Teal blue graphic

District heat networks: delivering a successful energy scheme

Delivering complex energy projects may look like a complicated process but the project can be broken down into stages, with each successive stage being informed by the stages that precede it. 

In order for this to work effectively it is essential that each stage is as fully developed as possible, as this will: 

  • maximise the chances of senior internal support for the project; and 
  • ensure the proposed project is responsive to your objectives and capable of being delivered on time and to budget. 

Policy 

Any organisation, be it a Local Authority or a registered provider, that has delivered successful energy schemes have invariably had leadership support.

The project will often be part of a longer term strategy. The purpose of this stage is to cement organisational support for the development of a viable project.

This is the foundation of the scheme and the policy stage needs to establish:

  • the aims and target outcomes for the project, eg tackling fuel poverty and generating a revenue return;
  • how the project reflects the strategic objectives of the organisation; and
  • what risks the organisation is prepared to accept to deliver project.

Feasibility 

The feasibility stage is critical in mapping out what the project could look like, and a number of key questions need to be considered and answered:

  • What energy studies has the organisation already undertaken?  
  • How extensive and accurate is the heat map and how does this inform thinking on potential schemes? 
  • Which building types could form part of the scheme?  
  • Is there a preference for a particular type of technology?  
  • Is this about heat only or cooling also?  
  • What consumer types could form part of the scheme - non-domestic and domestic consumers?  
  • Is there a mix of public sector and private sector consumers?  
  • What type of network(s) will be considered and how easily can these be expanded?
  • How reliable are any existing data sets (eg to establish base load)?

Feasibility studies need to identify and consider relevant options as they will inform the outline business plan, key stakeholders and decision makers.  

It is also important at this stage to check to see what funding may be available and what know-how is available. This will help to ensure the feasibility stage is as productive as possible and includes the development and testing of funding and cost envelope considerations.  

This is also the time to consider potential delivery structures. Identifying the correct delivery structure is directly related to the nature of the project, the outcomes the project should achieve and the level of risk the organisation is prepared to accept.

At this stage the organisation should start to assess what its client function will look like. How will it ensure that the understanding developed in designing and procuring a project is utilised to inform the management of the project through the construction phase and into the operational and maintenance phase?

Market testing 

Procurement exercises can be costly. The market will be more receptive to schemes that have been well thought through and tested. During the feasibility stage the organisation should start to take soundings from the market and other Local Authorities and registered providers as it formulates proposals.

This is a good opportunity for the organisation to learn not only from market requirements but also from other Local Authorities and registered providers. This research can then be used to maximise the attractiveness of the scheme. 

If there are issues which may be of concern to the market eg proposed sites, assumptions on construction timetables or availability of funding - it is better to identify these issues before commencing a procurement and finding out that the market appetite is lukewarm.

Procurement 

By the OJEU Contract Notice is issued, the organisation should be able to identify:

  • what is being procured;
  • the parties consuming the energy to be produced;
  • value of the project and the term of the opportunity; and
  • potential/preferred delivery structures eg contractual joint venture, corporate joint venture.

To allow the market to respond in a meaningful way, the organisation will need to have carefully considered how it intends to interact with the bidders for the project. The more complex a project is, the more likely it is that you will need to work with bidders to develop a viable, deliverable solution. Such an approach will control costs and shorten procurement timetables.   

The organisation will need to develop clear, well laid out and informative tender documents. The viability of the scheme will be dependent on the robustness of the output specification.  

The output specification will need to clearly link to the payment mechanics and reflect a common risk profile with the contractual documents (including connections agreement, heat supply agreement and service level agreements, property documents and, where applicable, a design, build, operate and maintain agreement).  

Risk profile issues such as obligations on the parties, payment issues, liability and terminations risks, performance measurement, fuel procurement strategy, heat off-take and the requirements for maintenance and replacement of plant and infrastructure will need to be clearly established.   

It is essential that the tender documents, including contractual suite, reflect your policy aims and preferred risk profile. These aims and the organisations’ appetite for risk must also be reflected in the evaluation criteria for the project.  

If the documents are not bound by this common narrative, there is a real risk that the organisation will not achieve its stated aims for the project.  

The procurement phase will culminate in the appointment of a preferred bidder and, ultimately, contract signature.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

Also in this series

District heat networks: an alternative solution?

District heat networks: assessing the opportunity

Insights & events View all