British heat networks regulation proposals welcomed

Jeremy Chang of Pinsent Masons, who specialises in energy market regulation, said: “Along with zoning, heat regulation is one of the cornerstone policies that the government hopes will catalyse the deployment of heat networks in Great Britain at a pace and scale which will help us achieve our net zero ambitions.”

He added: “Effective regulation will give confidence to customers that when they connect, they will be treated fairly and will benefit from protections which bear a broad resemblance to protections which gas and electricity customers currently enjoy.”

Heat networks, also known as ‘district heating’, supply heat from a central source to consumers via a network of underground pipes carrying hot water. Heat networks can cover a large area, such as an entire city, or supply a small cluster of buildings, and avoid the need for individual boilers or electric heaters in every building.

A number of possible technologies can provide the input to a heat network, including conventional power stations, energy from waste (EfW) facilities, industrial processes, biomass-and biogas-fuelled boilers, heat pumps, geothermal sources, electric boilers and solar thermal arrays.

The consultation (113 pages / 1.35MB PDF), published earlier this month by the Department for Energy Security and Net Zero and Ofgem, the industry regulator, seeks input on the detail and scope of regulatory requirements for issues including pricing, quality of service, transparency and how to protect consumers in vulnerable circumstances.

While the Energy Bill, which is currently being scrutinised by MPs, sets out the overarching powers and principles for heat network regulation, the government will set the specific standards and duties with which the sector will need to comply. Ofgem, supported by the Energy Ombudsman, Citizens Advice and Consumer Scotland, will have powers to take enforcement action against regulated entities that breach requirements.

Chang said minimising the disruption caused by the planned three-phase transition to regulation was a key issue for the industry. “It is reassuring that the government will be building on the foundations established by the Heat Trust, the world’s first heat customer protection scheme, which many providers will be very familiar with and already adhere to,” he added.

At the start of a proposed three-phase implementation, Ofgem will begin market engagement and preparation to design authorisation and sector-reporting regime and IT systems. Ofgem will also launch recruitment and prepare its compliance, enforcement, monitoring and audit policies.

In the second phase, Ofgem will officially take over as the market regulator. All operational heat suppliers and heat network operators will be automatically authorised to continue operating if they meet notification requirements set by Ofgem. The regulator will also begin collecting data, including on pricing, from the sector to enable the enforcement of pricing rules.

According to the consultation, Ofgem will then begin enforcing pricing rules and price investigations, as well as price benchmarks and cost allocation rules and guidance. Guaranteed standards of performance with compensation requirements will be introduced, alongside the ‘supplier of last resort’ regime.

Chang said some key aspects to the regulatory framework were not covered by the consultation, including the approach to carbon emissions limits and step-in and safety limits. “The latter, in particular, is an issue that the sector is actively grappling with. It is unfortunate that we will have to wait for a separate consultation in early 2024 before we can learn the government’s thinking on how ‘supplier of last resort’ arrangements might be structured,” he added.

“While a price cap or profit regulation remains off the cards for the time being, the sector will be keen to keep an eye on the shape and structure of how price regulation may come forward in the future if it becomes necessary and how it would impact existing projects at the time,” Chang said.

Energy and infrastructure expert Graham Wallace of Pinsent Masons said the consultation served as a reminder of the constitutional complexities of heat network regulation between the UK and Scottish legislatures, as regulation “criss-crosses” between reserved and devolved matters.

“To grow the heat network sector successfully, it will be crucial for the UK and Scottish governments to work together to ensure regulatory coherence. This will be essential to avoid unnecessary administrative burdens being placed on heat network operators due to the intricacies of the devolution settlement,” Wallace said.

He added: “The Scottish government is currently pressing ahead in earnest to activate the devolved elements of heat network regulation via the 2021 Heat Networks (Scotland) Act. As such, it is welcome to see progress on the key element of regulation which is reserved to Westminster, being consumer protection.”

The consultation closes on 27 October. The government said responses will be used to refine current proposals which will be implemented once the Energy Bill has passed into legislation.