We are delighted to announce the expansion of our team with Agnes Chan joining us as a Director, further bolstering our financial advisory and modelling practice.
Agnes brings with her over 10 years of experience within infrastructure and energy, most recently within the energy transition space. Agnes has joined us from Low Carbon, a renewable energy developer and IPP, where she focused on investing in and managing solar, onshore wind and battery storage assets in Europe and North America.
Prior to this Agnes was previously at DWPF (predecessor to Evolution Infrastructure), focusing on financial model development and audit in various sectors including regulated utilities, transport and renewable energy. Agnes performed a similar role within the Global Infrastructure Finance team of Mazars/Corality. She has also worked in tax consulting at Ernst & Young, infrastructure financing at Macquarie and with the state government in Australia on a number of PPP transactions.
Agnes’ arrival follows the additions of Craig Jenkinson and Oliver Durston. Craig joins as an Associate from Globeleq, a leading Pan-Africa renewable energy developer IPP, where his responsibilities included negotiating, structuring debt, and concessional financing for greenfield renewable power projects as well as supporting on buyside M&A processes.
Oliver joins us as a Senior Marketing Manager, following 5 years of experience across agency and in-house roles supporting financial modelling and advisory firms, with a particular focus on renewables and the Energy Transition – he will support in communicating EvoInfra’s offering and the creation of insightful content and market analysis.
Daniel Tyerman, Managing Partner said: “We have started 2025 at a brisk pace, as the market continues to build on the momentum gained in the latter half of last year. The depth of experience and knowledge Agnes brings, particularly from a commercial perspective, will further strengthen our ability to support clients across the board – whilst expanding our energy transition offering. Agnes’ arrival is the latest in a busy hiring period, following the additions of Craig Jenkinson and Oliver Durston, reflecting our growing presence within the sector.“
Heat networks are expected to become a crucial component in the UK’s pathway to net-zero by 2050. There is a growing demand for rapid, large-scale decarbonisation solutions, particularly with the backdrop of many local authorities declaring climate emergencies. Heat networks, distributing heat from centralised sources, offer a cost-effective and scalable approach to cutting carbon emissions from heating and hot water. As these networks expand, their potential to save carbon grows, as does their affordability, as utilisation of waste heat sources increases and economies of scale are capitalised upon. To meet the challenges ahead, the sector must accelerate its growth, presenting a compelling and increasingly rare greenfield opportunity for infrastructure investors in the UK – with some estimates projecting £60-80 billion investment required by 2050.
Looking back on 2024, it’s clear that the UK’s heat network sector made tremendous strides. From new investments and innovative pilot projects to strengthened consumer protections and strategic policy measures, the stage is set for greater progress in 2025 and beyond. In this article we delve into the key achievements across these areas and examine the challenges that lie ahead.
Transforming the Market Through Heat Network Zoning
The government has focused on strategically planning where and how heat networks can deliver the greatest impact. In early 2024, consultations on heat network ‘zoning’ stirred important discussions on how to identify and prioritise areas best suited to low-cost, low-carbon heating solutions. While a formal response to this consultation is now anticipated in spring 2025, the groundwork laid last year sets the stage for more robust market guidance and well-defined growth targets, providing more confidence to potential investors of a robust pipeline.
Figure 1: Illustrative heat network zone. Within a ‘zone’ heat networks are identified to be the lowest-cost heating source.
Heat zoning regulations aim to identify areas where heat networks provide the most cost-effective and low-carbon heating solutions, enabling targeted development and growth. Local authorities will be responsible for designating heat network zones based on criteria such as heat demand density, existing infrastructure, and environmental benefits. Within these zones, low-carbon heat sources can be required to connect to a network within a prescribed timeframe. Offtakers, such as public sector, large commercial buildings and new developments can also be required to connect. In addition to ensuring the required economies of scale, zoning should create a critical mass of supply and offtakers to support long-term investment in heat networks by developers, project sponsors and lenders.
