It is a challenging period for the domestic heat market. The impact of the government’s net zero 2050 target is already clear, with initial steps towards the Future Homes Standard pushing developers to low-carbon heat sources (such as heat pumps and low-carbon heat networks).
Alongside those practical changes, consultation on the Heat Network Regulations is expected to start in spring. These changes will have a significant impact on the heat market.
Future Homes Standard
The Future Homes Standard, which is due in 2025, will provide a step change in the way new homes are built. The expectation is that new homes built to the 2025 standard will have 75-80% less carbon emissions than under the current regulations. That means very high fabric standards and a requirement for low-carbon heating systems.
The government sees heat networks playing a significant role in the decarbonisation of buildings. The overview of the Future Homes Standard (included in the recent consultation on the interim changes to Part L and Part F) suggests that heat networks are able to decarbonise more easily by adding new technology with minimal disruption to individual households. They also suggest that heat networks have the ability to exploit larger scale, renewable and recovered heat sources that can’t be accessed at individual building level.
That may be true for new-build schemes, but there are challenges for existing heat networks to transition to a low-carbon future. Unless plant rooms include suitable space for low-carbon heat sources, there may be practical issues to adding new plant in the future. Systems designed to work with gas boilers and combined heat and power (CHP) systems may need significant modification to operate as lower-temperature heat networks.
Aside from the technical challenges, changes in the law requiring reduced emissions could have significant implications for existing energy service company (ESCO) concessions – including the cost of new capital investment, a reduction in planned revenues and questions about viability of connecting later phases to existing networks.
Move away from CHP?
Until recently, gas boilers and CHP systems have been the technology of choice for new-build schemes. That was driven by the application of the government’s Standard Assessment Procedure for Energy Rating of Dwellings, 2012 edition (SAP 2012), which allowed systems displacing grid electricity to report significant carbon savings. But things are already changing, recognising the progress made in decarbonising the electricity grid.
The current consultation on changes to Part L of the Building Regulations proposes a move away from targets based on CO2 emissions, with primary energy (ie energy that has not undergone a conversion or transformation process) becoming an additional metric. It also proposes adoption of the government’s most recent assessment procedure, SAP 10.1. This has implications for the design and specification of heat networks on new-build schemes. Heat networks which are designed with electricity as the primary energy source (using established technology such as heat pumps) will be able to demonstrate lower emissions than gas-fired CHP systems. Switched-on developers are already adapting – revising calculations and looking to future-proof by designing schemes with heat pumps (even for fully consented schemes). While the legislation pends, the route to net zero seems clearer.
Heat Network Regulations
In July 2018, the Competition and Markets Authority (CMA) published the final report of its Heat Networks Market Study. This identified a number of options for remedial action, including introducing a regulatory regime, giving heat customers the same protection as customers in the gas and electricity sectors, developing mandatory technical standards (and an accreditation regime for installers/operators), developing pricing rules and guidance and ensuring greater transparency of information for consumers.
Good things come to those who wait. Some 18 months on from the CMA publication, the government is expected to commence consultation on the Heat Network Regulations in spring. Given that the Committee on Climate Change predicts 18% of the UK’s heat needs to come from heat networks by 2050 if it is to meet carbon targets cost-effectively, many would argue regulation of the sector is long overdue.
The Heat Networks Market Study gives a good indication of the direction of travel. In the first place, expect a clear focus on consumer protection. That is likely to include a mandatory consumer protection scheme. The transition is likely to be easier for suppliers already signed up to voluntary consumer protection schemes like the Heat Trust. We’d also expect mandatory requirements for heat bills, presentation of tariffs and disclosure of information to prospective tenants and purchasers.
Given the concerns about quality and reliability, it is a good bet that mandatory technical standards will apply for construction and operation of heat networks (perhaps with some limits for smaller schemes). That is likely to be backed by an accreditation or licensing scheme for installers and operators. It is unclear how that would apply to existing networks, but it is likely that established ESCOs and operators will need to obtain accreditation to continue to operate. We’d expect technical standards to reflect net zero requirements, with obligations to improve the emissions of existing networks over time.
Regulation for heat networks will effectively push enforcement to the regulator. It is unclear if developers or landlords will continue to have a role in enforcing contractual obligations under concession arrangements. Once a regulatory regime is established, issues such as poor heat supply, changes to tariffs and replacement of failing operators are likely to fall to the regulator. The key question is how the Heat Network Regulations, and other law changes focused on achieving net zero, will impact existing heat networks and negotiated ESCO concession deals.
Perhaps a good time to check those contractual terms.
Chris Paul is partner, energy and sustainability group, at Trowers & Hamlins LLP
