With Heat Network Regulation due to be introduced from 2026, this article examines Ofgem's response to the consultation on Fair Pricing Protections and what this means for heat network operators and suppliers.
Heat networks are natural monopolies - with customers unable to switch suppliers in the same way as other utilities, such as gas and electricity. As regulation is introduced, Ofgem needs to balance safeguarding customers with supporting the growth of the sector.
Background
From January 2026, heat network operators and suppliers will need to comply with authorisation conditions set by Ofgem, including obligations to ensure heat charges are "fair and not disproportionate".
Ofgem published its response to the consultation on Fair Pricing Protections on 29 September 2025, alongside draft guidance on how to interpret the authorisation conditions.
This builds on recommendations under the 2018 CMA market study and initial pricing proposals under the consultation on wider consumer protections, published in November 2024.
Fair Pricing Framework
Ofgem is developing a principles-based Fair Pricing Framework, with the aim of delivering fair pricing and improving transparency for heat network consumers.
The framework identifies six key principles that heat networks will need to consider in determining customer charges:
Cost-reflectivity
Customer charges must reflect the actual costs of supplying such heat. This will need to be considered when developing and structuring tariffs.
Where meters are installed, heat charges must be based on accurate meter readings. New metering requirements are expected to be set out in the Heat Network Technical Assurance Scheme (HNTAS).
Cost-efficiency
Heat networks must take steps to create cost efficiencies where possible, including implementing a strategy for competitive fuel procurement and considering whether to outsource contracts to specialist providers.
Technical efficiencies will be addressed in minimum performance requirements under HNTAS, although the framework requires heat networks to make choices based on long-term efficiencies.
Fair and reasonable returns
With customers unable to switch suppliers, regulation needs to prevent heat networks from leveraging their monopoly status. In order to monitor profitability, Ofgem may investigate where profit levels appear to be disproportionate.
Ofgem does not define "fair" and "reasonable" returns by reference to key metrics, but heat networks will be expected to justify that their levels of profit align with these principles. Reporting on financial metrics, such as EBIT margins, is expected to be phased in over time.
Affordability
Affordability of heat network charges is a key concern – with an estimated two thirds of existing heat networks owned or operated within the social housing sector. Heat networks must balance maximising consumer benefits against their fair and reasonable returns and cost-recovery.
Although wholesale energy prices cannot be controlled, heat networks should minimise the impact and likelihood of shock bills for consumers. Consumer protection guidance will address strategies to manage bad debt, including offering repayment plans and referring to third party debt advisors.
Regulatory Control
Where metering and billing, operation and maintenance or other services are outsourced, the authorised heat network operator and supplier will be held responsible.
If you have any involvement with a heat network, it is important to check whether you will be considered a heat network "operator" or "supplier". The guidance encourages clear contractual obligations, robust tendering criteria and visibility over supply chains.
Price transparency
Prices must be communicated in in a clear, accessible manner so that they are easily understood by consumers.
Benchmarking is expected to be phased in, to allow customers to compare tariffs against alternative heating technologies. Ofgem will also explore central price transparency, expected to be introduced from 2027 onwards.
Fair but not disproportionate – what does this mean?
"Fair" and "disproportionate" will not be separately defined, although guidance will set out a fairness test to help apply and implement the authorisation condition.
This includes reviewing whether the six principles set out above have been followed and considering "reasonableness" – ie the standard that could reasonably be expected of a well-run and prudent regulated entity.
Where any enforcement action is required, Ofgem will assess on a case-by-case basis, taking into account the specific circumstances for the relevant heat network.
Cost allocation – what can you recover?
Benchmarking is complicated through the variety of pricing structures used to recover the costs of supplying heat – including a range of standing or variable charges, connection charges or other fixed charges. Guidance will set out best practices for cost allocation, although Ofgem intends to collect more data from existing heat networks before introducing more prescriptive rules.
Further consultation is required to address Ofgem's "unbundling" proposals – particularly where this conflicts with existing Landlord and Tenant legislation. In its response to the consumer protection consultation, Ofgem confirmed that certain pricing requirements will not apply to any networks covered by the Landlord and Tenant Act 1985. This means that certain landlords will not be subject to the same requirements as other heat suppliers.
Next steps
With the January launch date fast-approaching, now is the time to prepare. If you have any involvement with new or existing heat networks, it is important to check how regulation will apply to you, whether you will be considered a heat network "operator" or "supplier".
If you are concerned about any of the issues raised under the consultations or how regulation may impact you, please get in touch with a member of our Energy and Sustainability team.
