Heat Networks (Market Framework) (Great Britain) Regulations 2025

Earl Russell Excerpts

Monday 3rd February 2025 Grand Committee

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, these regulations were laid before the house on 28 November 2024.

We know that to reach our net-zero commitment and reduce our reliance on international fossil fuels, we must use all the tools we have available. Currently, heating accounts for 23% of the UK’s carbon emissions. Two of our key technologies for decarbonising heat are heat pumps and heat networks.

Heat networks present us with an opportunity to enable a more resilient and flexible future for the UK’s heat, reducing carbon emissions and our future bills. Heat networks are particularly important, as they are in a unique position to exploit larger-scale and local low-carbon energy sources, such as large, efficient heat pumps and waste heat from industry or from natural sources that would otherwise be dumped. Proven internationally to provide affordable, low-carbon heat, heat networks are especially suited to dense urban areas. The Government expect that about 20% of the UK’s heat demand will be met by heat networks by 2050, which will be a significant increase from the current figure, which is about 3%.

We want to do everything that we can to support the much-needed growth of the heat network sector, but we also want to ensure that we deliver a fair deal for heat network consumers. Heat networks currently function as an unregulated monopoly: the 470,000 households that are supplied by heat networks cannot change their supplier if they are dissatisfied with their service or obtain redress if they are unfairly treated. The lack of regulation means that consumers are not guaranteed a fair service: heating is less reliable, suppliers are less transparent and it is harder for consumers to represent themselves or make complaints.

We have been working with consumer groups and have engaged in research that will allow, and has allowed, us to identify where this is happening in the market and what we can do to put in place measures to prevent such activity. These regulations are what we need to put in place to ensure that customers are protected. They stem from the Energy Act 2023, which provides powers for the Secretary of State to introduce regulations across Great Britain that will protect heat network consumers in a way that is rightfully comparable with other regulated utilities.

This statutory instrument seeks to provide protections to heat network consumers that are comparable with activities such as those in the gas and electricity sector. The instrument introduces an authorisation regime to be implemented by Ofgem; this will work in a similar way to the gas and electricity licensing regimes. It takes an outcomes-based approach to reflect heat networks’ diversity of scale and their nascent market position.

The regulations ban running a heat network without an authorisation. Existing heat networks are automatically given an authorisation in order to phase in market regulation. The conditions for authorisation are set by either the Secretary of State or Ofgem, and apply rules for running a heat network. Ofgem will be able to monitor compliance with regulations and act where appropriate.

Actions Ofgem can take include issuing information notices for compliance data, investigating suspected non-compliance, inspecting commercial premises of authorised persons and issuing a range of orders requiring remedial action. Consumer redress orders can also be issued, requiring that affected consumers are given compensation.

These regulations require Ofgem to publish statements of policy on how powers are used. Penalties will be proportionate to the authorised person’s size and the scale of harm that their non-compliance has caused. Additionally, the instrument gives Ofgem powers to set minimum performance standards. Although the scope of these standards is not defined in this instrument, these will include quality of service, outage minimisation and treatment of vulnerable customers.

This instrument also applies Parts 1 and 2 of the Consumers, Estate Agents and Redress Act 2007, with some modifications to apply them to heat networks. These create the roles of consumer advocacy bodies for heat network consumers, providing access to advice. It also extends the Energy Ombudsman’s redress scheme to these consumers. The regulations automatically enrol all heat networks into the scheme.

The commencement dates for some of the provisions are slightly different. This is because delays to the passage of the Energy Act mean that Ofgem cannot commence regulatory activities before January 2026. However, to ensure that heat network consumers are afforded some support before then, we are establishing the roles of the consumer advocacy, advice and redress scheme providers earlier, in April 2025.

Finally, this instrument makes amendments to the Heat Networks (Scotland) Act 2021, following extensive consultations with the Scottish Government. These amendments were made to ensure that Ofgem can regulate consistently across Great Britain.

My department has carried out two consultations to inform these regulations. The first consultation was on creating a market framework, in 2020; the second was on consumer protection, in 2023. Across both consultations, broad support for the structures created in this instrument was expressed. There is an ongoing consultation on the contents of the authorisation conditions, the outcome of which will be published before the authorisation regime commences.

