July 2012 Legal Frameworks for Sustainable Energy Infrastructure A UK-GBC Task Group report, in conjunction with the Zero Carbon Hub
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July 2012
Legal Frameworks for Sustainable Energy Infrastructure A UK-GBC Task Group report, in conjunction with the Zero
Carbon Hub
2 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
About this report
This UK-GBC Task Group, in conjunction with the Zero Carbon Hub, was sponsored by the
following UK Green Building Council members:
This report was written by Colin Hall (chair), Winckworth Sherwood and supported by Robert
Tudway, Greater London Authority (GLA) with input from the following Task Group members:
Liz Turner - Barratt Developments
Laraine Phillips - Berkeley Group
Michael Barlow - Burges Salmon
Alasdair Young - Buro Happold
Peter Stuckey - E.ON
James Jeffery - Firstbase
Charlotte Parkes & Ramani Chelliah - Islington Council
Peter Ferguson - Johnson Controls
Derek Tadiello - Laing O'Rourke
Joanna Brown - Lend Lease
Tim Lunel - National Energy Foundation
A number of other organisations contributed towards the research for the Task Group. These
organisations are listed on the Legal Frameworks for Sustainable Energy Infrastructure Task
Group page of the UK-GBC website: www.ukgbc.org
UK-GBC would like to thank all of the Task Group participants for their valuable contributions.
© Copyright 2012
UK Green Building Council
UK Green Building Council
The Building Centre
26 Store Street
London WC1E 7BT
T: +44 (0)20 7580 0623
W: www.ukgbc.org
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Contents
About this report 2
Introduction 5 Use of terminology in this report 6
Sustainable Energy Infrastructure 6 The promoter 6
Types of network variations and schemes 8 Single Site and Ownership Scheme 8 Single Site Multiple Ownership Scheme 9 Multiple Site Schemes 10
The role of planners 11
The role of the ESCO and MUSCO 13 Core obligations 13 Core obligations may be reciprocal 14 The future development of the ESCO and MUSCO role 14
Implementation and operation 16 Essential obligation 16 The economics of a scheme 16
Price increases 17 Certainty of consumer base 17
Modifications 19 Inter-dependency 20 Policy Constraints 20 Physical Constraints 20
Access to facilitate operation 20 A Single Site Scheme 21 Single site scheme with multiple ownership 21 Multi site scheme 22
Continuity of supply 22 Landowners 23 Promoters 23 Consumers 23 Operators 23 Registered Provider 23 Commercial Lessees 24 Operator’s Right to Assign 24 Electricity 25
Consumer Issues 25
Growth of networks and linking of schemes 27 Legal issues to be considered 27
Network access by prospective heat generators or suppliers and consumers 28 Consumer protection 28 Land rights and access 28
Conclusion 29
Appendix A: Case studies 30 Birmingham city council – District energy scheme 30 Southampton City Council - District Energy Scheme 31 Woking Borough Council – Combined Heat & Power 33 Islington Council - Crouch Hill 34 Islington Council - Bunhill Heat & Power 35
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Argent Group plc – Kings Cross ESCO Development 36
Appendix B: Legislation schedule 37 Planning 37 Access 37 Residential Tenancies 37 Consumer Protection 38
Appendix C: Flow charts for developers 39 Single Site Scheme in more than one ownership – single operator 40 Single Site Scheme in more than one ownership – separate operators 41 Multi–site scheme – one operator 42
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Introduction
National carbon and energy targets are driving a move to more decentralised energy solutions at
a community level. In March 2012 the UK Government published its Heat Strategy1. The strategy
envisages an important role for district heating and heat networks in densely occupied areas,
both in the domestic and commercial context. Whilst elsewhere in Europe there is a great deal
of experience in planning, delivering and operating community-scale networks of all kinds, and
for energy in particular, in the UK such experience is limited.
A previous UK Green Building Council (UK-GBC) Task Group (in February 2010) addressed the
barriers and opportunities around the implementation and uptake of sustainable community
infrastructure such as decentralised energy, water treatment, waste disposal and
telecommunications. Following on from this piece of work it was suggested that there was a
need to provide clarity and guidance around the legal landscape for those groups who are
typically involved in setting up and integrating sustainable energy infrastructure solutions into a
development.
This report therefore explores the legal issues relating to the set up of sustainable energy
infrastructure, specifically district heating schemes as this service is not currently regulated as
with power. The report considers a wide range of general legal issues from the set up of the
scheme through to consumer issues such as access to land, continuity of supply, and consumer
repayment. Currently there is a lack of guidance, and many groups involved in setting up district
heating schemes find themselves spending time and fees researching the same issues which often
makes the integration of sustainable energy solutions financially unviable. Typical groups include
local authorities, developers, operators, landowners, occupiers and energy services companies
(ESCOs) who are often involved in the installation, operation and maintenance of a scheme.
In the context of the Government’s Heat Strategy, this report is therefore timely. It is clear that
the size, scope and structure of these systems are continually evolving and with it, the legal
structures that underlie them will also change. This report looks to identify the legal structures
that are likely to form the basis of future typical schemes. The report sets out three different
scheme types which are seen as relevant and adaptable to whatever commercial and financial
framework is chosen for a particular project and therefore aims to support scheme developers in
finding the most workable legal structure for their project. It also looks at the mainstream
functions and role of ESCOs and MUSCOs. It is intended purely as a guide to issues that should be
considered when developing the legal agreements for a community energy solution.
The Task Group had initially planned to set out standardised legal arrangements for wider
community scale infrastructure projects (i.e. beyond just energy). However, having explored the
landscape which is presented in the interim report2 it was decided that the issues were too broad
to focus on them all in detail. It should also be noted that this report does not provide guidance
on commercial and financial structures for community energy schemes, or standardise a
technical or political solution. These issues are currently being explored by government and
industry groups to support the development of heat networks such as the CHPA3, GLA4 and
industry5.
1 http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/heat/4805-future-heating-strategic-framework.pdf 2 http://www.ukgbc.org/resources/publication/uk-gbc-task-group-interim-report-sci-legal-frameworks 3 http://www.chpa.co.uk/knowledge-centre_13.html 4 http://www.londonheatmap.org.uk/Content/home.aspx 5 http://www.arup.com/Projects/DENet.aspx
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In summary the report aims to:
Shed light on the basic legal arrangements – to assist those parties looking to implement
district heating, but who are unfamiliar with the legal process such as planners,
developers and consultants.
Establish current trends regarding the likely structure and scale of new district heating
projects that are emerging amongst those already involved in such schemes.
Suggest solutions to legal issues that are seen to arise.
In the case of schemes developed and to be operated on a single site, differentiate
between sites that are under single ownership, as opposed to being owned by two or
more different entities.
Differentiate schemes on single sites as apart from those operating on more than one
site, involving a wider range of heat users and possibly also heat suppliers, including
addressing issues surrounding the need for the heat infrastructure to cross highways and
land in separate ownership between the sites and premises connected to the scheme.
USE OF TERMINOLOGY IN THIS REPORT
Sustainable Energy Infrastructure
In this report we use the term Sustainable Energy Infrastructure which refers to the
infrastructure that is needed to distribute power or heat from one or more local generating
sources. This can encompass a very wide range of schemes, for example:
A building with its own energy centre, this could be a new development or a retro-fit of
an existing residential or industrial estate
An estate with its own energy centre
A community within a town or areas of sufficiently dense heat demand
An urban regeneration area within a town or city, including the provision of low or zero
carbon heat to existing buildings through retrofitting them with connections to an
expanding or newly developed community heating scheme
The latter two examples are likely to involve a decentralised energy scheme spanning two or
more sites in different ownership and the crossing of highways and privately owned land.
Community heating schemes may involve the supply of heat to commercial and industrial
buildings as well as domestic premises, the differing profiles of heat demand often being
important to the economics and technical functioning of the scheme. The legal frameworks
therefore contemplate heat being provided to a range of types of heat users and from a range of
differing sources, renewable and otherwise.
The promoter
It is assumed that every scheme (irrespective of size or complexity) will have one overseeing
body which will often have instigated the scheme. That body will have an interest in ensuring
that the scheme is procured and continues to operate, although that interest may be limited in
time or its scope. On a single site scheme the promoter will therefore be a developer or
freeholder. However, if that promoter assigns its interest in the development, the assignee will
become the promoter, the developer having no further interest in the scheme. Regeneration
schemes (whether on single or multiple sites) will usually have at least one body with an interest
in ensuring the scheme is procured and continues to operate – where more than one, the
promoter may form its own joint venture company or partnership. That body may be the local
authority or a development authority or both. In the case of multi-ownership schemes, for
example where a network is connected to other local networks in different ownership, it is
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assumed that the constituent scheme owners will all be answerable to a body through the joint
venture or collaboration agreement.
The ESCO or MUSCO is not usually also the promoter, because its function is essentially different
from that of the promoter and the ESCO or MUSCO will often be an external contractor which
performs its role under contract from the promoter.
However, if the promoter also carries out the ESCO or MUSCO responsibilities, it could do so in
the same corporate vehicle and thus have the same legal identity. It is likely that will become
less common as networks increase in size and serve a wider range of premises and consumers on
sites in different ownership.
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Types of network variations and schemes
This section of the report sets out the likely decentralised energy network variations that are
typically implemented or form part of a wide range of schemes. These are referenced
throughout the report in relation to the legal issues that should be considered.
