Heat networks closing the gap on consumer protection

Government’s response and key areas

On 30 April 2024, the government published its response to a joint consultation with Ofgem on consumer protection requirements for heat networks. This article outlines three key aspects from the government’s response and outlines the upcoming steps in heat networks regulation.

Heat networks pricing considerations

• Price regulation: The government has re-asserted its position that a price cap or profit regulation will not be introduced in the near term. It was felt that the position should be kept under review, it being noted that Ofgem should be ready to act if there is evidence of widespread consumer harm, especially if there is disproportionate pricing
• Fair pricing: In the consultation document, the government proposed a transitional period known as the ‘initial period’ of no more than a year to phase in regulation. Ofgem will begin carrying out fair pricing investigations after this initial period ends. The government will further develop its expectations around disproportionate pricing, reasonable rates of return and excessive profits as part of a wider fair pricing consultation expected in Autumn 2024 to ensure that operators/suppliers adhere to the fair pricing objectives and guidance
• Comparison methodology and benchmarking: Consultation respondents were mostly supportive of the government’s proposed benchmarking approaches to identify disproportionate pricing. The government will continue to develop and later consult on a narrowed set of approaches to benchmarking including external benchmarks, comparator price-based benchmarks and self-comparison
• Transparency: Although most respondents favoured an annual approach to price reporting, the government’s view is that quarterly reporting on pricing data is necessary to ensure that the policy captures most of the price changes that occur in the market. The government will continue to develop and later consult on how national price data for heat networks should be published.

Quality of service and intervention

• Complaints: Given the positive responses to the government’s complaint handling proposals, the government will be moving forward with its proposals. The Energy Ombudsman will play a crucial role, supporting consumers with complaints and also function as an Alternative Dispute Resolution service for heat networks. 
• Guaranteed Standards of Performance: The consultation document outlines the core elements of the Guaranteed Standards of Performance. These include maintaining registers of interruptions and potential compensation on providing adequate notice of planned interruptions. The government will develop and later consult on refining its proposals. This includes how the standards could apply across different market segments considering factors such as the size, age, and ownership model of a network, and appropriate compensation levels.
• Step-in arrangements: Respondents broadly supported the government’s high level step-in arrangements to protect consumers from failures of heat networks. The government will consult further on authorisation conditions (including financial responsibility), customer supply continuity plans and contractual step-in (including how prevalent these arrangements are in existing networks). 

Authorisation, defined activities, and vulnerable consumers

• Authorisation: Ofgem as heat networks regulator will begin administering an authorisation regime. All existing heat network operators and suppliers will be automatically authorised provided they meet Ofgem’s notification requirements. New networks will need to apply for authorisation. Although the government acknowledges that often there will be a single entity performing multiple roles in a heat network, Ofgem will retain the ability authorise regulated activities separately. The government will however develop a streamlined process for entities to apply for multiple authorisations where activities are carried out by one entity. 
• Definitions of regulated activities: The government acknowledges that definitions used in the regulatory framework need to be refined so that entities in the market can clearly understand their obligations and responsibilities. This will include refining and providing guidance on the definitions of ‘operator and ‘supplier’. Revised proposals on scope and defined activities will be included in an upcoming consultation on authorisation conditions. 
• Protections for vulnerable consumers: The government will proceed with its proposal to require heat suppliers to operate a Priority Services Register, catering for specific services for consumers in need. The government will also further develop a definition of what constitutes a vulnerable consumer, including considering financial vulnerability as a factor.

Next steps

Heat network regulation will come into force in 2025. Ahead of that, the government will publish further consultations this year, starting in Summer 2024. These consultations will be on technical standards, further consumer protection measures, authorisation application and the pricing framework. Additionally, the government recently ran a consultation on its heat network zoning proposals in England. The consultation closed on 26 February 2024 with the outcome pending. The proposals for zoning are intended to dovetail with those proposed for consumer protections.