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.

Whilst the response includes details of some changes in direction from the initial proposals in 2020, in general there are no surprises. The response provides welcome clarity about the key components of the forthcoming regulatory framework in the interests of protecting consumers, promoting technical standards, and driving forward the growth and decarbonisation of the heat networks market.

Notable conclusions include:

  • 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 will be protected, including pricing protection, transparency and quality of service
  • All entities supplying heat through heat networks and entities operating heat networks will have to be authorised to do so. Ofgem will manage the authorisation process. Through authorisation conditions, Ofgem could introduce a supplier of last resort regime
  • Ofgem and Citizens Advice’s total ongoing costs of regulating the heat networks, gas, and electricity markets are to be spread evenly across heat network, gas, and electricity consumers
  • Cases of non-compliance will be resolved by Ofgem. Ofgem will support regulated entities to take steps to comply, with enforcement action only being taken in appropriate circumstances, such as where there is non-compliance causing significant consumer detriment or where the regulated entity has not taken steps to comply
  • There are proposals to introduce powers requiring commercial contracts to provide accountability, or a process for identifying accountability, for stepping-in in the case of market exit. It is acknowledged that ultimately Ofgem will be able to determine how and where step-in measures are implemented, reflecting market monitoring, stakeholder engagement, and the diversity of the heat network sector
  • A special administration regime will be introduced
  • Ofgem will have powers to mandate and enforce price transparency and introduce rules or guidance on cost allocation. As expected, there is currently no intention to introduce price caps or direct profit regulation
  • Minimum technical standards will be required through the authorisation regime, with compliance with the standards demonstrated by an assurance scheme, for example involving third party certification from an accredited certification body
  • Heat network operators may, by opting to be licensed, obtain access, permitted development and linear obstacle rights and street works permits as statutory undertakers
  • As part of the necessary primary legislation to enact the market framework, powers for setting maximum carbon emissions limits will be introduced. Specific decarbonisation targets will be set for England only.

Whilst 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 (BEIS) anticipate that there may be grounds for transition arrangements for some aspects of the Market Framework. In the meantime, BEIS continues its engagement with stakeholders including the creation of an industry-led advisory board to enable stakeholders to work with BEIS, Ofgem, the Energy Ombudsman, and Citizens Advice during the next phase of designing and implementing regulation.