Decentralised energy schemes can be categorised as falling within three types, however a
scheme may begin as one type but through growth or amalgamation with other schemes, change
its characteristics to become another type of scheme. Reference is made below as to how
schemes may develop.
The types of scheme outlined below are informed by the 2009 publication by the Mayor of
London, London First and others, called ‘Powering ahead – Delivering low carbon energy for
London6’. The types of scheme described are by no means confined to London but are equally
relevant in other parts of the UK and so can usefully be referred to in this context.
The Task Group’s Interim Report7, published in May 2011 suggested a wider variety of model
schemes and network variations, setting out a range of possible options for the types of schemes
that exist. However having reviewed the scale of the issues it was decided by the Task Group to
condense the options down to reference a smaller set of possible scenarios. These revised
scheme types are illustrated and described below and Appendix A – ‘Case studies’ gives some
examples of the sizes and types of schemes in the UK which are under development or planned.
All of them involve one or more of these land configurations.
Single Site and Ownership Scheme
These schemes are confined to a single site, the heat source being based in a building’s plant
room and typically serving residential units and perhaps also some small scale commercial
premises, normally all on a site in the same ownership. Many of these schemes are in the public
sector and serve to provide heat to
social housing and other convenient
heat demand on the same site. There
are numerous examples of such
schemes in local authority housing
estates and also in some new private
housing developments, particularly
where local authorities have required
the installation of district heating or
combined heat and power as a
condition of planning consent.
This scheme will typically be a closed
network, for example a network with
one operator directly in contract with
its consumers. Part of the network
could be off site and the scheme could
be a new development or a retro-fit.
6 http://www.london-first.co.uk/documents/Powering_ahead_DE_report.pdf 7 http://www.ukgbc.org/resources/publication/uk-gbc-task-group-interim-report-sci-legal-frameworks
Figure 1.1. Single Site and Ownership Scheme
Development site
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Single Site Multiple Ownership Scheme
This is a collection of development sites all of which abut each other thereby creating a single
site, but where the sites are owned by different developers. The network connecting the
different parts of the sites could be under the operation either of one entity or more than one
entity operating or owning different parts of the network.
These schemes are larger, serve more than one site and might normally involve premises of
mixed use. Such schemes may serve in excess of 3,000 residential units, together with
commercial premises and may involve a mix of public and private sector heat users. These
schemes may benefit from a mixed heat demand profile which may reduce uneconomic peaks in
heat demand, be more insulated from loss of heat customers as a result of the larger number of
sources of heat demand and also benefit from some economies of scale. These schemes, if the
heat is sourced through a combined heat and power unit, may have significant quantities of
electricity to export. There may be some opportunity to supply electricity retail to users on site,
depending upon whether the site has a private electricity distribution system, but even if such
on site supply is feasible, it may at least at times fall substantially short of the total quantity of
electricity generated. There are a number of established or planned schemes including these
characteristics, for example in Sheffield, Southampton and Pimlico in London, some of which
involve combined heat and power and other being heat only schemes.
Figure 1.2. Single site Multiple Ownership Scheme
Site 1
Site 3
Site 2
Site 4
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Multiple Site Schemes
This is a collection of sites which do not abut each other and are thereby connected into the
network through media which pass across public land or private land owned by somebody
completely unconnected with any of the schemes. The sites could be a mixture of new
developments and existing buildings. The network could be operated by a single operator or
multiple operators as above.
It is questionable whether as yet there are any truly area wide schemes in this country, but they
are a natural progression from the first two types of scheme. This type of scheme involves
extensive heat pipe networks connected to a range of different heat producers, including
renewable sources of heat and heat from large scale power stations. The capital costs of such
schemes are substantial, and could well exceed £100 million, with payback periods exceeding 15
years. If however, heat networks fill the role as outlined in the Government’s Heat Strategy,
such networks will need to be constructed, to enable the volume of heat supply and heat
demand implied by the strategy to be linked cost effectively. The challenge is financing and
installing the main heat transmission network. Once installed and linked with a range of heat
sources and a large number of sources of heat demand, these networks have the potential to be
stable long term investments, similar to the investment potential of established utilities. The
challenge is to grow the network to that scale in the first place.
The three different land configurations described above each require a different set of legal
relationships between the promoter and operator of the scheme; and land owners and occupiers,
to enable the assets to be installed, and rights of access to be obtained for the operation of the
network. It should be noted that the development could be part of a new build scheme or owner
of an existing site being retrofitted.
Figure 1.3 Multiple Site Scheme
Site 1
Site 3
Site 2
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The role of planners
To assist local authorities and encourage the gradual increase in networks and schemes, the Task
Group initially looked to develop standardised planning conditions. However the group agreed
that it is currently difficult to standardise these while decentralised energy models are still
developing.
This section instead explains the role that planners and local authorities can play in supporting
the wide scale take up of decentralised energy networks in considering the strategic
opportunities of linking up networks and new developments. In many cases, such as single site
schemes or large redevelopment projects, all the planning can be prepared in advance and all
the legal relationships can be forethought and provided for. But the real benefit of
decentralised energy will occur if promoters, particularly local authorities can be more
opportunistic and enable an existing network to take on additional load if and when it becomes
available. A network should therefore be expanded when enough new loads are available.
We are starting to see planning policies are beginning to allow for these possibilities and are now
recognised in policy documents, such as the London Plan as highlighted below.
THE LONDON PLAN
The Greater London Authority (GLA) London Plan, published in July 2011 states that:
Policy 5.5
“… it is expected all boroughs will actively promote Distributed Energy in their London Development
Frameworks”.
The London Plan also states that the London Development Frameworks should have policies to:
- Safeguard any existing networks.
- Look for opportunities to expand existing networks or create new ones.
- Identify heat loads and heat supplies.
- Identify implementation options.
- Require developers to connect to Distributed Energy systems where feasible.
Policy 5.6
In planning decisions, major development proposals should select energy systems in accordance with
the following hierarchy:-
- Connection to an existing heating or cooling network.
- Site wide CHP networks.
- Communal heating and cooling.
The policy also states that development proposals should evaluate the feasibility for either connecting
to existing, or creating new, CHP systems and also to extending systems outside the site of the
proposed development.
The scope and design of a given scheme will depend very much on the type of requirements set
from the local authority in connection to planning conditions and accordingly the legal
relationships will vary too. For example:
If the multiple site scheme in Figure 1.3 were phased so that a fourth area, being the
last one to be developed, were also to include an energy centre intended for all three
developments, the arrangements for taking the first three energy centres off line (and
potentially maintaining them as reserve back up) would be required. Or, alternatively, a
network may be connected to another energy centre or extended on the basis of heat
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being made available to it from existing heat sources at a stated price and level of
availability.
The decentralised energy scheme has to fit within the over-all planning and
environmental policies of the local authority and fit within their requirements – for
example the requirement for a scheme to serve a mix of commercial and residential
developments pre-determined by planning requirements; or to include a minimum
quantity of affordable housing, possibly accompanied by the local authority also being
driven by an agenda to combat fuel poverty.
Planning considerations may also influence technical issues such as the use of fuels - the
location or other characteristics of a site may, for example, make it unsuitable for the
use of biomass fuels or dictate that the site is not suitable for the installation of PV as a
significant energy source.
Conversely, the technical and economic requirements involved in building a network may
serve to drive planning policy, where for example the local authority has an energy
master plan which involves the installation of local heat infrastructure as the most
effective means of reducing carbon. An increasing number of local authorities are
developing energy master plans. These will drive decisions made in respect of the energy
sources for new developments, in the use of the Community Infrastructure Levy and,
subject to how government policy develops, the deployment of sums payable by
developers under an Allowable Solutions regime.
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The role of the ESCO and MUSCO
This section clarifies the role of an ESCO (Energy Services Company) or MUSCO (Multi Utility
Services Company) in the delivery of a decentralised energy project.
Often the perception is that having such companies employed automatically secures the delivery
of a project. In fact the viability of a scheme and the contracted company’s ability to deliver an
energy centre depends on achieving the technical and economic feasibility of the project.
Projects need to be structured so that there are available funding options and contract
structures that reflect the functional delivery requirements and entitlements of each party on
the project; together with the distribution of risk in a way which makes that and the funding
deliverable.
This means the role and involvement of the ESCO or MUSCO can vary from delivering the whole
service of an energy centre through to one part of the project delivery being outsourced to
them. Such delivery vehicles may not necessarily be existing energy or service companies. In
some instances the delivery vehicle is formed specifically for the project concerned, its whole
business being confined to the requirements of that one project.
However, although the role of an ESCO or MUSCO will vary substantially according to all the
considerations referred to above, there are core functions often falling within the scope of their
activities as set out below.
Core obligations
From a legal standpoint, the delivery of a project will be embodied within a number of core
obligations as set out below, many of which are associated with an ESCOs or MUSCOs delivery. It
should be noted however, that some or even most of these functions may be subcontracted to
other parties; or the risk otherwise distributed to them, depending upon the technical, economic
aspects, and funding structure of the scheme, as described above.
The party legally or contractually responsible for the delivery of the energy services or
those specified. E.g. heat / energy efficiency services / maintenance, operation and
enhancement of the plant and distribution systems.
Refurbishment /renewal of the plant and accumulation of the associated sinking fund.
