Who is the “supplier”? Managing regulatory risk for developers and asset owners

One of the most significant – and often underestimated – implications of the Heat Networks (Market Framework) Regulations and Heat Network Association (HNA) general conditions is the risk that developers and asset owners may be treated as the heat “supplier” for regulatory purposes.

Under the new regime, the supply of heat to end consumers is a regulated activity, requiring authorisation and compliance with detailed obligations. In many legacy and current project structures, it is not always clear who is carrying out that activity in practice. As a result, there is a real risk of inadvertent non-compliance with regulation. This makes supplier status not just a regulatory question, but a key structuring issue for both new developments and existing portfolios.

Why supplier risk arises

Heat networks are frequently delivered across complex ownership and contractual arrangements, particularly in real estate-led developments. A common model involves:

• a network operator or Energy Service Company’s (ESCo’s) supplying heat to a building; and
• the developer or landlord passing that heat through to occupiers.

In these scenarios, the legal and commercial arrangements do not always align neatly with the regulatory definitions of “supply”. In practice, where heat is passed through a building (for example via leases or service charge mechanisms), the landlord often holds the direct relationship with the end consumer. This creates a key issue: the party contracting with the ultimate consumer may be treated as the regulated supplier, even if someone else operates the network.

The landlord-supply model

The risk is particularly acute in landlord-led supply models, which are common across both residential and commercial developments.

In these models:

• heat is provided to the building by a third-party (e.g. an ESCo or a Management Company (ManCo));
• that heat (and/or hot water produced using it) is distributed to individual premises within the building or people in those premises ; and
• occupants pay the landlord for heat and/or hot water through:
  • a lease;
  • a service charge; or
  • a related contractual mechanism.

Historically, these arrangements were driven by real estate considerations, rather than regulatory design. Under the new regime, however, they may need to be re-examined through a different lens.

Key questions include:

• Is the landlord supplying heat to consumers, or simply recovering costs or charges for an unregulated service?
• Does the landlord control key aspects of the customer relationship (pricing, billing, complaints)?
• Is there a direct contractual relationship between the network operator and the end consumer which relates to the supply of heat or hot water?

The answers to these questions will be key to assessing whether the landlord may be caught by the regulatory regime.

Practical consequences of being the supplier

If a developer or landlord is treated as the supplier, the implications are significant. They may be required to:

• obtain and maintain heat network authorisation
• comply with consumer protection requirements (including pricing transparency and complaints processes)
• implement billing and customer service systems
• engage directly with the regulator
• review cost recovery, customer communications and operational governance arrangements.

In other words, the developer or landlord may be required to operate as a regulated heat supplier which is not typically aligned with its core business.

This is why, in practice, many developers are arranging for a specialist provider to be the regulated supplier wherever possible.

Structuring to manage supplier risk

Managing supplier risk therefore becomes a key part of project structuring. Broadly, there are two approaches.

1. Aligning supply with the specialist operator

The most common solution is to structure the project so that:

• the ESCo, ManCo or third-party operator supplies heat and/or hot water directly to end consumers; and
• the developer or landlord does not sit in the supply chain.

This requires:

• direct contractual relationships between the operator and occupiers/consumers;
• appropriate interface arrangements within the building; and
• alignment with lease structures and customer interfaces.

While this approach can increase complexity at the outset, it reduces the risk for the developer of unintended non-compliance with regulation.

2. Accepting and managing supplier status

In some cases, it may not be feasible (or desirable) to remove the developer or landlord from the supply chain. In these scenarios, the focus shifts to:

• ensuring that the developer/landlord structure is fully compliant with the HNA conditions;
• implementing the required systems and processes; and
• reflecting regulatory obligations clearly in contracts.

This approach requires careful consideration of both operational capability and long-term risk.

The importance of consistency across the portfolio

A further challenge arises where developments are delivered in phases or have evolved over time. In our experience, it is not uncommon for:

• different buildings to have different supply arrangements;
• legacy leases to sit alongside newer contractual structures; and
• inconsistent allocation of the supplier role across a portfolio.

This creates additional complexity, particularly where the same asset owner may be treated differently across different parts of its estate.

As a result, many stakeholders are now taking a portfolio-wide approach, reviewing arrangements across sites and seeking to standardise the allocation of supply roles.

The question of “who is the supplier?” is one of the most important – and fact-dependent – issues under the new Market Framework regime. It sits at the intersection of regulation, real estate and contract structure, and requires careful analysis in each case.

For developers and landlords, the key is to engage with this issue early. Whether through structuring projects to avoid supplier status, or by preparing to comply with the regime, a proactive approach will help avoid unintended non-compliance and ensure that projects remain deliverable and commercially viable. If you are developing, operating or acquiring heat network assets, we would be happy to help you review whether your arrangements create supplier status risk and identify practical next steps to ensure that you are compliant, or are on track to become compliant as soon as possible.

As part of our Clean Heat Hub series, we are supporting clients across the lifecycle of heat network projects – from supplier status reviews and structuring delivery models through to regulatory readiness and implementation.

If you are unsure whether existing or proposed arrangements could create supplier status risk, we can support with structure reviews, regulatory gap analysis and contract updates ahead of the new regime taking effect. Please get in touch with Antonia Venning or Charles Robson if you would like more information.