Exciting opportunities for local authorities in the heat network sector

Construction of heat networks is gathering momentum, supported by Government and forthcoming regulation. Nick Helm and Adam Hulme consider an exciting opportunity for local authorities to unlock environmental benefits and lower costs, given that many local authorities have net zero targets to meet by 2030 or 2035.

What is a heat network?

Heat networks enable heat and hot water to be distributed from a central “energy centre”, via mainly underground pipes, to multiple buildings.

Boiler systems in connected buildings would be replaced with new infrastructure, to enable circulation of heat from the network. The energy centre becomes the source of the heat supply.

Heat networks have a long history – with the first networks being tested nearly 150 years ago. Distribution of heat from a centralised heat source was taken forward in New York City in the late 19th century. In the UK, heat networks were used in blocks of flats in the 1960s and 1970s. Denmark was one of the first countries to start using heat networks on a wide scale, in response to the oil crisis in 1973.

Currently, heat networks are commonly used in Scandinavia and Eastern Europe, and in city areas in the USA and Canada. There are around 14,000 heat networks in the UK, with many being “campus-style”, providing heat to groups of social housing or hospital/NHS campuses (for example).

Why join a heat network?

Modern heat networks can utilise sources of low carbon heat. These include energy from waste facilities, geothermal sources, solar thermal arrays, air and ground source heat pumps and data centres.

Participating in a heat network is likely to be more environmentally friendly and, in some cases, more cost-effective than maintaining older, inefficient gas-fired heating systems.

Are heat networks being supported financially in the UK?

It is estimated that 50% of buildings in the UK are located in areas which would be suitable for the construction of a heat network, which currently supply around 2% to 3% of the UK’s heat. The Committee on Climate Change predicts that in order to meet net zero targets (with around 20% of heat supply being from heat networks), it is estimated that investment will need to equate to £60 billion to £80 billion by 2050.

The government has confirmed its support for the sector, as re-iterated at November’s Association for Decentralised Energy Conference by Miatta Fahnbulleh, Minister for Energy Consumers. The government has set a target for at least 18% of the UK’s heat demand to be met from heat networks by 2050. Over £600 million of government funding has been allocated to develop and improve heat networks.

The government’s recently published “Clean Power 2030 Action Plan” sets out that the National Wealth Fund will make available an expanded suite of financial instruments, as part of investment in heat networks and other clean energy sectors.

The growing prominence of Great British Energy, backed by government, is also likely to involve further support for heat networks as a renewable energy source. The Department for Energy Security and Net Zero already significantly supports the sector via capital grant funding from the Green Heat Network Fund.

In addition, the Heat Network Efficiency Scheme offers grant funding to applicants who are responsible for operating or managing heat networks.

Financial support for heat networks is supplemented by the work of other bodies such as the Heat Networks Industry Council, which is a joint industry and government forum that aims to grow the heat network sector.

Taken together, it is clear that there is genuine ambition to ensure that heat networks play a key role in helping the UK meet its net zero ambitions.

Notable heat network developments

A number of major heat network projects are underway, including (i) the hugely ambitious South Westminster Area Network (referred to as “SWAN”), which will supply low carbon heating to the Houses of Parliament, the National Gallery and large areas of Whitehall, and (ii) the Leeds PIPES heat network, which connects to over 3,000 dwellings.

The existence of these projects, and numerous others, is evidence of a growing trend in the emergence of heat networks as a major contributor to the UK’s net zero ambitions.

Local authorities are already taking a pro-active and significant role in multiple heat networks across the country, including a new heat network under construction in Bradford, numerous heat networks in London, and already established networks in Coventry and Nottingham.

Relevance to local authorities

Given the location of the projects mentioned above, local authorities based in urban areas should also consider whether it is feasible for their buildings to connect to a heat network, and whether a heat network is planned in their area.