Maintenance of the financial viability of the scheme:-
o Balancing price and cost.
o Managing the customer base by replacing departing customers, obtaining
customers enough to achieve break even, and balancing the load mix.
Managing the relationship with consumers on matters such as billing and consumer
protection, in some instances accepting credit risk.
Managing the purchase of fuel, in some instances taking price risk.
In community regeneration schemes (most notably schemes not confined to a single site), there
may also be an obligation to secure the extension or modification of the scheme to accept new
consumers or sources of heat or power. However it is unlikely that the ESCO or MUSCO will
accept the entire financial and delivery risk that may flow from that, since it may not be able to
manage much of the risk involved.
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Core obligations may be reciprocal
Core obligations go in two directions, an ESCO or MUSCO will be dependent upon subcontractors
to carry out its delivery functions; but it is also dependent upon the consumers, management
companies controlled by consumers, land owners and developers to carry out their functions.
For example:
If part of the system resides on land (or within a building) which is owned by the
consumer, then they will have to provide support and maintenance of the land and
building.
In some cases the scheme may be designed in such a way that some consumers (possibly
the commercial consumers) satisfy their heat load only partially from the scheme. In
that case the rest of their heat is satisfied from a secondary system which may be owned
and maintained by the consumer; and they will need to ensure that the secondary system
is maintained. The ESCO or MUSCO’s responsibilities will be limited accordingly, unless it
has accepted the maintenance responsibility.
In some cases a scheme might be joined by an existing building which has satisfied its
heat needs from its own boilers. The basis on which it joins the scheme might be that it
retains the boilers for use as a back up in various circumstances. For example, the back-
up might become necessary during outages of the scheme; or the operator and consumer
might have agreed that heat will be supplied at a certain capacity but then downgraded
in the future if, say, the operator is able to bring more consumers in to the scheme. In
the later instance the consumer would need to revert to partial use of its old boilers as a
back-up. By way of a further example, the arrangement between the operator and
consumer might be on the basis that the scheme will supply heat during certain periods
of the day but not others. In that instance, a commercial consumer might agree that it
will only take heat during the day time but not during the evening when the scheme has
more demand from residential consumers. Finally, a consumer might accept heat on the
basis that it will not demand peak heat during the winter months. In that case it would
need its back up boilers.
The future development of the ESCO and MUSCO role
As networks expand and become inter-connected, it may be expected that the role of the ESCO
or the MUSCO as the operating entity will change.
The linking of networks and the growth of networks to encompass multiple sources of heat and a
larger number of heat consumers, will tend to ‘unbundle’ the functions of the ESCO or MUSCO
and probably cause them to be more specialised in their functions; but that process of growth
will not substantially change the constituent functions involved. A good illustration of this is
provided in the core obligations of ESCOs and MUSCOs referred to later in this report.
Responsibility for the delivery of energy services
The ESCO may remain both heat supplier and distributor of the heat, but in the case of larger
networks those functions may be divided between a network owner or operator and heat
supplier. So for example, if a heat consumer changes supplier, the ESCO may remain responsible
for the distribution of the heat over the network or part of the network it owns, but not the heat
supply itself which may be provided by another party. Such prospective divisions of responsibility
are not inconsistent with the ESCO remaining responsible for other energy services.
Responsibilities for maintenance of heat generating plant and heat distribution systems
An ESCO may remain responsible for heat generating equipment and for parts or the whole of the
network, but that will depend more upon how the network has expanded and whether the heat
generating facilities the ESCO is responsible for are for instance de-commissioned. The ESCO may
also not remain responsible for the all the whole extent of the heat distribution system through
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which the heat is distributed, depending upon the point on the expanded network at which the
heat is generated.
Refurbishment and renewal of plant
For the reasons explained above, the ESCO’s responsibilities may not extend to responsibility for
all the plant upon which the consumer’s supply of heat depends; or the ESCO may in some
instances confine its business to that of heat supply and related energy services.
Financial
The financial viability of the scheme may cease to be a single question, with its ownership and
control in different hands. For example, individual heat generating plant may become
uneconomic, but the heat distribution and transmission network as a whole may not.
Billing of consumers and consumer protection
This is the function of a heat supply business. ESCOs and MUSCOs may operate only as heat
suppliers, other entities owning and operating the heat generation and heat distribution or
transmission infrastructure, but the obligations to consumers will remain (see below – new legal
and regulatory requirements on page 14).
Purchase of fuel and energy price risk
Fuel cost risks and price risks may become divided between separate businesses of heat
generation and heat supply. The heat generator may quote a wholesale price to the heat
supplier, the generator must match the price quoted with its fuel costs and the heat supplier
must match the wholesale price at which it has purchased the heat with the retail prices charged
to consumers.
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Implementation and operation
This section of the report covers the legal arrangements during the set up of a scheme, how each
subject is dealt with in agreements and how risks may be assigned between the participants
involved in the scheme.
ESSENTIAL OBLIGATION
The ‘essential obligation’ of each scheme is to supply and receive heat. The supply side agrees
to provide a service continuously and the purchaser’s side agrees to accept the service and to
pay for it.
If the core obligations mentioned previously are carried out entirely or partly by an ESCO they
will be collected together in a master agreement and the ESCO will agree to perform the
‘essential obligation’.
Any obligations that are not carried out by the ESCO will be set out in other agreements specific
to the activity in question. In addition to the agreements for the core obligations a normal
scheme will also have any agreements that cover the following:
Property agreements giving the ESCO access to the Energy Centre (the ESCO would
require this to be on an exclusive basis, subject to step in rights).
Agreements giving the ESCO the right to use the equipment in the Energy Centre.
Leases to the occupiers/consumers. These entities can be conventionally grouped in
three sorts:
o Private residential lessees or shared ownership lessees
o Registered Providers
o Commercial lessees8
Deeds of easements to allow for conducting media not otherwise covered in leases.
Agreements for the sale of electricity to consumers on site (if a private wire scheme or
otherwise to a licensed electricity supplier) produced by a Combined Heat and Power
plant (CHP).
Heat supply agreements to the consumers, which mirror the leases, ie:
o Consumers who are residential private lessees and shared ownership lessees.
o Registered Providers. If the lease is to the Registered Provider rather than the
ultimate consumer of the energy, there will be a further agreement between the
Registered Provider and the social tenant, under which the Registered Provider
agrees to procure and pass on or sell the heat and in some cases electricity, to
the social tenant.
o Commercial leases
Maintenance Agreements
THE ECONOMICS OF A SCHEME
Leaving aside the capital cost, the viability of a scheme is dependent upon its ability to generate
revenue. Also, in common with most other utilities, such as electricity and gas, it is convenient
to divide the revenue into two categories:
The price paid for the product (for example heat) for which the consumer pays for each
unit of heat consumed.
8 The agreements with these occupiers above will reserve the necessary rights for the conducting
media, notably in the case of community heating schemes the heat pipes, heat exchangers and
related equipment.
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A contribution to the fixed costs of operating, maintaining and replacing the scheme.
This, of course, is paid whether or not the consumer is drawing any supply of the
product.
The viability of a scheme is affected by a number of constraints which are dealt with in the
following paragraphs.
Price increases
The ability to increase the price for heat and service charge is subject to constraints. One such
constraint is the competitive forces of other forms of space and water heating such as
conventional gas boilers. Heat schemes cannot afford to gain a reputation for being unduly
expensive otherwise prospective occupants will seek to go elsewhere. This market competition
is also sometimes reinforced by specific conditions imposed on schemes by planning authorities
or by developers. Although the price of heat is not regulated, it is common for schemes to be
subject to a condition that prices must remain in line with a benchmark, one example of which is
to require the prices to be benchmarked to the price a consumer would pay for the equivalent
heating of space and water from a conventional source such as a gas boiler.
Certainty of consumer base
Because of their small scale, the viability of decentralised energy schemes is much more
susceptible to the ebb and flow of consumer demand from individual buildings or sites; or in the
case of heat networks serving a range of buildings or sites not linked to development
agreements, loss of sources of heat demand – for example through the re-development or change
of use of commercial buildings. This is in contrast to national utility infrastructures which,
inevitably, have a much wider customer base. In the case of heat networks, this points to the
benefits of scale and diversity of sources of heat demand as an important factor in managing
revenue risks. Also new decentralised energy schemes are dependent upon acquiring sufficient
long term heat demand or load from the outset (often referred to as ‘anchor loads’). Once that
number has been achieved (or surpassed) the revenue risk associated with loss of a consumer
from an energy scheme will reduce but will still have a proportionately bigger adverse effect
than in the case of a utility network serving an entire region.
In the light of this, it is common to limit the absolute obligation to provide a continuous supply
of heat (i.e. to operate and maintain the system) until the revenue achievable will cover the
scheme’s operating costs. Or alternatively a third party (usually the developer of a site served by
the heat scheme) may guarantee a minimum revenue until the consumer base is big enough to
cover the scheme’s operating costs.
The concept of sustaining a new community heating scheme until there are enough consumers
can be handled in a variety of ways depending on the scheme. The following examples are for
illustrative purposes. The range of solutions is dependent on the precise details of each scheme
as described below.
A new build, single site scheme may be designed so that scheme viability occurs with the
first phase of plot-lease completions occurs. In that case the occupation of the buildings
and the operation of the scheme will commence at the same time.
