Content

RESOLVED
 
To approve the proposed approach as set out in
this report for the development and operation of the Colville Heat
Network.
 
To approve spend of up to £14.04m of
capital investment by the Council to enable the design, build,
operation and maintenance of the Colville Heat Network Project as
outlined in this paper.
 
To approve that the Colville Heat Network
scheme (in the amount of £14.04m) be added to the
Council’s Capital Programme, funded by a grant of
£2.94m from the Green Heat Network Fund, £5.72m from
connection charge income, and £5.38m of prudential
borrowing.
 
REASONS FOR 
DECISION:
 
The Colville and Britannia developments have
been brought forward by the Council over many years and have been
subject to extensive consultation and have gained planning
permission. To-date the Colville development has delivered 355
homes which are currently being supplied with heat from a communal
heating system based on boilers. The same type of technology is
being used to supply heat to the new Britannia Leisure Centre and
City of London Academy, Shoreditch Park The next phases need to
meet specific planning conditions, one of which is that all
Colville phases are to be connected to a heat network and that the
Britannia Development must also connect to the Colville Heat
Network. The existing phases were completed during the time the
heat network was planned to be CHP/boiler based while the new
phases require a low carbon heat network which CHP/boilers cannot
fulfil.
 
In addition to the developments connecting to
the CHN, Shoreditch Park Primary School have agreed to connect to
the network. In conjunction with the Public Sector Decarbonisation
Scheme (PSDS) project, this will provide an upgraded school heating
system which is also fully decarbonised with an expected reduction
in cost for the decarbonised system compared with the originally
proposed local ASHP system. Future capital plant replacement and
maintenance investment will be reduced as these will be built into
heat and standing charges set at a level equal to or below the
equivalent cost of heating the school with gas. The external
connection for the school to the heat network is budgeted for and
will be incurred through the CHN project supported by the GHNF
grant whilst the required pipework upgrade internal to the school
will be budgeted and paid for through the PSDS3c project with as
much grant retained as permissible within the double grant
application for this site. GHNF have already confirmed their
support of this cost split. Pragmatic allocation of the
construction work, and the timing of the GHNF grant, may dictate
that it is sensible to use the PSDS3c contractor to connect this
site to the Heat Network pipes that are already installed close to
this site, taking advantage of the close proximity of the school to
the installed pipework and the synergy of the contractor being on
site already. The thermal storage planned within the school will
also assist the short term management of the heat network on the
temporary energy centre by providing a supply of heat that will
assist with any occasions where more heat is required than the
boilers can provide at any one instant. The cost that may be
procured through the PSDS3c contractor is estimated at £211k
for the provision of the heat network connection. The Council
already has an existing arrangement with a delivery partner for the
PSDS3b works procured through the ReFit
Framework, and the plan is to include the request for the approval
of this additional work in the PSDS3c contract award report that
will be presented to CPIC in July. Making the change to using the
heat network as the heat source for the school will lower the
proposed cost within the PSDS3c project but is also likely to lead
to a loss of grant. If all of the PSDS3c grant for this site is
lost, which is unlikely, the overall capital cost for the
decarbonisation of heat within the PSDS3c project will reduce by
£0.3m.
 
The Colville and Britannia developments are
important strategic projects for the Council, with the aim of
providing more new housing with a significantly lower carbon
footprint than any housing they replace together with low carbon
Schools and Leisure Centre. This heat network project is a major
project and investment for the Council and apart from the carbon
benefits that it would deliver for the borough, the Council sees
this project as integral to its ambition to deliver on its Climate
Action Plan commitments, to improve air quality, improve the
environmental sustainability of its neighbourhood and deliver other
wider social economic benefits to residents of the borough.
 
Notwithstanding the planning requirement for
the development of the heat network as articulated in various parts
of this report, it was equally important that the Council takes
forward a proposal for this project that is financially viable and
sustainable and one that does not place any additional burden on
the already stretched Council finances. To this end, the OBC for
the CHN project has been developed to deliver at least the minimum
IRR which Council will normally use for its investments, and also
secure funding from various sources to meet the capital and
commercialisation cost for the project. In specific terms, the
project will be funded using the GHNF grant of £2.98m,
domestic connection charges of £5,750 per dwelling which will
be paid to the project by the Colville and Britannia developments
for those properties which are as yet unbuilt and are factored into
the costs for these projects. This equates to 958 dwellings or 73%
of the total domestic connections and has a value of £5,509k.
A connection charge of £211k will also be levied on the
Shoreditch Park Primary School representing the estimated cost of
connection to the district heat network. Council borrowing has been
assumed for the balance of the capital expenditure not covered by
the GHNF grant or connection charges.
 
