The Energy Act 2023 appointed Ofgem as regulator for heat networks and introduced the framework for regulation of the heat sector.
The Act gives powers to introduce consumer protection rules and mandatory technical standards, to designate heat zones and to require certain buildings within these zones to connect to heat networks. Although the regulatory landscape is becoming clearer, we still await major elements of secondary legislation.
Consumer protection
The government published its response to the Consumer Protection Consultation in April 2024. This sets out the requirements for heat networks with domestic customers, which are expected to go live in spring 2025.
- Authorised activities: Following queries raised around which entities will be designated as “heat network operator” and “heat network supplier”, the definitions are to be adjusted. For a heat network operator, emphasis will be put on the degree of control that an entity has over the heat network assets, investment in the network and decision-making on repair/maintenance. For heat network suppliers, the authorised entity must have significant influence over consumer outcomes. The authorisation process is expected to be addressed later this year.
- Pricing regulation: The government confirmed that there is no intention to introduce a price cap in the short term, although it wants to retain this right for Ofgem to exercise in future if required (particularly if there is risk to customers). Further consultation on fair pricing will examine the government’s expectations around disproportionate pricing, reasonable rates of return and excessive profits, to ensure that operators and suppliers adhere to the fair objectives and guidance.
- Price transparency: The government’s view is that quarterly reporting on pricing data is necessary to ensure that the policy captures most of the price changes that occur in the market. Further consultation will consider proposals for price transparency and benchmarking.
- Guaranteed standards: Further consultation will address how guaranteed standards of performance and appropriate compensation levels will be applied across different market segments, taking into account the heat network size, age and ownership.
- Landlord and tenant legislation: Existing landlord-run/operated schemes will need to consider the interface with landlord and tenant legislation – especially the need to consult for long-term works/services arrangement and implication of heat costs being recovered as a service charge. Further consultation will review whether there should be exemptions to requirements under the Landlord and Tenant Act 1985.
Heat network zoning
The government launched a separate consultation on the approach to heat network zoning, which closed in February 2024. Zoning is expected to transform the development of new heat networks, with the ability to designate zones and require certain types of buildings and heat sources to connect to low-carbon heat networks (with limited exceptions).
Utilising heat from “recoverable” heat sources (such as data centres, energy-from-waste plants, sewage works or other industrial processes) is flagged as a key component for low-carbon heat networks. Zone coordinators will investigate the potential for recovering heat from local sources, and zone developers are expected to negotiate with the heat source owner to agree the terms of connection and access to heat. If negotiations fail, then zone coordinators will have the power to require heat sources to connect or provide access to heat sources.
Heat source owners will be interested in the mention of standard national guidance on acceptable or target prices for heat offtakes, and the extent to which heat source owners can appeal a decision requiring them to connect or give access to the heat source. More detail is awaited.
Heat Network Technical Assurance Scheme
The Department for Energy Security and Net Zero has been working to develop technical requirements for heat networks (such as pipe insulation, water flow temperatures, etc) which will be mandated under regulation as a technical standards code.
To help heat network operators demonstrate compliance, DESNZ and its technical adviser (Fairheat) have developed the Heat Network Technical Assurance Scheme – an assessment and certification scheme to underpin the regulations and ensure a minimum level of performance and reliability.
Under HNTAS, heat networks will be required to pass assessments to demonstrate that they have achieved the mandated technical standards. CP1 (2020), published by the Chartered Institution of Building Services Engineers, is the recognised code of practice for heat networks in the UK and will be the basis for the minimum regulatory standards used within HNTAS. Following a partnership between CIBSE and DESNZ, it is now free to access here.
New government, same approach?
The new government has already set out a packed legislative programme for the next 12 months, with an ambitious 40 bills announced during the King’s Speech on 17 July 2024. While there has been no specific update on heat networks, there is no indication that the government will abandon the current policy or change approach.
From spring 2025, the initial tranche of consumer protection requirements are expected to be in force, with a fully operational regulatory framework brought in during the course of 2025–26.
Regulation is coming, and owners and landlords should take the opportunity to consider how their heat arrangements are currently structured. That includes assessing how many sites might fall within the scope of the regulations, what regulatory risks should be identified and managed, the extent to which obligations can be flowed down to service providers and the interpretation of “change in law” provisions in existing contracts. New developments need to anticipate the regulatory requirements and ensure there is clarity on the responsibility for compliance.
Chris Paul is a partner and Hannah Giebus is an associate in the energy and sustainability team at Trowers & Hamlins LLP
Photo © Thomas Breher/Pixabay
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