Budget silence on heat networks ahead of UK market shake-up

Jeremy Chang, an energy infrastructure expert at Pinsent Masons, was commenting following the announcement of several initiatives by the chancellor last week designed to boost affordability of electricity and tackle fuel poverty as the heat network market prepares to welcome the rollout of a new, long-awaited supervisory regime from early next year.

The package of measures announced by the government include saving households around £150 on energy bills from April 2026. It also reaffirmed its commitment to the Warm Homes Plan by allocating a further £1.5 billion in capital investment to help tackle fuel poverty through the plan.

However, the budget did not refer explicitly to the Green Heat Network Fund, the Clean Heat Discount Scheme or the Targeted Electricity Discount (TED), leaving “substantial uncertainty” for long-term financing of the heat network sector, the Association for Decentralised Energy said in a briefing note (210 pages / 114KB) it published following the chancellor’s speech. The trade association said that the budget also did not provide further clarification on allocated spending for the Green Heat Network Fund, “casting doubt on its future scale”.

Chang said that although heat networks were notably absent from the budget, the implementation of new heat network regulations from January 2026 would help to establish a level of market certainty – although undoubtedly introducing compliance challenges for both suppliers and operators.

The regulatory changes follow two years of consultation by Ofgem, which was formally granted powers to oversee the heat networks market across Great Britain, enforce compliance and issue authorisations with specific conditions following the passing of the Energy Act 2023 in October 2023.

Heat networks, also known as ‘district heating’, supply heating, cooling and hot water from a central source to consumers via a network of underground pipes carrying hot water. These networks often cover large areas, or supply a small cluster of buildings, avoiding the need for individual boilers or electric heaters in every building.

Proposals to establish heat network zones have also been identified as a critical component of the UK’s ongoing efforts to transition to net zero carbon emissions by 2050. Last month, the government published its revised carbon budget and growth delivery plan (CBGDP), which highlighted its intention to support 10 of the biggest English towns and cities to establish heat network zones.

Historically, businesses operating across heat networks – from operators to suppliers – have not been formally regulated. Following several rounds of consultation on proposed regulatory rules, from 27 January 2026 entities operating in this space will need to begin complying with new regulations to help better protect customers. Developers, energy services companies (ESCos), landlords, social housing providers, local authorities and other participants in the market will need to be gearing up to ensure full compliance in the new year.

Ofgem kickstarted the first phase of regulation on 1 April by launching a dedicated consumer advocacy and advice services for heat network customers. Ofgem also sought views, via a consultation which closed at the start of this month, on specific wording of the proposed authorisation conditions for heat network suppliers and other entities, as well as how these conditions will be presented in the final draft of the regulations.

The consultation follows two previous consultations that have addressed other obligations, including registration and nomination of a single point of contact for heat networks involving multiple operators, as well as guidance on measures to mitigate the risk and impact of heat networks under financial strain.

Whilst the consultation responses are reviewed, Chang said businesses will need to take stock of both their existing and planned projects and contracts in line with the final conditions: “Whilst the new regime largely leans on that of pre-existing gas and electricity frameworks, the nuances of the heat network landscape need to be carefully considered,” he said.

“Heat providers will need to manage their day-to-day operations in line with the regulations. Whilst the conditions and new framework will provide more certainty in the heat network market, this will not be without the challenges of compliance. Understanding the role each entity has to play will allow for a smoother transition overall.”

Businesses that either operate or supply a heat network or plan to do so before 26 January 2027 will be ‘deemed’ authorised by Ofgem. From 27 January 2027, however, businesses will have to formally register. Notably, if an entity carries out a regulated activity without authorisation, it will be liable to a fine of either £1 million or 10% of annual turnover, whichever is greater.