With this year seeing the start of the new regulatory regime for heat networks, Ieman Barmaki, director of heat networks at Leep Utilities, investigates ways to reduce the implications and compliance burden that’s now facing many property developers.
The new regulatory rules for heat networks have arrived, and with them a permanent shift in what it means to own and operate a communal heat network in the UK.
The framework, being administered by Ofgem, introduces a set of obligations that will be familiar to anyone who has worked in regulated utilities, but are genuinely new territory for the heat sector. It includes elements such as requiring operators to demonstrate fair and transparent pricing, maintain a priority services register for vulnerable customers, hold disaster recovery and business continuity plans, and pass a financial resilience test to satisfy the regulator that the network is in safe hands.
New operators will need to meet all the criteria before they can begin to operate. But owners of existing heat networks are currently operating under deemed authorisation by Ofgem, with the deadline to submit the full supporting documentation and formal authorisation requirements being January 2027.
That timetable is not generous. Across the market right now, operators of every type are playing catch-up, pulling together processes, documentation and billing methodologies to demonstrate compliance.
A potential headache for developers
Historically, many developers have retained a degree of control over the heat networks serving their builds, creating a mechanism to protect residents from poor service and ensure continuity of supply.
Regulation changes the calculation entirely. The same protections that developers tried to achieve through contractual control are now being built into the statutory framework. Ofgem can intervene if prices aren’t transparent and price rises aren’t controlled, or if a regulated operator fails. A supplier of last resort mechanism – comparable to what exists in the electricity and gas markets – is also in development to ensure residents are not left without heat if an operator exits the market.
As a result, if a developer retains ownership or operational responsibility of a heat network, they have to become an authorised entity which meets all the regulatory obligations. It’s a massive endeavour and includes everything from creating and managing entire documentation and compliance frameworks to billing systems updates – and being able to demonstrate the financial resilience to satisfy a regulator.
For an organisation whose core expertise is in designing, building and selling properties, that is a significant and unfamiliar burden.
The increasing trend for network adoption
This regulatory burden is one of the biggest reasons why developers are increasingly choosing to divest their heat networks to a company which takes on permanent ownership and operation of the heat network, rather than managing it on a developer’s behalf.
The distinction matters, as ownership is one of the key tests Ofgem uses to assess where regulatory responsibility sits. A permanent transfer of the asset – what some call an adoption, others an asset transfer – transfers the regulatory burden to the new owner – and the developer achieves a clean break.
But many of the same concerns remain for developers – how do they pass on ownership of a critical part of their project without losing control of their brand or reputation?
At Leep, we are working with developers to take on the regulatory responsibility for heat networks. It’s not a new model for us: as a modern multi-utility we have operated as a regulated utility for close to a decade, and already do similar for water and electricity networks.
The frameworks that heat regulation is now introducing – guaranteed service standards, priority services registers, disaster recovery planning, financial resilience testing – are processes we already operate in our water business. We are not building compliance infrastructure from scratch; we are extending what we already do.
Leep already has deemed authorisation from Ofgem, and by January 2027, we will be fully authorised by Ofgem for heat. The statutory protections that entitles residents to – fair pricing obligations, guaranteed service standards, complaints and redress processes – are things we are already putting in place across our networks.
Flexibility is key
So far, so simple. But the reality is that managing heat networks can be complex and often unique to each network. Labels such as concessions, adoptions, hybrid arrangements, managed service agreements – they can be confusing for developers looking to move forward.
What’s actually important is that developers are able to get the arrangement they need for their network. And this will depend on the infrastructure, how developed it is, and the developer’s timeline.
What we do know is that the old model of a 25-year concession agreement, in which the rights to operate a network sit with a concessionaire but ultimate ownership remains elsewhere, creates a set of problems in a regulated world. At the end of that period, the network reverts to the developer, which then faces a decision: manage it under a regulatory framework they have not had to engage with directly, or transfer it to a regulated entity at that point.
Neither outcome delivers as much value as an earlier full adoption does.
Reducing the burden for developers
For developers who retain operational responsibility for their heat networks, the next few years are likely to bring significant business burden – a layer of compliance imposed on a business that was never designed to absorb it.
Most immediately, the January 2027 deadline for becoming authorised is approaching, with all of its regulatory requirements. For developers, it doesn’t have to mean difficult conversations and a heavy workload, just a conversation with one of the industry operators who are ready and experienced in working within a regulatory framework.
For more information about Leep and heat networks, visit https://www.leeputilities.co.uk/heat-networks/