17 January 2018

As evidenced in its Clean Growth Strategy, the government is keen to promote “central heating for cities”, and heat emissions are a key area of focus. Although heat networks currently serve approximately 500,000 households, BEIS hopes this will increase significantly to around 20% of households by 2030.

As we have previously reported, there are a number of opportunities for businesses in this sector and the government is already providing funding for heat networks via the Heat Network Investment Project and the Heat Networks Delivery Unit, as well as consulting on opportunities to recover heat in the industrial sector.

CMA market study

The very nature of a heat network means that often off-takers are unable to switch supplier (or will incur significant costs in doing so) and are locked into very long contracts – some for up to 25 years. The CMA has recently announced that it is beginning a market study into the sector. The market study will examine the causes of why the market may not be working well, taking into account the regulatory framework, economic drivers and patterns of consumer and business behaviour.

A number of concerns have been raised with the CMA, including:

  • concerns around pricing due to a lack of competition
  • barriers to entry to other suppliers
  • lack of transparency of bills and price increases once customers are locked in
  • poor service and intermittent supply
  • a lack of consumer protections (district heating does not fall within the regulatory remit of Ofgem, and accordingly heat networks customers do not benefit from the many rights and protections afforded to gas and electricity customers).

The CMA is planning to examine three broad themes:

  1. transparency of information – both before and after moving into a property
  2. whether heat networks are natural monopolies given an inability to switch and the impact of differing incentives for builders, operators and customers of heat networks
  3. price, service quality and reliability of heat networks.

Industry self-regulation

The concerns expressed by the CMA are already well understood by the industry, which has been working to address the concerns. Steps include putting together heat networks codes of practice and launching the Heat Trust scheme, a voluntary consumer protection scheme for the sector that gives access to the Energy Ombudsman to resolve complaints.

Customer satisfaction was a key theme at the Association of Decentralised Energy’s recent Heat and Decentralised Energy Conference. Its “Task Force” is due to report imminently on its assessment of a number of issues including how the cost of heat to customers can be reduced and whether there is a role for regulation to ensure customers receive good service.

What does this mean for developers?

The CMA is expecting to complete its study by December 2018, with an interim report issued in June 2018. If the CMA finds issues of particular concern, it may:

  • launch a full market investigation
  • open a consumer or competition enforcement case
  • make recommendations to government to change regulations in this area.

The CMA has recognised however that its market study must support “the sustainability of this market for all stakeholders, including current and potential suppliers” and has stated that it will “be mindful of confidence on the supply side and the risk of chilling investment”.

As this sector continues to grow apace, it is perhaps unsurprising that the CMA have launched this study given the lack of regulatory scrutiny imposed to date. However, the CMA’s study doesn't detract from the growing number of opportunities, provided developers consider these key issues in the design of their scheme.

Burges Salmon’s award-winning energy lawyers have a wealth of experience advising on heat projects and networks. If you are interested in hearing more from us please contact Nick Churchward or Emma Andrews.

Key contact

Nick Churchward

Nick Churchward Partner

  • Head of Resource and Waste Management
  • Projects
  • Energy and Utilities

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