Draft Heat Networks (Market Framework) (Great Britain) (Amendment) Regulations 2025
(1 day, 7 hours ago)
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The Parliamentary Under-Secretary of State for Energy Security and Net Zero (Martin McCluskey)
I beg to move,
That the Committee has considered the draft Heat Networks (Market Framework) (Great Britain) (Amendment) Regulations 2025.
It is a pleasure to serve under your chairmanship, Sir Alec. Heat networks are a pivotal part of our mission to achieve net zero. They are proven to be the most affordable low carbon heat solution in high-density areas, and they can access heat from a variety of sources, including waste heat from growth sectors such as artificial intelligence, which will support energy resilience in an uncertain world. That potential has fuelled Government ambition, and by 2050 we aim to grow heat networks from the current 3% of the UK’s heat demand to 20%. For that ambition to be realised, consumers need to know that they can trust heat networks to provide safe, reliable and cost-effective heat. That starts by ensuring that the nearly half a million households that already rely on heat networks are getting the best possible levels of service.
As the Minister for Energy Consumers, I have met people who are experiencing poor customer service and frequent outages, and people who have been left frustrated by poor communication and opaque prices—most recently two weeks ago in Edinburgh. There can be no greater motivation to get on and put in place a market framework that delivers for all heat network consumers. The Energy Act 2023 provides powers for the Secretary of State to introduce regulations to apply in Great Britain. As per section 220 of the Energy Act, we have consulted Scottish Ministers on these regulations and we have their support in this matter. These regulations, as Members will know, do not apply to Northern Ireland. The Northern Ireland Executive have their own powers to introduce regulation.
In March, when this House approved the Heat Networks (Market Framework) (Great Britain) Regulations 2025, we took the first step in ensuring that consumers in a heat network will receive protections comparable to those for gas and electricity. Those regulations introduced the authorisation regime, which will work similarly to the domestic gas and electricity licensing regime and will provide heat network consumers, including the most vulnerable, with the protections they need and deserve.
From 27 January, Ofgem will have the powers to investigate and take action where heat network prices are unfair, to put in place protections from disconnection for vulnerable consumers, and to establish complaints handling processes and standards of conduct that require heat network suppliers to treat their customers fairly. That is just the start, as we seek for the first time ever to establish a regulated market framework to protect heat network consumers and support sector growth.
This statutory instrument builds on the previous statutory instrument by amending it. The amendments expand on the authorisation regime that Ofgem will implement. That includes the provision of powers to Ofgem to assist with the conduct of pricing investigations. Those powers are essential if Ofgem is to protect consumers from unfair high prices and ensure that price decisions are fully tested and transparent.
Other new requirements include the introduction of deemed contracts for households that are being supplied without an official heat supply contract in place. That will ensure that their rights are protected and they will not have their supply disrupted. Additionally, the regulations include provisions to protect consumers if a heat network becomes insolvent. A special administration regime will seek to ensure that consumers do not experience interruptions to their supply of heating and hot water in the event of a heat network operator or supplier insolvency. The statutory instrument also makes it clear that air conditioning systems will be explicitly excluded from the scope of these regulations. Those systems are different from heat networks, and we believe that including them would not be proportionate or in the interests of consumers.
The regulations include provisions to partially revoke the Heat Network (Metering and Billing) Regulations 2014. This is designed to avoid duplication in legislation, as some existing requirements and obligations on heat suppliers in the 2014 regulations will be simplified and made more user-friendly, rather than removed entirely. Finally, the regulations make changes to the scope of the ombudsman scheme. The addition of small businesses aims to align the scope for heat networks with the scheme’s application in gas and electricity markets.
Members may notice that there is a slight error in regulation 10, which would have the effect of applying a different definition for a micro-business from that in gas and electricity markets. My officials are aware of this issue, and we will ensure that this error is rectified before the authorisation regime comes into effect.
Technical standards for heat networks are a crucial element of the market framework. We have committed to mandating minimum technical standards, and we aim to consult on proposals shortly. However, those are not in scope of this statutory instrument. There will be an opportunity to discuss that in Committee in more detail at a later date when we introduce regulations.
The regulations have been informed by four public consultations dating back to February 2020, in the time of the previous Government. Feedback from those consultations has been crucial in developing the final proposals included in the earlier 2025 regulations and in these ones. The detailed Ofgem authorisation conditions are still being consulted on and will be published before the authorisation regime commences on 27 January 2026.
