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

Lord Whitty Excerpts

Monday 3rd February 2025 Grand Committee

[Baroness Bloomfield of Hinton Waldrist (Con)]

My Lords, these regulations represent a pivotal step in securing the long-term sustainability of heat networks across Great Britain. Heat networks are central to the UK’s decarbonisation strategy, particularly in densely populated areas, and are projected to supply 18% of the nation’s heat demand by 2050. Presently, more than 500,000 households and businesses are already connected to these networks, which, as the noble Earl, Lord Russell, rightly observed, historically have operated without formal regulation.

The previous Conservative Government made notable progress in modernising this sector, investing £32 million through the heat network efficiency scheme. This funding allowed network operators to replace outdated and inefficient equipment, resulting in improved reliability and more efficient heating for consumers. Heat networks are expected to play a crucial role in reducing carbon emissions, particularly in areas where individual heating solutions are less feasible, such as, as the Minister suggested, dense urban environments.

The measures in the SI seek to establish a structure of regulation for the heat networks market designed to ensure that heat networks operate in a way that benefits the consumer. The key provisions include: the licensing of heat suppliers; stronger consumer protections; regulatory oversight from Ofgem; and performance reviews on data and reporting. Additionally, the regulations will encourage market development to foster innovation, competition and the integration of renewable energy solutions, which will be essential for meeting the UK’s climate goals. These provisions are designed to create a fairer, more transparent and consumer-friendly heat network sector, while supporting the transition to clean energy, making it a central pillar in the Government’s wider decarbonisation agenda.

Notwithstanding the comments made by the noble Earl, Lord Russell, about the lack of regulation in this market, Energy UK has acknowledged that the current level of regulation is lighter than that for gas and electricity, which is understandable given the market’s current stage and variability. However, it also recognised the need for regulation to become more robust as the market matures. While the measures to encourage investment in the sector are welcomed, Energy UK advocates for further efforts to promote wider connections to heat networks and enhance investment, particularly in underserved areas.

Despite the positive progress these regulations represent, several challenges remain. On consumer protection, how can we ensure that vulnerable consumers are adequately safeguarded and fully informed of their rights? Regarding investment and market growth, what additional steps can be taken to incentivise further investment in heat networks and ensure that the sector remains competitive? Could we see measures such as tax incentives or grants for businesses in local authorities looking to develop new networks or to expand existing ones? As the market evolves, how do we maintain the right balance between regulation and innovation—fostering growth without stifling creativity and new ideas? It is essential that these regulations allow space for technological breakthroughs and market experimentation. Finally, given that heat networks often operate as local monopolies, how can we ensure fair competition and prevent consumers being locked into poor-value contracts? The introduction of transparency measures, dispute resolution mechanisms and regulatory enforcement will be essential in addressing these concerns.

In conclusion, these regulations are a vital step in creating a fair, efficient and sustainable heat network market. They aim to protect consumers, encourage investment and support our climate objectives. As we move forward, we must ensure that these regulations continue to adapt to meet the evolving needs of the sector. To that end, ongoing consultation with stakeholders, consumers and innovators will be critical to ensuring that the heat network market thrives, while the interests of the public are protected.

I end with a plea to the Minister to keep a watchful eye on Ofgem, which has seen its workload increase exponentially over the last few years. I hope that his department continues to monitor Ofgem’s increasing responsibilities and to ensure that its resources are increased to match.

[Lord Whitty (Lab)]

My Lords, could I ask the Minister one question? I apologise to him: I realised this was being done today only about 20 minutes ago.

A significant number of existing heat networks are run by local authorities or hived-off organisations owned by local authorities. The aim of this legislation, as far as consumers are concerned, I have strongly supported for a long time, including during the proceedings of the Energy Act. I am very much in favour of consumer protection and consumer redress as spelled out in part of these regulations, but I have been told elsewhere that those protections and certainly those forms of redress are different if they are for consumers of heat networks run by local authorities, compared with a private sector or mixed ownership of the heat network. I would like to know whether that is true in principle. If it is at all true, perhaps the Minister could write to me and explain what the situation is.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am most grateful to noble Lords who have taken part in this short but none the less interesting and, I think, important debate. As the noble Earl, Lord Russell, the noble Baroness, Lady Bloomfield, and my noble friend Lord Whitty have suggested, the development of heat networks is a very important one, and we want to see considerable progress over the next few years.

