Heat network regulatory framework

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.