In the case of a new build development comprising premises which will never be
intended to take their entire heat load from the scheme, for example a commercial
development, there will be a back-up to the heat supply. In that case the back-up could
be used until there are enough tenants occupying the scheme to cover the costs of
producing the heat; and any agreements with the promoters and the early occupants will
contain provisions which relieve the operator of the obligation to operate the scheme
until that point has been reached.
18 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
The scheme may commence operating and be financially supported before self-
sufficiency. Then the agreements will need to deal with the arrangements for financial
support in the interim and these will depend on the nature of that support. Again, the
following examples are for illustrative purposes only:
o In new build single site development, the developer might choose to subsidise the
operation of the scheme until self-sufficiency. There might be a claw back provision
under which the operator repays money to the developer once profit has been
achieved.
o The promoters of a single site regeneration scheme might be willing to provide a
subsidy.
o The subsidy might come from the operator in certain situations where the operator is
performing all or most of the core activities and is willing to rely on its own financial
strength to fund a scheme until it starts to break even.
The issues are likely to be more pronounced in the case of new developments or redevelopment
rather than a retro-fit scheme because in the latter case the consumers will, in many cases, be
able to continue using their existing energy supply arrangements until the scheme is ready for
them. In that case, the agreements will contain provisions enabling the operator to commence
the supply when it deems the revenues earned to be sufficient.
Once a scheme is operating, heat schemes (and indeed all decentralised energy schemes) are
more susceptible than national utilities to the question of consumer retention in view of their
small size and relative newness. In the case of new housing developments where the community
heating scheme is integral to the design and construction of the residential units, the physical
barriers to consumers obtaining their heat from an alternative source may be the most reliable
means of the heat provider ensuring that its revenue stream is protected. There is the possibility
of placing consumers under an obligation (for example as a term of their leases in leasehold
apartments) not to acquire their heat from any other source. However, there are legal issues
involved that are as yet not fully explored, regarding consumers’ statutory rights (for example
under the Competition Act) and how far such restrictions may be unlawful.
In the case of the provision of electricity, such restrictions were declared contrary to the
Electricity Directive under the ‘Citiworks’ case of 2008 and is now enshrined in proposed changes
to the Electricity Act9 and the licensing exemption regime consulted upon by the Department of
Energy and Climate Change in 2011, to ensure that consumers are entitled to obtain their
electricity and gas from a third party.
In addition to the strict legal position however, the opportunity of placing consumers under legal
restrictions is also limited by consumer perceptions of fairness and by commercial realities
militating against arrangements that rely upon legally structured monopolies.
In commercial leases occupiers often require flexibility and are only willing to sign leases of
between 5 and 15 years, thereby leaving the scheme without a long-term commitment. This is
not normally an issue in residential leases given that they are normally long and can be expected
to provide a long and productive income. There is always the risk of the sudden insolvency of an
important or “anchor load” consumer.
Consumers cannot be forced to use the heat service, but in some circumstances it may be
possible to prevent consumers from gaining access to alternative heat sources – for example by
restrictions in leases preventing lessees from installing individual gas boilers.
The financial self-sufficiency of a scheme is affected not only by customer retention but also by
its ability to obtain the necessary reimbursement of the running costs from its consumers.
Where schemes contain an element of residential consumers who occupy their homes under a 9 Described in Appendix B
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lease, those leases are within the scope of the regulatory regime for residential lessees under
which the ability to recover costs from residential lessees is restricted unless certain procedures
are followed. That regime does not generally concern the supply of electricity from major utility
companies, where supplies are provided under contracts that are separate from the lease
between the residential lessee and his/her landlord. Heat schemes, however find themselves
part of the residential leasehold regulatory regime where the provision of heat is part of the
services provided under the lease. The effects of this are that the lessees have a right to be
consulted on service charges and also can decline to pay service charges that are regarded as
“unfair”. Until district heat schemes have been more widely adopted there is insufficient
evidence as to what is “fair” to give residential landlords (and the operators of their schemes)
confidence that they will be able to make full recovery of their costs. Therefore, there is a
tendency to try to arrange schemes in such a way as to avoid their coming within the scope of
the regulations but this is difficult and clarity in some form of legislation would assist.
The regulatory regime also gives some residential lessees the power to group together to require
their landlord to sell the freehold to them. The possibility of that power being exercised also
reduces confidence because under a forced sale the price and terms of the purchase are
regulated.
MODIFICATIONS
The legal structure of a scheme can be very difficult to modify once the agreements are fixed.
That is a result of the large number of parties involved in a scheme and the fact that they are
interdependent. Consequently it is necessary to foresee as many modifications as possible
during the planning stage.
The easy instances to deal with are those which can be foreseen at the planning stage, such as:
When a scheme is being built in phases, the subsequent phases will be allowed for in the
legal arrangements that are made at the outset.
On all schemes, it is not uncommon to allow for the scheme to connect to the initial
development plus a potential future building, such as a community centre or leisure
facility. Again, that additional load can be allowed for in the initial arrangements.
During the planning of the scheme, it is sometimes possible to identify an existing
building for inclusion in the scheme at a later date, possibly when that building’s existing
boilers reach the end of their useful life. Again, provision can be made in the
agreements for the inclusion of that extra load.
The less easy situations are where the future changes cannot be included in the planning, such
as:
The addition of a new network, as envisaged by the London Plan.
The inclusion of a new load. The London Borough of Islington has, for example,
consulted on its implementation of the GLA’s London Plan policies. The proposals
require (subject to some qualifications which can be seen in the extract of the policy on
the GLA website10) that a proposed major development within 500 metres; or a proposed
minor development within 100 metres, of an existing or planned Distribution Energy
Network (DEN) must be connected to the DEN if reasonably possible; and where there is
no suitable existing or future DEN, that major developments should aim to create or join
an existing Shared Heating Network (SHN), ie a network which links neighbouring
developments or buildings.
Modifications that may become desirable during the lifetime of the scheme. These
possibilities are endless and they could include upgrades to the scheme to make it more
efficient or changes to fuel.
10 http://www.london.gov.uk/priorities/planning/londonplan
20 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
The constraints that arise when modifications are identified after all the legal agreements have
been concluded fall into three very broad categories which are dealt with in turn below.
Inter-dependency
By their nature decentralised energy schemes are based on a series of agreements. It is
impractical to expect any of the participants to permit changes that might affect them, unless
those changes are within agreed boundaries. Typical boundaries are identified by the following:
Modifications might be permitted provided they do not increase the price of the service
beyond the benchmark level.
The operator might be permitted to reduce the amount of heat available within fixed
parameters, thereby permitting it to extend the scheme or to alter the load mix. In
cases where the consumers have a back-up system (particularly in the case of some
commercial buildings) they will find it feasible to reduce their heat demand, thereby
freeing up the scheme to alter the load mix. The altered load mix may then allow
greater carbon reduction.
Policy Constraints
The local authority might require schemes to be built with and retain certain features so as to
contribute to the local authority’s achievement of specific policies. For example, a scheme may
be required to be fuelled by biomass and it may not be within the bounds of the local authority’s
policy to permit the fuel to be altered subsequently.
Physical Constraints
There could be a very wide range of physical constraints which make it either impossible or
uneconomic to make modifications, for example, where a modification requires more land than
is available.
ACCESS TO FACILITATE OPERATION
Rights are needed to enable the operator of a decentralised energy scheme to place the
equipment on the land and keep it there indefinitely. Rights are needed to permit the following:
The initial construction.
The continuous supply of heat through the pipe.
The maintenance of the equipment.
The renewal of the equipment.
This access is needed for the energy centre, the conducting media and the consumption
equipment.
It follows that the operator needs to have the necessary permission from the land owners of
every piece of land which is occupied by the system. The agreements must also bite on every
person with an interest in the land. This means that when the operator is obtaining permission,
they will also need to ensure that the rights cannot be withdrawn by anybody taking a new
interest in the land. Therefore, the landowner needs to agree that if he grants a lease of the
land, the incoming leaseholder will not be able to object to the existence of the system.
Similarly, the same will apply if the freeholder sells the land.
The concepts set out above are well established in existing standard arrangements for the
granting of such rights already so, when a scheme is based on a site, the freeholder will ensure
that the rights are reserved in the leases. If the freeholder then brings in a third party to
operate the scheme, they will grant the rights to the operator. They will also ensure that, as
between each of the lessees on the site, the necessary rights are granted and reserved. If a part
of the scheme is off-site then easements over third party land are granted. If the scheme passes
21 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
through public land then the type of agreement will depend on whether it is passing through a
highway or other publicly owned land. If it is a highway then the standard Section 50 Agreement
will be used and if it is other land then a typical easement agreement will be used.
All of the above scenarios are sufficient to cover all types of scheme as can be seen below:
A Single Site Scheme
In Figure 1.1 the developer owns virtually the entire site but not quite all of it. For the
construction phase, the developer grants to itself the right to build on its own land and obtains
the right to build on third party land.
For the operational phase, the operator is granted a right to operate either from the freeholder
or from the third party owner. The rights in question are (i) to continuously pass the steam
through the pipes, (ii) to enter the land to maintain the pipes, and (iii) to enter the land to
renew the pipes.
When the freeholder then grants leases to the occupiers, if any part of the scheme is within the
demised part, the freeholder reserves the same rights as set out in the paragraph above on
behalf of the operator. The agreements that may be made for this type of scheme are illustrated
in diagrammatic form on the first page of Appendix C below.
