Government confirms plans for heat network regulation

The government has confirmed plans for the regulation of the heat network market, including appointing Ofgem as the regulator and spreading the resulting costs across all energy consumers.

The Department for Business, Energy and Industrial Strategy (BEIS) set out its intended arrangements in its response to a consultation on the market framework for heat networks, which previously identified Ofgem as its preferred option for regulator.

BEIS said a comparison with alternatives such as the Heat Trust – the voluntary consumer protection scheme for heat networks – “reaffirmed our view that Ofgem is most desirable option – it has relevant experience from regulating the energy market, brings efficiencies from existing expertise and overheads, and offers the quickest route to regulation.”

The department said it plans to require entities supplying and operating heat networks to receive authorisation from Ofgem to do so: “We recognise that in many cases, a single entity will be responsible for the supply of heat and the operation of the heat network. In these cases, only one entity will need to be authorised.

“However, in other cases, the heat supplier and heat network operator will be separate entities and there can be more than one supplier per network. Each of these suppliers and operators will need to be authorised to carry out supply and operation. We will consider further what regulatory requirements should fall to the asset owner.”

BEIS said Ofgem will set and enforce consumer protection rules across Great Britain, which will apply to all domestic consumers and micro-businesses, regardless of whether they are supplied by a small communal network serving one building or a large district network serving multiple buildings.

It said the introduction of a regulatory framework will ensure they have “ready access to information about their heat network, a good quality of service, fair and transparently priced heating and a redress option should things go wrong.”

It intends to appoint the Energy Ombudsman as the independent ombudsman service for heat network consumers and Citizens Advice as the consumer advocacy body for heat networks in England and Wales.

The department said it is still considering whether certain small and medium-sized business should also have the option to be protected, but believes this is not necessary for larger businesses, which are able to negotiate their own prices and terms of service with suppliers and receive redress through contractual arrangements.

BEIS said it will introduce outcomes-based quality of service standards to reflect the diversity of network types, give Ofgem flexibility over how they are implemented, and ensure the regulatory burden is proportionate and realistic.

With regards to pricing, BEIS said it will enable Ofgem to mandate and enforce transparency, introduce rules and guidance on fair and consistent pricing and take enforcement action again disproportionately high pricing. It said it does not plan introduce price caps or direct profit regulation but does want to give the secretary of state powers to allow Ofgem to introduce price regulation in future if this proves necessary.

It said suppliers and operators will be required to meet technical standards, with compliance being demonstrated through an assurance scheme, perhaps involving third party certification from an accredited certification body.

BEIS said it will take powers to set maximum carbon emissions limits for heat networks. It said they are not expected to take effect until the early 2030s, although some low-carbon requirements may be introduced earlier as part of its planned introduction of heat network zoning, on which it is consulting.

Where enforcement action is necessary, BEIS said Ofgem will have similar powers to those it already has for gas and electricity, including provisional and final orders, financial penalties, consumer redress orders and revocation of authorisation for regulated entities. It said it is still considering whether financial penalties should be applied to not-for-profit entities that may have fewer options for absorbing the costs, stating it wants to avoid a scenario in which they are merely passed onto consumers.

The department said the market framework should additionally include step-in arrangements for market exits but said this is “a complicated area from a policy and a legal perspective” and it therefore intends to “proceed cautiously” to avoid overburdening networks and ensure they are proportionate and cost effective.

Given the diversity of network types, ownership and commercial models, BEIS said it plans to introduce broad powers that allow a range of solutions to be developed, possibly including a supplier of last resort regime. It is also planning to introduce a special administration regime for protect consumers if their supplier enters administration, and powers to levy funds to recover costs associated with administration and suppliers of last resort taking on new networks.

BEIS said the default option for recovering the costs of heat network regulation would be for these costs to fall solely on regulated entities. However, the department said its current provisional estimates are that this approach would add an extra £10 or more to annual bills, compared to the less than £2 per year paid by gas and electricity consumers for regulation.

It instead plans to spread these costs across heat network, gas and electricity consumers, resulting in additional costs to heat network consumer of roughly £1.40 per year and only £0.10 per year for gas and electricity consumers. The department has launched a new consultation on the proposals for recovering the costs of regulation.

BEIS committed to introducing regulation to implement the new market framework for heat networks with the current parliament.

Commenting on the announcement last week (29 December), Ofgem chief executive Jonathan Brearley said: “We welcome the government’s announcement that it will appoint Ofgem as the new heat networks regulator. Heat networks can play a key role in reducing carbon emissions from heating and helping to achieve the country’s climate goals.

“We will work with the government to design a regulatory framework which attracts the investment needed while ensuring heat network consumers, especially those in vulnerable circumstances, receive a fair price and reliable supply of heat for their homes as we make the transition to net zero.”

Heat Trust director Stephen Knight also welcomed the response, stating: “In the absence of regulation, a growing number of consumers are being left unprotected. As the reliance of the country on heat networks grows, so will the scrutiny of their performance and service standards. Legislation to protect consumers is essential and overdue.

“To avoid any further delays, we now need government to commit to including the legislation to enact these changes in May’s Queen’s Speech.”

The government additionally announced the awarding of £19.1 million of funding from its £320 million Heat Networks Investment Project to five schemes – two in Bristol and one each in London, Liverpool and Worthing.

Climate change minister Lord Callanan said: “Almost a third of all UK carbon emissions come from heating our homes and addressing this is a vital part of tackling pollution, driving down bills and reducing our reliance on costly fossil fuels.

“[The] announcement builds on our commitments made in the Heat and Buildings Strategy to regulate the UK’s heat networks, protect consumers, and create opportunities for green jobs and investment across the country.

“This will allow thousands of households and businesses to feel the benefits of projects that are breaking new ground and making our villages, towns and cities cleaner places to live and work.”