Heat networks market study – next steps 

The heat network sector is at early stage in its development; today, heat networks provide around 2% of UK buildings’ heat demand. However, around 18% of UK heat will need to come from heat networks by 2050 if the UK is to meet its carbon targets cost effectively. In light of the expectation of significant growth in the sector, and to investigate consumer protection concerns including around price, transparency and quality, the CMA launched a market study. It issued its Final Report in July.

Key findings and recommendations in the CMA’s final report

The market study covered both district heating and communal heating systems across the whole of the UK.

Price

The CMA found that, while some networks offer poor value for money, overall, average prices in the CMA’s sample were close to, or lower than the price of a gas heating-based comparator.

Quality

Customer satisfaction of heat network customers is in line with gas and electricity customers. However, where issues do arise, heat network customers are often surprised that they do not have the same protections as gas and electricity customers.

The CMA’s recommendations

1. Regulation of heat networksThe CMA recommended the introduction of a sector regulator, rather than ad hoc CMA intervention. The CMA suggests that Ofgem would be well placed to take on this role. The regulatory framework should be designed to ensure that all heat network customers are adequately protected; as a minimum, they should be given a comparable level of protection to gas and electricity customers. For new and existing networks, it is proposed that the regulator:

• requires all heat networks operators to comply with ‘principles-based’ rules or guidance on price and service quality;
• oversees quality standards to protect customers from poorly designed, built and operated heat networks; and
• be given formal powers to monitor and enforce compliance.

In addition, the regulatory framework should require new heat networks to consider the whole life costs during the design and build phases, and how this is likely to impact prices for consumers. Where the whole life cost for customers of a new heat network exceeds that of alternative fuels, the CMA recommends that the additional cost should be met by the developer of the heat network to ensure that cost-based prices are consistent with a benchmark.

• Planning and technical standards

The need for mandatory technical standards was a common theme across responses to the CMA’s market study. As a result, the CMA recommend that all heat networks comply with a new set of minimum technical standards, focusing on measurable performance outcomes, such as operational efficiency. These standards should draw on existing industry expertise including CP1, to allow monitoring and compliance with quality standards.

Although it would not normally be for the sector regulator to determine how industry experts are trained and accredited, the CMA’s study indicated that to protect customers, stronger enforcement of technical standards is necessary, and that this will be difficult without both better access to skills and a suitable accreditation scheme to support this. The CMA recommends that government and/or the sector regulator engage with organisations, such as CIBSE, to develop formal training opportunities and accreditations with respect to the design, build and operation of heat networks.

The CMA also considered how technical standards could be enforced via planning and building regulations at both national, and regional and local level - for example by ensuring that the community heating guidance in The Building Regulations UK and planning guidance in England, Scotland and Wales appropriately references the CIBSE ADE Heat Networks Code of Practice (CP1) and Heat Trust standards, and by encouraging local authorities to include these in in local or development plans.

• Increased transparency

The CMA found that a lack of information about heat networks and ongoing costs might restrict the ability of consumers to make informed decisions and challenge heat network providers about the price and quality of their networks. To address this, the CMA recommends that the government, including where appropriate a future sector regulator, implements rules or guidance as to the level of information necessary to help heat network customers. It suggests that industry standards could be prepared in advance of the introduction of any statutory mechanism for monitoring and enforcement.

The position in Scotland

Heat policy is devolved to the Scottish Government, and its plans to increase technical standards and transparency and to introduce licensing have helped to shape the CMA’s thinking. The Scottish Government published its second consultation on local heat and energy efficiency strategies (LHEES), and the regulation of heat in November 2017. However, while heat is a devolved matter, consumer protection and competition powers are reserved, which means that it is essential that the UK and Scottish governments continue to work closely.

Next steps and timescales

• It is expected that the UK and Scottish governments will respond to the CMA’s recommendations in October 2018.
• Further consultation is required on a number of aspects of the CMA’s report; it is anticipated that BEIS will issue this in spring 2019.
• Primary legislation will be required for many recommendations, including the introduction of the sector regulator.

Comment

There will inevitably be a significant lead-time to implement the report’s recommendations. In the meantime, several new networks will be constructed and the CMA is proposing to work with BEIS, the Scottish Government and the sector to identify how improvements can be made and the perceived issues for consumers addressed. As part of that, the CMA has also indicated it will consider enforcement action under the Competition Act 1998, the Consumer Rights Act 2015, and the Consumer Protection from Unfair Trading Regulations 2008.