Estimating costs: Single Building Heating or Mini-Networks
It is beyond the scope of this toolkit to suggest ways to estimate the capital costs of heat networks or green space heat schemes that deliver heat for uses other than space heating – there are too many variables. It is more feasible to estimate capital costs for space heating-led schemes that supply a single building or a few buildings in close proximity to one another (“mini-networks”). The cost estimates and estimation methods outlined below apply to schemes with “standard” scope of supply: heat collectors, heat pumps (and ancillary equipment like tanks and circulation pumps), electrical connections, meters and control devices, transport, labour, design and project/site management.
In practice, two projects that supply heat on the same scale, to the same types of building and with the same scope of supply, but in different locations, can display quite different capital costs. Some of the sources of that variation are beyond the scope of this toolkit, and it is normally appropriate to interrogate these in a detailed way as part of a formal feasibility study. This may include cost of materials (e.g. transport uplift), variation in existing heat delivery system (e.g. piping or radiator upgrades) or site specific constraints (grid connection costs, planning or building warrant requirements). Instead, this module presents a low-effort cost estimation approach, which does not rely on technical expertise or detailed information about the opportunity in question. The resulting cost estimates represent an improvement over the use of a simple rule of thumb, but are suitable for first-stage opportunity assessment only and should not be considered to be robust or reliable beyond that point. Of course, wherever possible budget quotes should be sought from market participants.
In addition to the cost drivers that form the basis of the method, there are a number of additional uncertainties and considerations that users should be aware of when considering the likely capital costs of a particular scheme.
Capital cost estimation (before market engagement)
Starting point
As of early 2020, a reasonable starting point to generate an estimate is £1,700 per kW.1 This very rough number should then be adjusted upwards or downwards, guided by consideration of the cost drivers in the following section.
Cost drivers and impacts
Table 1 lists the key cost drivers that should be taken into consideration, along with indications of the scale of the impact that wide variations in each parameter would have. In practice, most of the time the impact of individual cost drivers on overall capital costs will be less than the ‘maximum’ values shown in the table.
When developing the capital cost estimate from the £1,700 per kW starting point, a judgement must be made about the impact of each relevant cost driver. Either:
Making individual quantitative estimates for the impact of relevant cost drivers, based on a qualitative understanding of the local situation relative to an “average” ground or water source heat project;
Selecting a higher cost multiplier within each range selected (the impact multiplier highlighted in bold); or
Using a mixture of the above two approaches.
From the initial £1,700 per kW, each of the conditions should be applied sequentially to the starting value using the chosen cost multiplier. This provides 12 values which can be averaged to provide a cost calculation for the specified site.
| Lower cost condition | Scale of maximum impact | Higher cost condition | |
|---|---|---|---|
| Water source heat pump | vvv/^^^ | Ground source heat pump | |
| GSHP only | Horizontal heat collectors (trenches) | vvv/^^^ | Vertical heat collectors (boreholes) |
| Lower spec heat pumps | vv/^^ | Higher spec heat pumps | |
| “Medium” scheme capacity | vv/^^ | Domestic-scale OR large-capacity | |
| GSHP only | Easier geology/soil composition | v/^^ | More challenging geology/soil composition |
| Geographically well-connected location | v/^^ | Remote location | |
| Low buyer-side costs (procurement, PM) | vv/^ | High buyer-side costs (procurement, PM) | |
| Few internal heating system upgrades | v/^ | Extensive internal heating system upgrades | |
| Demand is new build | v/^ | Retrofit | |
| Low labour costs | v/^ | High labour costs | |
| Simple design | v/^ | Complex design/engineering | |
| Straightforward construction site setup & access | v/^ | Difficult construction site setup & access |
| KEY | ||
|---|---|---|
| Symbols | Range of maximum impact | Impact multiplier |
| vvv^^^/ | ± 15 – 25% | Lower costs: 0.75 – 0.85 Higher costs: 1.15 – 1.25 |
| vv/^^ | ± 5 – 15% | Lower costs: 0.85 – 0.95 Higher costs: 1.05 – 1.15 |
| v/^ | ± 2 – 5% | Lower costs: 0.95 – 0.98 Higher costs: 1.02 – 1.05 |
Note: Vertical systems offer advantages in terms of efficient performance and energy yield from a limited area of land. Mid-scale heat pumps (~100kW) can offer the lowest costs because they benefit from economies of scale, but are not normally “bespoke” equipment.
Market engagement for cost estimation
Many installers will provide estimates or budget quotes for a particular opportunity, especially if persuaded that there may be a viable project. Sometimes estimates are based purely on desk work or knowledge of similar projects, but an installer may also offer to visit a site and meet with those proposing the project.
Additional uncertainties
Market evolution and disruption
The balance of supply and demand that prevails at the time will affect the prices that suppliers are able to offer. In an environment where government policy and fiscal incentives are undergoing change and the future situation is uncertain, market growth and maturation (or market damage due to setbacks) could see contract prices diverging from the “benchmark” ranges indicated earlier in this module.
Similarly, the degree of competition involved in the pricing exercise is likely to affect costs. Inflation should be accounted for if significant lengths of time have passed in between estimating and pricing stages.
Scope of supply
The cost estimation “benchmarks” apply to a “standard” scope of supply, but there may be additional elements that are required or recommended for a particular opportunity that will incur additional cost. Some examples of common additional elements include:
External “plant room” enclosures to house equipment when it is not possible to locate it in an existing building.
Asbestos, unexploded ordinance or other health and safety-related surveys and investigations.
Disposal of drilling waste – if it cannot be used on-site or elsewhere within the owner’s estate.
Thermal response or soil conductivity testing, to inform design work.
Reinstatement of ground with grass seeding, planting etc.
Optimism bias
It is widely recognised that there is a systematic tendency for opportunity assessors to be overly optimistic, including in relation to cost estimation. It is recommended that assessors consider incorporating a correction for optimism bias, or explicitly account for it by including a larger contingency on estimates than would otherwise be warranted. The HM Treasury Green Book Supplementary Guidance offers recommendations for redressing the impact of optimism bias.
Footnotes:
For guidance on how to determine the approximate capacity needed, see module 5.2, “Estimating the Heat Resource”.