Nicholas Doyle, Chirpy Heat

Now that the dust has settled on the first round of full heat network regulation consultation, what does this tell us about what it means for housing and heat network operators? And what does it say about the development of the heat network regulations more widely? We set out below some of the details and what it tells us about what is coming down the line.  We also set out how we can make full regulation a success for the sector, for the industry and for customers.

The consultation was launched on 4th August and ran until 27th October.  It focused on one of the key planks of the regulations – consumer protection. This is just the first phase of three consultation rounds – the next two will outline the proposals for heat zones and the technical standards, so lots more is coming.

UNDERSTANDING THE CHALLENGE

The first thing to say is that it was encouraging to get detailed proposals and a full three months to respond: the Department for Energy Security and Net Zero (DESNZ) and Ofgem must be applauded for getting out there and setting up events to outline the proposals. We have also seen a real willingness by them to engage at sector events, webinars, etc. It was also great to see the sector, including the National Housing Federation and Chartered Institute of Housing, putting in responses at a time when there are so many other pressures and demands to deal with. There is lots to talk about on both sides, but it’s a good sign of a positive dialogue opening up – this is going to be essential to ensure the regulations are successful.  Many have been surprised by the depth and breadth of the proposals.This may simply be because it was the first time that has been written down, but it also reflects the seriousness and complexity of the subject.

So, what are the take aways from the consultation at this point? There is a real need to learn on both sides and one of the things we have underlined time and again is diversity of the heat network sector. It ranges from small schemes with only a few homes connected, to entire district schemes covering thousands of homes. And those who manage the schemes are equally diverse – from charitable trusts that are focused on delivering specialist services through to huge multinational energy businesses. Equally the heat networks range in age from over 50 years old to those that are only just coming out of the ground. This is a fundamental change for Ofgem: a shift from regulating a small number of energy companies with lots of customers, to regulating heat networks that have thousands of operators and many with very few customers.

The other key consideration is that the majority (over two thirds) of heat networks are in the social sector, and they are run on a not-for-profit basis.  And in many cases, they do not recover their costs and often lose significant amounts of money. This is very different from the profit driven gas and electricity supply market.

The industry’s diversity and complexity and that it is, for most part, not profit making has to be a key part of how regulation is approached if it is to deliver for customers.  This is a fundamental point. Regulation is vital to providing heat networks services because on an individual network basis they are a natural monopoly – consumers cannot choose who their provider is. To ensure that heat networks deliver on their promise of providing affordable, reliable and low carbon heating and that consumers get the services they deserve we have to have regulation.

THE KEY TAKEAWAYS FROM FULL REGULATION SO FAR:

• It’s happening.  Royal Assent has been given to the Energy Act and heat network regulation will go live in Spring 2025. At the time of writing that’s around 500 days away. Now is the time to plan.

• Customers service will be key. We think housing providers will be pretty good at this – but it will take time, focus and planning. It will encapsulate contracts for metering and billing, repairs and maintenance, identifying vulnerable customers, the type of meters used, customers support, debt management and others.

• Housing providers will become fully regulated energy suppliers and see a major shift in their management of heat networks.They will be running a business within a business.

• All heat networks will have to be authorised and this will involve providing key information to Ofgem as a minimum; starting with information along the lines of the Office for Product Standards and Safety (OPSS) returns.

• For new schemes they will have to be authorised before they are commissioned. It is essential that housing providers do not find they have new schemes that they cannot let because they are not authorised. And given the timescales for development, work needs to start on those NOW. New schemes need to be regulation ready which will involve putting together all the requirements for data, monitoring and reporting.

• Transparency, accuracy and communication will be central to heat network management. This will mean understanding what scheme and portfolio costs are, what can be charged for and how they can be charged for.

• There will be new data, monitoring and reporting requirements on management, finance and scheme performance on schemes and across a portfolio.

• Customer Supply Continuity Plans (CSCPs) will demand the creation of a full asset register on all existing and future schemes. This is needed but will take time.

There is lots to be done – and much more detail on the regulation to come – but we need to make sure that we all work to make full regulation a success – for housing providers, for Ofgem and ultimately for customers.  We think there are some key things that will go a long way to making this much more likely:

A THREE-POINT PLAN FOR DELIVERING EFFECTIVE HEAT NETWORK REGULATION

1. Effective engagement with the heat network management sector: Understanding the diversity of the sector, the impact of being not for profit and the lack of resources for those that manage heat networks is critical to the success of effective regulation as well key issues like the development of the smart meter specification.  Ofgem will find housing providers to be a willing partner on regulation, but they are very short of time and resources. There is much to be said for creating a small number of regulation pilots so that both sides can learn how to deliver full regulation that delivers for the end consumer.

2. A clear and cost-effective time frame to full regulation. Heat network regulation is going to be a huge change in the way that we deliver heating and hot water for thousands of homes and this will inevitably add some costs. It is essential that unnecessary costs that could arise if regulations are delivered to an unrealistic and unclear timetable are avoided. An unrealistic timetable will create supply chain inflation and an unclear timetable will create confusion and abortive work. Time frame and supply chain inflation. Both will add costs that will have to be borne by the end consumer.

3. Create heat compliance plans as part of authorisation. A number of housing providers have made suggestions that they could create compliance plans in a prescribed a format to clearly set out how the regulations would be met, when they would be met and how they would be resourced. This would ensure that regulations would be met, that the responsibility would be for housing providers to develop and deliver but would also ensure that they were done in the most cost-effective way possible. Ofgem would then be able to monitor progress against the plans and also focus on those few heat network operators that fail to create and submit them. The compliance plan could form part of authorisation for all existing heat networks.

We all want to see effective regulation for heat networks being put in place and this includes the regulator, housing and heat network managers and customers. The next few months will be critical if we are all to get this right and that will require intelligence, consideration and a clear focus by everyone involved on the end goal of creating heat networks that provide affordable, reliable and low carbon heating for all consumers.

To discuss how you can both help shape the regulations and prepare your organisation for what is to come, do get in touch via info@chirpyheat.com.  You can also get a free Regulation and Compliance Report from Chirpy Heat – just fill in the short survey here and leave the rest to us!