BEIS is to invest £320 million of capital funding, which will be leveraged to make approximately £1 billion of other investment, for the commercialisation and construction of heat network projects.
Following a successful pilot scheme for its Heat Networks Investment Project (HNIP), the Department for Business, Energy and Industrial Strategy (BEIS) recently published guidance on the main HNIP scheme. A number of changes have been made under the main scheme, driven primarily from lessons learned from the pilot scheme:
- Widening the scheme to include all sponsors and operators (private, public and third sector).
- Adding a ‘connection delay’ feature to project loans in order to provide a degree of flexibility should heat demand issues arise (beyond the operators control) that impact significantly on project cash flows.
- Introducing a third party delivery partner to manage the scheme and leverage in third party investment.
What is the HNIP?
The HNIP is a major government project that will invest £320 million of capital funding by way of grants and loans for the commercialisation and construction of heat network projects within England and Wales. It is anticipated that the funding provided will be leveraged to generate approximately £1 billion of private and other investment in heat networks throughout England and Wales.
Objective of the HNIP
The objective of the HNIP is to contribute to the development of heat networks in England and Wales, and create a self-sustaining market that is no longer reliant on subsidies from the government post 2021. From the government's perspective, the ultimate aim is to kick-start and increase the long-term growth rate of the heat network market. This will support the achievement of the objectives of the government’s Clean Growth Strategy of providing 17% of heat in homes and 24% of heat in commercial and public sector buildings from heat networks.
The HNIP pilot scheme ran from October 2016 to March 2017 and provided a mix of grants and loans totalling £24 million to nine heat network projects within England. The supported heat network projects have a combined capital expenditure of £75 million and provide heat to approximately 5,000 domestic customers and 50 non-domestic buildings.
Support provided under the main HNIP scheme
The main HNIP scheme will be open to private, public (excluding central government departments) and third sector applicants for the commercialisation and construction of new heat networks and the refurbishment, expansion and/or interconnection of existing heat networks. HNIP can provide funding by way of the following:
- Grants – up to £5 million
- Corporate loans – between £25,000 and £10 million with discounted interest rates and terms of up to 25 years
- Project loans – secured non-recourse loans to a project company of between £25,000 and £10 million.
It is hoped that the above 'gap funding' mechanisms will assist in providing the financial boost necessary to get project internal rate of returns up to required hurdle rates (typically 10-15%). This will address one of the key barriers to the development of heat networks in the UK at the moment. While funding mechanisms may be combined, the total HNIP support may not exceed 50% of the capital expenditure for construction of the project.
BEIS will appoint a delivery partner that, on BEIS’ behalf, will undertake all functions related to the main scheme set up, support, funding allocation and administration. BEIS recently released the tender for the delivery partner and it is expected that contract award will take place in July 2018.
It is expected that the main scheme will start receiving applications in autumn 2018 with a view to allocating first year funding by March 2019. While the application process is still to be agreed with the delivery partner (once appointed), it is expected that it will include the following:
- A pre-application submission.
- A pre-qualification assessment (including eligibility check).
- A full application submission.
- An assessment of bankability.
- An assessment of deliverability (scoring against scheme objectives).
- A decision by investment committee.
- The issue of offer letters and draft funding agreements to successful applicants.
The delivery partner and the investment committee (formed by the delivery partner and to include members of BEIS) will be responsible for assessing, scoring and ranking projects and ultimately making funding decisions.