This statutory instrument is the culmination of years of engagement with the sector, consumers and their representatives. It seeks to introduce the final elements of the heat network market framework, providing better consumer protections and outcomes. That and the wider heat network regulatory regime represent the first big step in providing heat network consumers with equivalent protections to those in gas and electricity markets. It provides regulation proportionate to the size of Government’s ambitions for the heat network sector and its future growth.
Andrew Bowie (West Aberdeenshire and Kincardine) (Con)
It is a genuine pleasure to serve under your chairmanship for the first time, Sir Alec. Congratulations on your appointment to the Panel of Chairs.
This statutory instrument amends The Heat Networks (Market Framework) (Great Britain) Regulations, building on the commitments made in part 8 of the Energy Act 2023—what an Act that was. Heat networks are largely unregulated, leaving consumers vulnerable to expensive heat network contracts with little to no control, since the decentralised heat and water networks are not governed by the same regulation as other utilities. The remaining components of those regulations come into force in January 2026, and along with the Energy Act 2023—with which I am incredibly familiar, having spent hours, weeks and months of my life as the Bill Minister for that legislation—they create the foundation of a regulatory framework.
The statutory instrument establishes a special administration regime for protected heat network companies, designed to maintain essential heating services to ensure continuity of service if a heat network operator becomes insolvent. It mirrors similar arrangements in other regulated sectors, such as electricity and gas. As the Minister said, the statutory instrument also gives Ofgem the powers to investigate disproportionate pricing on heat networks. What guarantee can the Minister give that that will adequately protect the 500,000 homes across the country, including some in my own constituency, that have very little power over the price they pay to be connected to a specific heat network?
The lack of regulation for heat networks has created challenges for consumers. The Energy Act addressed that by introducing a comprehensive regulatory framework for heat networks. Under that Act, Ofgem will become the statutory regulator for heat networks from January 2026. The Act also provided for the appointment of consumer advocacy bodies and ombudsman services, which began earlier this year, and it sets out a staged implementation timeline. From 27 January 2026, the full authorisation regime and special administration permissions will come into effect, marking a significant step towards a regulated market—something that we very much welcome.
Although the statutory instrument is a necessary step towards the regulation of heat networks as set out in the Energy Act, I take this opportunity to reiterate the genuinely desperate situations some of our constituents find themselves in as a result of unregulated decentralised heating, paying extortionate fees with no way out. There have been well-documented cases of consumers facing high cost and limited options under existing arrangements.
With the new framework live at the end of January, it is essential that Ofgem and the Government are fully prepared to deliver effective protections for consumers. I would be grateful if the Minister confirmed what steps are being taken to ensure that the special administration regime will effectively protect consumers, and that the amendments introduced by this statutory instrument are sufficient to ensure fairness. We do not, of course, intend to oppose the regulations, but I emphasise the need for robust implementation to ensure that heat network consumers receive the protections promised under the Energy Act.
Martin McCluskey
I am sure that, having experienced the original work on the 2023 Act, the hon. Member for West Aberdeenshire and Kincardine has a firm grip of exactly what is in here. I am pleased to have been able to relieve him of the burden of the heat network regulations by taking on this role as Minister for Energy Consumers.
On the two points that the hon. Gentleman raises, I am confident both that what we are doing with zoning—that does not apply to Scotland, as he will know—will provide more regulatory power for those who are connecting to heat networks; and that this measure and subsequent regulations will ensure that people are properly protected. I agree with his comments about unregulated, decentralised heating networks. Many Members will have heard from constituents who have experienced real detriment because of a lack of regulation in this area.
As the hon. Gentleman will know, there are more than 12,000 heat networks across the country, many of which are old legacy systems, and other regulations that we will introduce will address some of the legacy issues with older heat networks. However, I am confident that what we have laid out today will provide additional support. Obviously, there will be further detail on the SAR process, but today is about setting out the general principles. The detailed processes and procedures will be delivered through separate instruments further down the line. I hope that that provides him with the reassurance he was looking for.
With the introduction of market regulation to this sector, the Government are doing something that has never been done before. All households that are connected to a heat network, including the most vulnerable, will now enjoy statutory protections. Heat networks, as I said earlier, could play a crucial role in helping to deliver our ambitions to become a clean energy superpower. To support that, we are proposing proportionate protections for current and future heat network consumers. I commend the regulations to the Committee.
