Heat Network Regulation: How to prepare

With regulation of heat networks imminent, landlords, operators and suppliers need to be ready for regulation. This article looks at the transition to the regulated market, practical steps for existing heat networks and how to future-proof. 

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". 

Regulation on the horizon

The countdown to regulation is on – with the market framework regulations anticipated to come into force on 1 April 2025 and the Authorisation Conditions to be launched in January 2026. Transitional arrangements will apply during an "Initial Period" to support the sector to adapt to a regulated market.

Deemed authorisation

All existing heat network operators and suppliers will be deemed authorised from 1 April 2025. Existing heat networks will need to provide certain information to register with Ofgem but will not be required to make any further application for authorisation.

Deemed authorisation will also apply to any new heat networks or new operation or supply activity that starts during the first part of the Initial Period (between 1 April 2025 – 26 January 2027). As well as registering this deemed activity with Ofgem, regulated entities will also need to apply to Ofgem for authorisation before the end of the Initial Period (January 2028).

Key dates – when will regulation apply?

From 1 April 2025, the Consumer Advocacy bodies (Citizens Advice in England and Wales, Consumer Scotland in Scotland) will provide advice and advocacy services for heat network consumers, and the Energy Ombudsman will help to resolve disputes.

The "Launch Date" for the authorisation conditions is expected to be 27 January 2026. From this date, the standards and obligations that apply to authorised persons (set out under the authorisation conditions) will become active and Ofgem will have powers to take actions against heat network operators and suppliers.

From 27 January 2027, heat network operators and suppliers will need to apply for authorisation before carrying out any new regulated activities. Our article on Ofgem's regulatory oversight looks at the application process in further detail. 

How to prepare – get organised 

Although further detail and consultation is required on certain key proposals, the scope of regulation is clear. All stakeholders involved with existing heat networks should start preparing for regulation: 

• Identify existing heat networks: Review and identify sites where heat, hot water and/or cooling is supplied through a communal network or a district network. These may be larger estate wide systems, or a small number of properties connected to a common heat network.
• Understand your obligations: Assess whether you will be a heat network "operator" or "supplier" under the new regulations. If a service provider or ESCO is already appointed, contractual arrangements should be reviewed to determine if substantial control has been given to a third party. Our article on the scope of regulation looks at the definitions for "operation" and "supply" in more detail and in what circumstances a third party operator/subcontractor will take on the regulatory obligations.
• Technical due diligence: Review the age and efficiency of existing heat network plant and equipment. The Heat Network Technical Assurance Scheme (HNTAS) is due to launch in 2025 and will require heat network to meet a minimum level of performance and reliability. Any existing defects and inefficiencies should be identified in advance so there is time to plan for any necessary works or upgrades.
• Billing and heat supply contracts: Consider existing billing arrangements, particularly landlords where the cost of heat is recovered as part of the rent or service charge. Although further detail is required around Ofgem's "unbundling heat charges" proposals, understanding your existing billing arrangements is vital, particularly where there are multiple billing providers, managing agents and/or energy brokers involved. Supply contracts (or leases/tenancy agreements) will need to be reviewed to determine any gaps in mandatory information that needs to be provided to customers.
• Heat charges: Although further consultation on Ofgem's pricing proposals is expected, existing heat networks should review how customer tariffs are calculated. Consider the term of any existing fuel supply contracts and when these are due for renewal. If landlords have built up existing sinking funds, lease provisions will require careful review to determine how these funds can be used. 
• Vulnerable customers: For heat networks with domestic customers, check whether heat suppliers have existing records of vulnerable customers. With specific requirements around vulnerability, review whether sufficient safeguards are already in place. 
• Data and reporting: Ofgem are proposing to start regular monitoring and reporting from 1 April 2026, with authorised entities required to backdate data to this start date. It will be important to start collating this information and ensuring whether data sharing is set-up under existing or future contracts, as well as considering any potential data protection implications
• Change in law: Contracts need to deal with the change in law, particularly long-term contracts (such as ESCO concessions or longer-term operation and maintenance contracts). For existing contracts, review 'Change in Law' provisions (if any) and take advice on how these will operate – including responsibility for any additional costs. Where contracts are under negotiation, check how the new regulations will apply and consider express wording regarding compliance/authorisation.

Have your say – respond to the consultations

Ofgem and DESNZ are encouraging responses to the consultations to ensure a wide range of stakeholder views are considered. The deadline to respond to the joint consultation on implementing consumer protections and the Ofgem consultation on authorisation and regulatory oversight is 31 January 2025.

Further consultations are expected to be published over the course of this year, including on technical standards, pricing policy, step-in, cost recovery and Ofgem guidance.

With Government ambitions to grow the heat network sector to 20% of the total heat market share by 2050 – this is an important opportunity to help shape the future regulation of heat networks.

Keep in touch

Our Energy and Sustainability team advise a wide range of clients on district and communal heating and cooling projects, including property developers, landlords, local authorities and commercial and industrial off-takers. We advise on the full suite of contractual documents and provide early advice on phasing and procurement, risk management exercises and management of negotiations through to finalisation of contracts.

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.