I also think it is important that the sector itself has broadly supported the regulatory proposals. I believe, and I think it was explicit in what the noble Baroness said, that that confidence will allow them to invest in the future and develop the market, which is what we earnestly hope for and wish to see.

In response to the noble Baroness, Lady Bloomfield, I accept that this is another responsibility that is being placed on Ofgem. I have had quite considerable experience in dealing with regulators in my time in government. I think Ofgem discharges its responsibilities very seriously, and I have confidence in its ability to discharge this new responsibility. In a sense, it is simply extending the principles of the current regulation of gas and electricity to network heating, so it is something I am confident it will be able to do.

In response to the noble Earl, Lord Russell, I make it clear that from April this year, heat network consumers will also be able to seek redress from the Energy Ombudsman scheme and, through Citizens Advice and Consumer Scotland, will have access to advice and advocacy services afforded to the gas and electricity markets. In answer to the noble Baroness, we think this will be particularly helpful to the vulnerable customers she mentioned.

The noble Earl asked me about retrospection. The new arrangements will not be able to be applied retrospectively. The fact he raised this shows why it is so important that we get a move on in introducing these new regulations, and how customers were at risk under the previous arrangements.

As far as fair competition is concerned, again, I very much accept that point. Indeed, this work arose from the Competition and Markets Authority, and Ofgem is well used to intervening in areas where it feels that competition is not being fairly adopted. I am confident that it can deal with that. The data gathered by Ofgem—and, of course, it will have this ability to require data to be provided to it—will enable it to identify emerging issues and trends and adapt regulation as the heat sector develops and grows. As I see it, regulation will be proportionate and organic, marching in step with the way the market itself develops.

I inform the Committee that we will be introducing further regulations this year: first, to introduce protections against insolvency and debt management; and, secondly, to create an entity to implement mandatory technical standards. Putting those together will provide the foundation for this market to grow in future. Market growth seems to me to be a fundamental question, so we are working to expand the existing heat network market through capital funding via the green heat network fund, which will establish heat network zones in key locations. This will allow heat network developers to deploy large-scale district heat networks in dense urban locations, where, as I have said already, they are best suited to provide low-carbon heat.

On support for smaller heat networks, my understanding is that, first, Ofgem will take a proportionate and outcomes-based approach to regulation, providing guidance and supporting small operations.

To come back to the legacy issue and add a bit more information, on legacy issues with existing heat networks, we will take action to guide heat networks through legacy challenges that they face with existing heat networks, with remedial works implemented over time. One advantage of giving authorisation to current schemes is that, once they have been given an authorisation, they then come under these regulations. In one way, if there are pre-existing issues, at some point they will be authorised, and then they can be dealt with under these regulations. So, in fact, although strictly speaking it cannot be retrospectively applied, I hope that that can bring comfort to customers who are really concerned about the situation as it is.

I understand also, in relation to vulnerable customers, that a priority services register will enable vulnerable consumers to access additional support relating to their heat network, including receiving communications in an accessible format, assistance reading their meters and the ability to nominate another person to act on their behalf when dealing with their heat provider.

In relation to the point raised about regulation and customer prices, Ofgem will have direct powers to intervene on prices with a general authorisation condition, to set prices fairly, with data-driven interventions proceeding from January 2026.

On the point raised by my noble friend Lord Whitty, first, I acknowledge the work of local authorities of in some ways even pioneering district heating systems. My noble friend may know that in the heart of the city of Birmingham we had a district heating system that ran right through the city centre, and we can see the potential area. I have also been informed about the South Westminster Area Network, which is being established through close working between Westminster Council and Westminster business improvement districts. That is a new approach to procurement; it took four months to bring forward a partner, which is much quicker than for many of the schemes and developments.

The point that my noble friend raised is a new one to me, and I hope that he does not mind me just checking it out and coming back to him on it. On the face of it, it seems puzzling, but I think that I need to find out some more information about it. But I take his point that we want local authorities to continue to take a lead in developing some of these network heating schemes and, clearly, the public must have confidence in how that is done.

Finally, the noble Earl, Lord Russell, asked me about Great British Energy. He will know that we believe that, in the development of local plans and the role of GBE in doing that, there is clearly potential to give encouragement to community energy schemes and network schemes. I cannot really say any more about that, but I shall draw those remarks to the attention of the start-up chair of Great British Energy.