If a third party leases or sells his land, then the incoming lessees or buyers are bound to maintain
the operator’s rights because that obligation has been reserved in the original agreement.
The freeholder might sell all of its land in which case the buyer will be bound by the operator’s
rights.
The freeholder might be required (under the residential tenancy legislation) to sell only part of
the land. This prospect would be taken into account during the planning stage by giving
consideration to the physical location of the energy centre if the promoter wanted control over
it for the use of the remaining parts of the development.
Single site scheme with multiple ownership
In Figure 1.2, although there is a single site which is owned by multiple landowners there is
physically one network. The network may be owned either entirely by one entity or in separate
parts by different entities. Although the ownership of the network could sit separately from the
ownership of the land, it is assumed that the landowner will also own the network.
For the construction phase, where the entire network is within one ownership, that network
owner will obtain the right to construct from each of the landowners (including the third party
owner(s) of the land occupied by Energy Centre 4) and there may be a series of private
agreements.
In the case of a part ownership network, each landowner will grant itself the right to build its
part of the network on its own land and one of the network owners will obtain the right to build
on the land of the third party, and to keep the network on the land if the land is sold.
At Appendix C, there are illustrations of the agreements that may be made for a single site
scheme in multiple ownership, where (i) the network is in single ownership (the second page of
Appendix C) and (ii) where the network is in multiple ownership (the third page of Appendix C).
For the success of the scheme, each of the network part owners will have to agree to keep their
part of the network on their own land. They will have to bind their successors in title.
22 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
For the operational phase, if the network is operated in its entirety by one entity, the network
operator will secure the right from each landowner to:
continuously pass steam through the pipes,
to enter the land to maintain the pipes and
to enter the land to renew the pipes.
If there are part operators of the network, each of the landowners will grant to the operator the
same rights mentioned above for their part of the network; and will also collaborate with the
other part owners by agreeing to permit the operator to maintain their part of the network and
to contribute steam. There may also be revenue and cost sharing agreements.
The lease to each occupier of dwellings or commercial premises will reserve to the freeholder
the rights to (i) continuously pass steam through the pipes (ii) to enter the demised property to
maintain the pipes and (iii) to enter the demised property to renew the pipes.
If a third party leases or sells his land, then the incoming lessees or buyer are bound to maintain
the operator’s rights because that obligation has been reserved in the original agreement.
If one of the freeholders sells all of its land the buyer will be bound by the rights granted to the
operator(s).
The level of complexity in the arrangements may be dictated by the scale of the site. It is
envisaged that these arrangements could apply to a development site sold in lots to, say, four
developers; or to a major regeneration site covering part of a city centre.
Multi site scheme
Under a Multi Site Scheme there is physically one network. Although there is nothing to prevent
a network being owned in parts, our assumption is that it will be owned by one entity. For the
construction phase that owner will obtain the right to build the network from the owner of every
piece of land on which it will sit (or through which it will pass).
For the operational phase the network operator will obtain the same operational rights for the
other schemes ie to continuously pass steam through the pipes, to enter the land to maintain the
pipes and to enter the land to renew the pipes.
The fourth illustration at Appendix C shows the agreements that may be made for a multi-site
scheme with one network owner.
As in the previous examples, if any third party or tenant leases or sells his land, then the
incoming lessees or buyers are bound to maintain the operator’s rights.
CONTINUITY OF SUPPLY
Given the importance of decentralised energy schemes to the welfare of the community, it may
be argued that there is justification for a consumer’s right to terminate use of the heat
infrastructure to be severely restricted. That also goes for restrictions on the ability of
operators to interrupt the service or deny it to consumers. Restricting the right of consumers to
obtain their heat from elsewhere may be thought justified in supporting the viability of the
scheme for the reasons mentioned in on page 17.
However, although it may be thought that in admitting such restrictions, heat provision is simply
following the path already trodden by other utilities owning monopolies of gas and electricity
distribution infrastructure; such utilities operate within a tight regulatory framework to protect
consumers from the adverse effects of the monopoly. Whether a similar approach is justified
23 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
now or in the future in respect of heat distribution networks and heat supply is examined below
in relation to consumer issues.
Landowners
Quite clearly there would be serious disruption if the landowner could terminate the scheme’s
right to be on the land. Consequently any third party landowner should agree not to terminate
those rights, except in exceptional circumstances.
A landowner who has nothing whatever to do with the scheme would be caught by this. In
addition, in multi-ownership schemes each of the owners should agree with all the others that
none of them will terminate those rights.
That those landowners who have nothing to do with the scheme may be reluctant to grant a
permanent right is hardly unexpected. The statutory powers would be available to a statutory
utility seeking those rights. Heat, however, is not treated in the same way as statutory utilities
and is therefore not able to insist on placing pipes in third party land. It is therefore left to
commercial negotiation.
Promoters
Although promoters of a scheme are unlikely ever to want to see it terminated, there is the issue
of whether or not they should be restricted in terminating the various agreements that they have
entered into in order to make the scheme work. The entities affected by this issue are not only
the suppliers but also the consumers.
Schemes that involve ESCOs very often involve an element of investment by the ESCO and, for
them, it is important that the agreement granting the concession to the ESCO is not terminable
before the end of an agreed fixed period, except in the case of serious default and other
circumstances referred to below. If the promoter is effectively operating as its own ESCO but
sub contracting the core activities, then such issues may not arise. The ESCO would be looking
for a level of commitment from its contractors more normally obtained from subcontractors
rather than from a party integral to the scheme.
Therefore an ESCO Master Agreement will contain provisions which only permit the promoter to
terminate in limited circumstances. Typical ones are, if the scheme is no longer complying with
the Section 106 requirements; if the ESCO wishes to assign the contract to an operator that is
not technically competent or financially stable; or if the ownership or management of the ESCO
changes for the worse.
Consumers
Consumers have a high level of dependency on the continuation of the scheme and consequently
it is normal for the promoter and operator to be placed under agreements that do not give them
the right to terminate except under very prescribed circumstances. (“Termination” is used here
in the sense of bringing the scheme to an end as opposed to termination or temporary suspension
of a service for operational reasons.)
Operators
The real issues concerning Operators are less to do with their rights of termination as opposed to
controlling their rights to transfer their obligations to another operator (who might not be
suitable) and dealing with the consequences if the Operator fails through insolvency. These
issues are considered in the section operators right to assign on page 23.
Registered Provider
A Registered Provider can be the freeholder or the developer; and although they can, on some
developments, conduct all of the core activities (thereby eliminating the need for a separate
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ESCO) there are schemes in which the Registered Provider is more in the role of recipient rather
than provider of heat. In such schemes, the Registered Provider will be interested to ensure that
heat is provided to the units, for the benefit of their social tenants.
Given that the Registered Provider is not conducting the core activities, it follows that a third
party is supplying the heat to those units. If the scheme is set up in this way, the Registered
Provider sits between a heat supplier and the consumers of those units. Under the
arrangements, the Registered Provider agrees to be obliged to pay both elements of the service,
see ‘The Economics of a Scheme’ on page 15 i.e. the price of the heat consumed and the service
element. Although the Registered Provider agrees to pay, the consumer receives the heat and
the Registered Provider is therefore at risk of being out of pocket unless the consumer
reimburses them in full. To alleviate some of the risk, the heat suppliers will sometimes agree
to an arrangement under which the Registered Provider’s obligation to pay for the heat
consumed is disengaged whilst there is an occupant in a unit. Instead, the heat supplier collects
the payment for heat consumed directly from the consumer under a separate agreement (made
directly between the supplier and consumer.
It follows that a Registered Provider’s right to terminate needs to be considerably restricted.
They would not normally have the right to terminate at will. Instead:
As between themselves and the heat supplier they would be permitted to terminate if
the supplier is in breach.
As between themselves and the consumer (their own tenant) they would not normally be
able to terminate.
By virtue of the normal arrangements for supply of electricity and gas, we are generally
conditioned to the idea that the consumer has a direct contract with the supplier. In other
words there is no intermediary standing between supplier and consumer. The concept of a
Registered Provider standing as intermediary is therefore different. The concept does not have
to end at Registered Providers. Developers in private developments are also known to engage an
independent operator (ESCO) and to accept an obligation to pay the operator for the service
supplied to the units; and to reimburse itself from payments made by the consumers occupying
the units.
Commercial Lessees
The position of commercial lessees is dictated by the fact that the majority of commercial
occupancies are on the basis of 15 years duration or less. The significance is that any
commitment from a lessee will expire with the lease. Commercial lessees, therefore, are not
going to provide the same sort of continuity that comes from residential lessees or Registered
Providers. Added to this, commercial lessees are generally reluctant to restrict their commercial
flexibility. This includes their flexibility to switch energy providers when they wish to. If a
district scheme is heavily dependent on one commercial lessee this degree of flexibility will be a
problem. However, in schemes which have a greater number of consumers the disappearance of
one will be less problematic. In general commercial lessees are not required to commit to take
their energy for a fixed period. Instead, they are permitted to terminate but may be required to
pay an early termination fee, the level of which is fixed by commercial negotiation. Moreover,
they might require some control over changes in the operation of the Scheme. So, for example,
if an ESCO providing the core activities wishes to assign or change its ownership or management
or if a promoter suggests a change in the way the service is provided, the Commercial Lessee
may have a right to vet them or to terminate if the changes are to their disadvantage. The level
of intervention permitted will depend on the level of influence of the Commercial Lessee.
