This article was first published by EG – @EGPropertyNews – on 8 March: It is reproduced with their permission.

The UK must deliver a mix of new, low-carbon heating solutions if it is to meet its legally binding targets to slash greenhouse gas emissions. As minister for business, energy and corporate responsibility Lord Callanan puts it: "Heat networks will play a vital role in making net zero a reality."

In July 2018, however, heat networks were calculated in the CMA's Heat networks market study – final report to provide just 2% of UK buildings' heat demand. The independent Committee on Climate Change has estimated that to meet carbon targets, around 18% of the UK’s heat needs to come from heat networks by 2050. And, with an estimated 50% of buildings in the UK located in areas of suitable density for heat networks, the market is primed to expand.

What are heat networks?

Heat networks supply heat from a central source to nearby buildings (domestic and non-domestic), via a network of insulated pipes carrying hot water.

They can use a variety of technologies as a heat source, including combined heat and power systems which simultaneously generate heat and power in a single process, biomass and biogas fuelled boilers, energy from waste facilities and heat pumps.

Moving forward, lower carbon heat sources are likely to be preferred and increasingly innovative solutions are being promoted. For example, in London the revolutionary Bunhill 2 Energy Centre, the first of its kind in the world, uses waste heat from the London Underground to warm homes, two leisure centres and a school in Islington. Other innovative low carbon heat sources being explored include utilising mine water, from existing mine water treatment schemes (Seaham Garden Village), and extracting waste heat via a heat pump from sewers (Worthing Heat Network).

Heat networks are flexible. They vary in size and serve various combinations of building types. They can be expanded over time, with new heat demands added and energy sources upgraded or added to (either to cope with increased heat demand or to better align with climate change targets).

Who is the supplier?

Supplying heat to customers connected to a heat network can be the responsibility of a range of organisations, including dedicated heat network companies (known as ESCOs), property developers, housing associations, local authorities and management companies. 

Identifying who the supplier is for a particular heat network is important as the customer will want confidence in its security of supply. Confidence can be derived from not just the contractual commitments its supplier is willing to be bound by, but from understanding how robust that entity is, as well as how qualified or experienced it is to provide a sufficient standard of service. 

Is there a competition of supply?

Heat networks are monopolised, which means that one entity is the supplier for all buildings connected to a single heat network. When connecting to a heat network, the customer has no choice in who they buy their heat from and they cannot switch supplier.

This means that while continued poor service standards might trigger a termination right for a customer under its terms of supply, the customer will need to consider whether practically it has access to an alternative source of heat.

Is there a supplier of last resort?

With the supply of gas or electricity, where a supplier has failed and its supply licence has been revoked, Ofgem can appoint any gas or electricity provider to inherit the failed supplier’s customers as the "supplier of last resort". The aim is to provide seamless continuity of service for customers.

In the heat networks market there is no such system in place (although incoming regulation, discussed below, could change this). Currently in cases where a heat supplier becomes insolvent or is significantly and persistently failing to perform its obligations, what happens next is left to whatever contractual arrangements are in place for a particular scheme. There is no standardisation of how this risk is allocated and so it is always important that the arrangements proposed for a "supplier of last resort" are considered when connecting to a heat network.

Are heat networks regulated?

Unlike gas and electricity suppliers, to date heat network suppliers have not been subject to a regulator. 

There are voluntary standards intended to protect consumers (most notably the Heat Trust scheme, which is a non-profit consumer champion for heat networks) and generally there is some standardisation around the minimum level of service customers can expect to receive from a heat network. However, the lack of a regulator carries the risk of disparities in consumer outcomes between different heat networks; not just in terms of price, but also in terms of overall performance standards.

Heat network operators can also be disadvantaged by not enjoying the same statutory powers as gas and electricity providers, for example they do not have the right to carry out roadworks which may be essential to the construction and maintenance of a network. This means that heat networks can often experience longer delays for construction, maintenance and repair than other utility services. 

Is regulation coming?

The establishment of a regulatory framework for heat networks has taken a step closer with the government’s response, published in December 2021, to the Heat networks: building a market framework consultation.

The response provides welcome clarity about key components of the forthcoming regulatory framework which seeks to protect consumers, promote technical standards, and drive forward the growth and decarbonisation of the heat networks market. Notable conclusions include:

  • confirmation that Ofgem will be appointed as regulator, with Citizens Advice as the consumer advocacy body for heat networks in England and Wales;
  • all domestic customers and micro-businesses are to be protected, including on pricing protection, transparency and quality of service, although there is currently no intention to introduce price caps or direct profit regulation;
  • all entities supplying heat through heat networks will have to be authorised to do so and Ofgem could introduce a supplier of last resort regime.

While the market will need to wait a while longer for the introduction of specific legislation to implement these measures, the Department for Business, Energy & Industrial Strategy anticipates there may be grounds for transition arrangements for some aspects of the market framework.

Is funding available?

The UK government is financially committed to promoting the growth of the heat networks market including:

  • recently announcing £19 million of investment in five new heat networks (two in Bristol, and three across Liverpool, London and Worthing). The funding is part of the government’s £320 million Heat Networks Investment Project for England and Wales, which has awarded more than £250m since its launch in 2016; and
  • plans to launch in 2022 the Green Heat Network Fund, a £270m fund to support low and zero-carbon heat networks in England (the Transition Scheme was launched in July 2021). Unlike HNIP funding, GHNF will only fund heat networks that use low-carbon technologies such as heat pumps, solar and geothermal energy.

What is zoning?

A dramatic increase in the number and scale of heat networks in the UK will only be delivered with strategic intervention that goes beyond just financial support from the government. One such intervention is zoning, which the government committed to in the 2020 energy white paper, Powering our net zero future. Zoning envisages central and local government working together with industry and local stakeholders to identify and designate areas within which heat networks are the lowest cost solution for decarbonising heating.

The proposal, which targets implementation by 2025, is that in a heat network zone all new buildings, large public sector and large non-domestic buildings – as well as larger domestic premises which are currently communally heated – would be required to connect to a heat network within a prescribed timeframe.

Once zones are established (and possibly before that) the private sector will have both the opportunity and incentive to invest in what is, in the prescribed locations, a no-regrets infrastructure class for decarbonisation. 

Looking ahead

Decarbonising heating underpins the UK government’s ambition to reach net zero for UK greenhouse gas emissions. There is no single solution for achieving this, but with a requirement for an estimated £17.5 billion of investment by 2030, heat networks are central to delivering on this challenging undertaking. Accelerating towards a self-sustaining heat networks market, which is both attractive to investment and reliable and affordable for consumers, will be critical to making that net zero ambition a reality.