Momentum for Heat Network Roll Out Gathers Pace

In December 2021, the Government published two new documents critical to the future development of heat networks. These new documents show HMG is taking heat networks exceptionally seriously. There is massive room for growth in this sector with over £16bn of capital investment needed in Heat Networks to reach Net Zero. HMG funds are available to support growth in this area and now is arguably the time for significant public and private sector investment.

The two documents published in December 2021 were:

• The first was a consultation response to its “Building a Market Framework Consultation”
• The second was a new consultation (which closes in February 2022)

These consultations support heat network zoning which should create natural monopolies to enable heat network growth.

Ofgem will be appointed as the industry regulator for heat networks. The Energy Ombudsman and Citizens Advice will also have a role for consumers.

Regulation will protect domestic customers and microbusinesses (as is currently the case for Heat Trust Standards). HMG are considering whether other small and medium-sized businesses should be protected and whether additional protections are required as a result of zoning. The extent of protections are as yet unclear but will include protections on pricing, transparency and quality of service. Critically (and helpfully) HMG has stated that while it will be imposing transparency requirements on heat network pricing arrangements it does not propose price caps – which seems sensible given the nature of the market. Service standards will be outcome-based to take account of the differences between heat networks.

The form of regulation will be a “general authorisation” – this means all entities supplying heat or operating networks will need to notify Ofgem and conform to certain standards. Ofgem will have enforcement powers which will include financial penalties and (ultimately) removing authorisations.

HMG are also actively considering step-in mechanisms (akin to special administration and supplier of last resort regimes seen in other regulated sectors).

HMG also appears to be contemplating the introduction of a licensing regime (which appears to be optional) but which would provide heat suppliers with powers akin to statutory undertakers such as access rights, permitted development rights and street works permits.

What’s Next

HMG has stated that it will continue to work with BEIS, Ofgem and others to develop regulation. This is effectively the critical phase. Lots of what government is proposing is positive and is the logical counterpart to zoning – namely the creation of monopolies to foster investment in heat networks must inherently be twinned with regulation to protect customers. What is proposed is the use of a tried and tested industry regulator and sensible baseline standards to protect consumers. However, HMG must be careful not to regulate their nascent market away. In resisting price capping it appears HMG understands this risk but the devil will be in the detail. Heat networks are a developing sector and must be encouraged and supported to grow. Stifling development with overly burdensome regulation could occur all too easily in a sector where profit margins are invariably narrow.

For potential public and private investors, these consultations (as well as the zoning consultation and availability of government funds) are further evidence that now could be the optimal time for heat network rollout.

Steve Gummer is a partner at Sharpe Pritchard LLP.

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