Guidance

Energy Security Bill factsheet: Heat networks regulation and zoning (updated 20 March 2023)

Updated 1 September 2023

Summary

The Bill introduces a regulatory framework for heat networks and powers to enable heat network zoning in England. The measures will work together to reduce the cost of living by regulating prices and ensuring this sector can contribute to delivering net zero in the most cost-effective way.

There are over 14,000 heat networks in the UK, providing heating and hot water to approximately 480,000 consumers.

Heat Networks will play a key role in achieving net zero. The Climate Change Committee estimated that around 18% of UK heat could come from heat networks by 2050 to support cost-effective delivery of our carbon targets (up from around 2% currently). They are a proven, cost-effective way of providing reliable, efficient, low carbon heat at a fair price to consumers, while supporting local regeneration. They are uniquely able to unlock otherwise inaccessible larger scale renewable and recovered heat sources such as waste heat.

As set out in the Heat and Buildings Strategy, we are investing £338 million over 2022/23 to 2024/25 into a broader Heat Network Transformation Programme to scale up low-carbon heat network deployment and to enable local areas to deploy heat network zoning, which will create a step-change in low-carbon heat network market growth.

Why are we legislating? – Heat Networks Regulation

A heat network – sometimes called district heating – is a distribution system of insulated pipes that takes heat from a central source and delivers it to a number of domestic or non-domestic buildings.

Heat networks are a crucial part of how the UK will reach its net-zero targets as they are one of the most cost-effective ways of decarbonising heating in built-up areas at a fair price to consumers, while supporting local regeneration. They are uniquely able to unlock otherwise inaccessible larger scale renewable and recovered heat sources such as waste heat from industry and heat from rivers and mines.

They will therefore play a key role in achieving net zero. The Climate Change Committee estimated that around 18% of UK heat could come from heat networks by 2050 to support cost-effective delivery of our carbon targets (up from around 2% currently).

Currently, there are no sector specific protections for heat networks consumers. The Competition and Markets Authority (CMA) carried out a market study into the sector in 2018 and found that although on average heat networks deliver a comparable service to individual heating systems, there was a sufficient minority of consumers who receive significantly worse outcomes, such as high prices and frequent outages. The CMA recommended that the government regulate the sector.

These measures will make good on our acceptance of this advice to regulate the sector and will extend Ofgem’s role to cover heat networks. As the regulator Ofgem will help to ensure consumers get a fair price and reliable supply of heat. Ofgem will also facilitate market growth by ensuring heat network developers can access powers equivalent to other utilities such as gas and electricity, including powers to excavate roadways. This will enable heat networks to be built out more quickly and cost effectively.

These measures will also support the decarbonisation of the sector and energy efficiency improvements by promoting technical standards and introducing carbon emissions limits on heat networks. The growth and decarbonisation of the market will make a vital contribution to government’s net zero ambition and create jobs. With a regional pipeline in the North East of England of over £500 million, heat networks will support government’s Levelling Up objectives and help spread opportunity more equally across the UK.

How the Bill will achieve this – Heat Networks Regulation

The Bill appoints Ofgem as heat networks regulator. It contains powers to introduce an authorisation regime so that organisations that supply heat through a heat network or operate a heat network can be effectively regulated. It provides for the introduction of authorisation conditions and other regulations set by government and Ofgem. We intend for these conditions and regulations to include provision for fair prices and transparent information for consumers, a high quality of service, and minimum technical standards and carbon limits.

Ofgem will monitor compliance and will be given powers under the Bill to take enforcement action where heat networks are not meeting the required standards.

Regulations under the Bill are expected to provide Ofgem with powers to investigate and intervene where consumer prices appear to be disproportionate compared with heat networks with similar characteristics, or if prices are significantly higher than those consumers would expect to pay if they were served by an alternative and comparable heating system. The Bill also provides the Secretary of State with powers to introduce various forms of price regulation, including a price cap, should it be necessary to protect consumers whilst growing and decarbonising the market.

The Bill contains powers to introduce a licensing regime through which Ofgem will be able to grant licences that give heat network developers rights and powers similar to those held by other utilities. It is proposed that a licence will grant access to particular permits, for example for street works, and allow the same use of land when building and maintaining heat networks as electricity, gas and water companies. This will reduce costs and accelerate market growth.

The Bill provides for the appointment of the Energy Ombudsman and Citizens Advice as the sector’s Alternative Dispute Resolution Body and consumer advocacy body respectively through secondary legislation.

