Turning the thermostat: UK moves to regulate heat 

The Energy Bill (the “Bill”), which was introduced to Parliament on 6 July 2022 takes aim at providing a regulatory framework to support the Government’s commitment to fully decarbonise heating in the UK.

There are over 14,000 heat networks in the UK, with the anticipation that around 18% (up from around 2%) of UK heat could come from heat networks by 2050. The UK government has pledged to invest £338 million over 2022/23 to 2024/25 into a broader Heat Network Transformation Programme and it is estimated that the sector has investment potential between £60 billion to £80 billion by 2050.

The Bill deals with heat regulation in two places, Part 3: New Technology, which enables the introduction of a low-carbon heat scheme, and Part 7: Heat Networks which paves the way for heat regulation within Great Britain and heat network zoning across England and Wales. We have considered each in-turn below. Part 7 of the Bill is likely to be particularly welcomed by industry as effective regulation will be required to facilitate and manage the anticipated investment.

The Bill also covers interaction with the Heat Network (Scotland) Act 2021 which separately introduced heat network licensing and zoning in Scotland. However, as consumer protection is not a devolved matter, the relevant provisions of the Energy Bill on consumer protection as it relates to heat networks will extend to Scotland.

New Technologies – the Low-Carbon Heat scheme and Hydrogen trials

The Bill will enable the introduction of a new Low-Carbon Heat scheme (which will be introduced in subsequent secondary legislation). The Bill confers upon the Secretary of State the authority to draw up regulations establishing one or more low-carbon heat schemes, using heating sources which do not burn unabated fossil fuels. The low-carbon targets and the appliances eligible will be set out in secondary legislation. Penalties, such as fines and criminal convictions, may be imposed in the event of non-compliance with the Low-Carbon Heat scheme, however the exact amounts are yet to be legislated.

Under the proposed Low-Carbon Heat scheme (greater detail of which can be found in the Government response to consultation on the scheme), the Secretary of State may place an obligation on the manufacturers of fossil fuel heating appliances to meet a low-carbon heat pump target through either selling their own heat pumps (and specifically hydronic heat pumps) or purchasing credits from other manufacturers. The new scheme will be complementary to other Government schemes such as the Boiler Upgrade Scheme and will further support growth and enable a reduction in the installed cost of heat pumps due to market scale up and a zero VAT rating on installation (as per the Chancellor’s 2021 Spring Statement) for the next five years. The Scheme provides a framework for business to invest in emerging supply chains and the Government hopes that this will enable the scale up of heat pumps to make them a more attractive choice to UK households.

The Government’s plan for a Green Industrial Revolution published in November 2020 aims, amongst other things, to support industry to deliver a hydrogen neighbourhood trial by 2023 and a village trial by 2025 including trialling the use of the gas grid to transport hydrogen safely and securely into occupied buildings for cooking and heating.

Under the Bill and subsequent legislation, Hydrogen grid conversion trials will be expanded. The Secretary of State may designate trial location, duration and modification of the local gas network to facilitate the supply of hydrogen. All and any such trials will be monitored for the purposes of assessing the feasibility, costs and benefits of using hydrogen for domestic heating or cooking. Regulations, to ensure that consumers in a trial location are properly informed about a hydrogen grid conversion trial being conducted, are envisaged but no timelines have yet been shared.

Heat Network zoning

The Government has committed to introducing heat network zoning in England by 2025. Heat network zoning identifies areas where heat networks would provide the lowest cost solution for decarbonising heat. Research conducted by the Government has found that barriers to deployment include uncertainty regarding location and the lack of requirement for buildings to be connected to a network. There is currently a governmental pilot scheme in place which tests the approach and methodology for developing heat network zones. A key part of zoning will be to identify “anchor” network consumers located reasonably close to one another to help facilitate the investment case for developers – e.g. large public sector buildings, large non-domestic buildings (in particular new builds) which could be required to connect to a heat network.

The Bill takes this further and enables a “zoning methodology” under which the Authority under the regulations (expected to be Ofgem) and zone coordinators (expected to be local government with oversight from BEIS) can identify appropriate areas for district heat networks. The methodology will likely be finalised following the pilot scheme however it will include criteria for determining whether an area is appropriate and how the identified areas will be recorded.

Much of the detail around zoning will be fleshed out through secondary legislation in the form of regulations made by the BEIS Secretary of State. Any regulations may contain enforcement provisions – a zone coordinator may require a person to demonstrate compliance with a requirement with penalties imposed for non-compliance. Secondary legislation will set out relevant amounts.

Zoning related regulations may impose requirements around the carbon content of heat sources (in terms of requirements for new heat sources and requirements for existing heat sources to reduce their carbon intensity within a defined transition period).

The Bill also provides that regulations may be made that allow zone coordinators to grant exclusive rights to design, construct, operate or maintain district heat networks within zones or parts of zones. Such exclusivity will come with conditions attached, but the intention is that by affording developers exclusivity to a pipeline of projects within a defined area it will be a more attractive proposition and improve the prospects of a viable core network being built within that zone or part zone. From that viable core network, the hope would be that the network can expand over time to connect and supply other premises and perhaps to connect additional sources of heat.

Heat Network Regulation

In order to regulate heat networks, the Gas and Electricity Markets Authority (Ofgem) has been formally assigned as the heat networks regulator. This differs from the Low Carbon Heat Scheme where the administrator will be the Secretary of State.