Question put and agreed to.
Draft Financial Services and Markets Act 2023 (Prudential Regulation of Credit Institutions) (Consequential Amendments) Regulations 2025
Draft Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025
(1 day, 7 hours ago)
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The Economic Secretary to the Treasury (Lucy Rigby)
I beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2023 (Prudential Regulation of Credit Institutions) (Consequential Amendments) Regulations 2025.
The Chair
With this it will be convenient to consider the draft Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025.
Lucy Rigby
It is a pleasure to serve under your chairmanship, Mrs Harris.
I turn first to the environmental, social and governance ratings order, which I note the Secondary Legislation Scrutiny Committee flagged as an instrument of interest in its 41st report. The draft order will bring the provision of ESG ratings within the regulatory perimeter of the Financial Conduct Authority. Regulation will improve standards in the market, boost investor confidence and reduce greenwashing, and it has strong support across the financial sector.
As hon. Members will be aware, ESG ratings are a spectrum of products usually marketed as providing an assessment of the ESG profile, characteristics, risk exposures or impacts associated with a company, fund or other financial instrument. ESG ratings are widely relied on by investors to guide investment decisions in line with sustainability risks, opportunities and preferences. Of the £10 trillion-worth of assets under management in the UK in 2024, half had integrated ESG factors into the investment process. In the UK in 2024, more than 5,400 firms were using ESG ratings.
However, the ESG ratings market has developed rapidly and without formal oversight. This has led stakeholders and users to raise concerns about transparency, governance, internal controls and potential conflicts of interest within ESG ratings providers. Identifying these concerns, the International Organisation of Securities Commissions published recommendations for ESG ratings and data providers, calling for higher standards and sufficient oversight in the sector. The Government have acted quickly to deliver progress on this important agenda.
Chris Coghlan (Dorking and Horley) (LD)
The Liberal Democrats welcome this measure, but what work have the Government done to ensure that the regulation will be in line with that of international regulators such as the Securities and Exchange Commission, to reduce the burden on our businesses?
Lucy Rigby
We remain open to the prospect of regulatory alignment with other regimes. We want to get this done first, but the hon. Gentleman raises an important point.
As I say, the Government have acted quickly to deliver progress. As hon. Members will know, a consultation was issued by the previous Government; this Government have ensured that the consultation response and draft legislation were published for technical comments as part of the Chancellor’s first Mansion House speech. That draft legislation has been refined into the ESG ratings order before the Committee.
The draft order will create a new regulated activity of providing an ESG rating where that rating is likely to influence a decision to make a specified investment. This will require providers of ESG ratings to be authorised and be supervised by the FCA. In recognition of the fact that ESG ratings are provided by a range of different persons, the scope of the regulated activity is designed to be proportionate to the risk of harm, avoiding dual regulation and maintaining consistency with the existing regulatory framework. The draft order contains specific exclusions to that effect, for example where a firm is providing ESG ratings as part of another regulated activity.
To support the integrity of the UK market and ensure a level playing field, ESG ratings that are provided to a UK customer by an overseas provider will fall into the scope of the regulated activity, except where those ratings are provided without remuneration or financial incentive. The Government support open, competitive and internationally connected financial markets, and we therefore intend to give further consideration to market access arrangements for overseas ESG ratings providers.
In the interests of allowing plenty of time for industry to engage, while also delivering a regulatory regime in a timely manner, the FCA launched its consultation on the specific regulations for ESG ratings providers on 1 December, on the basis that the draft order had been laid on 27 October. The FCA rules will be designed to be proportionate and tailored to address harms while protecting innovation, in line with the regulator’s secondary growth and competitiveness objective.
The proposal to bring ESG ratings providers into regulation has received strong support from industry. The move will strengthen market integrity and boost investor confidence, helping the sector to attract new users and providers. The draft order is a core part of the Government’s agenda to drive growth in the UK’s sustainable finance market.
The draft prudential regulation of credit institutions regulations are a technical instrument that makes changes to support reforms to UK banking regulation. The regulations will keep our legislation for financial services effective, and they will assist the Treasury in applying the FSMA model of regulation to set a prudential framework for banks. The regulations do not introduce any new regulatory requirements for firms.
