Local Heat & Energy Efficiency Strategies, and Regulation of District Heating

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Local Heat & Energy Efficiency Strategies, and Regulation of District Heating Response by the Council of Mortgage Lenders to the Scottish Government consultation paper Introduction 1.

Our 135 members currently hold around 97% of the assets of the UK mortgage market.

1 Local Heat & Energy Efficiency Strategies, and Regulation of District Heating Response by the Council of Mortgage Lenders to the Scottish Government consultation paper Introduction 1. The CML is the representative body for the residential mortgage lending industry that includes banks, building societies and specialist lenders. Our 135 members currently hold around 97% of the assets of the UK mortgage market. In addition to home ownership, CML members also lend to support the social housing and private rental markets across the UK. 2. We welcome the opportunity to respond to the consultation on the development of Local Heat and Energy Efficiency Strategies and the regulation of district heating. General comments 3. The CML and mortgage lenders recognise and support initiatives that could reduce the energy running costs for households in all tenures across the owner-occupied (mortgaged) sector; the private rented sector as well as the Registered Social Landlord (RSL) sector, which provides homes for social and affordable rent as well as for affordable home ownership. 4. In developing new initiatives and approaches, such as Local Heat and Energy Efficiency Strategies, and proposals for the regulation of district heating, we want to ensure that government (national and local) as well as other key stakeholders, such as providers (e.g. district heating suppliers/ operators) are fully aware of, understand and take account of the interests of consumer households and any mortgage or commercial lenders with an interest in the property or properties that might be subject to the installation of measures or connection (voluntarily or by compulsion) to a district heating network. 5. From the perspective of mortgage lenders, it will be vital that nothing is done that might adversely impact the value of their mortgage security or its recoverability without lenders permission or consent where this may be required. This would be the case for residential as well as buy-to-let mortgages. 6. In a similar vein, mortgage lenders will want to be reassured that any claimed energy cost savings can be evidenced in a robust and consistent way, preferably on a national as opposed to local basis, and that household consumers are afforded all the protections needed to ensure there is no consumer detriment to them in terms of choice of supplier and that they are not locked-in against their wishes to a scheme or provider that is not their choice. 7. Recognising that issues of consumer protection are reserved to the UK Government, and that much has already been done in relation to the issues of technical standards/ consumer protection and quality through the earlier Bonfield Review and the Each Home Counts approach that is emerging from it, we feel that the overarching approach and principles to the Scottish Government s LHEES and District Heating Regulatory Framework should be consistent as far as possible with Bonfield/ Each Home Counts. We would be keen to see direct reference and correlation from the current consultation proposals to Each Home Counts and the single Quality Mark that it envisages. Specific comments 8. We have responded to those of the consultation questions/ proposals that could have an impact on the interests of lenders, including residential and buy-to-let mortgage lenders and those of our members who are commercial lenders/ funders and investors in Scottish RSLs that might be subject to district heating connection requirements. address North West Wing Bush House Aldwych London WC2B 4PJ telephone fax website

2 Section A: Local Heat & Energy Efficiency Strategies (LHEES) Q1: Do you agree that local authorities should have a duty to produce and implement a Local Heat & Energy Efficiency Strategy (LHEES) as outlined? 9. Local authorities are already substantially burdened with an array of duties and implementation/ enforcement requirements. 10. We are concerned that requirements on individual authorities to produce LHEES could result in a plethora of approaches which could, to a greater or lesser degree, take into account the interests of lenders and mortgaged borrowers. We would like to see a single consistent approach, ideally at a national level. Q1b: What are your views on the appropriate geographical scale for the preparation of LHEES? Should each local authority produce a single strategy for its area, or would it be possible for local authorities to work together to prepare strategies jointly for a wider area? 11. For consistency and uniformity, if a single national approach is not forthcoming, then we would prefer to see an approach which delivers consistent LHEES for sub-national areas, such as North-East; South; North-West etc. Given the correlation between health and housing (particularly in the context of fuel poverty and energy efficiency), there might also be merit in joint working among authorities that combine in health commissioning areas. Section B: District Heating Regulation Q4: What are your views on the broad principles for regulation outlined? What else do we need to consider? What should be prioritised in cases where principles may not always be compatible? 12. We would like to see the principles of and approach to regulation take account of real and pertinent issues for lenders and mortgaged households, such as the need for lender consent to measures or initiatives that might impact the value and mortgageability of the property. Connection to a district heating system could involve physical changes to the property that might affect its value. Any requirement to take a district heating connection could run counter to consumer choice and result in consumer detriment if consumers are effectively locked-in to systems and providers that are not their choice. The absence of a stand alone heating system might have a negative impact on its marketability and value, and this could be an issue particularly for lenders in possession cases, where prompt disposal of the property at the best price will protect both the lender and the defaulting borrower. Q5: What are the key principles or approaches that should inform how our regulatory approach manages risk for district heating across the whole system? 13. As above, the principles of and approach to regulation should enable the identification and management of financial risk arising in the context of mortgaged properties that connect (voluntarily or through compulsion) to a district heating network. Q8: What are your views on taking district heating zones, or parts of district heating zones, and establishing an exclusive concession for either private- or public-sector heat network developers to fulfil that part of the LHEES? 14. We are concerned to see in the consultation proposals that concessions could be used as a means of allowing district heating network developers to have rights to construct and operate in a zone, and that concessions could confer wayleave rights and the ability to require specific buildings to be connected to their network. 15. We are concerned that the conferring of such significant rights by way of concession could conflict with the rights and interests of mortgage lenders (both residential and buy-to-let) over their security properties. In the RSL sector, we are concerned that it might be possible for the rights of concession holders to be exercised in a way as to require RSLs to connect all or part of development