As with zoning, much of the detailed requirements are expected to be made through secondary legislation. Such regulations are expected to provide that the principal objective of Ofgem will be to protect the interests of existing and future heat network consumers, particularly as to (1) reliability of supply; (2) reduction of greenhouse gases generated by heat networks; (3) the charges for supply being proportionate; and (4) information about services and charges being communicated plainly.

Such regulations may also make provision about the duties of Ofgem, including (1) a duty to consider the need to ensure that persons operating under a heat network authorisation or under an installation and maintenance licence are able to finance obligations imposed by or under the relevant regulations and (2) a requirement to promote competition between persons engaged in (or in the commercial activities connected with) heat supply by means of heat networks.

Heat Network Authorisations

Regulations will be introduced which will prohibit certain activities relating to a heat network unless the person carrying out that activity holds a heat network authorisation. Heat network authorisations may contain conditions (both standard conditions and conditions that are special to a particular authorisation).

The conditions may relate to – (1) installation and maintenance of metering equipment; (2) charges payable by consumers (including a price cap for charges imposed on domestic consumers; and an obligation not to impose disproportionate prices); (3) billing and information requirements; (3) service standards; (4) price regulation; (5) technical standards (including as to design, construction, commissioning, operation and maintenance and decommissioning – and the equipment and materials used and competency of persons engaged in such processes); (6) continuity of supply (including obligation to step-in and carry on a regulated activity in relation to another heat network in the place of another person); (7) limiting greenhouse gas emissions.

Conditions in heat network authorisations in relation to technical standards may also require holders to enter into governance arrangements with a “code manager” who is to publish and maintain a technical code – referred to in the Bill as a “designated document”. The code manager is to be separately licensed pursuant to regulations.

Installation and Maintenance Licences

This licence will authorise the holder to exercise certain land rights relating to the installation or maintenance of relevant heat networks in England and Wales or Northern Ireland. Regulations will be published that set out these rights which may include: (1) a right to apply for the authority to make a compulsory acquisition of an easement or other right over land for the purpose of installing or maintaining works an apparatus relating to a heat network; (2) a right to install works and apparatus in, under or over a street or road (or railway, canal or tramway) and to inspect, maintain, repair, upgrade and remove the same

The Bill allows Ofgem to:

1. grant licenses to heat developers which provide comparable rights and powers to those of other utilities;
2. monitor compliance and take necessary action against heat networks who are failing to adhere to the relevant standards; and
3. investigate in the instance of disproportionate consumer prices relative to heat networks with similar attributes, or if prices are substantially greater than consumer’s expectations if they were with an alternative or comparable heating provider.

This means that developers will need a heat authorisation and will be regulated like a monopoly as was first suggested in the Government response to the Heat Networks: Building a Market Framework Consultation (covered in our previous Law-Now). No further detail has been given on the specific licensing regime in the Bill. It is therefore anticipated that, at least initially, the Government will introduce a general authorisation regime as per the previous response to the consultation. As the general authorisation route still seems to be the preferred route, albeit with powers to monitor compliance and take action, it seems likely that the regime will be more light touch than the full licensing regimes in the electricity or gas sectors. The Secretary of State has also been permitted to introduce a range of price regulation mechanisms, including a potential cap (for domestic consumers), to provide additional protection to consumers. Accordingly, it will be interesting to see whether RIIO, Ofgem’s price control framework, will apply to heat networks and how it is suggested that this would work.

The Government expects heat networks regulation to come into force as early as 2024 and we can expect more detail to follow. All heat networks will be required to notify Ofgem so that they can be authorised to operate in the market. Steps that heat network operators can take in the short term to prepare include following existing good practice (for example as set out by the Heat Trust and the industry’s Code of Practice).

Miscellaneous Provisions

The Bill permits the regulations to provide for a special administration regime for companies that are holders of heat network authorisations. The special administration regime envisioned under the Bill is similar to the regime in the electricity and gas sector and is analogous to the Supplier of Last Resort scheme with the Authority having power to rescue the company or to transfer as much of the undertaking as is associated with the relevant heat network.

The Bill proposes to bring heat networks in line with the electricity and gas sectors. The Bill permits the regulations to provide for offers to connect. Practically, it is anticipated that such offers will be similar to current grid connection offers.

The Bill also contains a specific section on consumer protection which allows the regulations to prescribe standards of performance in connection with the regulated activities of holders of heat network authorisations affecting both actual consumers and potential consumers. The regulations may provide for compensation to be made to persons affected by a failure to reach the standards of performance set out in the regulations. Therefore, going forward, consumers may be in line to receive compensation where the licensed entity does not achieve the requisite standards.

Commentary

The Bill is welcomed by the sector, and it is envisioned that the framework will help to encourage the roll-out of heat networks. The Heat Trust, the national consumer protection scheme for heat networks, views the Bill as the first step in bringing greater consumer protection to the sector, which has previously relied on a voluntary scheme without a clear regulatory framework. The Heat Trust has been working closely with the Government and the regulator to help outline the regulatory framework and accordingly it is expected that consumer protection regulations will closely match the Heat Trust’s existing Scheme Rules, which are themselves modelled on consumer protections in the gas and electricity sector.

Statutory regulation will go beyond areas covered by Heat Trust Scheme Rules to include matters such as heat pricing and technical standards which will further protect consumers. By appointing Ofgem as the regulator for heat networks to safeguard reliability of heat and pricing levels, there should be increased consumer protection including potential price controls in relation to supplies to domestic consumers to stop developers passing on wholesale costs.

The Government anticipates that the framework put in place will result in increased demand for heat pumps and networks and may prompt further investment into the heat sector. However, further details in relation to the licensing regime and the practicalities of the regulation are still awaited.