Operator’s Right to Assign
Because continuity of supply is vital, it goes without saying that the scheme must be operated by
people with technical competence and financial stability. The importance of this is as its
maximum in a scheme where the core activities are handled by a single operator, diminishing
where the core activities are spread amongst different entities. Even then, however, the entity
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which coordinates all of those providing core activities must itself be technically and financially
competent.
For these reasons, there are restrictions on rights of operators to either assign their obligations
or to change their ownership or management. These restrictions comprise a requirement for the
operator to seek approval before making such changes and to have their contract terminated if
they proceed with changes without approval. The interested parties from whom approval must
be obtained are:
The Promoter
The Landowner who may have an interest as lessor or as occupier.
Developer
Some commercial lessees (see above page 23)
Where Registered Providers are also the developer and/or landowner they will have an interest
in intervening. Residential Tenants generally do not have power to intervene in proposed
changes.
A question arises as to whether this all makes a case for distributing the core activities amongst
a variety of operators. On the face of it, there is greater safety for both the operators and the
consumers if the operators do not have all their eggs in one basket. However, this creates a
trade-off against the benefits of a single organisation’s ability to control and manage the scheme
to the best advantage. In particular, over the 25-50 year concession period that is typically
granted to an ESCO, it is highly likely that all concerned would benefit from modernisation and
technical innovation, which will be easier to arrange if one party has control.
Electricity
Community heating systems may also produce electricity where the heat source is a combined
heat and power plant. Electricity sales can significantly enhance the financial viability of
schemes, through the revenue earned by operators supplying electricity to consumers linked to
the system. However the risks costs and complexities of supplying electricity in the electricity
market system have tended to limit the opportunities for retail sales to heat consumers to
smaller single sites where the electricity supply can take place under the class exemptions from
electricity supply licensing. However, as schemes grow in size and scope, the value of the
available licensing exemptions will diminish, in addition to which there is at least the prospect of
scheme operators having to compete with licensed electricity suppliers in supplying their heat
consumers with electricity, since competing suppliers can now demand access to private wire
networks. This is because the ‘Citiworks’ case referred to above requires private wire system
owners to grant access when requested; so in time it can be expected that private wire
electricity supply will become less appealing to community heating operators.
Given the possible benefits to community heating operators and investors of being able to gain
revenue from the retail sale of their electricity to their heat consumers and others, work is being
done to find a means of enabling small electricity generators to become licensed to supply under
rules that enable them to manage the costs risks and complexities involved. The arrangements,
which were formally put forward by Ofgem in proposals of February 2009, are now being
developed by parties interested in developing CHP and community heating, notably by the
Greater London Authority and some London boroughs, with the support of the Department of
Energy and Climate Change and Ofgem. The process of implementing Ofgem’s proposals (known
as ‘Licence Lite’) is a demanding one, but work is proceeding on delivering it.
CONSUMER ISSUES
Heat distribution systems are natural monopolies. In addition, in the case of most community
heating schemes where there is only one heat supplier, the supply of heat is also a monopoly
business.
26 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
Protecting consumers under such circumstances is likely to be a growing issue, as the number
and size of heat networks grow. If the Government’s Heat Strategy published in March 2012 is
followed up by heat networks growing in number and size to attain the potential described in the
strategy, the issue can only increase in prominence.
Currently, there is little evidence of consumers being disadvantaged by the monopoly status of
their heat supplier in community heating arrangements; and in addition, more is being done by
scheme operators to introduce codes of conduct which provide consumers with some re-
assurance that their reliance on a single heat source will not be abused.
That may be a tolerable position for the present, because currently the number of consumers
receiving their heat through community heating systems is relatively small and a high proportion
of those who do, are tenants of local authorities or housing authorities that can provide some
protection to consumers.
The alternative is some form of mandatory regulation to protect consumers against monopoly
suppliers. The more the industry does for itself to self regulate, the more distant is that
prospect. What is more, unnecessary regulation introduces complications and slows up network
development, so there is a case to be made to government that mandatory regulation should be
resisted until or unless industry self regulation is not seen to be working.
For the long term, it may be argued that the more heat networks grow in size and diversify their
heat sources, the more the supply monopoly disappears, as consumers may have access to more
than one supplier through the same network. In logic, that may happen, since if community
heating systems are to develop, as illustrated above, that will occur more easily if the risks to
the developers of the networks are lower. Risks are reduced through the growth of networks and
growing diversity of heat consumers and heat suppliers – so in principle at least, the protection
of consumers from monopoly suppliers could be self fulfilling as networks feature more in heat
supply.
That looks like a promising scenario although it needs testing in practice. Namely industry self
regulation providing adequate protection for consumers until the growth of the networks
provides its own protection through the advent of competition between heat suppliers – a
broadly similar scenario to that seen in other utilities.
However, although that prospect may at least provisionally, provide an answer to consumer
protection in the context of heat supply, it does not in relation to heat distribution. Heat pipes
are naturally monopolistic and would remain so, in the same way as electricity and gas
distribution and water supply have done.
Although barely relevant now, if and when networks expand as described above, we may expect
the prospect of economic regulation of heat networks to arise, as it did on the privatisation of
the existing utilities. Regulation might cover similar areas, for example the right of consumers to
be connected to available heat networks with the capacity to supply them; the right of heat
generators to be connected to a network and supply their own customers through it; the
regulation of the charges made by a network owner for carrying heat along the network.
Such economic regulation is some way away. There is currently no or very little inter-connection
between networks or heat sources connected to the same network to justify regulation and
regulating unnecessarily would be damaging. However, looking to the future, it is likely to be the
price (if such it be) the industry pays for its own expansion and success.
27 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
Growth of networks and linking of schemes
This section looks to the future and explains how, as networks develop, the operation of the
network, heat generation and supply will become more specialised and ‘unbundled’, as heat
networks take on more of the characteristics of traditional mainstream utilities such as piped
natural gas and electricity.
A major challenge in developing heat networks at scale is the risk of heat infrastructure
becoming a stranded asset. This can happen as a result of either planned sources or demands of
heat not being delivered as planned or ceasing to be available before alternative sources are
available. A fully developed ‘Multiple site scheme’ network may be a relatively safe investment,
since it has the range of heat sources and points of demand to moderate the risk. The question
arises as to how a network can be developed to that point, when expensive transmission
infrastructure is required before the required range of heat sources and heat demand can be
established? Some of the answer lies in securing an initial number of sufficiently secure long
term heat sources and heat users; but much of the answer lies in interconnection, in effect
linking schemes so that they migrate from single site through to multiple site schemes. That does
depend upon the engineering and design characteristics of the schemes being compatible with
interconnection, but if they are, then the risk of new heat transmission infrastructure being
stranded can be substantially reduced.
LEGAL ISSUES TO BE CONSIDERED
When determining the legal structures required with delivering schemes, we have to be aware of
how the change in scale and range of heat sources and sources of heat demand will affect the
relationships between heat generation, supply and distribution and with it, the role of the ESCO
or MUSCO appointed to operate the scheme.
As explained above, the extensive roll out of heat networks in line with the Government’s
strategic proposals and inter-connection between networks are likely to go together, but there
are significant legal and regulatory issues that should be considered with inter-connection, such
as:
One network owner may ask for connection to another network. That connection should
take place if practical, but commercial terms have to be reached and there is no
regulatory mechanism to mandate connections or regulate the terms upon which they
take place.
Heat generators may be dependent upon reaching a connection agreement with a heat
network owner so that heat can be transported to consumers. As decentralised energy
networks grow and join up with each other, there is the potential for a local heat market
to develop, with new heat sources offering heat to their own heat consumers, connected
to the same network. Although it may be in the public interest for that to happen, there
is no legal or regulatory framework to enable it to do so.
This raises several issues that should be addressed by those designing legal structures for
decentralised energy schemes, particularly around connection between networks and their use:
The costs of physical connection and any risks attached to it
Use of system charges to be levied by the party through whose network the heat flows
will pass
The rights of heat consumers to switch suppliers where alternative sources of heat are
available
Common engineering standards to ensure connection is physically possible
Cost transparency, whereby the network owner must separate the costs of operating the
network from the costs of its own heat supply or generation business.
28 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
These requirements will not remove any of the functions currently associated with ESCOs and
MUSCOs, but it may mean the functions take on a new form in some instances or are divided
between different ESCOs or MUSCOs carrying out differing functions on a network, for example:
Network access by prospective heat generators or suppliers and consumers
This is area is not currently regulated. If and when it is for the reasons described above, it will
become an obligation of the ESCO or MUSCO owning or operating the heat network, not an ESCO
or MUSCO whose business is confined to heat supply and other energy services.
Consumer protection
These obligations may be split, as between heat supplier and network owner. The network owner
will be distributing heat to consumers who are depending upon the network continuing to
operate and at a price which remains competitive, as explained above in ‘Price Increases’ on
page 16. We may expect the operation of the network to be regulated as a monopoly asset, like
an electricity or gas network. However, the heat supplier will owe obligations to consumers to
protect them against abuse by the supplier of its position. Whether this is confined to self
regulation by the industry or becomes a matter for statutory regulation is currently being
reviewed by government, see consumer issues above on page 25.
