The UK has made great strides in the last three decades with regards to the decarbonisation of electricity, bolstered by the significant growth in renewables.

Progress has also been made with ambitious plans to decarbonise transport, but what of the third element of the agenda – heat.

To some extent, heat has had the misfortune of falling into the ‘too difficult’ or ‘too expensive’ box for many different types of developments. And with no robust regulatory regime (similar to that which is in place for electricity) yet established, it hasn’t had the same level of focus from government or certain parts of the energy sector.

That position is now changing, however – both in terms of regulatory change and a stable framework and also investment in the sector, with the expansion of district heating a key focus

Scale of the challenge

Nationally, heat networks are not a well-developed route to supplying heat. Around two per cent of UK residential heat demand per year is currently supplied by district heating. The UK Climate Change Committee has stated that this figure must increase to 17 per cent of predicted domestic heat supply to achieve net zero targets by 2050. This demonstrates the scale of investment required; it is estimated that an annual investment of £1-2 billion is needed to achieve this ambition.

District heating in the UK

District heating has many benefits, including lowering costs for consumers, higher energy efficiency and lower carbon intensity, which is key for reducing emissions as the UK transitions towards net zero. So, what is exactly is district heating and how does it work?

_{(Figure 1: District heating Explained (Boiler Guide, 19 September 2023)}

Heat networks supply heat to domestic and non-domestic properties from a central source, avoiding the need for individual gas boilers, through an interconnected system of highly insulated pipes (as demonstrated in figure 1 above). As heat networks can be run from renewable energy sources or waste heat sources, there is  growing support for its expansion and large-scale deployment, which would go a long way to decarbonising emissions produced by UK homes and commercial buildings over the coming decades.

Current projects

One such project is centred on delivering city-wide district heating in Edinburgh and Glasgow. The joint venture enterprise aims to supply low-carbon heat to more than 600,000 homes in Edinburgh and Glasgow by 2050. This project has the potential to save over 2,500 tonnes of CO2 emissions per year – the equivalent of taking 1,200 cars off the road.

Currently, 86 per cent of Scottish households rely on fossil fuels to keep warm. It is predicted that the installation of heat networks in Edinburgh and Glasgow could reduce emissions by up to 90 per cent when compared to the levels associated with individual gas boilers fitted in Scottish homes.

With so much promise and opportunity, this highlights the importance of robust and stable regulation of district heating in Scotland. The Scottish Government’s heat networks delivery plan, published in March 2022, set out plans to expand the development of heat networks. This includes funding for new projects and introducing new rules to regulate the sector, with a range of legislation and regulations currently being brought forward on a UK-wide basis.

Scottish district heating regulation

The Heat Networks (Scotland) Act 2021 gives powers to appoint a licensing authority for the regulation of heat networks in Scotland. The Scottish Government is working with the UK Government to appoint energy regulator Ofgem to this role, as heat policy is a devolved matter. The legislation aims to accelerate the deployment of heat networks in Scotland through the introduction of a robust regulatory system aimed at boosting overall confidence in the sector and providing greater certainty for investors.

Consumer protection

However, district heating consumer protection – covering fair pricing, transparency, and quality of service – remains a reserved matter. Heat network customers are currently lacking regulatory protection so UK Government action in this policy area is urgent and should cover all households – especially the fuel poor and vulnerable households.

At present, heat network customers have no opportunity to switch heat suppliers and have a limited right to redress should the services they receive fail to meet expectations – or worse, should their supplier enter administration. This is further compounded by the lack of regulation requiring a heat network contractor to hold a licence or permit to operate. This is a critical factor to achieving the necessary buy-in from housebuilding developers and consumers. By improving and strengthening consumer protections, stakeholder confidence will increase.

Ofgem’s role

In August 2023, the Department for Energy Security and Net Zero (DESNZ) and Ofgem published a joint consultation on consumer protection in relation to heat networks regulation at UK level. The consultation addressed the key reforms necessary to provide consistently good standards for consumers, improve price transparency, and reduce the number of consumers paying relatively higher prices.

Through the passing of the Energy Act 2023, Ofgem is to be appointed as the UK heat networks regulator – granting it powers to prevent unfair pricing and improve the quality of service for consumers.

It is also anticipated that Ofgem will help to facilitate market growth by ensuring heat network developers can access powers equivalent to other utilities. This will allow heat networks to be built more quickly and cost effectively. Regulation will also support the decarbonisation of the sector and energy efficiency improvements by raising technical standards and introducing carbon emissions limits on heat networks.

In the devolved context, the Scottish Government plans to introduce secondary legislation which is expected to come into effect from 2025. This will help to ensure that all heat network consumers are given a comparable level of protection to customers of gas and electricity in the regulated utilities sector. With Ofgem as the proposed regulator for heat networks, this will ensure consumers can get a fair price and reliable supply of heat energy. This is a positive step for consumers, as heat network operators have experienced large wholesale price increases that they are ultimately passing onto consumers.

Conclusion

The Heat Networks (Scotland) Act 2021 represented a positive step forward by establishing a district heating regulatory framework that will help to build consumer confidence and trust in heat network suppliers. Nonetheless, as a reserved matter, a robust consumer protection framework must be brought in for the district heating sector to ensure that standards are maintained and that, where failures take place, consumers have a higher degree of certainty and options for recourse. This is the subject of consultation at a UK level, and its importance to the sector (and to Scotland) cannot be underestimated when it comes to the building of trust in heat networks, their delivery and roll-out, and their operation.

This is also a vital step to support network heating developers themselves, as established regulatory protections will help to improve consumer uptake of low carbon heat networks as a solution for both domestic and non-domestic heating. In addition, greater consumer certainty is needed to stimulate investment in the district heating market and give the supply chain enough time to adapt and prepare for a rapid growth in demand.

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