To help applicants pinpoint future heat network hotspots, ‘zoning maps’ were released by the Department for Energy Security and Net Zero (“DESNZ”) in September 2024, covering 21 towns and cities across the UK. These data-driven resources allow potential investors, local authorities, building owners and developers to visualise where heat networks currently exist, where they are likely to expand, and areas for new deployment. They ensure better, more informed decision-making and demonstrate how data is guiding market evolution.
Pilot Projects Leading the Way
The government went one step further in October by announcing the first towns and cities to ‘pilot’ heat network zones. The 6 areas selected by DESNZ were Bristol, Leeds, Plymouth, Sheffield, Stockport and London (2 separate areas). Collectively, these projects will receive a share of £5.8 million in government funding to develop the heating zones, with construction expected to start as early as 2026.
These pilot zones represent a critical step in demonstrating the potential of targeted, large-scale heat network developments. By focusing on areas with high heat demand and abundant low-carbon heat sources, these zones aim to showcase the power of combined strategic and spatial planning.
If successful, the projects will not only provide a blueprint for future zones but also act as testbeds for innovative technologies and approaches, helping to identify best practices and how to tackle challenges that will inevitably emerge. In particular, the pilots should inform how to optimise procurement processes and commercial delivery models, with local authorities having the power to decide upon the appropriate structure – ranging from fully council to fully private-sector owned, in addition to hybrid joint-venture agreements.
The Impact of SWAN
One of the most prominent projects is London’s £1 billion South Westminster Area Network (“SWAN”), which was awarded to a joint-venture of leading developers, Hemiko and Vital Energi. The project aims to source heat locally from the London Underground and the River Thames to warm businesses, homes and the many iconic landmarks across the area.
Having advised DIF CVC on its acquisition of Hemiko in 2023, the developer is now a valued client of Evolution Infrastructure, and we are pleased to see the company continue its rapid growth and securing landmark projects such as SWAN.
Figure 2: For the buildings identified on this map, connecting to SWAN should be the most cost-effective way to decarbonise heating, according to the National Zoning Model.
Aside from the unparalleled scale of ambition of SWAN, it demonstrates that large-scale procurement can be done effectively at speed – with only 4 months between tender notice to signing and commencement of development work, 5x faster than most procurement exercises run to date.
Government Support Fuels Growth, Scale and Innovation
On the investment front, 2024 saw an impressive £190 million in funding allocated through the Green Heat Network Fund (“GHNF”), a capital grant initiative that is a core element of the government’s Heat Network Transformation Programme. In addition, a further £9.8 million was awarded from GHNF’s predecessor, the Heat Networks Investment Project (“HNIP”) in its final round of awards. These awards are energising projects that harness waste heat, tap into data centres, and serve thousands of new homes and commercial spaces. Notably, a major new network in North-West London being developed by the Old Oak and Park Royal Development Corporation will supply low-carbon heat to around 10,000 homes and 250,000m² of commercial space utilising heat from nearby data centres, showcasing both scale and innovation.
Through GHNF support, £80 million was allocated to innovative heat networks utilising waste heat, including £11 million for Bolton’s sewer heat project. Additional funding of £79 million supported low-carbon heating for 17,000 homes and buildings, with projects in Birkenhead, Hampshire, and Loughborough. As the year concluded, the final HNIP awards included support for Gateshead’s mine-water scheme, Islington’s initiative to harness London Underground waste heat, and E.ON’s ectogrid™ decarbonisation project in Silvertown, London.
There was also closer alignment between wider public sector funds and the heat network agenda. The Public Sector Decarbonisation Scheme and the Warm Homes: Social Housing Fund have highlighted heat networks as a key technology to consider. This recognition underscores the government’s intent to integrate heat networks into broader decarbonisation efforts.
A Milestone Year for Policy and Consumer Protection
One of the year’s most significant achievements was the advancement of consumer-focused policies, particularly in the context of recent stories in the press regarding sub-par service. Ensuring households and businesses can trust their heat network providers has been a central goal. In April, the UK Government published its response to a consultation on consumer protections for heat networks. This step addressed key concerns, such as pricing transparency, service quality standards, and support for vulnerable consumers.
