With market regulation looming, what does this mean for new and existing heat networks and how can local authorities and landlords prepare? Hannah Giebus explains.
The Government's response to the Heat Networks: Building A Market Framework consultation was published in December 2021, confirming that Ofgem will be appointed as market regulator to protect consumers, promote technical standards and help drive forward decarbonisation.
Under the proposed regulatory framework, all entities supplying heat or operating heat networks will need to be authorised by Ofgem and meet minimum consumer protection standards and technical requirements.
Who should take note?
Landlords, developers and local authorities involved with existing heat networks (or those considering developing or connecting to new heat networks) need to be aware of the regulations. The key question is: who will be responsible for meeting the requirements?
There are a variety of commercial models for the ownership and operation of heat networks. The Government's proposed authorisation route will allow Ofgem some flexibility to deal with this - making the activity of supplying customers and operating a heat network subject to regulation. This means multiple entities may require authorisation during the various stages of development (eg during the design, build and operational phases). Early consideration needs to be given to identifying which entities require authorisation, along with the associated costs and obligations.
The original consultation suggested that the ultimate asset owner would retain overall responsibility for compliance, but this remains unclear. The Government are giving this concept further consideration, so landlords in this position will need to watch this space.
As heat networks are currently unregulated, there are no specific protections for customers, unlike those afforded to electricity and gas consumers. Landlords and developers will be required to provide prospective residents with a minimum level of information and guidance on the heat arrangements prior to any sale or letting, and continue to provide easily accessible information in relation to customers' heat supply and billing. It is not clear that separate customer supply agreements will be required in all circumstances, but landlords should expect to go beyond existing service charge provisions.
Ofgem are to be given powers to enforce price transparency and take action where prices are disproportionately high for customers. Although there are currently no plans to introduce a price cap, it is intended that the Secretary of State will have powers to introduce pricing regulation in future, if required. There will also be a special administration regime to protect consumers where their supplier collapses. This will provide similar 'supplier of last resort' protections as for other regulated utilities.
Rights and powers for developers
Step-in arrangements are particularly important for heat networks (as opposed to other utilities) to avoid customers being stranded without heating. The Government intends to introduce broad powers that can cover a range of different solutions, which could include requiring commercial contracts to set out which entity is accountable for maintaining continuity of supply in a worst-case scenario.
Developers will also be able to apply to Ofgem for an optional licence to become 'statutory undertakers'. This would allow the licensed entities to exercise certain rights and powers in order to facilitate their commercial operations, similar to rights granted to utilities companies, including compulsory access rights (easements), street works permits, the right to install pipes under the roadway, permitted development rights and linear obstacles rights.
What can you do to prepare?
Although further detail is required on many key points, there is still some pre-emptive action that can be taken:
- Heat Trust: The Government has recommended that the Heat Trust scheme standards will pave the way for regulated consumer protection. To the extent not already implemented, landlords should ensure that ESCOs operate to meet Heat Trust standards. It is worth examining customer supply agreements to make sure residents are getting the benefit of the highest standards in consumer protection.
- Technical standards: The consultation indicated that future technical standards will be based on the ADE-CIBSE Code of Practice. An updated edition of the Heat Networks Code of Practice was published in January 2021, which should be adopted for use where relevant. With ever changing technology, it is important to keep up with moving technical standards.
- Data and reporting: Particularly in relation to decarbonisation targets, it will be important for regulated entities to be able collect data and report on the performance of the network (eg providing customers with the carbon factor of heat supplied). It will be important to examine whether data sharing is included under existing or future contracts, as well as considering any potential data protection implications.
- Change in law: All contracts should consider the potential for a change in law, particularly long-term contracts (such as ESCO concession agreements) which are likely to be impacted by incoming regulation during the term. The ability to negotiate the impact and cost consequences of a Change in Law will be important for landlords, especially if there is any indication that additional costs may need to be passed on to customers. For example, Ofgem will have authority to set benchmarking methodologies, which are likely to change as heat networks increasingly decarbonise and could require changes to customer supply agreements.
- Decarbonisation: Heat networks are a key element of the Government's Road to Net Zero, with a commitment of £338 million announced under the Heat and Buildings Strategy towards its Heat Network Transformation Programme. The Government has decided to delay introducing any legislation that mandates the decarbonisation of heat networks until the early 2030s. The trajectory of change is clear however, and both existing and future schemes should have suitable decarbonisation strategies in place. This includes both the primary energy source and any temporary or back-up heating technology.
While we await full details of the proposed regulations, there are some key points in the consultation response that will assist stakeholders to prepare for the transition to a regulated market. Well advised landlords should consider how to futureproof contracts at this stage.