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How the CMA market study might create a regulated heat network industry

Posted by Ian Allan

A few weeks ago the Competitions and Markets Authority (CMA) announced its preliminary findings resulting from their study of the heat network industry. In our blog we discuss the findings you need to know and how proposed regulation might affect existing heat networks, and more importantly the end customer.

Heat networks: An answer to low carbon heat

The development of heat networks (community or district heating) in the UK is becoming increasingly recognised as an important cog in the UK’s developing UK energy strategy to meet carbon reduction commitments and address the energy trilemma. The past few years have seen lots of new initiatives putting heat networks centre stage as an answer to reducing carbon in our inner cities. Our blog 2018 hot topics and initiatives for heat networks delves deeper into the strategies said to shape our industry.

What is the energy trilemma?

 The energy trilemma is based on three core dimensions: 

  1. Energy security 
  2. Energy equity
  3. Environmental sustainability 

The energy trilemma provides a clear framework to deliver the energy transformation and make sustainable energy systems a reality. 

So, what were the findings?However, there are still many challenges on existing schemes that need to be overcome for new heat networks to gain more momentum in the UK. In response to a growing number of customer complaints the CMA launched their market study surrounding these challenges to do just that. The key objective been to examine whether the sector is working well for end customers of heat networks and make recommendations for improvements or launch a market investigation if serious deficiencies are found

The findings of the CMA market study into heat networks chimed a similar tune to the Department for Business, Energy Industrial Strategy (BEIS) report released shortly before in December 2017; that the majority of heat network customers are getting a good deal.

The report highlighted that the majority of customers were receiving a good deal for their heating and hot water, including a comparable service to those on traditional utilities at a reduced rate. However the report did state that some customers don’t and are not privy to the same levels of protection available for gas and electricity customers are.

The CMA report’s main concerns are:

Concern one: Design and build

The investigation found that some property developers may try to cut the upfront costs of installing a network, resulting in higher ongoing operating costs, usually paid for by customers. Furthermore it said that heat networks may also be installed where they are the best way to meet planning requirements, rather than the best solution for customers.

Concern two: Monopoly of supply

The CMA found that heat networks were a natural monopoly and customers often have no alternative sources of heat and can be locked into long-term contracts, with little hold on suppliers to account on price or quality.

Concern three: Low transparency

The final main concern for the CMA surrounded the transparency of being a part of a heat network. The findings showed that before moving in to a property, people often don’t know that their energy will be supplied by a heat network and once people are living in the property, customer bills often fail to set out key information.

Addressing the issues

The CMA said that given the expected expansion in the market driven from being a key driver of low carbon heat, their provisional view is that the sector should be regulated. The proposed areas of regulations surrounded:

  • Strengthened customer protection, similar to the Heat Trust that allows Scheme Members access to an Ombudsman but available for all heat network customers
  • Steps to improve the design and build of networks, improving the quality and reliability of schemes
  • All suppliers adhering to mandatory rules and criteria around price and quality in long-term contracts, providing a unified approach to service and quality to end customers
  • Measures to improve transparency including better information on networks, provision of heat supply agreements of contracts and clearer and more detailed bills

So how will this affect the industry?

At Switch2 we think the introduction to regulation will be a good thing! We believe it will drive higher performance standards in the industry, allowing for a better quality of service to residents and a streamlined approach to the delivery of new heat networks.

Introducing regulation will help suppliers to increase resident satisfaction and provide protection to them, which is currently missing from many schemes. Furthermore we feel that regulation will also encourage further investment into the sector thus pushing us closer to decarbonising heat.

What’s next?

The CMA are due to publish its final conclusions on the industry over the summer, so until then we can only wait and see.

Key takeaways

  • The CMA launched its review into the heat network industry in December 2017
  • Key findings were published on the 10th May 2018, calling for regulation for the industry
  • Potential regulation is likely to address three areas: design and build, monopoly of supply and transparency
  • We believe that regulation will be a good thing and will improve the quality of heat networks across the industry
  • Further announcements on Regulation and next steps are due to be released over the summer

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Ian Allan

Head of R&D at Switch2