Sustainable Business Series 2022: Impending regulation of heat networks

Freeths LLP

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Many homes and businesses around the UK are connected to heat networks, where heat is generated in a central energy centre and supplied to multiple properties or developments through a network of underground pipes. Although they only represent 2% of the UK’s current heat supply, Government is looking to increase this to 18% by 2050 in order to meet its carbon reduction targets.

Unlike the electricity and gas markets, heat supply is currently unregulated, meaning that anyone can be a supplier and no price caps apply to heat charges.  The lack of specific consumer protection and the fact that most customers are tied into heat supply contracts for long periods (usually 25 years), has forced Government to introduce regulation.

The 2022 Energy Bill was laid before Parliament in July this year and, once passed, will entitle the Secretary of State to introduce legal requirements.  We don’t have the detail of the regulation yet, although proposals have been set out in the Heat Network Market Framework consultations over the last few years.  Government is hoping for implementation in 2024.

So, what will change?

• Heat network operators and heat suppliers will have to be registered with Ofgem under an authorisation scheme, and adhere to a code of practice;
• Ofgem will be appointed as regulator with the power to enforce compliance with the code, including financial penalties, consumer redress and revocation of authorisations;
• Consumer protection obligations will require transparency of pricing information, with Ofgem being entitled to investigate expensive networks where there is significant customer detriment;
• The generating plant will have to decarbonise, moving away from natural gas towards lower carbon options, such as heat pumps, biomass or industrial heat recovery, interfacing with the emissions permitting scheme;
• Technical standards for design and operation will become mandatory under a quality assurance scheme; and
• Contracts will have to govern processes for continuity of heat supply in the event of failures, with an innovative proposal for a supplier of last resort scheme where suppliers face administration.

How will it impact my business?

• Security and cost of gas supplies are a significant concern for almost all businesses. With gas being phased out over the next few decades, low carbon heat networks will become more commonplace.  You may therefore be required to install or connect into one via planning conditions when constructing or adapting new premises.
• Businesses connected to existing networks can expect scrutiny of contracts already in place and potential re-negotiation as suppliers and operators feel their way through their new obligations.
• Businesses with high levels of waste heat, such as manufacturers, waste incinerators and data centres, should consider revenue opportunities from heat recovery and supply via district networks. Regulation and quality assurance are intended to provide investor confidence in the heat supply market.
• Although the consumer protection elements of the proposed regulation will apply to residents and microbusinesses, some elements, such as technical standards and decarbonisation, will apply regardless of the size of the network or its customer type.

Rhianna Wilsher
Director and clean energy lawyer, Freeths LLP

Kirstin Roberts (pictured)
Director, Waste and Sustainability, Freeths LLP