On 7 November 2024, Ofgem and the Department for Energy Security and Net Zero (DESNZ) launched the latest round of consultations on the new heat network regulations. These focus on implementing consumer protections and the authorisation regime and regulatory proposals.
Developers and landlords should take note of the following key proposals set out in the consultations:
- Regulated activities: 'Operation' and 'Supply' will be regulated activities:
- The 'operator' is the heat network asset owner or entity with significant control over network infrastructure, with the ability to invest and direct repairs and maintenance. This is the entity responsible for the day-to-day operation and maintenance of a heat network and its infrastructure.
- The 'supplier' is the entity with a heat supply contract (or equivalent) with customers for the supply of heating, cooling or hot water.
In most cases, the regulated 'operator' and 'supplier' will be the building owner (unless an ESCO has been appointed to supply customers directly and has significant control over the heat network assets).
- Authorisations: Existing heat network 'operators' and 'suppliers' will be deemed authorised from 1 April 2025, with an initial period to allow regulated entities to engage with Ofgem. From January 2027, it will be a criminal offence to operate or supply on a heat network without authorisation from Ofgem.
- Step-in Measures: The consultations require heat networks to have a continuity plan in place, with separate step-in contractual arrangements with another authorised entity. This is a new concept for the market, and it is not clear what form these step-in arrangements should take. The intention is that this back-up entity will take over in the event of heat network failure. Ofgem will have powers to nominate a new authorised entity to take over a heat network and implement a Special Administration Scheme to ensure continuity of supply.
- Fair Pricing: Fair and proportionate prices are required for the end-consumer. Although further consultation on price protection is expected, DESNZ proposes that consumers are protected from recovery of significant capital costs in the development phase and improper use of sinking funds, to ensure consumers are not paying for improvements that do not benefit them.
- Billing and Transparency: Transparency on pricing and requirements to provide certain information on customer bills will be required (including how the network contributes to net zero targets, fuel source and carbon emissions and efficiency ratings, if available). Back-billing will be restricted to 12 months, with an exemption for an initial transitional period for heat networks that currently that rely on 18 month service charge recovery, to move across to 12 months over time.
- Vulnerability: There are additional protections for vulnerable consumers (including safeguards around prepayment meter installation and protection for disconnection for non-payment in certain circumstances).
- Guaranteed Performance standards: Regulated entities must pay compensation payments to consumers for failing to meet certain guaranteed standards, although it is proposed that this will not apply to any "not-for-profit" heat networks.
- Service Charge and Heat: DESNZ and Ofgem are seeking views on unbundling heat supply from other service charges and requiring individual heat consumption to be separated from service charges, rent and maintenance charges. The aim is to protect customers against evictions and forfeiture for non-payment of heat charges under Landlord and Tenant legislation. This will require changes to existing housing legislation in order to align with Ofgem's proposals and it is not clear how this will apply to existing arrangements.
- Market Segmentation: Due to the broad range of heat network suppliers and operators and scale of heat networks, Ofgem are proposing to categorise heat networks into large, small and 'not-for-profit' networks, with the intention that regulatory outcomes/conditions are proportionate depending on the regulated entity.
- Social Housing Sector: The consumer protection consultation proposes certain exemptions for the social housing sector, including around financial monitoring and step-in requirements, as it is proposed these issues are covered by existing regulatory arrangements.
- Monitoring and Compliance: Ofgem will require regular submission of data from regulated entities. That includes quarterly reporting on a number of metrics (including on pricing and quality of service). Ofgem will consider introducing fixed penalties for non-compliance and has the ability to audit regulated entities. Annual reporting on the financial standing of regulated entities will also be required.
Key dates
- 1 April 2025: All existing heat network operators and suppliers will be deemed to be authorised. Consumer Advocacy and Advice functions in force.
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27 January 2026: Regulatory regime and main authorisation conditions come into force.
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26 January 2027: Deadline for deemed authorised entities to register with Ofgem. More complex regulatory activities to come into force (pricing and standards of performance)
Further consultations and responses on technical standards, heat zoning and pricing are expected to be published over the next year.
We will be publishing a series of articles looking at specific topics in more detail. If you are concerned about any of the issues raised under the consultations, please contact us and we can explore in further detail with you. The deadline to respond is 31 January 2025.
