The Competition & Markets Authority (CMA) has recently concluded that heat networks should be regulated. The CMA recommendations seek to tackle three main issues: inefficient design decisions which pass costs on to consumers in the long run, the natural monopoly of the industry, and a lack of transparency to the consumer on key information. This blog post outlines the five key messages to take from their report.
1. Statutory framework and an industry regulator
The CMA suggests establishing a statutory framework and regulator to underpin regulation of all heat networks and to ensure that customers receive adequate protection. These regulations would cover price, quality of service, transparency, and minimum technical standards. The regulator would be given powers to introduce new regulations, and Ofgem seem well-placed to take on this role.
2. Regulation of prices
Pricing is also under consideration, although there is no call in the report for price caps. CMA advocates a 'principles-based' approach to pricing and tariffs which should reference price benchmarks or costs plus a reasonable profit margin. According to the report, the regulator would be able to adjudicate on cases where prices deviate significantly from the guidance.
3. Regulation of quality of service
Under the proposals, domestic heat network customers would be given similar protections to electricity and gas customers, particularly in relation to the quality of service and protections for vulnerable customers. The protections could include performance indicators for quality of service, a priority services register for vulnerable customers, requirements regarding billing frequency, and complaint-handling requirements. CMA specifically holds the Heat Trust set of rules as a model framework.
The report is clear that customers should be able to understand and act upon their bills. A set of industry standards is recommended, comprising performance indicators such as the number of planned outages, the number of unplanned outages, the response times to outages, and the availability of customer call centres. CMA highlights specifically that heat supply bills should include details of the period of a bill, the unit cost and the quantity consumed.
5. Minimum technical standards
Heat networks would have to comply with mandatory technical standards to be implemented through an authorisation or licencing regime. New standards which draw on existing industry experience should be developed and engineers should be able to gain certification.
The CMA's findings in the report are not surprising given the projected expansion of heat networks and their natural monopoly status. The CMA stresses that the majority of existing heat networks set a good standard of service and customer protection, but that regulation is needed to protect customers in the few cases where standards slip.
A key concern for participants in the industry will be aligning their heat supply agreements with regulatory proposals made by the CMA and to ensure that their heat networks remain compliant when the regulations themselves come into force.