Land rights and access
As described in the previous section, the growth of district heating schemes and the extension of
their infrastructure is seen to occur primarily through the linking of schemes through their
mutual extension and the installation (when the required heat demand can be connected) of
heat transmission infrastructure, linking networks. The result is that the characteristics and land
ownership issues associated with single site schemes, single site schemes with multiple
ownership and multi site schemes are likely all to be comprised in a single larger scheme. The
heat sources may change as a result of smaller single site schemes being absorbed into larger
schemes, but the ownership and control of the network, land rights and access requirements on
that site need not change. What may change is the interface between the operator of the now
linked single site or multi-site network and the consumers connected to such networks, since the
linking of networks offers further possibility of more than one heat source being available to
consumers and the prospect of competing heat sources (see the role of the ESCO and MUSCO and
the legal and regulatory considerations referred to later in the report).
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Conclusion
This Task Group set out with a goal to provide standardised legal agreements for the setting up
of sustainable community infrastructure. In reality, that proved highly ambitious due to the
sheer volume of potential issues that could be considered. The group decided that the needs of
stakeholders would be best served by focusing on the delivery of district heating and CHPand
that it would be of most value to provide guidance that is accessible by non legal practitioners
who will be involved in the setting up of district heating schemes but who may have limited
knowledge in this area.
In terms of the longevity of this piece of work, the Task Group found it encouraging that despite
the expected growth of decentralised energy infrastructure, the legal issues will still revolve
around the three basic land ownership configurations referred to at the beginning of this report,
while the planning and operational considerations outlined throughout the report will all remain
relevant. The changed context arises in particular as larger networks develop into recognisable
utilities and their internal functions become more specialised and unbundled.
Decentralised energy infrastructure has a key role to play in creating sustainable communities.
We hope this report is a useful contribution, which helps provide some clarity and guidance on
these often complex legal issues and structures.
30 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
Appendix A: Case studies
The following section sets out a range of case studies that have integrated energy centres in a
development or multiple developments.
BIRMINGHAM CITY COUNCIL – DISTRICT ENERGY SCHEME
The Birmingham District Energy Scheme is playing a pivotal role in Birmingham City Council’s
climate change strategy, which aims to reduce CO2 emissions by 60% by 2025.
The Birmingham District Energy Scheme is owned and operated by COFELY District Energy
working in partnership with Birmingham City Council – under the name of Birmingham District
Energy Company Ltd (BDEC). The scheme features tri-generation, producing heat, electricity and
chilled water. The scheme makes extensive use of highly efficient large-scale combined heat and
power (CHP) technologies, and uses conventional boilers for ‘top up’, standby and increased
resilience. BDEC’s three core schemes initially involved the supply of energy to 10 prestigious
users from both the public and private sectors. However, due to the scheme’s significant
delivery of financial and carbon savings to its consumers, it has already expanded to supply
several third party private developments.
The Birmingham District Energy Scheme was conceived in 2003 and the first 25 year energy
supply agreement with Birmingham District Energy Company Ltd (a wholly owned subsidiary of
COFELY District Energy) was signed in 2006. The first phase (the Broad Street scheme)
encompassed a range of buildings in the central business district served by an Energy Centre at
the International Convention Centre (ICC), and was launched in October 2007. Further phases
began operation at Aston University during 2009 and Birmingham Children’s Hospital in 2010. The
schemes are also being extended into several regeneration areas across the city and, ultimately,
all of these ‘sub-schemes’ will be linked together to improve resilience and maximise energy
saving opportunities.
The Birmingham District Energy scheme has enjoyed rapid growth since its inception, enabling
the on-going expansion of the scheme and its combined low carbon plant capacity, as more
customers have come on stream. As the scheme evolves, COFELY District Energy’s innovative
approach ensures that low carbon technologies are applied to maximum effect.
For example, the Birmingham Children’s Hospital scheme (which includes a connection to
Birmingham City Council’s Lancaster Circus) features a low carbon energy centre housing a
1.6MWe CHP, designed and built by BDEC and is expected to save 3,500 tonnes of CO2 emissions
per annum. Overall, the Birmingham scheme is saving over 12,000 tonnes of CO2 per annum
compared to traditional systems.
Key statistics:
Over 41,000MWh of heat per annum
6,700MWh of electricity from the CHP
plant
More than 4,900MWh of chilled water
4km of insulated distribution pipe
Electricity supplies synchronised with
the National Grid
Just 0.5°C temperature loss per km of
pipe
Hot water flow/return temperatures of
approximately 100°C/60°C
Over 12,000 tonnes of CO2 saved per
annum
31 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
SOUTHAMPTON CITY COUNCIL - DISTRICT ENERGY SCHEME
The Southampton District Energy Scheme (SDES) is a pioneering project that has led the way in
the delivery of sustainable supplies of heat, chilled water and power in the UK. For over 25 years
SDES has pushed the boundaries of district energy and tri-generation and continues to expand
into new areas. The scheme now encompasses over 45 energy users in the public and private
sectors.
The SDES is operated by COFELY District Energy working in partnership with Southampton City
Council – under the name of Southampton Geothermal Heating Company Ltd (SGHC). It is
currently saving around 10,000 tonnes of carbon dioxide emissions per annum, utilising heat from
a large scale combined heat and power (CHP), supplemented by geothermal energy and
conventional boilers. It also incorporates a district cooling system.
Users include TV studios, a hospital, a university, a shopping centre, a civic centre, residential
buildings and a hotel - as well as public and private sector residential developments.
Since its launch in 1986 the
Southampton District Energy
Scheme has grown into a thriving
and expanding multimillion
pound, multi-source heating and
cooling system, saving over
10,000 tonnes of carbon dioxide
emissions per annum.
Initially, the scheme served a
core of consumers from the
geothermal well and this is now
supplemented by large-scale CHP
and absorption cooling, using
conventional gas-fired boilers for
‘top up’ and standby. The heat
from central plant is distributed
through a 14km district heating
network.
Key statistics:
Saves 10,000 tonnes CO2 annually
Over 40,000 MWh of heat per annum
26,000 MWh of electricity from the CHP plant
More than 7,000 MWh of chilled water
14km of insulated distribution pipe
Serves buildings within a 2km radius of the energy centre
Just 1°C temperature loss per km of pipe
Hot water flow/return temperatures of approximately 80°C/50°C
The Southampton scheme was developed on a low temperature, low pressure basis to reduce
heat losses and maximise the life of the network. The network is operated using a flow
temperature of approximately 80°C and a return of 50°C, with distribution pressures of
approximately 5 Bar. This enables direct connections into most buildings, removing the need for
heat exchangers, further reducing capital costs and energy losses.
Associated British Port Connection
2009 marked the Scheme’s electrical synchronisation with Southampton’s Port, The connection
enables the Port to consume, under a 10 year Power Purchase Agreement, all the electricity
generated by the scheme’s 5.7MWe and 1MWe CHP’s located at the Harbour Parade Heat Station.
SGHC and Southampton City Council had long sought a commercial partner to locally consume
the 23.5 million kWe of electricity generated by the scheme, which was previously exported to
32 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
the UK national grid. Both parties were delighted when Associated British Port Southampton
recognised the considerable benefits associated with the proposed connection.
To deliver the project, engineering history was made when during December 2008 COFELY
District Energy’s projects completed the final ‘pulling’ of a 25 ton “private wire” 33kV cable
through underground ducts of over a mile in length across the city. Never before had such an
ambitious engineering feat been attempted (and successfully delivered), a testament to the
commitment and willingness of all parties to collaborate to deliver this remarkable project
within the city.
The link enables SGHC to supply the port with initially 55% of its total annual electricity
consumption, although future increases to this figure are planned. The electrical connection will
now aid and facilitate further expansion of the heat network and greater utilisation of the
Scheme’s CHP engines.
This truly is a mutually beneficial project, which has only been able to evolve through the
Scheme’s close collaboration and partnerships.
Southampton District Energy Scheme Continued organic growth is a key feature of the success of
the Southampton scheme. Following the connection of the Civic Centre, the first commercial
customers was ASDA in 1987 and more recent commercial participants include IKEA and
Carnival (UK) Ltd. Chilled water supplies were added in 1994 and, again, demand for this service
has grown rapidly.
More recently, in 2009, a cable was laid to the Port of Southampton, where electricity from
SGHC’s CHP engine is supplied under a 10 year Power Purchase Agreement. This enables the Port
to consume all of the electricity generated by the 5.7MWe and 1.0MWe CHP engines at the
Harbour Parade Heat Station.
Heat Station and Consumer Connections
The Scheme’s main energy centre, located in the heart of Southampton’s retail quarter, houses
the core energy generation plant which provides heating, power and cooling to the consumers on
the Scheme. The Energy Centre building was constructed in 1986 to house the geothermal well
heat exchanger, district heating pumps and small scale CHP plant. Since that time the buildings
have been expanded to include a 5.7MW CHP engine in 1998 as well as the district cooling plant,
and in 2008 a reconditioned 1MW CHP was installed. This continued organic growth is one of the
key features of the success of the Southampton scheme.
33 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
WOKING BOROUGH COUNCIL – COMBINED HEAT & POWER
The Woking Town Centre Combined Heat and Power (CHP) station is believed to be the first
commercially operating energy station of its kind in the country. It was the first project of
Thameswey Energy Limited, a joint venture company of Thameswey Limited (a company wholly
owned by Woking Borough Council) and Xergi Limited of Denmark.