The OBC for the CHN project demonstrates a
financially viable project that can be developed and used as the
basis for the renewal and developing other networks that could be
standalone or part of a wider heat networks which have been mapped
out in the heat masterplan which was produced by the Council in
2019. There are ten more clusters identified in the study and it is
expected that lessons learned from this project will be useful for
making decisions on how to take them forward in the future as an
integral part of the work required to deliver the Council’s
decarbonisation ambitions and plans.
The Council is not primarily seeking to
maximise revenue in this project but to alleviate fuel poverty and
reduce carbon emissions in the Borough. It is recognised that the
cost of supplying heat to dwellings that would be connected to this
heat network needs to take account of what people are paying and/or
would pay if connected to other heat sources such as individual
boilers. The financial modelling to establish viability has
therefore been completed within an overall restriction that no
householder would pay more for heat through the heat network than
they would if the same property was heated through an individual
boiler system. This restriction is analysed and demonstrated within
Table 6-15 on page 58 of the attached Outline Business Case.
 
Soft market testing has been carried out by
the Council both in terms of the delivery and commercial structures
for the project. This considered various options discussed in
relevant sections of this report and the outcome has informed the
recommendation to create a wholly owned Special Purpose Vehicle to
manage the heat network, and to contract with a specialist
contractor responsible for Design, Build, Operation and Maintenance
(DBOM) of the heat network. This approach aligns with the
Council’s plan to set up a wholly owned energy company and
also preserves the flexibility required to deliver a long-term
coordinated strategy within a fast-changing energy market whilst
also balancing the risks of construction and operation into a
single contractor.
 
Government figures have estimated that 9,700
households in Hackney suffer from fuel poverty. This high level of
fuel poverty is being taken into account as the Council develops
its heat networks and renewable projects. Specifically the CHN
project is being developed with clear guidelines set out within the
Financial Modelling to ensure that the heat tariff for this network
will be comparable and competitive with existing ones in and around
the borough and more widely within London.
 
DETAILS OF ALTERNATIVE OPTIONS CONSIDERED AND
REJECTED:
 
Having established that the CHN project needs
to be taken forward as a condition of the planning application for
the Colville and Britannia developments, further work has been
undertaken to develop an investable project that meets the
Council’s investment criteria of a minimum of 6% IRR. This
work also considered the delivery and commercial structure options
for the construction of the network and commercial operation over
the 40 year life of the scheme. These options are extensively
discussed in the OBC and summarised in this section of the Cabinet
report.
 
Delivery Options
The delivery options identified as part of the
development of the OBC are focused on the delivery, and ongoing
operation and maintenance with additional consideration of the
commercial development and funding, both of which will be led by
the Council. The delivery options listed in the table below
illustrate a number of discrete points on a continuum of delivery
vehicles ranging from fully public sector led to fully private
sector led. Without prejudice to the Council’s commitment to
set up a wholly-owned energy company, option 2 on the list was
preferred and recommended based on the outcome of the financial
case and the potential for opening up the commercial structure to
allow for private investment in the project should the Council
choose to explore this option in the future. It should be noted
that the financial returns on investment from this project would
not accommodate options 3 or 4 due to the financial requirements of
a Private Sector Delivery agent. The 15-20% IRR that would be
required by these options could not be achieved without a
substantial increase in the Heat Charges to customers of the
network which would breach the rule established that no charges
would be levied that are higher than the equivalent cost of heating
the same property with a gas boiler.
 
Option 1 - Community Led (Community body has
leading role in the business supplying heat)
Option 2 - Public Sector Led (Local Authority
responsible for design, financing, building, owning and
operation)
Option 3 - Public – Private (Local
Authority and private sector company share risks and returns)
Option 4 - Private Sector Led (Private sector
company responsible for design, financing, building owning and
operation)
 
Commercial Structure Options
The delivery options were extensively
considered and appraised in a series of workshops involving the
appointed consultants and the Council project team. From these and
based on the assessment of the financial performance of the network
and the risks associated with the solution, Option 2 above is
recommended as being the most appropriate for the project. This,
therefore, forms the basis for developing the commercial structure
options discussed as follows:
 
Option A - Delivery structure with single DBOM
contractor holds heat supply agreements with customers
 
This option will deploy the Council energy
company as the operating entity for the CHN project with the DBOM
contractor being asked to take responsibility for the purchase of
fuels required to generate the  heat and
also for the supply of heat to customers. Although the Council
would receive a proportion of the net benefit from these costs and
revenue to support the debt funding used to finance the project,
this option is discounted because it can
not be used for supply of heat and power to Council’s
buildings without going through more formal and complex procurement
which will not yield additional benefits to the Authority. Also
there is the risk that the whole operation largely sits under the
DBOM contractor particularly with regards to pricing, metering and
billing with the Council not able to exert the level of control
that could protect people within fuel poverty
 
Option B - Delivery structure with single DBOM
contractor, but the Council energy company holds heat supply
agreement with customers.
 