As hon. Members will be aware, banks are required to follow a set of prudential regulations to manage their risk appropriately and maintain adequate levels of capital to protect against any losses. In addition, the biggest banks are required to hold additional loss-absorbing debt to ensure that they can be allowed to fail without the need for taxpayer-funded bail-outs such as those seen during the global financial crisis.
A significant amount of prudential regulation is set out in the capital requirements regulation, or CRR, which formed part of domestic law during our time as an EU member state. Following our exit from the EU, the Government have been tailoring the existing financial services framework to the UK’s needs. That includes the CRR, which will be removed from the statute book and largely restated in the Prudential Regulation Authority’s rulebook, providing more flexibility and allowing the PRA to set the relevant requirements.
To do that, legislation has been passed to revoke the CRR—notably in FSMA 2021 and FSMA 2023. In that context, the Government have brought forward these technical regulations to make a small number of consequential amendments to pieces of legislation that refer to specific CRR articles—specifically, they amend the Banking Act 2009 to ensure that definitions relating to share capital instruments and banks’ own funds reflect the revocation of certain CRR articles.
In summary, although these draft regulations are technical and do not introduce any new rules, they are nevertheless a necessary step in continuing the reform of our banking regulation to ensure that our regulatory framework remains coherent. I commend the regulations to the Committee.
Gareth Davies (Grantham and Bourne) (Con)
It is always a great pleasure to see you in the Chair, Mrs Harris. I will follow the Minister’s lead by starting with the ESG ratings order before moving on to the draft regulations.
The Minister usefully and clearly set out the Government’s view of the ESG ratings order and what it aims to achieve. I want to ask two questions in particular, straight out of the gate. First, although she referred to this slightly in answering the hon. Member for Dorking and Horley, could she go into more depth about the approaches taken in other jurisdictions—particularly the United States and the EU? What are the specific implications for our competitiveness? She mentioned that she is open to alignment with other jurisdictions, and she specifically said that she is open to allowing the ratings of overseas ratings providers to be recognised in this country. But will she address the specific point about competitiveness and where the order stands in the global ecosystem of ESG ratings regulation? It would be helpful to understand that.
Secondly, I understand that in the responses to the consultation concerns were raised about charities being granted an exemption. Is the Minister concerned that charities, and particularly household names, might publish ESG scores against certain companies and sectors that investors take seriously, despite there being a lack of transparency on how those scores were reached? I have taken a particular interest as that legitimate concern stood out from the consultation.
As the Minister considers those answers, it is useful for us to step back as we think about ESG to ensure that, as we scrutinise the draft order, we talk about the overall effectiveness of ESG in supporting the interests of savers and investors in the country. My view, having led an ESG team in my previous life—I think this view is shared by a lot of savers and investors in the industry— is that investment managers should always act with the aim of delivering sustainable returns for investors. From the teacher who has paid into their pension their whole life to the entrepreneur who has just sold their business and invested all their money, many people from all walks of life entrust their money to investment firms and portfolio managers, and they rightly expect financial professionals to uphold their fiduciary responsibilities.
In recent years, however, many, including me, have expressed the view that the rise of ESG has allowed and encouraged some fund managers to impose their own values on investment portfolios, thereby potentially impacting the returns achieved for thousands of investors. Of course, where individuals have enough money for a separate account, or where other retail investors choose to invest in a dedicated ESG fund, that is their choice. They may well pay a premium for not investing in certain industries and be comfortable with that.
Chris Coghlan
The shadow Minister makes an interesting point about the personal views of some fund managers. What is his view on including defence stocks in ESG portfolios, given the change in the geopolitical situation?
Gareth Davies
If the hon. Gentleman will allow me, I will come on to that point. It is a very hot topic right now, in terms of our national security, and I think there are implications when it comes to ESG ratings and the overall ESG approach that many fund managers take.
As I was saying, the overall picture is that there is a risk that everyday savers might miss out on returns because of the values and ideals pursued by a particular fund or fund manager, without their expressed wishes necessarily being taken into account. If we accept, as many do, that this is a problem for funds, it follows that it extends to those who provide ESG ratings, too. Therefore, more transparency, which this measure achieves, could and should help to mitigate the risk for savers.
At a broader level, I have made very clear my personal opinion that ESG has gone too far towards values-driven investing, while neglecting to include our collective national, strategic and economic interest. At a time when the world is increasingly geopolitically unstable, and with an aggressive Russia at the door of Europe, is it really responsible or ethical to shun investment in defence companies?