Thameswey Energy Limited aims to finance, build and operate small scale CHP stations (up to
five megawatts) to provide energy services by private wire and distributed heating and cooling
networks to institutional, commercial and residential customers.
The Woking Town Centre CHP station is just one of a range of
sustainable and renewable energy projects delivered by
Thameswey Energy Limited, helping to meet the Council’s
Climate Change Strategy objectives. Projects outside the Borough
are also investigated, of which profits can be used to improve the
environment within the Borough of Woking and benefit its
residents.
Local customers include Holiday Inn, Quake Nightclub, Big Apple
Entertainment Centre, Metro Hotel, H.G.Wells Conference and
Events Centre, Victoria Way Car Park, the Lightbox Gallery
and Museum and Woking Borough Council’s Civic Offices.
Brockhill is an ‘extra-care’ sheltered housing scheme operated by Woking Borough Council for
elderly residents which receives sustainable energy from the CHP plant as well as photovoltaics.
This approach makes a positive contribution to the Council’s Climate Change Strategy target of
purchasing 20% and 100% of the Council’s electrical energy requirements from renewable energy
resources and sustainable energy resources respectively by 2010-11.
As the development provides a local community energy system and because of the way it
functions, Woking has managed to avoid charges and costs which are imposed on power
generators and suppliers accessing the national grid. The charges to residents are set in
accordance with the Council’s Climate Change Strategy, which provides heat and electricity
within the Government’s affordable warmth targets of 10% of income for heating only.
This has positive effects on Woking’s strategy to tackle fuel poverty (addressing the affordability
of both heating and electricity) and energy conservation.
The combined system of photovoltaics and CHP will save around 4,734 tonnes of CO2 emissions in
its lifetime and provide a 100% renewable and sustainable energy source. Brockhill uses 81.5 kWp
of photovoltaics and, together with a 30 kW CHP station, has a total generation capacity of 111.5
kW.
34 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
ISLINGTON COUNCIL - CROUCH HILL
Islington Council is regenerating the Crouch Hill Park, to build a new primary school and nursery
and refurbish the existing youth centre building. The youth centre will house an energy centre
that serves the building with heating and hot water via a site wide heat network and the school
with electricity. In addition to serving the site, the scheme includes the first ‘Shared Heat
Network’ in Islington via heat network connection to the neighbouring homes existing Coleman
Mansions Estate.
The Energy Centre includes a Biomass Boiler and Gas CHP engine
The shared heat network supplies heating and hot water to the school, nursery, youth
centre and 40 existing flats
Most of the electricity generated will be used in the school
The development is designed to be zero carbon
Islington council will initially operate and manage the energy centre and heat network
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ISLINGTON COUNCIL - BUNHILL HEAT & POWER
Bunhill Heat and Power is Islington Council’s first community scale heat network serving over 700
homes and 2 leisure centres. The heat network and energy centre will be completed in
September 2012 and will be serving cheaper greener heat to Islington residents for the winter.
Bunhill energy centre will house a 2MWe gas CHP engine and 100m3 thermal store
Three estates will be connected serving over 700 existing homes
Two leisure centres and Ironmonger Row Baths will be served by the network
Remote peak and back up gas boilers will be located in each of the connecting buildings
Final stages of agreement to supply an addition three new build developments
Fully grant funded scheme
Initial operation and management will be undertaken in house by Islington Council with
specialist external support for maintenance (10 year maintenance contract).
36 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
ARGENT GROUP PLC – KINGS CROSS ESCO DEVELOPMENT
At 67 acres, King’s Cross is the largest site in single ownership to be masterplanned and
developed in central London in over 150 years. Despite the phenomenal transport links, the site
itself had very little in the way of existing services, offering the developer, the King’s Cross
Central Limited Partnership, a blank canvas to create infrastructure suited to the 21st century.
Working with the Camden planning team, a series of targets were set including the reduction of
carbon emissions by at least 50% relative to 2005 levels. This required a number of energy saving
and efficiency measures, with a significant part being played by the energy centre and district
heating network.
Working with its utility partner, Metropolitan, KCCLP created Metropolitan King’s Cross (MKC) to
deliver all of the low-carbon heat requirements on
the site. Following the model of other utilities and
the likely requirements of future regulation, an early
decision was taken to separate the generation and
the distribution of heat. The heat network is
therefore adopted separately, facilitating the future
extension of the network off-site, and the potential
for new heat generators to feed into the network and
serve new customers.
MKC operates the energy centre under a concession
agreement, balancing the commercial needs of an
independent ESCO with the security required to serve
a long term regeneration project. Under this
agreement, one of MKC’s key responsibilities is
compliance with the code of practice. This sets out
how the ESCO should deal with all customers and
includes requirements for prices to be benchmarked
and at least competitive with heating through other
traditional means, such as gas boilers. It is hoped
that this will be redundant once regulation is in
place.
Construction started on the site in 2008 with the
majority of occupiers expected to be connected
before 2020.
Key statistics
Peak heat demand – 45MW
Three gas fired 2MW (pink) CHP
engines
66% of all heat generated by CHP
5MW of available local absorption
cooling
Estimated carbon savings of over 45%
©Paul W
est
on
©John S
turr
ock
37 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
Appendix B: Legislation schedule
This schedule refers to the main legislative instruments referred in the body of the report.
PLANNING
The London Plan
The Mayor of London published the London Plan on 22nd July 2011. The London Plan gains its
statutory power through the Town and Country Planning Act 1990 and the Greater London
Authority Act 1999. It replaced the former Spatial Development Strategy for Greater London,
from 22nd July 2011.
The Community Infrastructure Levy (CIL)
The CIL was introduced under the Part 11 of the Planning Act 2008 and amended in the Localism
Act 2011. It is operated under the Community Infrastructure Levy Regulations 2011 (as amended
by the Community Infrastructure Levy (Amendment). It came into force on 6th April 2010 but its
actual operation depends on local authorities taking steps to implement it and they are taking it
up at different speeds. The CIL permits local authorities to impose a levy on those carrying out
new developments and the funds raised are to be used for a range of infrastructure projects
including district heating schemes and other community infrastructure projects. Useful guidance
on the CIL and changes to it included in the Localism Act can be obtained from the Department
for Communities and Local Government.
Section 106 Agreements
Section 106 (s106) Agreements which are made under s106 of the Town and Country Planning Act
1990 are the long-established way in which local authorities have imposed obligations on those
carrying out developments to (a) contribute funds to local infrastructure and (b) incorporate
specific features into the planned development. Their use will survive the introduction of the
Community Infrastructure Levy because they will continue to be used by local planning
authorities to require specific features. These features will include such things as the
incorporation of district heat schemes or the flexibility to allow for future district heat schemes
to be connected together. Section 106 Agreements are legally binding agreements and may be
capable of the providing a partial solution to the difficulties of allowing for a service charge
sinking fund that is compliant with the landlord and tenant legislation.
ACCESS
Section 50 of the New Roads and Street Works Act 1991
Many schemes will depend on part of the network crossing land owned by a third party and
where that land is a highway the scheme owner or operator will need to enter into an agreement
under s 50 of the New Roads and Street Works Act 1991 unless they already have statutory rights.
Consequently whereas large utility companies will have statutory rights, many district heat
scheme operators and owners will need to make s50 Agreements.
RESIDENTIAL TENANCIES
Sections 20 and 20ZA of the Landlord and Tenant Act 1985
Under Sections 20 and 20ZA of the Landlord and Tenant Act 1985 there are restrictions on a
landlord’s freedom to charge for services in that they are required to consult with the lessees
(and to charge their costs) where they carry out work above a certain value or enter into long-
term agreements for services.
Leasehold Reform, Housing and Urban Development Act 1993
Under the above Act residential tenants with long leases of over 21 years can have the right to
collectively require their landlord to sell them the freehold of their apartment block. If the
block is part of a district heating scheme the heat source, such as the CHP plant, may well
38 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
occupy land that is separately let to a management company under a business lease. Under the
terms of the Act, the business lease would be excluded from the land transferred under the
collective entitlement and consequently a landlord will need to take care to ensure that part of
the scheme is also provided for on such transfer.
CONSUMER PROTECTION
Electricity Act 1989 (as amended by the Utilities Act 2000)
Many schemes may comprise combined heat and power sources of energy, in which case they are
generating electricity in addition to heat. Generally, most activities surrounding electricity are
regulated and operators are required to have an appropriate licence for the generation,
distribution or supply of electricity. Some exceptions are permitted under the Electricity (Class
Exemptions from the Requirements for a Licence) Order 2001 and these exemptions may be
available to operators of a scheme.
39 www.ukgbc.org Legal Frameworks for Sustainable Energy Infrastructure
Appendix C: Flow charts for developers
SINGLE SITE SCHEME – ONE OWNER, ONE OPERATOR
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SINGLE SITE SCHEME IN MORE THAN ONE OWNERSHIP – SINGLE OPERATOR
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SINGLE SITE SCHEME IN MORE THAN ONE OWNERSHIP – SEPARATE OPERATORS
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MULTI–SITE SCHEME – ONE OPERATOR
UK Green Building Council
The Building Centre
26 Store Street
London WC1E 7BT
T: +44 (0)20 7580 0623
W: www.ukgbc.org