3 portfolios/ estates to a district network. Such a requirement to connect might conflict with the views and decision of the independent RSL governing body. In this respect, we suggest that government explore more widely with the RSL sector and the Scottish Housing Regulator as to the possible implications, positive and negative, of the current proposals. On the positive side, it could be possible for an RSL to establish a district heating venture to provide heat to its estates/ portfolio but, again, RSL boards would need to be fully aware of relevant risks and the regulator would need to be satisfied that those risks were understood and managed so as to protect the interests of tenants and of public and private financial providers to the RSL business. Q8b: Do you agree that local authorities should be responsible for issuing and enforcing concessions in their areas? 16. We are concerned that local councils might be insufficiently resourced to enforce concessions. This could be an issue of great significance if enforcement also covers or is intended to cover consumer protection and quality. We suggest government ensures that any proposals that are taken forward in this area are consistent with the Bonfield/ Each Homes Counts approach which covers consumer rights and protections, as well as issues of quality. Q15: What are your views on the proposed power to compel existing buildings to connect to district heating? 17. Although the proposals envisage initially that only key or significant buildings or groups of buildings might be subject to a requirement to connect, we are concerned that a connection requirement could substantially conflict with and seek to override the interests of mortgage lender and their borrower households, who might not wish to choose to connect to a particular network or heat supplier. 18. As above, we are concerned that any application of the requirement to RSL developments could conflict with the legitimate decisions of independent RSL boards. Q15c: Do you agree that.assessment at project level should include an assessment of the impacts on consumers of requirements to connect? 19. Yes, particularly as a requirement to connect could override consumer choice and potentially lead to consumer detriment; consumer detriment might also arise in the context of mortgageability and marketability of a network-connected property or could also arise in the context of a borrower wishing to remortgage property that has become subject to a connection requirement. Q15d: Do you agree that local authorities should exercise powers to compel connection of existing buildings (for example when requested by relevant concession holders)? 20. No. Compulsion would override legitimate consumer choice and could result in consumer detriment and conflict with the interests of mortgage lenders. 21. We are also concerned that the issue of a requirement to connect/ compulsion to connect and enforcement gives rise to issues of penalties and sanctions for enforcement. These are not explored in the consultation paper. But they are significant issues, and we would like to see further detail from government on how these issues might be addressed in a way that takes account of lender and consumer interests. Q25: Do you agree that as district heating becomes more widespread it will need to become a licensed activity? 22. Yes. A license-based approach would appear to be consistent with the Bonfield/ Each Home Counts approach, but we would like government to ensure consistency between any license-based approach and Each Home Counts.

4 Q26: What technical standards and consumer protection measures should be part of standard district heating licence conditions? How should these relate to existing schemes? 23. As above, we suggest that standards and consumer protection in a license-based approach should be consistent with Bonfield/ Each Home Counts, as appropriate. Q30: Do you have views on who should issue District Heating Licenses and ensure that technical standards are being met? 24. Yes: If appropriate, the body that will be responsible for the Quality Mark being developed following Bonfield/ Each Home Counts. Q32: What are your views on the best approach to ensuring that potential customers understand the differences as potential customers of a heat network, and who do you think is best placed to convey these messages? 25. Issues of consumer education and awareness raising should be dealt with at both a national and local level, with government providing high-level awareness raising and network operators providing local information. The quality and veracity of information provided by network operators should be consistent across suppliers to enable consumer comparison and we suggest there is a role for the Bonfield/ Each Home Counts Quality Mark (or equivalent) to play in ensuring consumers receive the right information at the right time in a way that is meaningful for them. Government might also consider engaging with appropriate consumer groups in this respect. Q39: Please set out any further views on issues covered in this consultation that you have not already expressed, providing evidence to support your views. 26. The Domestic Renewable Heat Incentive which includes elements of district heating from biomass heat sources is already providing valuable learning in respect of mortgage-related issues that arise from the connection of mortgaged homes to such networks. Learning points from RHI domestic should be taken into account as appropriate in the development of the government s LHEES and district heating regulation proposals. 27. It is important also to flag that there could be issues of property blight arising in zones or areas, particularly where a concession holder could require/ enforce or compel connection of a property to their network against the wishes of the consumer and/ or their mortgage lender. Next steps 28. The CML stands ready to engage with the Scottish Government in further work to develop proposals in this area in a way that takes into account the interests of lenders and mortgaged households. Contact 29. To discuss this submission further, please contact John.Marr@cml.org.uk 13 April 2017

LHEES AND REGULATION OF DISTRICT HEATING RESPONDENT INFORMATION FORM Please Note this form must be returned with your response. Are you responding as an individual or an organisation?

5 LHEES AND REGULATION OF DISTRICT HEATING RESPONDENT INFORMATION FORM Please Note this form must be returned with your response. Are you responding as an individual or an organisation? Individual Organisation If you are an organisation please indicate which category best describes your organisation: Academic or Research Institute Community organisation Local government Private sector organisation Public body, including Executive Agencies, NDPBs etc. Representative body for professionals Third sector / equality organisation Others please state: Financial services trade association Full name or organisation s name Council of Mortgage Lenders Phone number Address North-West Wing, Bush House, Aldwych, London Postcode WC2B 4PJ John.marr@cml.org.uk

6 The Scottish Government would like your permission to publish your consultation response. Please indicate your publishing preference: Publish response with name Publish response only (anonymous) Individuals only Do not publish response We will share your response internally with other Scottish Government policy teams who may be addressing the issues you discuss. We may wish to contact you again in the future, but we require your permission to do so. Are you content for the Scottish Government to contact you again in relation to this consultation exercise? Yes No

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