FAQ – Heat Networks Regulation

How soon is heat networks regulation going to come into effect and what is the government doing in the meantime to support heat networks consumers until the regulations come into place?

We expect heat networks regulation to come into force as early as early in 2024. Following a period of being automatically authorised to operate, all heat networks will be required to notify to Ofgem to maintain their authorised status. Government encourages all heat networks to prepare for regulation now by following existing good practice, such as that set out by the Heat Trust and the industry’s Code of Practice.

We are aware of the immediate effect of energy price increases on the bills of people living on heat networks and support is available throughout this winter. The Energy Bill Relief Scheme (EBRS) will enable the Government to provide financial assistance for all eligible non-domestic customers, including heat network operators, to ensure they are protected from excessively high energy bills over the winter period.

The Government Supported Price has been set at £211 per megawatt hour (MWh) for electricity and £75 per MWh for gas, less than half the wholesale prices anticipated this winter when the scheme was announced.

The price reduction will include charges for electricity and gas used initially from 1 October 2022 to 31 March 2023. The Energy Prices Act requires eligible heat network operators to pass on discounts from the EBRS to their consumers. They will also be required to explain how they intend to reduce prices or hold them down if their prices are already low. We are also using legislation to appoint the Energy Ombudsman as a body that consumers can go to this winter if they are concerned their heat network operator is not meeting the requirements of legislation.

The EBRS was designed as a temporary six-month measure to protect non-domestic consumers from soaring energy costs, cutting the cost of power bills and providing consumers with the certainty they needed to plan through the acute crisis this winter. The government has been clear that such levels of support were time-limited and intended as a bridge to allow businesses to adapt. The latest data shows wholesale gas prices have now fallen to levels just before Putin’s invasion of Ukraine and have almost halved since the current scheme was announced.

A new scheme was announced on 9 January, the Energy Bills Discount Scheme (EBDS), which will run for 12 months from 1 April 2023 till 31 March 2024. It strikes a balance between supporting businesses over the next 12 months and limiting taxpayers’ exposure to volatile energy markets, with a cap set at £5.5 billion based on estimated volumes.

How will this regulation help heat networks consumers face the rising cost of living and heating bills?

The Bill provides the Secretary of State with powers to introduce various forms of price regulation, including a price cap, should it be necessary to protect consumers whilst growing and decarbonising the market.

Through the Bill, Ofgem will take on the role of heat networks regulator. Regulations are expected to give Ofgem powers to investigate and intervene on networks where prices for consumers appear to be disproportionate compared with heat networks with similar characteristics, or if prices are significantly higher than those consumers would expect to pay if they were served by an alternative and comparable heating system.

Finally, it is proposed to make regulations under the Bill to give Ofgem powers to set rules requiring heat networks to publicly disclose sufficient information to the consumer to understand how much they are paying, including but not limited to, their fixed charges, tariffs, and unit rates, and provide clear explanations about how prices are set and how heat network consumers are billed.

Is the government planning to introduce a price cap for heat networks consumers?

Heat networks (District or communal heating systems) typically buy their energy through commercial contracts. These commercial contracts are not covered by the existing Default Tariff Price Cap.

The legislation provides the Secretary of State with powers to introduce a price cap should it be necessary to protect consumers whilst growing and decarbonising the market.

In addition, secondary legislation is intended to give Ofgem powers to investigate and intervene on networks where prices for consumers appear to be disproportionate compared with systems with similar characteristics, or if prices are significantly higher than those consumers would expect to pay if they were served by an alternative and comparable heating system.

Background – Heat Networks Regulation

In February 2020 we published the Heat Networks: Building a Market Framework consultation where we set out our proposals for regulation. In December 2021 we published the government response to the consultation, where we reaffirmed our commitment to legislating to regulate within this Parliament.

As well as introducing a heat networks regulatory framework, the Bill introduces powers to enable heat network zoning in England.

In addition to our measures in the Bill, we are supporting the growth and decarbonisation of the heat networks sector through several schemes.

We have launched the Heat Network Zoning Pilot Programme (HNZPP). The pilot is being conducted in around 28 English cities and towns of varying sizes to test a methodology for identifying heat network zones. We will be working with local authorities and relevant stakeholders to collate key information that will underpin the work.

The Green Heat Networks Fund (GHNF) is a 3-year £288 million capital grant fund that will support the commercialisation and construction of new low and zero carbon heat networks and the retrofitting and expansion of existing heat networks. The scheme launched on 14 March 2022 and will run until 2025.

