Regulation of Heat Networks

Mark Northey discusses the need for increased regulation around localised heat networks.

Heat networks are used to supply heat to properties utilising centralised generation of heat as opposed to individual boilers. This heat is then distributed through a network of pipes with heat exchangers at individual properties controlling the input temperature. Heat, often steam at high temperatures, is (like gas and electricity) capable of causing harm to individuals if they come into contact with it. There is a more limited risk of damage to property as steam is not likely to cause explosions in the same way as gas can. Separately, since properties have no boiler, there is a need to ensure continuity of supply. In effect, heat networks are utilities.

Currently there is no overarching statutory regulation of heat networks in the UK as there is, for instance, in respect of electricity or gas supply. Certain standards and the Common Law do, of course, apply and indeed some regulations were placed in 2014 [1] on the metering and billing of heat networks. Original plans had been for the Energy Bill to legislate for the further regulation of heat networks by the appointment of Ofgem (NIAUR in Northern Ireland) as the regulator to ensure fair pricing and security of supply for consumers and for the enabling of local heat network zones in which buildings would be compelled or encouraged to connect to a heat network.

Looking forward, the Energy Bill may proceed as originally intended or it may not. Equally, even if the Energy Bill does not proceed as originally intended, those parts related to the creation of a regulator and the establishment of heat networks may.

Much of the development of heat networks to date has occurred due to the requirements placed upon developers to install heat networks as part of the conditions for approval of the development. The Energy Bill assumes a continued involvement by local government in heat zones.

There are of course arguments that local authorities could continue to develop heat networks without further regulation. Some like to argue that regulation is not helpful and leads to increased costs. Depending upon the efficiency or otherwise of the regulator there can of course be issues, but the outcome and principles based approach increasingly used in the UK has been generally successful, whatever some may claim. That there are costs of regulation is not disputed. The intent is that overall the benefits outweigh the costs.

Conceptually, the aim of regulation is to benefit and protect people, businesses and the environment and to support economic growth. [2] In the heat sector this could mean: that standards are set leading to lower costs of both installation and the supply of heat due to standardisation; that pricing can be controlled in some manner (the regulated asset base approach already used in the water, gas and electrical networks would be a candidate as they are in essence equivalent to a heat network); that investment can be required and conversely that inefficiencies can be removed; that the consumer and industry is protected from both physical injury and financial hardship; that schemes are more easily financed; that operators are licenced and subject to review; and that the staff of a regulator will remove some of the current burden placed upon local authority staff and budgets.   

Currently some of the issues that apply to gas, water and electrical networks have not been a huge issue in the heat sector as the former are all large scale natural monopolies operating either nationally (gas network) or at least over large areas of the country (water networks). By contrast, heat networks are fairly small scale in area covering a development or part of a town or city. As more heat networks are installed, the issue that is most likely to arise is a monopoly of ownership as opposed to multiple interconnected heat networks (in effect one large heat network).

Given the likelihood of increasing issues with the development and operation of heat networks, the desire for more of them and the general advantages of utility regulation provided it is properly handled, there are considerable potential advantages in heat regulation.

Mark Northey is a Partner in Ashfords’ Commercial Team.

[1] Heat Networks (Metering and Billing) Regulations 2014 (amended 2015 and 2020)

[2] National Audit Office “A Short Guide to Regulation”