Heat networks are not a recent phenomenon – the first one in the UK opened in Pimlico in the 1950s, and they have increasingly become a feature of new developments. But they now form a significant element of the UK Government’s
strategy to decarbonise heating particularly for high-density urban areas. The Climate Change Committee estimates that around 18% of UK heat could come from heat networks by 2050.
Heat networks have their own specific challenges, and lack the regulatory framework given to regulated utilities. This places greater emphasis on contractual protections, and connections to existing networks need careful due diligence. Plus, the regulatory landscape is changing. Current and proposed changes to legislation and building regulations to drive the transition to net zero will affect heat networks, both existing and new.
Legacy heat networks, some of which have been in operation for decades, will need a decarbonisation strategy as the market shifts away from gas. The changes to building regulations also make it difficult for new developments to connect to existing heat networks unless they are decarbonised.
The first step for developers is to get comfortable with treating heat like other regulated utilities. “If the heat generation plant isn’t located on your site, you are reliant on the contractual arrangements to ensure heat keeps flowing. And that can be a difficult step for some,” says Chris Paul, Partner.
Most developers are familiar with concession arrangements, where an energy services company (ESCO) is appointed on an exclusive basis to adopt the energy plant and provide heat. These were traditionally 25 year contracts, but the financial models supporting low carbon heating are driving longer concessions. Some ESCO models are also aligning with the regulated sector, with a push towards standardised contracts, supply terms and transfer of ownership.
Currently, ESCOs don’t have any obligation to decarbonise, but that will likely change to meet the Government’s net zero carbon targets. Pressure will also come from customers and developers.
The draft Energy Bill includes provisions for the creation and regulation of designated heat network zones. This includes powers to designate heat network zones and require buildings to be connected. There are some areas where connection to heat networks are already a planning requirement. Monkerton, on the outskirts of Exeter, has a low-carbon heat network run by E.ON, brokered by Devon County Council, East Devon District Council and Exeter City Council.
"If you buy a plot of land within that development area,
you have to connect to the heat network” says Megan Coulton, Senior Associate.
The area around the Olympic Park in Stratford East London is similar. Heat zoning is a key step to allow the investment to create low-carbon heat networks. It is a critical step in the transition of the heat market beyond individual developments.
Although the Energy Bill proposes a regulatory framework for heat networks, there is currently no legislative framework that governs the supply of heat.
Customers get some protection through the Heat Network (Metering and Billing) Regulations 2014 and the voluntary Heat Trust Scheme. However, customers do not currently benefit from the consumer protection available for regulated utilities such as gas, electricity and water.
So, it is important to negotiate controls in the contracts, and do due diligence on the ESCO entity.
“You need to be asking questions such as: How will the tariff structure impact plot sales, what are the terms of supply, and how are customers protected?” says Coulton.
And what happens if the heat isn’t supplied? “Is there sufficient resilience in the system, and have you allowed space for temporary plant? Does the ESCO
have a business continuity plan with clear response times, and is it a contractual document? It’s part of risk management and minimising the risk of customers not getting heat,” says Paul.
“There is a new licensing regime coming, and if you are supplying heat, whether
as an ESCO or a landlord, you will have to satisfy OFGEM to become a licenced supplier,” says Paul.
Exactly what OFGEM will require is still to be detailed. Based on the draft Energy Bill, it is likely that the regulations will include provision for fair prices and transparent information for consumers, a high quality of service and minimum technical standards and carbon limits.
“Setting up the minimum standards, as outlined by the Heat Trust, ahead of changes to legislation, is certainly an important first step,” says Coulton.
Regulatory changes will also impact tariff structures. Currently, no one ESCO prices in the same way. There will generally be a fixed charge and a variable charge, but what is included in each differs and impacts the bill.
“There will be a requirement to disclose the detail of the tariffs and how that has been calculated so people can understand what they are paying for. That’s particularly important where the standing charge might include a capital
contribution,” says Paul
For existing heat networks, it is particularly important to consider how contracts will deal with a change in law. Communicating to customers what is being done is also crucial.
“It needs to be explained properly, particularly if they are
going to see an increase in tariffs so there are no surprises,”
says Rubianka Winspear, Senior Associate.
Technological advances are creating more opportunities for low-carbon heat networks, and systems are getting increasingly complex. Schemes will require
more electrical capacity to deal with heat pumps, and groundwater and river based systems require careful advice on licencing and associated operating risks. Still, whether setting one up or connecting to an existing network, it’s important to keep an eye on regulatory and legislative changes and allow sufficient time for appropriate due diligence.
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