Protecting and supporting vulnerable consumers is a primary objective for Ofgem – but with a much smaller customer bases than gas and electricity markets, how will this impact heat suppliers?
This article is part of our Heat Network Regulation series which looks at key issues under the latest round of consultations published by Ofgem and the Department for Energy Security and Net Zero on 7 November 2024. If you have any involvement with a heat network, check how regulation will apply to you and whether you will be considered a heat network "operator" or "supplier".
Vulnerability
Vulnerability protections are a priority for Government, particularly with the recent rise in households struggling to pay their bills. The Standards of Conduct will contain a broad vulnerability principle and all authorised heat network suppliers will be required to meet obligations to protect and support vulnerable domestic consumers.
Ofgem are proposing a wide definition for who is considered "vulnerable", taken from existing gas and electricity markets. Targeted protections for vulnerable consumers will be introduced through authorisation conditions, including obligations to provide additional services for consumers who require support or have specific needs.
Priority Services Register (PSR)
Ofgem will require heat network suppliers to establish and maintain a Priority Services Register (PSR), an existing requirement for other utilities. The aim of the PSR is to allow vulnerable consumers to effectively communicate with their supplier and prepare for potential outages. Services offered to registered vulnerable consumers are likely to include priority support in emergencies, advance notice of outages, language support and accessible communication.
Consumers will need to self-refer to join the register, but there will be an obligation on heat networks to promote the PSR to domestic consumers. This may place an administrative burden on smaller heat networks, particularly for landlords in the social housing sector who may already have a system in place to identify vulnerable customers.
Consumers in payment difficulty
Heat network suppliers will have an obligation to proactively offer repayment plans for consumers struggling to pay their bills, as well as considering alternative payment methods and providing advice on how to reduce energy usage.
This is likely to be challenging for smaller heat networks, particularly those operated on a "not-for-profit" basis or as a cost pass-through, who may not be able to absorb the bad debt risk.
Dealing with non-payment – disconnection ban
Non-payment of bills and the build-up of bad debt is a challenge for suppliers across all utility markets. However, with much smaller numbers of customers (per network and in total), this is a significant issue for heat networks operators and suppliers.
The consultation proposes a ban on disconnecting customers for non-payment in a wide set of circumstances, including during winter where occupants are aged under 2 or over 75, disabled, terminally ill or chronically sick or at any time where a medical condition means the occupant requires heating/hot water throughout the year.
Disconnection for non-payment is a last resort measure – but without this option available, smaller heat suppliers (such as landlords or a ManCo) may struggle to finance a shortfall.
Self-disconnection – when to get involved
Heat suppliers will also be required to make efforts to identify domestic consumers that are disconnecting themselves to determine whether they are in vulnerable circumstances, with obligations to offer emergency credit and friendly-hours credit.
The ability to identify customers that are self-disconnecting will largely depend on the meter functionality. Where it is technically unfeasible to do so, heat suppliers will need to ensure customers can easily contact them so a range of debt-management methods can be offered.
Pre-payment meters
Where properly managed, pre-payment meters (PPMs) can be a useful debt-management tool for heat networks – with certain models allowing in-home displays to show customers how much heat is being used, how much this costs, and how much available credit is left. Smart functions can also allow for remote monitoring of usage, settings to prevent disconnection, and remote switching between pre-payment and credit billing, without having to force entry into homes.
However, installing PPMs to manage non-payment often has negative connotations – particularly following investigations into gas and electricity suppliers that were using powers of entry to forcibly install them in vulnerable customers' homes.
Ofgem are proposing to replicate authorisation conditions from gas and electricity markets that restrict the ability to install a PPM for non-payment purposes in a range of circumstances. This goes beyond the restrictions for disconnection to also include occupants with serious mental or development disabilities, households with children under the age of 5 or pregnancy (unless a vulnerability assessment has been carried out to determine there would be no significant impact on wellbeing).
Concerns have been raised about the ability of some networks to carry out these vulnerability assessments, particularly for smaller landlords or ManCos. Further guidance is expected to be published to help heat network suppliers navigate these responsibilities.
Powers of Entry to install PPMs will be temporary and only available as an absolute last resort. With further consultation on technical requirements likely to specify metering installations, the intention is that these powers of entry will be phased out as meters that allow for remote switching to prepayment mode are rolled out.
Managing unrecoverable debt – what can options are left?
Large electricity and gas companies can spread the cost of bad debt across thousands of customers – whereas DESNZ statistics show that 76% of heat network suppliers supply fewer than 100 consumers. Smaller networks will not be able to spread the cost of one consumer's debt across the other consumers without a significant impact on charges.
In recognition of this, Ofgem are seeking views on whether the burden on smaller networks (or networks with higher numbers of vulnerable consumers) would be reduced by spreading debt across the wider heat network market. It is not clear what form this would take and how this would be financed.
Vulnerable sector?
Customer scale is not the only issue for the heat sector. Ofgem estimates around two thirds of existing heat networks are owned or operated within the social housing sector, that generally has higher numbers of vulnerable consumers.
The Government's 2022 Heat Network Consumer Survey (HNCOS) found that heat networks have a disproportionately elderly consumer base (31% of consumers aged 65 or over compared with 18.6% of the general population within this age category) and heat network consumers are more likely to have additional needs such as long-term illness, caring responsibilities and height or sight disabilities (31% compared with 28% of gas and electricity consumers).
Although vulnerable consumers need protection, this puts additional pressure on heat networks compared with other regulated utilities.
Communication is key
Particularly for landlord-run schemes, where there may be different service providers responsible for responding to outages and notifying customers or offering payment plans and dealing with disconnection, it will be important to ensure there are joined up lines of communication.
Regulatory responsibility to manage this process will fall to the landlord or building owner as the authorised "supplier" unless a third party has been appointed to enter into supply contracts with customers (with control over the contract terms). See our article on scope of regulation to determine whether you are a "supplier".
This article is part of our Heat Network Regulation series. Read our overview of the proposals under the latest round of consultations.
If you are concerned about any of the issues raised under the consultations or how regulation may impact you, please get in touch with a member of our Energy and Sustainability team.