The GHNF is the successor to the Heat Networks Investment Project (HNIP), which provided £320 million of capital funding to heat network projects in England and Wales between 2016 and 2022.

The £32 million Heat Network Efficiency Scheme (HNES) provides grants for existing heat networks and communal heating systems to part-fund the installation of improvement measures and carry out Optimisation Studies. By delivering targeted and cost-effective improvements HNES aims to improve the efficiency of poorly performing heat networks and improve outcomes for consumers. This should save consumers money on their bills and reduce carbon emissions.

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Further information – Heat Networks Regulation

Text The following documents are relevant to the measures and can be read at the stated locations:

• Government response to the Heat Networks Market Framework consultation (2021)
• Heat Networks Market Framework consultation (2020)
• Heat and buildings strategy (2021)

Why are we legislating? – Heat Networks Zoning

Heat network zoning is a key policy solution to help reach the scale of expansion of heat networks required to meet net zero. Certain localised areas are particularly suited to heat networks due to a range of factors such as building density and availability of heat sources (for example, excess heat from industrial processes or environmental sources such as ground and river source heat).

Zoning involves central and local government working together with industry and local stakeholders to identify and designate areas within which heat networks are the lowest cost solution for decarbonising heat. Certain buildings within zones would be required to connect to the heat network.

This will help overcome barriers to deployment that the heat network market currently faces and help deliver the growth we want to see in the market:

• By identifying where heat networks are cost-effective solutions to heat decarbonisation, zoning will provide local stakeholders with clarity and confidence as to where heat networks should be located.
• Knowing that certain types of building within a heat network zone will connect to a district heat network and use the heat provided, provided it is cost-effective to do so, gives project sponsors and investors greater assurance which helps support delivery of viable, large-scale heat networks. This will support the growth of the market and accelerate deployment of heat networks.

The heat network zoning proposals are expected to deliver an additional 31 terawatt-hours of deployment in the period to 2050 (equivalent to around 7% of total UK heat demand) and save 13.1 million tonnes of CO2e over carbon budgets 4 to 6 (2023 to 2037).

How the Bill will achieve this – Heat Networks Zoning

These measures will provide powers for government to implement heat network zoning in England through regulations. This includes powers to:

• Develop a nationwide methodology for identifying and designating areas as heat network zones;
• Establish a new Zoning Coordinator role, which we generally expect would be fulfilled by local government, with responsibility for designating areas as heat network zones and enforcing requirements within them;
• • Require heat networks developed in zones to meet a low carbon requirement and for certain buildings and heat sources to connect to a heat network in a zone within a specific timeframe.

FAQ – Heat Networks Zoning

Will domestic consumers be forced to connect to heat networks?

Our proposals for zoning envisage that new buildings, large public sector buildings, large non-domestic buildings and domestic premises which are already communally heated would be required to connect to a heat network within a prescribed timeframe.  

Domestic premises within a heat network zone which do not have communal heating systems installed will not be required to connect but may still choose to do so.  

In all cases, we propose that exemptions may be sought where it would not be cost-effective to connect, compared to an alternative low carbon solution. 

Will local government have enough money/resource to fulfil the proposed zoning role?

We recognise that heat network zoning policy will be dependent on local government having the right resources to deliver its responsibilities effectively.  

A pilot of the zoning methodology is currently underway in 28 towns and cities across England. This and other Government studies will provide evidence which we will use to inform detailed policy design, including around local government resource requirements.

Background – Heat Networks Zoning

The 2020 Energy White Paper committed us to support local government to designate new heat network zones, no later than 2025, as a key part of our strategy for growing the heat network market. In 2021 this commitment was reiterated in the Heat and Buildings Strategy and the Net Zero Strategy

In October 2021 we consulted on proposals which have informed the measures in this Bill. This was the first step towards delivering our Energy White Paper commitment and we will publish further consultations which refine the proposals and explore how they will work in practice. This will inform the secondary legislation that will be used to implement the policy.

In February 2022 we launched the Heat Network Zoning Pilot Programme (HNZPP). The pilot is being conducted in 28 English cities and towns of varying sizes to test the methodology for identifying heat network zones. We will be working with local authorities and relevant stakeholders to collate key information that will underpin the work.

Further information – Heat Networks Zoning

The following documents are relevant to the measures and can be read at the stated locations:

• Proposals for heat network zoning (2021)
• Heat network zoning pilot (2022)
• Heat and Buildings strategy (2021)