Understanding the heat tariff

With plans to increase the number of heat networks in the UK, questions are being asked whether existing customers are coping and if any lessons have been learned. Locked in with a heat supplier for a fixed term, customers often complain about the cost of bills and if they are getting value for money. Setting the right heat tariff is paramount. So, it’s worth exploring the options available before deciding on the best one for you and your customers.

What are tariffs for?

The purpose of a tariff is to:

Recover the costs of providing heating
Promote fairness and transparency of allocated costs
Encourage behavioural change in the way customers use their heat

The type of tariff will depend on whether the customers are domestic or commercial. In residential buildings, there may be vulnerable tenants on low incomes who need help managing their energy costs.

What’s in your toolbox?

One of the main contentions raised by customers is transparency of charges. They receive heating bills just like gas and electricity customers, and they want to establish if their energy costs are fair, so it’s natural to compare like for like. When information needed to so this is unclear or is lacking, then confusion arises.

The cost of providing heating on communal heating schemes is not just the cost of fuel. In addition, it includes costs of running equipment, system maintenance, operational management and administration. The difference is that when using gas heating, a resident has to provide and maintain their own boiler. How these costs are then applied on communal heating schemes is reflected in the type of tariff selected.

Commonly used tariff

In simple terms, most common tariffs comprise of metered and fixed charges:

Metered rate: cost of the fuel and variable elements
Fixed charges: costs for maintenance and repair (including future equipment replacement), billing, shared heating areas, administration and other fixed components

How the fixed charges are calculated and allocated within the tariff model is one of the complexities to be considered, especially as the tariff is also used “to sell” the benefits of the system and influence the way in which customers use the heat. Fixed charges may be based on property size, type or floor area, or they could be simply shared and equally split between the total number of properties.

But is this approach fair? Does this maintain a logical level of fairness between small and large properties? It could be argued that the customer with the larger property already pays more for metered charges, and so could be penalised further if paying their fixed charges, say, per square metre. However it is probably fair that the largest apartment pay a larger share towards the cost of boilers and other heating infrastructure.

Unfortunately, the total fixed charges for relatively small heat networks cannot be compared to standing charges for gas and electricity, which have the benefit of being spread across a greater number of customers and where the infrastructure has been heavily subsidised over many years.

The Landlord and Tenants Act also has to be considered as the cost of maintaining heating systems has to be included in the rent. For this reason, social landlords pass elements of the standing charges to residents in the rent.