In February 2020 – which in some ways feels like 100 years ago – BEIS launched a consultation on the new regulatory framework for heat networks. With the deadline for responses now extended to 1st June, we’ve taken a look at the proposals and the new compliance challenges for the social housing sector.
There are well over 14,000 heat networks in the UK and social housing providers manages more than any other sector. But the reality for most is that they remain a minority of their overall portfolio. Up to now heat networks have been only regulated around their metering and billing. This is about to change with a wholescale shift to full utility regulation just like the gas and electricity markets, to which all heat network providers will have to comply.
So, what does this mean for the sector?
What’s BEIS proposing?
The BEIS ‘Heat Networks: Building a Market Framework’ consultation covers two main areas: legislative changes to give heat network developers equivalent statutory rights and undertakings to other utilities through a licencing arrangement, and making sure market expansion is accompanied by consumer protections to ensure people receive good quality outcomes at a fair price.
BEIS lays out their guiding principles for heat network regulation – that it should be clear, principle-based, proportionate, enforceable and flexible: regulating the many thousands of small heat network operators is going to be quite a different endeavour to the electricity and gas markets.
Ofgem has been proposed as the new regulator (which makes sense although we think they still have a lot to learn) with ultimate arbitration resting with the Energy Ombudsman. The proposed regulatory model is one of ‘general authorisation’, where networks notify the regulator rather than apply for a licence – a lighter touch to the gas and electricity markets and therefore less expensive. Those needing access rights under roads etc for developing larger district heating schemes can apply for an optional licence for rights and powers.
The new regulatory regime will apply to all heat networks – both new and existing – serving domestic and micro-SME customers (although there maybe exceptions for the very smallest of schemes. The plan is for authorised schemes to report yearly and pay an annual fee proportionate to their size. There’s also a plan to align the reporting with the Metering and Billing Regulation requirements to avoid duplication.
When it comes to protecting customers, BEIS are proposing a three-pronged approach:
· Transparency – the provision of information both before and during residency
· Pricing – public disclosure of tariffs with clear explanations of how they are compiled
· Quality of service standards – outcome based standards to help customers understand what is being provided by who and what to do if it goes wrong
So what does it mean for the social housing sector?
We see seven key risks to social housing heat network operators that you should begin thinking about right now:
1. Proportionality is everything: heat networks are not our raison d’être – we are housing providers above all else. On the most part we run our heat networks on a not-for-profit basis (and in some cases at a loss). Regulation must be proportionate and take into account that it is not core business for us: the way we notify, report and pay for regulation must be carefully balanced against making sure our customers are protected. The cost of regulation must also only be borne only by those who benefit from heat networks: currently that’s only 2% of the population so how these costs can be fairly socialised needs careful consideration.
2. A transition will be required: even though it’s unlikely that the new regulator will be in place for a couple of years, as a sector we need to be cut some slack in the transition to the new world order. Compliance will be relatively easy for new schemes, but for our older, legacy stock this is going to be a more complex process, not least because they’re also going to become the focus of the Metering and Billing Regulation’s cost effectiveness tool (at the time of writing, we’re still awaiting post-consultation clarity on timescales for this). Has anyone asked the question of what will happen if we aren’t able to comply with these older schemes?
3. It’s not fine by me: where remedial action for non-compliance fails, Ofgem will be able to impose fines. The consultation proposes that non-compliant heat network operators will be fined at the entity level, which for a local authority for example would be devastating and unfairly penalise their non-heat network citizens. We also believe that if one schemes has got to the point of fines being imposed, there could be further problems at an organisational level: this must therefore be used as an opportunity for a wholesale review of the heat network operator’s performance.
4. Revoke! If fines don’t work, then Ofgem will also be able to revoke authorisations for individual heat networks. How this would practically work for social housing providers is unclear: there’s a risk that a for-profit heat network operator would be put in place instead, pushing up the costs to the end customer (at a time when there’s already likely to be a deluge of customer complaints).
5. The joys of decarbonising heat: in the consultation, BEIS also proposes that heat network operators make information available to consumers about their energy performance and the share of low-carbon heat sources that they use – all good! However, there is another proposal that suggests where a heat network is failing and is beyond remedy, then one option is to switch the heat network to an alternative low carbon heating solution. Sadly, low carbon doesn’t (currently) mean low cost: electricity prices are currently three times higher than gas, and heat pump networks are unproven in terms of mass on-going operational costs for residents. BEIS needs to think more carefully about the practical implications of this.
6. Stand up to the (technical) standards: BEIS also uses this consultation to begin the conversation about minimum technical standards for heat networks, what it might look like and how it might work. More work is yet to be done on this (and more consultations will follow) but the risk as we see it is – once again – how this will impact on legacy schemes.
7. Three cheers for consumer protection: we’re strong advocates of transparency in communications and pricing, and have been suggesting that tariffs be made publicly available for a while. That said, it’s likely to require some careful thinking within your organisation. You must be able to fully explain and justify the costs you pass through to your heat network customers, especially if there are big differences between schemes. Honesty is always the best option, but be prepared for some serious customer liaison on the more expensive schemes. On the upside, with the for-profit publishing their prices too, our customers will be able to better see what a good deal they’re getting.