Programme, Heat Network Efficiency Scheme and the introduction of regulation and heat network zoning via the Energy Security Bill.

The GHNF is key to assist existing networks to decarbonise by moving to low-carbon heat generation technologies, and invest in new low-carbon heat networks to help grow the sector and supply chains towards a more sustainable marketplace, whilst ensuring that consumers are treated fairly by networks that will benefit from its support.

Mechanics

Key points included in the GHNF scope:

• the GHNF is a capital grant programme providing funding for low- carbon heat generation and primary distribution for both new and existing heat networks
• both new heat networks and existing heat networks currently utilising higher carbon generation methods would be eligible to apply for scheme support, including all types of project sponsor (public, private and third sector). Crucially, those heat networks planning to use Gas Combined Heat and Power (Gas-CHP) as a primary heat generation technology will not be eligible to apply
• the fund itself opened for applications in March 2022 and will run for 3 years through to March 2025. Projects were able to apply for commercialisation funding from mid-2021 as part of the GHNF Transition Scheme, ahead of the main scheme launch in order to create a pipeline of projects capable of applying for full scheme funding
• the GHNF main scheme is administered by an external Delivery Partner
• geographic spread of GHNF is focussed in England only
• this fund will be separate to any future funding support for other forms of low-carbon heat

Objectives

The GHNF objectives are to:

• achieve carbon savings and decreases in carbon intensity of heat supplied
• increase the total amount of low carbon heat utilisation in heat networks (both retrofitted and new heat networks)
• contribute towards market transformations across the investment landscape and supply chain that will better prepare the heat network sector for further decarbonisation

Assessment against the Accounting Officer Standards

Regularity

The GHNF relies on existing primary legislation and is within BEIS agreed spending budgets. Grant funding will be allocated to projects through Section 31 of the Local Authorities Act 2003 to local authorities and Section 98 of the Natural Environment and Rural Communities Act 2006 to other government departments, NHS, universities and private sector organisations. Following EU Exit, options for GHNF funding allocation were agreed with subsidy of up to, but not including 50%.

Development of the GHNF was in accordance with the relevant commercial and HM Government policies including HMT Green Book guidance, Managing Public Money and the Sourcing Playbook.

Overall assessment: My assessment is that the regularity test is satisfied.

Propriety

GHNF is compliant with parliamentary control procedures and expectations. Interdependencies and interaction with other public sector schemes and procedures have been carefully considered and documented during the development of the GHNF business case – the GHNF will work strategically alongside other HM Government policies and does not hinder other initiatives. The GHNF has been approved at both Outline and Full Business Case stage by the BEIS Project Investment Committee, the Cabinet Office Spend Controls, Commercial Assurance Board and HMT Treasury Approval Point process.

Overall assessment: My assessment is that the propriety test is satisfied.

Value for Money

A long list of 6 options were assessed using a multi-criteria analysis approach against these criteria following the principles in HM Treasury’s Green Book:

• strategic fit,
• potential value for money,
• market development potential, and
• achievability

The options assessed and their corresponding overall score are:

1. do nothing - 4
2. continue with the Heat Networks Investment Project (HNIP) – 10
3. a version of GHNF funding existing heat networks only – 15
4. a version of GHNF funding new heat networks only - 13
5. a version of GHNF balancing new and existing heat networks - 18
6. bringing forward of regulation and zoning – 9

This assessment showed that the fifth option provided more benefits than other options, including delivering better value for money, as it will lead to a more balanced portfolio of affordable projects by building new networks as well as decarbonising and expanding existing networks supporting supply chain development, job creation and stimulate market growth. Continuation of HNIP would deliver lower value for money than GHNF as it would likely support market growth through more deployment of gas generation technologies. Bringing forward regulation and zoning into a nascent market would potentially increase the costs of decarbonisation and deter further investment despite costing less than GHNF.

Following the long-list assessment the short-listed options assessed were:

1. do nothing
2. a higher funding Green Heat Network Fund
3. a lower funding Green Heat Network Fund

The value for money appraisal was assessed over a 40-year appraisal period with an assumed technology mix and specified funding constraints.

The costs and benefits assessed include the direct greenhouse gases emissions (in carbon equivalent terms), air quality impacts, as well as the whole life costs (capital costs, operational costs, fuel costs) of potential projects and opportunity costs from electricity generation shortfall as a result of displacing gas combined heat and power technology. A cost optimism bias of 21% was accounted for. Although majority of the costs are borne by project developers, GHNF makes projects economically viable through contributing towards the initial commercialisation and capital costs. Local impacts, fuel poverty impacts as well as other impacts on equality and the wider energy systems were also considered.

The preferred option is the higher funding option, as it has a larger net present social value (NPSV) and is expected to deliver:

• larger volume of thermal energy supplied through low-carbon sources. The majority of the savings come through monetising these savings;
• greater carbon emission savings and air quality improvements;
• leveraging larger amount of external investment into the heat network market driving growth and expanding supply chain capacity;
• unlocking a wider range of heat sources and recovering more waste heat and benefiting more local geographies and populations across the country.

The appraisal concludes that the preferred option will deliver stronger value for money with a NPSV (greater than £1 billion) and a benefit to cost ratio greater than 3. This is due to the expected amount of low-carbon heat delivered through the GHNF increasing with the funding awarded - higher funding permits greater capital support to build a larger project pipeline and enable greater heat network deployment. GHNF is a demand-led scheme, with substantial uncertainty in which type of projects will apply for funding. Sensitivity analysis had been carried out to test key uncertainties and found that GHNF is robust and can still deliver value for money under more adverse market conditions.

The key methodological and data assumptions of the cost-benefit analysis were based on the best evidence available at the time informed by industry data, experts’ views and the GHNF public consultation.

Overall assessment: My assessment is that the value for money test is satisfied.

Feasibility

The design of the GHNF has benefitted from lessons learned from the predecessor HNIP scheme as well as industry feedback collected from public consultation. At a Gateway 3 review conducted in December 2021, GHNF received an Amber/Green rating for deliverability, with the review team noting it was a well organised project. The five recommendations received from this review have been fully incorporated into the scheme. The GHNF Risk Management Strategy drafted at Outline Business Case stage and updated at Full Business Case stage adopts the wider BEIS Risk Appetite Statement as the GHNF Risk Appetite and details how the project has adopted the BEIS Risk Management Framework.

Overall assessment: My assessment is that the feasibility test is satisfied.

Conclusion

As the BEIS Accounting Officer I have considered this assessment of Green Heat Network Fund and approved it on 05 September 2022.

I have prepared this summary to set out the key points which informed my decision. If any of these factors change materially during the lifetime of this project, I undertake to prepare a revised summary, setting out my assessment of them.

The summary included in this letter will be published on the government’s website (GOV.UK). Copies of this letter will be deposited in the Libraries of the House and sent to the Comptroller and Auditor General and Treasury Officer of Accounts.

Sarah Munby
Permanent Secretary, BEIS
05 September 2022

1 Victoria Street
London
SW1H 0ET

T:+44 (0)20 7215 5916
E: permanentsecretary@beis.gov.uk