Financial Assessment 

Capital Cost
The capital costs for the district heating network in Kinlochleven were found through estimates from associated companies that produce and sell the components that are needed for the scheme. The components range from the pipe network, heat connection and thermal stores, and these are shown in the following chart.

The capital cost also includes the installation costs. A miscellaneous cost was incorporated into the analysis to account for features such as the metering and sensors for the system, at 10% of the capital cost.

The total capital cost came to £3.41 million

          Capital Cost of District Heating Network          

System Expenditure 

A loan repayment was included in the expenditure, as we assumed the full capital cost of the project would be absorbed by a loan. A repayment period of 15 years and an interest rate of 3% were considered as district energy projects are eligible for low interest loans. The operation and maintenance cost for the system was found, which was taken as 5% of the capital cost of the network based on the industry standards.  The cost of the electricity required to run the system and the fuel for the auxiliary boiler were also included.
The total annual expenditure of the system amounted to £623,000. 

System Expenditure

System Revenue
​​There are two streams of revenue that will be generated by the district heating network. The main stream is the charge of heating to the consumers of the network. The secondary stream will be the renewable heat incentive (RHI), which is a government scheme set up to encourage the uptake of renewable methods for the generation of heat.

1. Charge of Heat Provided by Network​
As the network would be providing a new form of delivering heat to the community, it was important to price it as competitively as possible. A review of literature and the charges applied to heat networks of similar size, specified by the Department of Energy and Climate Change was done. The government provides a range of reviews on pricing and the associated costs of this technology being newly implemented in the UK. The report outlines the rates of heating in the UK to be between 4.6 p/kWh to 7.2 p/kWh.

For the community of Kinlochleven, 5.5p/kWh could be a competitive rate, when taking into consideration the efficiency of the different heat sources being currently exploited. Additionally, this rate would enable the community to continue to sustain the system in the long-term.

Cost of Fuels Used by the Community

As the graph illustrates, this rate would be the most economical for the residence in the community. It was also selected so that it would attract the residence to adopt this new method of heating. 

2. Renewable Heat Incentive

​​​​​​​The Renewable Heat Incentive is a government program that offers financial perks for producing heat in a sustainable and ecofriendly way, rewarding lower carbon emission technologies. The non-domestic RHI help businesses, non-profit organisations and public sector meet the costs for installation, and this program provides quarterly payments to businesses for 20 years. ​ Additionally, the tariffs payments provided are exempt from income tax.

​​It is proposed that Kinlochleven would utilise a water sourced heat pump as the renewable generation, making this project eligible for the tariff payments provided by the government for this scheme. It is important to note that the annual clean energy cash-back for heating will normally be larger than the annual running cost.

In order to calculate the revenue generated by the water source heat pump, first we had to identify the tariff rates. The tariffs come in two tiers. Tier 1 provides a payment of 9.09 p/kWh for the initial 15% of the heat generated. Tier 2 provides a payment of 2.71 p/kWh after Tier 1 threshold and then on until the end of the year.​

The total revenue generated by the two streams amounted to £710,000 per year. These are shown in the graphs below. ​

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Revenue Generated by Network 

Appraisal of Income and Expenditure 

Following this, the profits for the system were found to be £37,000 per year for a system, which had a loan repayment period of 15 years, as shown below.

System cashflow

Financing Outline 

1. Loan 
For the purposes of this project, it was assumed that the full capital costs would be covered by a loan. There are Government schemes that have been established to help cover some of the costs of district networks, however including these would not allow for the projects viability to be assessed fully as the funding is not definitive and policies are constantly changing under new leadership. Additionally, doing so would assure the community that they would be able to fund and sustain this project independently. 

A 15 year payback period and a 20 year payback period were examined and compared. The results for this analysis are shown below.

Loan Repayments for Different Payback Periods

For the first 15 years, the two payback periods generate a constant profit, however after the 15 year loan is paid back there is a surge in profits. The 20 year loan continues to generate a constant profit until year 20. It would be the responsibility of the community to select the loan repayment period and annual profits rate they deem appropriate.

It is also important to note that the decline in revenue after year 20 is due to the RHI expiring. However, the rate for heat was set at a price that would enable the community to continue to sustain the system after this. 