I believe this mindset undermines our national security effort, but it also means that savers and investors could miss out on better returns. The FTSE 100 index is up around 19% for the year to date, compared with shares in Rolls-Royce, which are up 77%; shares in BAE, which are up 38%; and shares in Babcock, which are up 118%. Those companies form the bedrock of the British defence industry. Over the past year, they would have delivered better-than-average investment returns for savers, but so many savers have been excluded from investing in such companies, perhaps without their knowledge.
Similar national importance could be attached to oil and gas companies and investments. Even the Climate Change Committee has been clear that the consumption of oil and gas will be needed for years to come as part of our energy security. Yet just last week, the National Energy System Operator warned that Britain could face gas shortages by 2030 if the industry—
The Chair
Order. While I appreciate the shadow Minister’s thoughts, could he please keep his speech within the context of our debate?
Gareth Davies
I am grateful for your guidance, Mrs Harris. This is related to ESG, which is about environmental, social and governance principles, and accordingly an investment approach and ratings. I was talking about defence as part of the “S”, and oil and gas as part of the environment.
The Chair
Order. I have to be guided by the Clerk, who fears that we may be going out of scope. I would appreciate it if the shadow Minister kept his remarks to the task in hand.
Gareth Davies
I will end my point by simply suggesting that it is not serving investors or the country well by being excluded from oil and gas companies or defence stocks as part of an ESG strategy that they perhaps did not know about.
I now turn to the draft regulations, which revoke assimilated EU law relating to financial services and replace it with rules set by the Bank of England and the PRA. This is part of an ongoing process to repeal and replace assimilated EU financial services law following our departure from the European Union. The purpose of the draft regulations is largely to revoke the relevant parts of the assimilated prudential regime, as set out in the capital requirements regulation, and replace them with the PRA rules, as the Minister set out.
As the Minister made clear, the draft regulations make consequential technical amendments to UK legislation for the purpose of legal coherence. In practice, any references to revoked CRR provisions will be read as references to the corresponding PRA rules. Where no PRA rule exists, the amendments will help to avoid gaps in the legal framework, with which I think we can all agree. This instrument continues the process begun under the previous Government, as the Minister said, and therefore the Opposition do not oppose it.
Lucy Rigby
I welcome the consensus on the draft regulations. Four principal points were raised in relation to the draft order. The first was on the international position, and the recommendations we are putting in place in this draft order are in line with the IOSCO and OECD recommendations. The EU framework has been legislated for, but it will not come into force until 2026. In many areas of financial services, we have the ability to put in place an overseas recognition regime—an ORR. We do not yet have the ability to do that in relation to this, but we hope to take the power in the next financial services Bill to enable us to bring forward exactly this kind of measure where we wish to do so. The shadow Minister might be aware that Hong Kong, Singapore and Japan have codes of conduct of this nature.
In relation to charities—this is a good point and was considered—the scope of the regulated activity set out in the draft order is designed to be proportionate to the risk of harm. As such, charities will be excluded from regulation where a rating is provided on an occasional or one-off basis, or where there is no remuneration or other financial benefit provided to the charity. As I said, this approach, informed by consultation, ensures that the regulation is risk-based and proportionate while avoiding loopholes.
The shadow Minister also mentioned defence. The Chancellor has stated very clearly her view that supporting the defence industry, and indeed Ukraine, is consistent with ethical investing. The regulation will allow investors to more fairly evaluate ESG risks and opportunities related to defence companies. I should make it clear that we have engaged extensively with the defence sector, and we think there is quite limited evidence that defence firms have struggled to access finance on ESG grounds.
Briefly, the fiduciary duty is important and, as the shadow Minister knows, it has been much discussed. The Pensions Minister will address it further in subsequent stages of the Pension Schemes Bill.
Gareth Davies
I am very grateful to the Minister for outlining the Government’s position on defence stocks. I wonder whether she could do the same for oil and gas.
Lucy Rigby
The point in relation to oil and gas is exactly the same as that for defence. There is no conflict between what we are doing here and investment in those areas. If anything, it will be helpful across the board. Fiduciary duty was the final point raised, so I will leave it there.
Question put and agreed to.
DRAFT FINANCIAL SERVICES AND MARKETS ACT 2000 (REGULATED ACTIVITIES) (ESG RATINGS) ORDER 2025
Resolved,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025.—(Lucy Rigby.)