As those familiar with the heat network sector will be aware, current levels of regulation are low and consumers do not enjoy similar levels of consumer protections to those seen in the gas and electricity sectors. This will change in the imminent future.
Following several public and market consultation exercises, and with Ofgem having been named as the regulator for the sector in the Energy Act 2023, a number of regulatory arrangements are on their way. In this short briefing we summarise the themes of the proposed regulatory arrangements which we might expect to come into law in 2025, 2026 and perhaps beyond.
Current regulations
The only specific regulatory measure for the sector is the Heat Network (Metering and Billing) Regulations 2014. These were introduced to improve energy efficiency and reduce carbon emissions from heating systems in the UK. These regulations require heat suppliers (meaning as any person or organisation that supplies and charges for the supply of heating, cooling or hot water to customers through a heat network) to install metering devices and bill customers based on their actual consumption of heating, cooling, or hot water.
The Office for Product Safety and Standards (OPSS) enforces these regulations by issuing compliance notices, accepting enforcement undertakings, imposing financial penalties, and pursuing prosecution for serious or persistent non-compliance.
Proposed regulations
The Heat Networks (Market Framework) Regulations 2025, currently in draft form, aim to establish a comprehensive regulatory framework for district and communal heat networks in Great Britain. These regulations are designed to ensure consumer protection, promote fair pricing, and enhance the overall efficiency and sustainability of heat networks. Key proposals include the introduction of a licensing regime for heat network operators, mandatory consumer protection measures, and requirements for transparent billing and metering. The regulations also empower the regulator to monitor compliance, collect data, and enforce standards to ensure the reliability and environmental performance of heat networks.
The regulations are expected to come into force in stages throughout 2025, with the exact timeline for the finalisation and implementation of the regulations, and perhaps further regulations for other topics, subject to the outcome of various additional consultation processes and any subsequent legislative steps.
We summarise the key expected features of the proposed regulatory regime below.
Proposed heat network regulations - themes and status summary
The core principles of the 2014 Regulations will be maintained but the 2025 regulations are expected to introduce additional measures and a more comprehensive framework, including regulatory oversight, consumer protection, and technical standards.
Heat charges to be “unbundled” from other service charges and rent. This would require suppliers to charge separately for the supply of heat (based on individual consumption). The practicalities of this have not yet been specified and their uncertainty about how this would work for existing heat networks where heat charges are governed through the terms of a lease or tenancy agreement.
All regulated entities will be required to provide certain information to register with Ofgem whether they are deemed to be authorised entities or not.
Perhaps the boldest feature of the upcoming measures, specific geographic areas will be designated as heat network zones. Within these zones, certain types of buildings will be required to connect to a heat network within a set timeframe. This proposal was subject to a public consultation conducted in 2024 and the Heat Network Zoning Identification Pilot conducted in 2023. The Government’s response to the consultation is expected in spring 2025.
A guaranteed standards framework is to be established. Compensation payments will be made to customers if heat network operators and suppliers fail to meet key standards. It is understood that this will not apply to any "not-for-profit” networks.
Step-in arrangements will only apply where the heat network operator or supplier is in financial difficulty or has had an authorisation revoked. There will be a social housing exemption applicable where the heat network operator or supplier is also subject to social housing regulation or is a local authority, in which case the step-in framework will not apply.
It is not currently clear how the step-in regime will work in practice. As the back-up/step-in entity will need to be an authorised operator or supplier, it is uncertain whether developer/landlord step-in rights set out in a contractual or lease network will be sufficient.
If a commercial resolution cannot be reached and contractual step-in measures have failed, Ofgem will be able to issue a Last Resort Direction to appoint an authorised entity to take over the operation or supply of a heat network. This process will be similar to Ofgem’s Supplier of Last Resort mechanism seen in other Energy sub-sectors.
If other options and the Last Resort Direction prove unfeasible, Ofgem has proposed implementing a Special Administrative Regime. This regime would ensure the continued supply of heat and related services to customers.
Funding options proposed for the Last Resort Direction and Special Administrative Regime are likely to have an impact on customer tariffs given the additional costs required to establish such arrangements.
Authorisation conditions are to be introduced around financial responsibility and risk management. Financial monitoring data is to be submitted annually with specific reporting required around net profit or loss, liquid assets and fixed costs (amongst other financial statistics). There will be fixed penalties for non-compliance and Ofgem will have powers to audit regulated entities
It is expected that financial monitoring data will not be required for local authorities and registered providers, but they may still be expected to meet the financial responsibility and control of material assets authorisation conditions.
It is proposed that technical failures will be addressed through Ofgem's compliance and enforcement powers. It is not yet clear how plant and equipment failure linked to the operator’s ability to finance repairs or replace infrastructure would be treated here (ie would it fall within the step-in framework?).
A "fair pricing framework" and guidance is to be developed. Ofgem will be given pricing powers, including power to impose scheme-specific pricing restrictions and introduce price cap regulation in the future. Ofgem will also have investigatory powers in respect of pricing. All pricing proposals are subject to further consultation later in 2025 that will focus on price protection.
In summary:
- All existing heat network operators and suppliers: automatically authorised from 1 April 2025
- New heat networks or new operation or supply activity that starts during the first part of the Initial Period (between 1 April 2025 – 26 January 2027): automatically authorised
- New heat networks or new operation or supply activity that starts during the first part of the Initial Period (after 26 January 2027): application required for authorisation
The consultation does not currently anticipate that there will be a deemed authorisation/expedited authorisation process for landlords/developers who are party to an ESCO concession structure (ie as unlikely to be authorised already and may need to step-in and takeover immediately).
HNTAS is due to launch in 2025. HNTAS will set minimum technical standards and procedures to ensure high performance and consumer protection.
If you require any assistance please contact Nick Helm, Adam Hulme, Jess Foreman or Alice Powell.
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