Local authorities will be involved in the following key ways:

• Local authorities will be approached by heat network operators/developers for the purposes of:
  • securing planning permission to take forward the construction of an energy centre and/or required pipework being installed.
  • determining whether the local authority itself wishes to become a heat off-taker from the proposed heat network.
    
    
• Highway authorities will need to be consulted in respect of the digging of any trenches, into which the pipework will be installed, with relevant permissions granted, or agreements entered into, in order to facilitate works on or underneath adopted highway.
  
  
• Local authorities may themselves decide to procure the construction of a heat network in respect of some or all of their buildings.

Heat networks therefore present local authorities with an exciting opportunity to forge the way in supporting both new sources of heat, and decarbonising heat in urban areas.

Regulation of the heat network sector

Aside from regulations that govern billing and metering, the heat network sector is largely not regulated. This, however, has started to change – the Heat Networks (Market Framework) (Great Britain) Regulations 2025 are coming into force in stages over the coming months. Ofgem will regulate heat networks in Great Britain.

For example, as from 1 April 2025, it has become illegal to operate or supply heat from a heat network without authorisation, although:

• An existing heat network operator, as at 1 April 2025, will be deemed to be authorised.
  
  
• Any new operator will also be deemed to be authorised if they begin a heat supply prior to 26 January 2027 (any new operator seeking to begin a heat supply after this date will need to apply for an authorisation from Ofgem). 

The regulations will otherwise largely come into force on 27 January 2026.

Regulation had also been the subject of consultation, including consideration of how different groups of consumers are to be protected, and specific arrangements on standards of conduct and billing transparency.

In addition, the proposed regulations do not specifically refer to a “supplier of last resort” regime, which would enable an authorised entity to continue the operation of a heat network where the relevant operator had become insolvent. We understand that Ofgem and the government are considering how this would work, given the complexity of arranging for the ownership transfer of infrastructure and capital assets. We await further developments on this but are aware of proposals for Ofgem to be able to issue “Last Resort Directions” for an authorised supplier to assume the operation of a heat network where the original heat supplier is not able to continue operating. Ofgem’s proposed “back-stop” solution is a “Special Administration Regime”, like what is used already in the gas and electricity sectors.

The scheme rules of the Heat Trust, which operates to protect the interests of domestic and micro-business customers of heat networks, partly informed the content of forthcoming regulations. The Heat Trust’s voluntary scheme is intended to establish common standards of heat supply and associated customer service (with standards of service comparable to those required by Ofgem of electricity and gas suppliers). We therefore anticipate robust standards to be introduced within the regulations, for a wider group of consumers.

Of particular interest to local authorities will be new measures to designate specific geographic areas as heat network zones.  Within these zones, certain types of buildings will be required to connect to a heat network within a set timeframe. Although it is contemplated that the implementation of heat network zoning will be overseen by a new Heat Network Zoning Authority, we anticipate that once zoning comes into effect, local authorities will receive higher amounts of planning applications (for example) to facilitate the construction of heat networks within relevant zones, where such zones fall within the local authority’s area of planning responsibility. This is in addition to the proposal for local government to provide the “local zoning co-ordinator” teams that will designate the heat network zones, and enforce requirements within them. This is likely to represent a significant new workstream for local authorities.

Legal support

Connecting to a heat network involves technical aspects relating to design, maintenance, service standards, and availability of a ”green” heat supply. Legal support is key, as well as specialised technical support.

Examples of relevant legal topics include:

• Procurement risks.
• Design and delivery risks.
• Real estate and contamination issues.
• Construction issues, particularly around connection work and secondary side works.
• Exclusivity arrangements.
• “Change in law” provisions (especially given forthcoming regulation).

How we can help

Mills & Reeve advises heat suppliers and off-takers on their participation in heat networks.

If you are considering participating in a heat network, or if you are seeking further information about the proposed regulation of the sector and how this could affect you, please do contact the Mills & Reeve team.

This article originally featured in the 2025 summer edition of ACES' Terrier.