By November, momentum had continued with the introduction of secondary legislation on the Heat Network Market Framework. The Government also worked closely with Ofgem (incoming regulator) to jointly consult on implementing consumer protections, making 2024 a landmark year for safeguarding the interests of households.
It is also worth mentioning the Heat Network Efficiency Scheme (“HNES”), which supported over 230 projects with more than £34 million in funding. HNES supports performance improvements to existing district or communal heating projects that are underperforming.
Scaling Up
2024 marked the end of an active year for heat networks and laid crucial groundwork for 2025 and beyond. With strong policy frameworks, enhanced consumer protections, significant investments, and a broad strategic vision now in place, the UK’s heat network sector is poised to deliver even more ambitious outcomes in the near future. The progress made this year not only inspires confidence but also reflects a shared commitment – from government, industry, investors, and communities.
Ultimately however, the UK has a long way to go if it is to achieve the aim of heat networks providing 20% of total heat requirement by 2050 and emulate the effectiveness of heat networks such as those in Northern Europe. Scale is essential to the success of heat networks; aside from the numerous technical and economic benefits of larger networks, increasing scale supports the cost equalisation between clean and fossil-fuel derived heat by enabling efficient use of power markets. Building public awareness and trust, developing a robust supply chain, and progressive policy that persists over multiple governments are the foundations that create the necessary conditions for scale, and of course stimulate investor confidence.
Figure 3: Illustration of heat network capacity growth potential (source: Heat Road Map Europe 2050 scenario and DESNZ).
It will be interesting to see how local government fares with the increasing procurement and governance burden and complexities that zoning introduces, particularly given their role as ‘zoning coordinators’ whilst also potentially playing a role in network development and ownership.
EvoInfra’s Breadth of District Heating Expertise
We have a wealth of experience in the district heating and decentralised energy sectors across our service lines. This ranges from M&A advisory support through to financial modelling for individual or portfolios of projects (for appraisal, monitoring and valuation) through to corporate-level models for shareholder and lender reporting. Our model audit team has also provided assurance on numerous models in the sector. Get in touch with Moeen Patel at patelm@evoinfra.com to learn more.
The Debt Service Cover Ratio (“DSCR”) is one of the key financial ratios that lenders focus on in project finance transactions. It measures the ratio between Cash Available for Debt Service (“CFADS”) to Debt Service. In essence a DSCR highlights how much financial headroom a company has in relation to its debt obligations during a specific period. A ratio of 1.00x indicates cashflow is just sufficient to service debt, while a ratio of less than 1.00x signifies a shortfall.
When arranging debt (pre ‘financial close’)
The DSCR is widely considered the most important ratio in a project finance transaction. Lenders typically require minimum and average DSCRs be met as a ‘Condition Precedent’ (“CP”) to signing the financing agreement, with the DSCR often the limiting factor when financial models are optimised – as opposed to other ratios such as the Loan Life (“LLCR”) or the Project Life Cover Ratio (“PLCR”). The agreed CP level is negotiated with lenders based on the perceived risk of the project.
As a result, the DSCR often dictates the level of gearing in a project. If the DSCR is not meeting the CP, then a higher equity investment may be required (reducing debt and thus lowering debt service) or, alternatively, an increased annual payment from the Grantor when, for example, the project is a part of a Public Private Partnership (“PPP”) tender process.
Once debt has been invested (post ‘financial close’)
Whilst the DSCR initially governs how much debt a project can support when financing is arranged (as based on the financial close model’s forecast results), it continues to be relevant even after senior lenders have invested their capital and the project becomes operational.
Lenders will monitor a project’s performance at regular intervals using the DSCR, alongside other financial ratios. If the DSCR falls below agreed-upon thresholds the project may enter ‘lockup’, where sponsors are prohibited from making equity distributions or, more drastically, ‘default’, where lenders can assume control of the asset to safeguard their investment.
Periodic DSCR
The DSCR is generally calculated as an annual ratio (“ADSCR”) and tested on a historic (“HADSCR”) and forecast (“FADSCR”) basis at the point debt service is paid, usually on a quarterly or semi-annual schedule.
