Bill Fowler, partner, and Adam Brown, managing practice development lawyer, Dentons Energy networks, Heat networks, Opinion

Heat networks are a critical part of decarbonising heat supply in the UK – and regulation is essential if the sector is to thrive.

The UK cannot meet its greenhouse gas emissions reduction targets unless it decarbonises its heat supply. To decarbonise in a cost-effective way, we will have to use energy sources other than methane and electricity generated from renewable sources. Large-scale switching to different gas fuels or electricity for heat would have significant physical and regulatory implications for the gas and electricity networks.

Meanwhile, there is a consensus that making more use of heat networks is a “no regrets” option. Networks currently supply only 2 per cent of UK heat demand, but this could increase to 18 per cent by 2050.

However, developing low-carbon heat networks is not easy for various reasons:

  • It is not clear how the markets for the various low-carbon energy sources will develop, so making a future-proof choice of fuel is not straightforward.
  • Developers face high capital costs and often have to negotiate a complex web of contracts with a disparate group of stakeholders with divergent interests.
  • How do you achieve long-term predictable returns that will attract affordable funding and still give consumers – who may have low understanding of and confidence in networks – a good deal?

On 23 July, the Competition and Markets Authority (CMA) published the final report of its heat networks market study. It found that:

  • For many customers, heat networks offer an efficient supply of heat and hot water at prices that are the same or lower than gas or electricity.
  • Some customers, however, particularly those on certain privately-operated schemes, have poorer outcomes in terms of price and service.
  • Where service and reliability problems arise, heat customers have limited consumer protection and there may be issues with accountability.

The CMA concluded that the sector should be regulated by a public sector body – Ofgem is suggested. A statutory framework should provide the same regulatory protection that gas and electricity customers enjoy, and the scope of regulation should include price, quality of service, transparency and minimum technical standards. Also, the regulator should have powers to introduce regulation in these areas and monitor and enforce compliance.

The UK and Scottish governments both want to expand the low-carbon heat sector. The question is whether they will find the time to legislate to implement the CMA’s recommendations.

 

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