In October 2023, the Energy Act 2023 became law, bringing in the most extensive reform of the energy market in the past decade. Amongst other measures, the Energy Act appoints Ofgem as the regulator of heat networks and introduces regulation into the heat sector. Here's what social landlords need to know.
Heat networks supply heat directly to consumers across a network of underground pipes carrying hot water. They can provide heat to a large area and can make use of inaccessible large-scale renewable and recovered heat sources, such as large rivers, geothermal and industrial heat. For social housing properties without the space required for individual air source heat pumps (i.e. flats), heat networks can provide an efficient solution that works within limited space constraints.
Decarbonising the heat supply to social housing is an essential step in meeting the net zero targets for the sector and increasing connections to heat networks play an important role in the Government's net zero strategy. Government funding such as the Social Housing Decarbonisation Fund is available for landlords who are looking to fund connections to low carbon heat networks.
The heat sector has been unregulated and customers connected to heat networks traditionally rely on the protections provided in landlord and tenant legislation or on the voluntary standards imposed on heat suppliers set out in the Heat Trust. Following the Energy Act, the sector will now be regulated. The Government and Ofgem ran a consultation last year on the approach to heat network regulation and consumer protection.
Here are the key takeaways for social landlords following the Consultation:
- Scope of regime: Two activities will fall within the scope of regulation: (i) operation of relevant heat networks; and (ii) the supply of heating, cooling or hot water to consumers through a relevant heat network. Landlords will need to review whether they are carrying out one or both those activities.
- Fair pricing: The consultation seeks views on the approach to pricing. Key outcomes are intended to ensure that pricing is not disproportionate, that it is transparent and that consumers do not take on a high level of corporate risk. It remains to be seen whether landlords will be required to provide information on a public register on the heat pricing used at their networks.
- Quality of service: Ofgem will set Guaranteed Standards for the performance of heat networks. There is also likely to be a compensation regime for failure to meet Guaranteed Standards. We expect that Guaranteed Standards and relevant service level compensation will be aligned with the current Heat Trust standards as a starting point. Landlords who have schemes that do not currently align with the Heat Trust standards will need to consider how to manage future compliance with Ofgem's Guaranteed Standards and how compensation payments will be funded.
- Transparency: The consultation has a focus on information that needs to be provided to the consumer (pre purchase/sale) and during occupation/ownership and expects a more standardised approach to metering and billing, building on the existing Heat Network Metering and Billing Regulations. Ofgem wants a regime that provides consumers with clarity on the terms of their supply and the quality of service they can expect. This is likely to require certain information to be included either in separate heat supply agreements or as part of lease or tenancy agreements.
- Customer vulnerability: The consultation proposes to identify vulnerable customers and be clear on the protections offered (e.g. all heat networks to have a Priority Services Register and to promote it where appropriate). This concept is already covered by Heat Trust rules and most landlords already have additional protections in place for vulnerable customers.
- Landlord and Tenant considerations: Many existing landlord-run/operated schemes will need to consider the interface with landlord and tenant legislation – especially the need to consult for long-term works/services arrangement (e.g. operation/maintenance of heat networks). Leases/tenancy agreements will also need to be reviewed to consider how they may address the new requirements.
The consultation closed on 27 October 2023 and the first tranche of consumer protection rules that govern heat networks is expected to be introduced via secondary legislation in 2025. The Government also separately consulted on the approach to Heat Network Zoning to expand area-wide heat networks which closed on 26 February 2024.
How can social landlords get ready for regulation?
Existing landlord-run arrangements are the most likely to be affected by the new regulations. Pending the publication of the new regulations, here's what social landlords can do to ready themselves for the new regime:
- Review existing communal/district heat networks within your portfolios and consider whether you are a heat supplier or heat operator (or both).
- Review how operation and supply of heat is currently managed on your schemes (including any contractual arrangements with operation and maintenance contractors or metering and billing providers) and how this might need to change in a regulated landscape.
- Consider whether existing leases/tenancy agreements are appropriate or whether separate/updated heat supply agreements are required.
- Consider future customer communication strategy with tenants/leaseholders (e.g. notifying price changes and changes in approach to operation/service provision).
Ofgem also recommends that landlords should be following existing good practice in the sector such as the Heat Trust rules in order to prepare. With regulation expected next year, Landlords will need to be ready for the new regime.