The formula for the DSCR = CFADS / Debt Service
The financing agreement will set out the detailed components of CFADS and Debt Service but, broadly speaking, Cash Flow Available for Debt Service will be equal to:
Project Revenues
Less: Project Costs (excluding Financing Costs)
Less: Tax
Less: Certain reserve account deposits
Plus: Certain reserve account withdrawals
Debt Service will typically include:
Principal debt repayments
Interest payments
Commitment fees and other fees
Net amounts due (to) / from the project company as a result of interest rate hedging
It is essential however to cross-check the financial model against documentation, as different lenders will have their own approach to certain items. Several common discrepancies are listed later in this article.
Average DSCR
Whilst lenders will usually specify an Average DSCR CP that must be met, financing documentation is typically silent on how this average should be calculated. Two main approaches to calculating an Average DSCR exist:
A simple average of individual DSCRs is taken
Total CFADS over the debt term is divided by total Debt Service over the same period
Method 1 weights each individual DSCR equally regardless of the quantum of debt outstanding. This can however result in a skewed average, especially if DSCRs are higher in later periods where Debt Service is lower – perhaps in a scenario where gearing hasn’t been maximised.
Method 2 divides total CFADS by total Debt Service to overcome this this problem, meaning high ratios in the later years of the project (particularly the maturity period) will not materially impact the average reported.
As noted above funding documentation doesn’t usually specify how the average DSCR is calculated and whilst Method 2 may appear more robust, it is more common to see the Average DSCR calculated as a simple average, per Method 1.
Debt sculpting
As previously mentioned, lenders will require the DSCR in the base case financial model to meet a minimum level, or CP. The optimal scenario that will either maximise gearing and equity returns, or minimise the annual Grantor payment in a PPP whilst meeting the desired equity return, will be to just meet this CP in each period.
CFADS is unlikely to remain constant though throughout the life of a project due to the seasonality of income or the lumpy nature of life cycle costs amongst other things. Constant Debt Service in each period will not therefore be optimal. To maintain a flat DSCR, Debt Service will need to fluctuate, increasing in periods of high CFADS and decreasing in periods of low CFADS.
Figure 1 below demonstrates how the DSCR might fluctuate over time where debt repayments are based on an annuity and with variable CFADS. In this scenario, assuming a minimum DSCR CP of 1.10x, the maximum debt that can be raised is £49.52 million (right hand scale).
Figure 1: ADSCR with ‘lumpy’ CFADS and annuity debt repayments
Where debt repayments are structured to align with fluctuations in CFADS a flat DSCR can be achieved. This results in the potential for higher debt capacity (£62.15m) to be supported from the same CFADS or, alternatively, the same debt amount serviced from a lower CFADS (equalling a 12.6% reduction in the unitary payment in this example).
Figure 2: ADSCR with ‘lumpy’ CFADS and sculpted debt repayments
This structuring technique is referred to as debt sculpting. Debt sculpting can be demonstrated by rearranging the formula for the DSCR as follows:
DSCR =CFADS / Debt Service
Can be rearranged as, Debt Service =CFADS / DSCR
Illustrating this numerically, where CFADS is 130 in a period and given an assumed DSCR CP of 1.30x, we know that Debt Service must be equal 100 in order for the ratio CP to be met.
Since the interest due in the period can be calculated (being the opening debt balance multiplied by the interest rate for the period length), along with any applicable fees, the maximum principal repayment that ensures the DSCR CP is met can be determined. This can be expressed algebraically as follows:
Principal Repayment =CFADS / DSCR less Interest and Fees
Assuming Interest and Fees total 20, the maximum Principal Payment in this scenario would be 80 (calculated as 130/1.30 – 20). By repeating this calculation across the tenor of the debt, the sum of the maximum repayments that can be made is known, thereby informing the total debt quantum that can be drawn.
It is important to note that debt sculpting is only performed when initially arranging the debt package. Once the financing agreement is signed at (‘financial close’) the debt repayment profile will become fixed.
