As the industry strives to deliver the volume of new homes necessary to tackle the escalating housing crisis, innovation is always at risk of being a Cinderella among the sheer volume and numerous targets.
However, decarbonisation remains at the top of the policy agenda. Last week, the chancellor used his Spring Statement to announce the Future Homes Standard, declaring “the end of fossil fuel heating systems” in all new homes by 2025. By then all new-builds will be required to include low-carbon heating systems. This policy is in line with the current planning framework, which increasingly requires housebuilders to fit new developments with district heating systems in a push to decentralise, as well as decarbonise, energy production.
There is no getting away from the fact that on the surface this can be an expensive distraction for developers – and for many, sticking to the status quo would make life far easier.
However, far from being a cumbersome requirement, developers should view district heating as a potential investment. District heating systems are still only a step on the journey to decarbonisation, which is still in its nascent years in the UK. However, by embracing the technology and dedicating necessary resource to it, developers can ensure genuine financial return while facilitating innovation in technology to help move the property sector closer to decarbonisation.
Find the model that works
The benefits of district heating for developers are not obvious. However, planning policy is driving housebuilders towards district heating, and by embracing this shift and making a virtue of the requirement, developers can find benefit.
Decentralised energy systems are essentially micro-utility businesses once they become operational on a site – with developers and their buyers responsible for their maintenance, output, billing and customer satisfaction. This may sound like a burden, but there is flexibility in how these resources are managed, which grants the freedom to find beneficial solutions.
Whether developers opt for an ownership and management (O&M) model or outsource the operation of the system to an energy services company (ESCo), there are benefits to be reaped and a well-planned micro-utility will appreciate in value. While the O&M approach allows developers and the eventual asset owner to continue to control the business and benefit from that appreciation, the ESCo model takes away some risk and allows the ESCo specialists to experiment with innovation.
Benefits exist under both frameworks, with return on investment intrinsically linked to the quality of the system in place. Committing the right resource is necessary, but so is knowledge of an ever-changing sector and the legitimate consumer apprehensions.
Passing on the benefits
A major concern over district heating is that it adds costs for consumers. In fact, as processes mature and more resource is invested, schemes will become more viable, with savings passed on to customers.
At the same time, regulation is beginning to mobilise too. Currently, the Heat Trust benchmarks the cost of district heating to comparators based on traditional energy prices, but this framework still isn’t mandatory. While many operators are committed to voluntary regulation, policy and investment is still needed before mandatory regulation can become the standard.
The Competition and Markets Authority is already exploring this, but prices will remain impossible to prescribe until more data on the market is available. Needless to say, there are a number of variables that affect costs on schemes. As such, a large amount of big data is needed to inform a standardised framework, which will rely on more operational systems and investment in the technology.
Build for the next generation
Despite its advantages, district heating is on its own journey. Currently, most schemes operate as gas combined heat and power (CHP) systems – this is currently more carbon friendly than centralised energy; however, studies show that it could lose this carbon advantage over the next decade.
Yet innovation is ongoing and the technology already exists for new, state-of-the-art, fifth-generation heat pumps – a carbon-friendly alternative to gas CHP. This model sees ambient water circulated and heated or cooled as it is needed. This system has kick-started innovation in the sector, but few examples are operating at present.
While more expensive to install, these models should be seen as investments in the long run, as costs will be lower. For instance, it is a lot cheaper to keep your water at ambient temperature until it is needed, which contributes to a carbon advantage. In addition, as a micro-utility, a fifth-generation system is likely to become a valuable asset far more quickly than older technology.
As developers install more decentralised systems, the smart money will be invested in next-generation technology, keeping an eye firmly on the future of innovation.
Get ahead of the game
Developers are being required to fit these systems under current planning policy, but by embracing the obligation – and being mindful of consumer relations and innovations in the sector – they can turn the duty to decarbonise construction into an opportunity that benefits the environment as well as their bottom lines.
However, the housebuilding sector shouldn’t be expected to do this alone. Planning policy has been at the heart of encouraging decentralised energy so far, and it has a major role to play to incentivise further use and innovation.
Such policy is already starting to appear – for instance, the draft London Plan states that gas CHP shouldn’t be the first option for district heating systems – but the government and its subsidiaries can go further. Fifth-generation heat pumps are part of the future; legislation will support this and there will be benefits ahead.
Colin Hall is a partner in the energy team at Winckworth Sherwood LLP
