When will heat generation networks be regulated, and by whom?

When will heat generation networks be regulated, and by whom?

The decarbonisation of heat generation is an essential component of the UK’s strategy to address climate change.

Contributed by John Grady

While it is welcome that we are seeing a growing number of community heat projects in the UK, concerns about the way in which consumers are tied to these district heat networks have attracted the attention of the Competition and Markets Authority (CMA) and the UK and Scottish governments.

Currently, heat networks supply around half a million UK homes. Unlike other utilities, regulation of heat is limited, and there is currently no licencing regime.

There is voluntary self-regulation (for example the Heat Networks Code of Practice and the Heat Trust) as well as limited statutory regulation, namely the Heat Network (Metering and Billing) Regulations 2014. These require landlords supplying energy to tenants to provide information on costs, and to give tenants a degree of control over those costs, in line with the requirements set out in the EU Energy Efficiency Directive.

If heat networks are to gain acceptance among consumers they must be appropriately regulated. At present, some UK consumers get a bad deal from heat networks, and such negative stories raise the risk that consumers will reject them. As an example, some residents who have the option to use heat networks are not doing so, opting instead to use electric heaters, adding to carbon emissions as a result.

The CMA published a thorough report on heat networks last year that emphasised the fact some customers are getting very poor deals. The CMA made four key recommendations:

  • The establishment of a regulator for heat networks. The CMA recommended the energy regulator Ofgem be given the role. This is entirely sensible, as Ofgem has the necessary skills.
  • The introduction of a consumer protection regime to give customers the same level of protection as gas and electricity consumers.
  • The regulator should ensure there is greater transparency regarding the contractual terms for the supply of heat and the charges for heat.
  • The regulator should make sure customers are protected from poorly designed networks – the risk being that developers use cheaper options that will cost consumers more in the long run.

These proposals have not yet been implemented. Late last year, the UK Government published a paper on heat networks which takes on board many of the CMA’s recommendations. However, no firm proposals have been suggested – the UK Government aims to consult on policy recommendations in summer 2019.

Meantime, the Scottish Government is keen to push ahead, with consumer protection being a key focus. However, the issue here is that while the regulation of heat is not a reserved matter, consumer protection is. This is the responsibility of Westminster and only Westminster can do anything about it.

Despite this, the Scottish Government is advancing plans to implement a regulatory framework for district heating in Scotland. As set out in its March 2019 consultation paper, the plan appears to do this without the consumer protection powers currently reserved by Westminster. The Scottish Government plans to follow the CMA’s recommendations.

At the same time, they will work together with the UK Government where possible – continuing to call for more powers on consumer protection. An expert group is being set up to advise on the framework, with a Heat Networks Bill coming to the Scottish Parliament when time allows. On this issue, it seems the Scottish Government are taking the lead.

I am sure, by now, any reader will see where this article is heading. Further decarbonisation over the next decade involves some “big asks” of consumers. Consumers are used to gas and electricity – they are not used to heat networks, the uptake of which requires a major step change in consumer behaviour.

Other potential changes, such as encouraging the use of electric vehicles, the potential replacement of gas with hydrogen, more flexible use of electricity and, more radically, steps to reduce carbon emissions from agriculture, will all require significant changes in consumer behaviour.

Decarbonisation simply cannot succeed unless consumers accept the practical results of the policies designed to achieve it.

It follows that the consumer, and consumer protection, must be at the very core of the decarbonisation agenda.

Unfortunately, little progress has been made of late at a UK level. While Parliament focuses on Brexit policy, it is impossible to get legislative time to promote changes to the law, and there has been little discussion about decarbonisation, including the vital issue of consumer protection.

The next phase of decarbonisation will have to focus on the buyers of these services – we the consumers and our acceptance of the new. Perhaps this renewed push from the Scottish Government might be the catalyst for further action.

 

John Grady is a Partner in Shepherd and Wedderburn’s regulation and markets practice.

 

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