With more than 14,000 heat networks coming under new regulations next year, Ofgem will have to take steps to ensure that, this time, heat network regulations are taken seriously.
The UK heat network industry hasn’t had much in the way of regulation up to now. The Heat Network (Metering and Billing) Regulations (or “HNMBR”), brought in in 2014, are the only purpose-built regs that UK heat networks have had. But unfortunately they’ve been ineffective.
A key element of the HNMBR is the meter viability calculator for legacy networks, where the heat network operator is meant to carry out a test to assess whether it’s cost effective to install heat meters on customer connections. The method is deeply flawed, which I wrote about back in 2015.
And like most spreadsheets, the viability calculator could be tortured until it told you what you wanted to hear. Didn’t want to install meters? Don’t worry, there’s an app for that. And as a consequence of the flawed method and flexible interpretation, few meters got installed, despite the overwhelming case that meters significantly benefit customers and operators.
The HNMBR also require that heat networks put their hands up every four years to tell the government that they exist. We’ve all suffered from a lack of basic data about how many heat networks there are in the UK, and this requirement was intended to improve levels of transparency.
People needed to take the HNMBR seriously because it’s a criminal offence not to comply and the potential fines are unlimited.
And yet, despite a fairly patchy response from heat networks in the first round of notifications, the OPSS (who oversee the HNMBR) just stood by, while the market looked on with interest like a herd of zebras who suspect that the lion under a nearby tree has no teeth. Or claws.
It soon became clear that the OPSS wasn’t minded to take enforcement action at all. Low and behold, when that first tranche of heat networks were due to make their second notification in 2019, even fewer of them bothered to fill in the forms. Yet only one enforcement action was ever taken, and that was just a compliance notice (a gentle nudge to pull your socks up).
Few meters were installed under the HNMBR. On all those unmetered networks (the Guru team reckon there are something like 400,000 unmetered domestic connections on heat networks in the UK, but remember no one knows for sure) there is no link between how much each heat customer uses and how much they’re charged. Heat network operators have no data to understand the efficiency of their networks, other than it’s really bad. Metered or unmetered, on bad networks, customers are bearing the brunt of inefficiency and too much carbon is being emitted.
Jump to the present day and we’re now preparing for Ofgem to take up the position of regulator of heat networks in 2025. A truly huge amount of work has already gone into formulating these regs; those parts that have already been developed are generally good, specific and proportionate. DESNZ and Ofgem have every possibility of creating a heat network market that’s investible, provides a good deal for customers and results in much lower carbon emissions.
The HNMBR will still be with us in some form after the new regs come in. We don’t yet know whether it will still exist in its own right or get subsumed into the new regs. Importantly, the viability test will almost certainly be scrapped and installation of consumer heat meters will be mandatory in most cases. These are welcome developments.
But whatever the words on the page, it’s the ghost of the HNMBR that poses the biggest threat to the upcoming regulations from Ofgem and to the heat network market as a whole. It’s the spectre of loose, unquantified standards and unenforced rules that already stalks the halls at the new regulator.
Ofgem will be responsible for regulating more than 14,000 heat networks (probably a lot more, remember that no one knows exactly how many there are) all of whom have watched over the last 10 years as well-intentioned regulation fell flat and went largely unenforced.
How do Ofgem get it right? How do they exorcise the ghost of the HNMBR from the halls of number 10, South Colonnade?
First, the regs must be clear and quantified with very little wiggle room. They must be numbers-based, with well defined calculations. There must be no ambiguous holes to drive through, a lá the viability calculator. So far signs are positive here.
Second, Ofgem must enforce and be seen to enforce. They’re going to have to put some heads on pikes at the town gates, and they’re going to have to do this early. Within a year of the regs coming in, Ofgem must be seen to enforce them, and not in a gentle way – in a way that jolts market participants and deters noncompliance among the 14,000+ networks. It needn’t be a large number of enforcements, but they must be highly visible in order to work. And on this one, there’s no evidence either way on whether Ofgem understand what they must do.
If Ofgem repeat the mistakes of the HNMBR and the OPSS, then this whole exercise of bringing proper regulation to heat networks to benefit customers and enable decarbonisation of heat will have been a waste of time. Customers will go unprotected. Many heat networks will continue to be inefficient, have high operating and maintenance costs and continue to emit high levels of carbon.
But get it right and we’ll have taken a significant step towards decarbonising a huge part of the UK economy, creating a fairer energy system for customers in the process.