Financial penalties and compensation paid by heat network suppliers for outages and regulatory non-compliance must not be passed on to the customers they are serving, the Heat Trust has urged.
The body has also called for price protections for heat network customers, warning that without an “enduring equivalent” to the domestic energy price cap, the regulation of heat networks will be viewed as a failure in the eyes of consumers.
The organisation was responding to a government consultation on the planned introduction of consumer protections as part of a new regulatory regime for heat networks. Under the proposals, heat network suppliers and operators will be licenced and regulated by Ofgem in a similar manner to other energy suppliers.
The Heat Trust said Ofgem faces an “unprecedented challenge” in regulating a “highly diverse sector of thousands of small heat suppliers, some with a history of poor performance and low levels of compliance with existing metering and billing regulations”.
The consumer advocate said the regulator must foster a “culture of compliance” through “robust and rapid enforcement activity.” It therefore welcomed the inclusion of financial penalties in Ofgem’s “enforcement toolkit”, but added that as most heat networks operate on a cost-recovery business model, the regulations must ensure that “consumers don’t end up paying their supplier’s fine for them.”
The Heat Trust likewise backed plans to require heat suppliers to pay compensation to customers for outages as happens for electricity and gas networks. The average consumer on a Heat Trust registered network experienced five outages in 2022, each lasting for an average of around five and a half hours. It noted that its own rules require suppliers to pay compensation for long or recurrent outages and so the performance of the rest of the sector is likely to be worse.
However, the Heat Trust again warned that compensation payments will be “cold comfort if the heat supplier can simply pass this cost, plus an administration charge, back to consumers,” either through heat bills or through rent if they are also a landlord.
It said the risk of this “injustice” emerging is particularly pronounced for smaller networks, where compensation costs cannot be spread across a large customer base: “Some consumers may end up paying more towards the compensation than they actually receive back.”
“Ofgem regulation needs to protect consumers from this while recognising that housing regulation requires landlords to run their networks on a cost pass-through basis,” it added.
In general, the body said it is “essential” that housing and energy regulations work together to protect consumers and that “one set of regulations does not undermine the intended outcomes of the other.”
The Heat Trust said the new regulatory framework must also ensure that customers “do not pay an unaffordable price premium” for their heating: “This means tackling the root causes of high heat bills, which include heat suppliers’ own exposure to uncapped commercial gas prices as well as the often-poor heat network efficiency that increases this exposure.”
Exacerbated by the inefficiency of some networks, which can use up to 3kWh of gas to deliver 1kWh of heat, the Heat Trust said the recent energy crisis has seen customers facing “extremely high” prices of as much as 50-60p/kWh: “We have been told of one central London council that is currently charging social tenants a flat rate for communal heating and hot water of £67.38 a week (£3,503.76 a year).”
The Heat Trust said the proposed Heat Network Technical Assurance Scheme (HNTAS) should go so way to addressing the issue of poor efficiency: “However, we have yet to see any government proposals to provide an enduring equivalent to the domestic energy price cap for non-domestic energy supplies to heat networks.
“Whilst this is outside the scope of the proposed regulation of heat suppliers, without such proposals to regulate the price of energy on which heat networks rely we believe that regulations will be unable to achieve the price-protection outcomes set out in this consultation. Without these, in the eyes of consumers, regulation will be seen to have failed.”
The Heat Trust also called for Ofgem to identify the most unreliable, inefficient and expensive heat networks and take “accelerated remedial action” to improve their reliability and efficiency before this would normally be required under HNTAS.
The organisation additionally raised concerns over a lack of transparency in the sector. It said no data has been published in the number of heat networks in the UK since 2018 and this information was actually collected in 2015: “It is not even currently possible for local authorities to identify heat networks in their area and most we speak to seem unaware of the number and location of existing communal heating schemes.”
The Heat Trust said many consumers were also “completely unaware” that their home was on a heat network until “long after they moved in when they received their first bill.”
“Many had assumed that their electricity bill also covered gas, or that they had electric heating,” the response added. “Many had mistaken their Heat Interface Unit for a gas boiler, as they can look very similar. Many consumers have no proper contract setting out the terms and conditions of their heat supply, leaving them extremely vulnerable to unfair practices by heat suppliers.”
It said regulation must “shine a light on the sector,” providing consumers with the information they need to exercise their rights and report regulatory non-compliance.
Stephen Knight, director of the Heat Trust, said: “Since our launch in 2015, Heat Trust has consistently called for government intervention in ensuring that heat network consumers have equivalent rights and protections to traditional gas and electricity consumers. We have continuously advocated for statutory regulation of heat networks and believe this can’t come quickly enough.”
He continued: “Many heat network consumers get a reliable and value-for-money heating system. But sadly, too many suffer high prices, unreliable systems and poor customer service.
“The experience of consumers facing huge, uncapped, price rises during the energy crisis has been especially difficult. Because heat network consumers cannot switch supplier, it’s vital that regulation delivers tangible improvements in terms of price protection, reliability and service quality.”