The UK heat network market is growing fast, providing opportunities for both suppliers and property developers/owners looking for low carbon energy solutions. But what are heat networks, where are they being rolled out and how are they regulated? And what are the key issues when making contractual arrangements involving heat networks?
A heat network (sometimes also referred to as "district heating") is a system of distributing heat generated from a centralised location to residential and commercial buildings through a network of insulated pipes, using heat generated from a low carbon source. They provide both heating and hot water to buildings, thereby improving energy efficiency and reducing carbon emissions.
Importantly, heat networks are "source agnostic" – which means that they can take heat from a variety of different sources, such as:
This means that as new heat-generating technologies become available, they could be added to the sources from which the network draws its heat.
Whilst heat networks currently provide approximately 3% of UK heat demand, it is estimated that they could provide up to 20% of UK heat demand by 2050 (with an investment potential of around £60 billion to £80 billion). It follows that there is a major opportunity for investors in this space.
Although most of the funding for heat networks is expected to come from private capital, the Department of Energy Security and Net Zero (DESNZ) recognises that Government has an important role to play, particularly around:
Examples of current UK heat network projects
The Government describes a heat network zone as "a formally designated geographical area….where heat networks are expected to provide the lowest-cost solution for decarbonising heating."
Obligation on buildings within zones to connect to heat network
For heat network operators, the key benefit of being within a designated zone is the power of the Zone Coordinator (typically the local authority) to require certain buildings within the zone to connect to the heat network (see below for more detail). This should give investors greater certainty about the number of likely network connections.
For property developers and owners, an obligation to connect to a heat network may initially seem like an unwelcome restriction on their freedom of choice. However, it is expected that for many, heat networks will provide an attractive and low cost solution to the need to decarbonise heating, particularly for new developments facing more stringent energy efficiency requirements.
Other advantages of zoning (from which both operators and property owners/developers stand to benefit) include:
Zone Coordinators may require developments receiving planning permission after designation of the zone to connect to a heat network before completion. New buildings not mandated to connect must nevertheless be “heat network ready” (so connection is feasible) and may be required to connect at a later stage (e.g. once the heat network operator has built out its network further).
Existing buildings can also be required to connect, subject to the heat network operator building out its network sufficiently and any relevant exemptions. For example, buildings may be exempt where it would not be cost-effective to connect to a heat network or where a better low carbon solution exists.
Currently, DESNZ is proposing heat network zones in the following locations, but it is expected that more zones will follow:
For information on the precise locations of the zones, please visit the Heat network zoning maps page on the Government website. For information on zoning outside England, see these pages dealing with the position in Scotland, Wales and Northern Ireland.
Historically, heat networks have not been regulated in the same way as other utility providers. The Energy Act 2023 provides for heat networks to be regulated by UK energy regulator Ofgem, placing them on a broadly similar footing to other regulated utility providers. It also aims to address consumer protection concerns over the fact that residential customers will not generally have a choice to obtain their heat and hot water from elsewhere (and cannot therefore switch away from the heat network provider if they are dissatisfied with costs or service levels). They also face a risk from failure of the heat network operator, as it is likely to be difficult to find a replacement provider of heat and hot water at short notice. Entities involved in the supply of heat and hot water via networks will therefore be required to:
Unsurprisingly, heat network operators will be regulated – but landlords could also be subject to heat network regulatory obligations, even where they are not directly responsible for operating the heat network. This is because the regulations apply to both "operators" and "suppliers", with the latter being defined as the entity that holds the contract with customers. For example, if a lease includes the provision of heat and hot water via a heat network, the landlord may fall within scope. By contrast, where an energy services company (commonly referred to as an "ESCO") is appointed and contracts directly with customers, the landlord is unlikely to fall within scope. Given the extent of the regulatory obligations, many landlords are therefore likely to prefer arrangements where the heat network operator contracts directly with occupiers – and developers will want to bear this in mind when structuring their arrangements (see section 5), prior to disposing of the property to a landlord.
Ofgem will not begin regulating the sector until January 2026, when most of its authorisation conditions will start to take effect. All regulations are planned to be in place and enforced from January 2027.
Existing heat network operators will benefit from "deemed authorisation" and this approach will continue for any new operators until 26 January 2027. After that, new operators will need to apply to Ofgem for authorisation.
Contractual arrangements for heat networks can be complex, particularly given the regulatory background (see above). They will typically need to address the following:
When establishing a heat network, various contractual arrangements are required. These agreements typically define responsibilities and terms between developers, operators, landlords and customers (commercial or residential) in respect of the installation, connection, operation and maintenance of the heat network and the supply of heat. Key types of agreements include:
Travers Smith offers a comprehensive approach to navigating the complexities of heat networks:
Our combined expertise ensures your project is not only legally compliant but strategically positioned to benefit from the evolving regulatory landscape. Contact us today to learn how we can support your initiatives in the heat network sector.
