Developments in heat network regulation and financing are creating greater
flexibility for local authorities or housing associations to play a wider range
of roles.

There are two main changes – the impending regulation of heat networks through the new Energy Act and the opening up of the Green Heat Networks Fund (GHNF) to the private sector.

Regulation – the birth of the regime

Local authorities have traditionally played a leading role in developing heat networks, providing finance, land and anchor demand for the network. The ‘leading developer’ role has also lent many heat networks credibility because authorities are best placed to maintain the trust of the local community. This was necessary because of the lack of any other regulation of heat networks.  Voluntary standards, such as those associated with Heat Trust were enormously helpful but obviously lacked teeth. The potential problem is that most customers are reliant on a heat network for heat and hot water, with either no alternative or only very expensive alternatives to the network.  The issues with potential and actual abuse of this dominant position were recognised by the Competition and Markets Authority. In response, the Government has legislated in the Energy Act 2023 to bring forward a regulatory regime overseen by OFGEM. Broadly, the Act will lead to significantly greater oversight of ‘fair prices and transparent information for consumers, a high quality of service and minimum technical standards and carbon limits’. There will be a licensing regime for the installation, maintenance and operation of heat networks.

Greater regulation might be good news for consumers, but what about local authorities? In the shorter term and from the perspective of local authorities running heat networks, the major issues will be for any outliers in terms of costs or reliability. There is a range of solutions for this, including applying for the Heat Networks Efficiency Fund for network improvements or having better enforcement and management of existing operator contracts. We will be publishing a further article about the detail of the regulatory regime as it is revealed.

The role of OFGEM might, in the longer term, mean that local authorities feel it less necessary to either own or control heat networks within their area. Whilst authorities might still seek some governance controls (ie through a joint venture) or commercial controls as anchor tenants anyway, the traditional role of being the trusted party who would ensure fairness and ultimately price control could be diminished over time. Of course, much of the detail of the regulatory regime has yet to be published, but the current information available points to a willingness for OFGEM to get into the detail of why certain networks might be relatively expensive or unreliable.

Green Heat Networks Fund

The GHNF is the prevailing scheme under which capital grant funding can be drawn down until 2027 and is specifically for the construction, refurbishment or extension of low or zero-carbon networks.  There will be a further funding round in February 2024. 

The major difference between the GHNF and previous grant funding (for example, the Heat Networks Investment Programme) is that the GHNF is open to the private sector. Whilst the majority of awards have been to local authorities so far, there is more than a smattering of energy from waste operators and other private existing constructors and operators applying for funding. 

Where the local authority has the anchor demand for these projects, the local authority could have a range of roles – at a minimum – possibly just being the local planning authority and a customer, but at a maximum having a greater interest, justified because this is a piece of critical and long term local infrastructure. That greater interest might be through contractual safeguards, certainly where any council housing stock or social housing is concerned or potentially even greater engagement by investing a small amount of capital through a joint venture for example. Commercially, a private network operator will need to be mindful of the requirements of its anchor demand customers, but how far the private funders of heat networks will welcome engagement by local authorities corporately (they will be concerned about delays and governance) will be seen in the longer term.

So, which role then?

Regulation and finance both point to local authorities being more able to actively select the degree of involvement they want in the local network. Meaningful regulation will force local authorities to either invest or review their involvement in existing networks. In the much longer term, regulation is likely to reduce the current moral impetus for the role of honest broker and trusted actor for local authorities, potentially allowing local authorities to be less involved. Allowing the private sector access to funding is just one sign that greater flexibility is coming in this space.

For more information, please contact Richard Brooks.