Is it getting hot already? Regulating for the heat networks of the future

"Low carbon heating" formed one of the focus areas of the Labour Party's 'Warm Homes Plan'. As part of this the Government intends to continue the work started by its predecessor and capitalise on the opportunities that heat networks present in decarbonising heat and reducing costs. 

The Energy Act 2023

Part 8 of the Energy Act 2023 ("Act") provides the platform for regulating the largely (currently) unregulated space of heat networks by granting powers to the Secretary of State to introduce appropriate secondary legislation. The purpose of the legislation is to safeguard consumer interests and provide for appropriate oversight in a largely monopolistic market. OFGEM is appointed as the regulator of 'relevant heat networks' in England and Wales. The intention is that an authorisation regime will be introduced ( from January 2026, under the latest proposals) pursuant to which persons or entities undertaking certain activities in connection with a heat network will need to be authorised to either commence said activities or continue to undertake the same.

The Energy Act also introduced the concept of 'heat network zoning' where certain types of buildings within designated geographic zones will be required to connect to a network within a prescribed timeframe. Under sections. 232 and 233 of the Energy Act 2023, local authorities have been empowered to require that certain (non-domestic) buildings connect mandatorily to a heat network. The Act also gives OFGEM the power to grant licenses to developers which confer rights similar to those held by statutory undertakers such as electricity developers, meaning they will be able to install equipment in roadways and undertake street works.

A consultation closed on 26 February 2024 on the role of central government, zone identification, requirements in zones (consumer protections, emissions, requirements to connect) and zone delivery (selecting developers and ensuring construction), and an update is expected at some point in 2024.

What do the terms mean?

A 'relevant heat network' is defined as a "district heat network" (defined as "a heat network by means of which heating, cooling or hot water is supplied to two or more buildings or persons in those buildings") and a "communal heat network" (defined as a " heat network by means of which heating, cooling or hot water is supplied only to a single building divided into separate premises or persons in those premises").

In turn "heat network" is defined as "a network that, by distributing liquid or gas, enables the transfer of thermal energy for the purpose of supplying heating, cooling or hot water to a building or persons in that building (and includes any appliance the main purpose of which is to heat or cool the liquid or gas)".

It is intended that houses of multiple occupation and other single buildings that are not divided into separate premises, such as nursing homes or student accommodation, will not fall within the ambit of the regulation.

Secondary Legislation

OFGEM and DESNZ entered a formal consultation on consumer protection in relation to heat networks. The consultation opened on 4 August 2023 and closed on 27 October 2023 with the primary aim of informing secondary legislation and the license conditions that would be imposed on the "suppliers" or "operators" of a relevant heat network (see below).

The former government published its response in April 2024. The response largely follows the position outlined in the consultation document and notes that the 'consumer protection framework' will be introduced in three phases, with the first tranche of regulation coming into force in 2025 and the remaining consumer protection regulations following shortly thereafter as part of the second tranche (anticipated in 2026). 

Who will be caught under the new regime?

'Heat Network Operators' and 'Heat Suppliers' will need to be authorised under the proposed new regime.

A heat network operator is defined in the consultation document as "an organisation that is responsible for the day-to-day operation and maintenance of a heat network and its infrastructure", as a result of which has "significant influence over the quality of service outcomes for consumers". This could be the developer of the network (where the developer carries responsibility for both the primary and the secondary heat network, or the owner of the building that is supplied with heat from the network.

A heat network supplier is defined in the consultation document as: "an organisation that is responsible for the supply of heating, cooling or hot water through a heat network often via contractual terms to end consumers".

Depending on the set-up of the network the same entity could fulfil both roles, such as where a housing association has responsibility for the secondary heat network within a building and responsibility for the supply of heat to individual tenants within the same building.

From the government's perspective, it is preferable to have as few entities as possible involved with a heat network, as this enables more targeted regulation and a single point of contact between the regulator and the entity responsible for the heat network. That said, the former government acknowledged in its response to the consultation that there is no 'one size fits all' and reinstated its intention to further refine the roles of 'heat network operator' and 'heat supplier' in a subsequent consultation. 

It is intended that the heat network operator and heat supplier of each relevant heat network will be subject to a separate authorisation. This would apply even where the same entity/person fulfilled both roles. It is noted that the intention is for the process to be streamlined such that only one application for authorisation needs to be submitted in such instances.

Phasing in of regulation for existing and new heat networks

Existing heat networks: These will come under the authorisation regime, but transitional arrangements will apply. The nature of these transitional arrangements is not clear. What is clear is that: (i) there will be an "initial period" (no longer than 12 months) during which certain measures will be phased in, (ii) the operation of a 'relevant heat network' and the supply of heat will become a regulated activity at the start of the initial period and (iii) heat network operators/suppliers will be required to provide certain information to OFGEM in connection with their existing networks prior to the end of the initial period. The information will be supplied through an online system that is being developed by OFGEM.

New heat networks: Before any new heat network comes into operation or begins supply after the start of the initial period they will need to apply to OFGEM for authorisation. The overriding purpose is to avoid barriers to entry whilst minimizing the risks to consumers by seeking to ensure certain minimum standards are met at entry. The process will not provide any endorsement of the suitability of any entity to undertake the regulated activity, as this shall be a 'point in time' check against certain minimum requirements. Additional information demonstrating consumer protection measures, such as complaints handling processes, pricing methodology, vulnerability procedures, evidence of technical compliance and commitments to address faults within a time period will also be required. More details of the authorisation process will be issued by OFGEM following a further consultation in 2024.

OFGEM launched this consultation on 8 November 2024. The deadline for responding is 31 January 2025.

The consumer at the 'heart' of regulation

The principal objective of the proposed regulations is to protect heat network consumers, ensuring they receive a fair price, reliable supply of heat, and transparency of information. OFGEM therefore proposes to primarily draw on its existing Standards of Conduct and implement a very similar, cross-cutting principle. This would include a broad objective to treat domestic consumers fairly and tailor consumer services to their needs.

Fair pricing

OFGEM will have the powers to mandate price transparency, impose price structures or cost allocation rules, investigate prices and collect data to develop a comparison methodology. The primary aim of the framework is to ensure fairness and good outcomes for consumers.

Centralised Price Transparency

OFGEM will expect customers to be provided with specific details about billing information, as well as greater transparency across the sector. The consultation considered several different options of how a pricing information system could be developed, which varied from a "Full HN register" approach whereby a list of all heat networks with prices and key characteristics is available at a network level, to using high-level market averages with comparisons to gas or low carbon alternatives. In deciding on an approach, OFGEM have and will continue to consider the need to avoid commercial sensitives whilst ensuring the best outcome for consumers.

A joint consultation by DESNEZ and OFGEM was launched on 7 November 2024, with a closing day of 31 January 2024 to seek additional input on the practical implementation of such consumer protection measures. The consultation distinguishes between domestic and non-domestic consumers and provides additional information on how OFGEM intends to apply its Standards of Conduct in the heat network space.

Under the proposals, it is intended that consumers will be given access to a 'Consumer Advocacy' and redress scheme as early as Spring 2025. It is intended that heat networks will become regulated from January 2026.

Should you wish to discuss the proposals and their potential effect on your proposed scheme, please get in touch with our team of experts.