In summary, this instrument represents the important first step in introducing comprehensive utility regulation to the heat network market. It lays the groundwork for a much fairer and just sector where heat network consumers are protected. We expect that this will provide a very good foundation for growing the sector in future. Putting consumer protection at the heart of our agenda is, we believe, a way to inspire public confidence. I beg to move.

[Earl Russell (LD)]

My Lords, I am pleased to say that we are very supportive of the heat networks regulations before us. We broadly welcome these moves, which will start to regulate the heat networks market in England, Wales and Scotland.

These regulations will bring in some much-needed consumer controls and protections for the customers of heat networks. As the Minister said, heat networks are a form of deregulated energy distribution, where heating, cooling and hot water are circulated from central sources of generation to multiple endpoints of use. These can include domestic dwellings as well as public and commercial buildings.

Frankly, it is shocking that heat networks have been largely unregulated to date, despite being an essential utility that is presently used by nearly 500,000 households in the UK. The only legislation that currently applies specifically to heat networks are the Heat Network (Metering and Billing) Regulations, which apply only to metering and billing.

Heat network customers have significantly fewer rights and protections compared with any other energy utility customers in the UK. A report carried out by the Competition and Markets Authority in 2018 found that the existing market was, in effect, a monopoly. It raised concerns about customer protections as this market grows and moves forward. To date, this market has been allowed to operate mostly unregulated. In all other aspects, heat network customers have fewer rights and consumer protections than any other energy customers.

We welcome the Government’s intention to grow this share of the energy market and we recognise that the extension of heat networks can bring benefits to customers as we make the energy transition. We welcome the use of large-scale heat pumps and novel uses of waste heat, particularly in urban areas. The recently announced Bunhill 2 Energy Centre, which will provide heat and hot water to more than 1,350 homes, a school and two leisure centres in Islington, with waste heat from the London Underground, is an example of this type of innovation. In future, waste heat from industrial processes or data centres could be used to provide new forms of domestic heat and hot water from heat that is currently used just as a by-product and released into the atmosphere.

I note the Government’s stated intention to see that some 20% of the UK’s heat demand is met by heat networks by 2050. These regulations are about creating those basic consumer protections for heat network customers so that they have the same protections as everybody else. We want to make sure that this heat network market is fit for purpose so that it can grow and new customers can enter it. At the moment, the lack of consumer protection is the main barrier to growing this market, so we fully agree with the Government on these points. The lack of a properly regulated market needs to be resolved, and we support the Government doing so.

This instrument uses the powers in Chapter 1 of Part 8 of the Energy Act 2023. It defines “regulated activities” in relation to heat networks and provides that anyone carrying out these activities needs an authorisation. Authorisations are to be granted by the Gas and Electricity Markets Authority, GEMA, and in practice by Ofgem. Ofgem will also have relevant enforcement powers and authorisations under the instrument. The regulations give it the powers to carry out this role, including investigative powers to collect information and issue different types of compliance notices, consumer redress orders and variable penalties.

What support will the Government give to very small heat networks and small community heat networks, particularly those with fewer than 50 members? Obviously, with new regulations there is some level of new burden, so are the Government aware of that and doing everything they can to support them in the transition?

As the Minister said, these regulations are only the first step in introducing a much fuller regulatory regime in the months and years to come. The authorisation regime run by Ofgem will come into force on 27 January 2026, but the provisions on consumer advocacy and the redress scheme to be operated by the Energy Ombudsman will come into force on 1 April 2025. How will those two systems work together? What will happen in that interregnum? Will the Minister and the Government ensure that, as they move from one regulatory regime to another, consumers will be protected through that transition?

I want to ask about historical legacy issues, in particular the money the Government gave to people in heat networks. Once these regulations come into force, what will happen to any legacy issues, conflicts or problems that pre-date these regulations?

Finally, in a statement in the other place it was made clear, as the Minister has said, that the Government want to grow heat networks to 20% by 2050. This has not had a lot of discussion in this place or the other place. We welcome this policy, but will the Minister take a moment to say how they plan to grow the heat network market? Beyond these regulations and making the regulatory framework work, what steps are planned to help increase the use of heat networks? What investment framework are the Government looking to use to help bring about more heat networks? What other mechanisms do they have in mind to help grow this market? How will it be reported on? What organisations will oversee the delivery of the increase in heat networks? Finally, does the Minister see a role for GB Energy in increasing the number of heat networks?