Heat networks – Ofgem consults on authorisation and regulatory oversight

On 12 November 2024, Ofgem launched a consultation on proposals for the authorisation and regulatory oversight of heat networks in Great Britain. This consultation was launched alongside a joint Ofgem and DESNZ consultation on the implementation of consumer protections for heat networks, and therefore the two consultations should be read together. Please see our article on the consumer protection consultation here.  

Both consultations build on the government’s Spring 2024 consultation response on consumer protection requirements. To recap, Ofgem is planning to implement a regulatory framework for heat networks from April 2025, with regulatory rules from January 2026 (please see further on timeframes under ‘Next steps’ below). This article outlines key elements of the authorisation and regulatory oversight consultation. 

Authorisation of regulated activity on heat networks

Operator-led Approach: Ofgem as the heat networks regulator will administer an authorisation regime. The requirement to be authorised will apply to any person undertaking a ‘regulated activity’, which will include the operation and supply of a heat network. Ofgem acknowledges that in most cases the same entity will  carry out both activities so has proposed an ‘operator-led approach’ where the operator will need to confirm if they are also acting as a supplier as part of the registration and authorisation process. 

Single Operator: Ofgem is proposing that the authorisation process includes a requirement to have a single entity assume the role of operator, given the advantages of having a single point of contact for regulatory accountability. The consultation proposes three options to address the potential of multiple operators being identified on a heat network and to advance towards identifying a single operator. Ofgem encourages heat network operators to consider their current arrangements and how these might evolve to having a single operator, if this is not already the case.

Regulatory Obligations and Heat Network Boundaries: The consultation includes proposed regulatory obligations for operators and suppliers, as  detailed in the draft authorisation conditions appended to the Spring 2024 consumer protection consultation (conditions will differ depending on heat network consumer type). An authorised person is proposed to hold a single heat network authorisation which specifies all activities they can undertake. The consultation includes detail on what Ofgem considers the boundaries of heat networks for the purposes of authorisation with illustrative examples of different heat network arrangements. 

Registration and Authorisation Process: The consultation includes proposals for the Registration and Authorisation application process, which industry are invited to provide feedback on as well as proposals for ongoing interactions between authorised persons and Ofgem to keep information about heat networks and regulated activities up to date and record changes. The consultation also proposes a process for the transfer and revocation of authorisation.

Market monitoring and Data Requirements

General Approach: Ofgem will implement a monitoring regime to ensure market oversight of heat networks. The consultation includes proposed reporting periods, reporting frequency and extensive reporting metrics. The monitoring framework will be phased in from the Initial Period (please see ‘Next steps’ below) and Ofgem are proposing different reporting requirements for certain segments of the market. Ofgem acknowledges that the scale of regulation and information requirements will be new for most of the sector so further guidance will follow.

Digital Service: Ofgem will issue a Request for Information (“RFI”) with reporting requirements. The RFI will request data related to the heat network as described in a regulated person’s authorisation. Ofgem will use a digital service to support this process, starting the monitoring process through a notification of information requirements. The digital service will then remain as the interface for the monitoring process. Ofgem anticipates that the reported data will provide an oversight of how heat network customers are being served in key areas such as pricing, billing, vulnerability, and quality of service.

Audit, Compliance and Enforcement

Audits: The draft authorisation conditions for heat networks include requirements for heat networks to consent to an audit. The consultation includes Ofgem’s proposed approach to auditing including scope, process, targeting, selection of third-party auditors and testing the declarations made by heat networks at registration and the authorisation stage. In general, Ofgem are proposing that audits cover the authorised entity rather than being site specific however Ofgem may undertake some site-specific audits.

Compliance and Enforcement: Ofgem will use a range of approaches to identify non-compliance including using the data reported by industry, audit findings alongside broader market intelligence. Ofgem will consider enforcement in serious cases of consumer detriment, harm to the market, habitual non-compliance or other poor conduct. The consultation proposes ‘fixed penalties’ where there are breaches of lower order ‘clear cut’ regulatory requirements. For example, where authorised persons have not provided timely and accurate data in line with reporting requirements. Further detail will follow in a penalties policy for heat networks.

Next Steps

A summary of the key implementation dates, from phased transition to full regulation, is set out below: 

• Initial Period (1 April 2025 to 26 January 2028): From the beginning of this period, existing activity will be deemed authorised under regulations and heat networks will be brought into consumer advocacy and redress schemes. 
• First Part of the Initial Period (1 April 2025 to 26 January 2027): New regulated activity that begins during this period will be deemed authorised under regulations. Regulated entities with deemed authorisation for existing or new activity will be required to register this activity with Ofgem by the end of this period. Registration is expected to be available on the digital service from early 2026.
• Launch Date (27 January 2026): From this date, authorisation conditions on authorised persons will become active and Ofgem will have powers to take action in relation to these conditions. Soon after this date, the digital service for heat networks regulation and interactions between authorised persons and Ofgem, including Registration, will go live. 

The authorisation and regulatory oversight consultation closes on 31 January 2025. Ofgem is planning on publishing a response to feedback in Spring 2025. Ofgem will also consult on regulations covering the authorisation application process and accompanying guidance in due course.