Option B which sets out a scenario whereby the
sourcing of the input fuels is placed under the responsibility of
the energy company was also considered but discounted. The revenue
from heat sales would also go to the energy company. This option is
primarily discounted because the contracting arrangement that sits
below the energy company places all the risk for delivery and
operation of the network under the one single contractor even
though the Council’s energy company would have responsibility
for purchasing the input fuels.
 
Option C - Delivery structure with multiple
contractors, and the Council energy company holds heat supply
agreement with customers.
 
Under this option, the scenario in option B
above is replicated but instead of having one single DBOM
contractor responsible for the whole operation, the contracting
arrangement is split into three, allowing three different
contractors to provide, design and build, operation and
maintenance, and metering and billing separately. The
Council’s energy company will still be responsible for the
procurement of the input fuel for operating the network. This
option is also discounted because of the complexity of contracting
with three different contractors and because separating the long
term maintenance from the initial design and build risks a conflict
of priorities which is intended to be managed by a DBOM contractor
responsible for both. Analysis of other schemes shows that having
the same contractor reduces disputes and ensures compatible
decision making across the separate disciplines.
 
Option D - Delivery structure with single DBOM
contractor and separate metering and billing arrangement.
 
This is the preferred option. Although similar
to option C, it de-risks the contracting arrangement by splitting
the metering and billing operation from the design and build,
whilst maintaining the link between operation and maintenance of
the network with the DBOM contractor responsible for these
complimentary activities.
 
Since the Council plans to develop multiple
heat networks across the borough and also as the metering and
billing provider for an existing scheme, the Council wishes to
contract this to a single entity or to potentially retain this
function in-house and therefore establish a homogeneous approach
across all district energy networks in the borough. Given that Heat
Networks will be regulated from 2025, it is likely that the Council
will be best served by contracting this activity to an established
contractor with a good track record but the selection of a
preferred delivery option will be subject to a comprehensive
options appraisal which will be detailed in the CPIC Business Case
report later in the year.
 
Technology Options
The technology options were extensively
considered against the original design and the Carbon Factors
required by National and Local Planning Regulations and
Policies.
 
The energy centre proposed for the Colville
development initially included a gas fired combined heat and power
(CHP) engine with top up natural gas boilers. The energy centre was
intended to supply the Colville Estate only. A later masterplan for
the Britannia development proposed a connection into this energy
centre.
 
Following Hackney’s Energy Masterplan
and the Climate Emergency declaration in 2019, The MEP designers
for Colville carried out an energy options appraisal for a change
of technology at the Colville energy centre1. From this, a communal
Air Source Heat Pump (ASHP) with natural refrigerant was selected
to be carried forward into Stage 3 design, removing the gas fired
CHP entirely from the design. Gas boilers are to be maintained as
peaking plant/back up.
 
The air source heat pump has been sized by MEP
designers to meet the base load of the annual heat demand with gas
boilers providing top up during peak periods only. A 2MWh ASHP has
been selected to meet c85% of the annual heat load, currently
assumed to be based on using ammonia (R717) as a high efficiency,
natural refrigerant. The final decision on the choice of
refrigerant will be made during the procurement of the DBOM
contractor. This is to allow the market to propose what they
considered to be most suitable based on their designs.
 
Alternative refrigerants that could be
possible would include R-290 (Propane) or R744 (CO2). The advantage
of using a natural refrigerant is that Chlorofluorocarbons (CFCs)
are extremely damaging to the environment if leaked and are 10,000
times more damaging to climate than CO2 and last 110 years in the
atmosphere. Most CFCs have been banned, some are permitted except
for the largest systems and this ban is expected to be widened over
time. Natural refrigerants also have specific compression
characteristics making them ideal for use in high temperature heat
network applications provided the operating parameters are
carefully designed and operated.
 
When the gas boiler plant reaches its end of
life, a review will consider whether to replace the boilers like
for like or whether to use further heat pumps or alternative low
carbon technologies to step up flow temperatures as required. It is
likely at that time that other connecting heat networks can provide
this capacity which will be planned for as part of the design.
 
The MEP designers developed the design to just
beyond RIBA Stage 3. The energy centre will be housed in Plot E as
shown on the plan below. As far as possible, the detailed design
(RIBA 4) and beyond will be placed with the DBOM contractor but
there will be aspects that need to be incorporated into the
Colville Development design and build to avoid delays to the
development. Timing of the GHNF and pragmatic allocation of
resources may also require some compromises on the DBOM principle
including potentially using the PSDS3c contractor to connect the
Shoreditch Park Primary School to the existing pipework already
installed close to the school’s perimeter.