2. Government Schemes 

As mentioned before, there are a number of different schemes available for either reducing the capital costs of heat network projects or annual grants to contribute to the maintenance and operation of the systems. The government has pledged to expand the penetration of this technology in the UK market to higher than the current 2%. 

The Heat Network Investment Project has been established with funds of £320m funding being provided to cover the capital costs of developing Heat Networks in Britain.   
Most recent activities include Sheffield District Energy Network development which received £5.73m (£2.23m grant, £3.5m loan)

Click here to find out more about the Heat Network Investment Project

Climate Challenge Funding (CCF)
Annual grant of £150k available for community-led projects.
Currently combined expenditure £9.97m for 113 projects in Scotland ​

Click here to find out more about the Climate Challenge Funding

District Heating Loan offers loans of up to £500k and low interest, 3.14% and a payback period of either 10 years or 15 years. 

Click here to find out more about the Energy Saving Trust, District Heating Loan

Feed-In-Tariffs schemes is a Government program designed to encourage uptake of a range of small-scale renewable and low-carbon electricity generation technologies.  
The FITs provide three separate financial benefits. One would be a generation tariff, which is based on the total electricity generated and the type of energy. An export tariff payment, which is for any energy export made when generating more than you use and lower bills from your supplier for the electricity that is being important from them. 

Click here to find out more about the Feed-In-Tariffs

Financing Outline Assumptions Made 

• The entire capital cost of the project has been included in the financial analysis from year one of operation. All the operational and maintenance costs will be absorbed by the revenue and thus, the community trust will not have to find more funding to maintain operation. 
• Even though the operational and maintenance costs have been included from year one, they will not be as high as the initial stages of the operation for the network as the system is new and requires minimum maintenance.
• The heat demand for the buildings connected to the system will remain the same every year. However, in reality, the profits could be potentially used to finance retrofitting homes in the community, thus increasing the efficiency of the buildings and reducing the total heat demand.

 Financial Methodology and Considerations for Real Life Assessment 

The process of implementing a district energy network has many stages, which will be outlined in this section. From the preliminary study to the final construction, each stage has an associated financial cost. These will be explored, though only the first two stages were conducted for the purposes of this project.

1. Complete the preliminary study to determine whether the location is likely to be feasible. 
This stage comprises of scoping the area to assess its potential and appraise its viability of being able to sustain a district energy network. This stage is conducted by a consultancy, and they will take a fee for conducting the study. This cost will be included in the miscellaneous costs for the project.  

​2. Conduct a detailed feasibility study to determine the required capital costs and operational costs for the system. 
The capital costs for the project are found in this stage. Additionally, this stage of the project determines if there are any available subsidies for the system, usually in the form of Government Funding.​ The cost for such an extensive study is very costly and the funding for such a study are sourced from a variety of bodies depending on the nature and scale of the project.

3. Decide on the ownership of the system and allocate operational responsibilities. 
​This step would follow the detailed feasibility study. The options available for the ownership and operation of the network include public sector ownership and operation; cooperative ownership, but operated by a private energy company or utility, or a new energy service firm. 

4. Negotiating contracts, setting the energy rate structure and any required capital or operating subsidies.
This would include the long term contract period between the system operators for district heating and the consumer, which are used to ensure that the capital investment is repaid, as voluntary interconnection from the residence is very risky, should they opt out of the system prematurely.  The main aim of the rate structure is to ensure security for the investors and the consumers. 

5. Raising the required funds to develop the system
This stage can be very complex as district heating networks require subsidies to cover the high capital cost. There will be a lot of time and complexities related to gaining grants, subsidies and sourcing out potential sponsor. In the event of a loan absorbing the full capital cost, there needs to be a structure for securing the loan and the debt will have to be backed by the system revenue. ​

6. Project construction
This would include the implementation of the system to existing building and having a system ready for adding new buildings too. This will occur in the phase for system serving a larger area. The planning for this would be very detailed for staging the capital investment.

​7. Energy system operation, revenue collection and repayment of debt and any owner return on investments, if private ownership.
This is typically conducted by a third party owner and/or operating business or the managing utilities.

 ​8. Anticipating future changes to the business plan
District heating projects are a combination of an engineering project and a dynamic business that has expansion potential, changes in technology and innovation. As a result, it is important to establish a business plan that can be continuously updated. ​