Switch2 Blog

Community Heating: who pays?

Posted by Ian Allan on 21-Jan-2016 15:11:46

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Running a community heat network can be a complicated business, with installation and maintenance costs, fuel pricing, and the cost of repairs just a few areas to consider.

Community_Heating_-_who_pays__Small.jpgThat’s why the first priority for scheme operators is to fully understand their financial responsibilities and the opportunities they have to access government subsidies or charge costs on to residents.

The European model of community heating systems is taking off across the UK, with the aim of cutting pollution and easing fuel poverty. The focus is very much on consumers, with Which? putting forward recommendations and best practice coming together in the Heat Trust scheme.

For many years, community heating systems have been the dominant form of heating in much of northern Europe, where they are often shared among estates, suburbs or even whole villages. For example, almost 95% of flats in Finland use district heating, essential to efficiently cope with regular winter temperatures of minus 40c. In the UK on the other hand, over 80% of households have a gas boiler which are relatively expensive to fuel and maintain.

When it comes to paying for community heating, most of the responsibility falls on the heads of the residents and consumers, although government subsidies are available across the UK to help with project construction, and with operational costs in some cases where heat is generated using renewable energy sources. Consumers can be reassured that charges only need to cover costs, as community energy schemes are generally not-for-profit, and are typically managed by local authorities or energy service companies.

The total cost of a community heating system can be split into a number of elements. First comes the fixed capital expenditure of installing the central infrastructure, which must be paid for irrespective of how much it is used, along with fixed maintenance costs. Normally a sinking fund is set up to pay for replacement capital items such as boilers when they eventually reach the end of their lives. But residents can sometimes find they are paying off both the original CAPEX and into a sinking fund at the same time, leading to claims that such funds inflate costs unfairly.

Heat lost between the boiler and the meter in each property may also be accommodated in the fixed costs, although a portion, especially that lost in the buildings, is often moved into variable costs. Fixed costs are generally apportioned based on property size, especially where there are significant size differences.

Then we come onto fuel or on-costs, which vary according to use. Their main component is fuel cost if the system is not wind, solar or geothermal. Fuel costs are charged based on the amount of energy used by each property, which can be measured using conventional domestic energy meters or smart meters attached to each consumer’s residence. Long-term raw material costs should be studied before calculating likely future bills. As far as spreading the cost of any repairs, make it clear to residents whether a dedicated reserve fund is included in regular payments, or whether one-off fees will be levied occasionally.

It is important to communicate effectively with residents, to ensure they understand what they are paying for and the reasons for using a community heating system. The residents should also know where the heat network operator’s responsibility ends, which is normally up to and including the Heat Interface Unit (HIU), but not the heating system in the property.

All charges must still be covered, so don’t overestimate the efficiency of community heat networks and power plants – well positioned plant-room and network heat meters are able to provide operators the means to validate the design and financial model. To guard against residents being unable to pay, consider installing PAYG meters, which avoid debt becoming a additional financial burden on the scheme, and encourage reduced  consumption.

The choice between conventional billing options or pre-payment can be made on a property-by-property basis. PAYG is becoming an increasingly popular method of billing and payment, with almost half of people in a recent survey expressing a preference for smart pay-as-you-go energy meters in their homes.

So while there may be some money available from government grants, the bulk of costs need to be passed onto the consumer. Compared to conventional alternatives, community heating schemes can very much stand on their own two feet commercially, although a lack of transparency  has often prevented costs from being identified and driven down. At the same time residents can be assured they are doing their bit for the environment, whilst benefiting from the most up to date facilities and technology.

Takeaways

  • Residents bear the bulk of costs, although funds are available from government in some cases
  • Fixed charges are generally allocated on the basis of property size
  • Fixed charges can include heat that is lost during distribution
  • Variable costs are dependent on usage
  • Repairs can be covered by a back-up fund or levied when the need arises
  • Economies of scale and other factors should mean charges are lower than conventional systems
  • Consider plant room and network metering to measure performance as a basis for efficiency improvements.
  • Consider installing PAYG meters to avoid debt

Download our free eGuide : Business Plan: How to ensure your community heating scheme will lead to tangible financial returns

Business Plan - How to Demonstrate Your Community Heating Scheme Will Lead to Tangible Financial Returns

Ian Allan

Head of R&D at Switch2