1. Alignment with documentation
The DSCR calculation itself is straightforward and issues therefore more commonly therefore arise due to a misalignment with documentation. Items that may differ between projects include:
Bank agency fees: May be included in CFADS or Debt Service
Interest income on project accounts: Not always included within CFADS
Commitment fees: Not always included within Debt Service
Timing of ratio calculations: The timing (calculation dates) and length of calculation periods, e.g. in the period following construction and or just prior to debt maturity, require careful consideration
2. Cash sweep mechanisms
In some financing arrangements a cash sweep mechanism may be present, redirecting free cash that would otherwise be distributed to instead accelerate senior debt repayments. If 100% of free cash is swept the principal debt repayments will increase to the point where Debt Service equals CFADS, resulting in a DSCR of 1.00x. The DSCR therefore becomes less meaningful in this scenario as it no longer reflects the financial strength or stability of the project. Lenders may therefore prefer to see the DSCR calculated with only scheduled principal repayments included in the denominator.
3. Sensitivities
Errors can arise when conducting sensitivity analyses. For example, if a Debt Service Reserve Facility is part of the financing package it may be utilised in a downside scenario. Interest payments on such facilities must therefore be included in DSCR calculations. Furthermore, the treatment of DSRF repayments should be carefully assessed – if prioritised over all other cash flows, similar to the cash sweep scenario above, the outturn result will be a DSCR of 1.00x, with the true financial strength of the project masked. Lenders may again therefore prefer DSRF repayments not to be reported in the DSCR, notwithstanding how this is actually documented.
4. Lock-up mechanics and circularity
Financing agreements specify the DSCR should be tested against lock-up and default levels on both a historical and forward-looking basis. Forward-looking calculations are however inherently circular and so frequently excluded from models to avoid complexity. Where excluded we recommend adding an audit check to the model to flag where the lock-up should apply.
Have you found this article helpful?
If you have found this article useful and would like further information about our training courses, then you can read more here. To discuss your advisory, financial modelling or model audit requirements then speak to us about your project today by emailing us at info@evoinfra.com.
The award is testament to the persistence and collaboration of all parties and advisors involved, driving forward a complex project through challenging economic conditions.
The landmark project for the university features 1,000 student rooms, a new village hub and strong sustainability credentials with deployment of a large solar energy system. Construction is progressing well and is due to be completed in 2026.
Partner, Simon Johnson said: ‘At Financial Close I noted that the student accommodation sector must rise to the challenge of completing projects even in the face of pressures on construction, operating and financing costs, without making student rents unaffordable.
So it’s very satisfying to see Property Week judged our University of Staffordshire project to be student accommodation Deal of the Year 2024, and in particular to recognise the exceptional collaboration, expertise and dedication of all the parties involved. The intricacy and innovation of the complex DBFO deal was also highlighted.‘
Ramon Sequeira and Stella Njiki, who is also a graduate of the Infrastructure Investment and Finance MSc (IIF), led a comprehensive financial modelling course for 60 students enrolled in the IIF and Learning Environment MSc programmes at UCL.
The workshop provided invaluable insights into the infrastructure industry, project finance, and financial modelling, including a walk-through of how to build a best-practice financial model for a project finance transaction. Conducted at UCL East Marshgate, the workshop had in attendance IIF Programme Director Yiming Wang, Deputy Program Lead Roberto Cardinale, and Programme Administrator Tahira Khawaja, who all contributed to the organising of the workshop and the overall student learning experience.
The day-long course was followed by an informal drinks reception, fostering networking opportunities for students, academic staff, and professional staff associated with the relevant MSc programmes.
Ramon Sequeira, Director at Evolution Infrastructure, said: “Having hired a number of students from the Infrastructure Investment and Finance MSc course over the last decade, EvoInfra has a longstanding relationship with UCL and the programme, and we are delighted to continue this partnership.”
Dr Yiming Wang said: “The MSc IIF programme takes pride in its strong connection with practitioners working in the relevant commercial and industrial sectors worldwide. We are grateful to EvoInfra as one of our longstanding industry partners for having delivered another successful financial modelling workshop to our students.”