Heat networks call for regulation to protect consumers and investors

The Heat Network Task Force has called for a new regulatory framework for district heating schemes to protect customers and soothe investors’ fears.

The industry initiative says the framework would reduce investment risk, lower financing costs and cut energy bills for consumers.

The task force made the recommendation in a new report titled, ‘Shared Warmth: a heat network that benefits customers, investors and the environment’.

The report states that investor confidence and consumer protection are “two sides of the same coin. Investors want assurance that customers will be content with the service, as it reduces the risk of investment. More investable projects can attract institutional investors, which lowers the cost of capital and results in lower heating bills.”

It says district heating projects often face a “catch 22” in that “future customers cannot commit until the network is built, and investors cannot commit without future customers”.

To overcome this problem, the report calls for a new regulatory framework based around “demand assurance”.  Under this model, a developer would produce a strategic plan for a heat networks project based on reasonable projections for the heat demand that would arise from customers if it went ahead.

The plans would then be submitted to a regulator. Once approved, the developer would be offered protection on part of their investment if the demand predicted in the plan failed to materialise.

“As a minimum this protection would cover the cost of capital for demand shortfall,” the report explains. “The demand assurance would operate as a safety net, ensuring that the heat network developer was incentivised to secure new heat customers as quickly as possible to achieve the returns anticipated.”

As part of the arrangement, the developer would be obligated to meet certain conditions, “including minimum customer service requirements, and heat network design and build standards”.

“For customer protection to be effective it needs to be both binding on, and aligned with, the interests of those supplying the service of heat provision,” it adds. “By making access to demand assurance contingent on meeting customer service standards, the investor has a direct stake in ensuring those standards are met.”

The Heat Network Task Force is led by the Association for Decentralised Energy (ADE), whose director, Tim Rotheray, said: “Government recognises heat networks as a key tool for cost-effective heat decarbonisation. This report sets out how to build on current policy support to create a long-term sustainable investment market for heat networks.”

Energy and clean growth minister, Claire Perry, said: “Heat networks offer huge potential to reduce carbon emissions from our homes and businesses, deliver significant cost savings for consumers and create thousands of skilled jobs.

“Our ambitious clean growth strategy sets out how we will support the market to build and extend heat networks across the country. That’s why we are investing £320 million in the Heat Networks Investment Project and why we welcome the Heat Network Task Force report, which sets out clear proposals on how to reduce investment risk and develop a market which provides strong protections for consumers.”

Zoe Guijarro, task force member and policy manager for renewable heat and community energy at Citizens Advice, said: “Heat accounts for nearly half of all energy consumption in the UK and there is huge market potential for the heat network industry. Consumers must have confidence that they are getting a fair deal for this market’s potential to be realised.

“While further progress is required on the role of regulation to deliver fair heat prices for customers, the proposed customer service obligations and the introduction of competition into the heat sector is a good start to providing customers with the assurances they need.”

ADE has also released a separate report on the current state of heat network market. It says there are currently around 17,000 heat networks in operation around the UK supplying roughly 12TWh of heat each year to half a million customers.