Key Commercial Considerations when Connecting to a Heat Network
Key Commercial Considerations when Connecting to a Heat Network
March 2025
Funded and supported by:
Introduction
The purpose of this document is to provide potential heat network customers with an overview of the key areas for commercial consideration when entering a heat offtake arrangement with a heat network operator. This document is intended to help customers become an ‘informed buyer’. It is envisaged that this document will provide non-expert buyers with sufficient information to ask the right questions of their Network Operator. It is aimed at those who will either be leading a heat network connection project or are part of a team involved in assessing decarbonisation options.
Connecting to a heat network represents a long-term decision and, in most cases, will leave a building with no alternative form of heating and a single heat supplier organisation. In addition, customers will need to understand if their building heating system is compatible with the district heating supply.
Currently the supply of heat is not regulated, and customers are not protected in the same way as gas or electricity customers. This is expected to change once heat regulation, via OFGEM, comes into effect.
Consequently, it is important for customers to understand the commercial terms, risks and opportunities associated with a district heating supply.
This document does not replace the need for off-takers to seek independent technical, legal and commercial advice.
This guidance has been developed by Local Partnerships working with the Greater South East Net Zero Hub.
Introduction to Heat Networks
Heat networks, also known as district heating systems, are a method of distributing heat generated in a central location to residential, commercial, and industrial buildings across a wider area.
A heat network is a system that provides heat to multiple buildings from a central source, including capturing waste heat and heat produced from renewables.
The central plant produces or captures heat, and this is transferred to a fluid (often water) that circulates through a network of highly insulated pipes.
At each building or facility, the heat is transferred from the network fluid to the building’s heating system through a heat exchanger* After delivering its heat, the fluid (which is now cooler) returns to the central plant to be reheated and recirculated.
*A heat exchanger is a device designed to transfer heat between two or more fluids (liquids or gases) without mixing them. It enables thermal energy to move from a hot fluid to a cold fluid, increasing the efficiency of heating or cooling processes.
Heat networks are expected to play a crucial role in sustainable urban development by providing a more efficient and environmentally friendly way to heat buildings compared to traditional methods.
These systems remove the need for individual boilers or heaters in each building and can utilise local sources of low carbon heat, which would otherwise go to waste.
They can be one of the most cost-effective ways of providing secure, reliable, affordable low carbon heat to consumers and are common across northern Europe
Currently, around 2-3% of heat in the UK is provided by heat networks. It is estimated that heat networks will need to be supplying almost 20% of heat by 2050 to enable the UK to reach net zero. To support this growth, the Energy Act 2023 was passed in October 2023. The Act, which has now become law, establishes an authorisation regime for regulating organisations that supply heat through a heat network or operate a heat network, along with powers to identify and designate areas where heat networks provide the lowest-cost, low carbon heating option (Appendix 1: The Energy Act 2023)
Key drivers for a Heat Network Connection
The primary reason for customer connection to a heat network is to cut the carbon associated with their heating and hot water needs. A heat network connection should also represent the lowest cost form of decarbonising heat.
Further information on carbon considerations and costs and pricing can be found in Appendix 2
Key Risks associated with connecting to a Heat Network
There are a number of risks to consider when connecting to a heat network and it will be necessary to mitigate these where possible to optimise connections and performance.
Risk 1: Reliability of supply
A heat network connection is likely to include the removal of any on site heating equipment, so the customer is entirely reliant on the provision of heat from the network.
This risk can be mitigated by ensuring the network operator has sufficient resilience built into their network system, full business continuity and disaster recovery plans and sufficient contractual obligations and penalties to incentivise the Network Operator to resolve any issues quickly.
Certain customer types, such as healthcare organisations, may consider this risk too high and either retain on site back up plant or install connection points which would enable an emergency mobile boiler to be connected.
Risk 2: Reliance on single supplier
District heating provision is by its nature monopolistic, and customers will not have the ability to switch suppliers Customers should consider the financial standing of the Network Operator and the adequacy of the contractual provisions to ensure the quality of supply is maintained and sufficient price protections are built into the contracts.
At the time of writing a Supplier of Last Resort** does not exist within the district heating market although the Energy Act 2023 has conveyed the authority to OFGEM to put these arrangements in place.
**Supplier of Last Resort
Supplier of Last Resort arrangements are designed to ensure continuity of supply for customers, in circumstances where the incumbent supplier is at risk of entering becoming insolvent. The arrangements are a special form of administration The process and principles are established for the gas and electricity supply sector and mean that even if a gas or electricity supplier (and in the future heat network operator) become insolvent, their customers will not be left without an energy supply and any credit balance on their accounts is protected. Details are not confirmed at this time but are anticipated to reflect the regime for gas and electricity suppliers.
Risk 3: Cost protections
A connection to a heat network should represent the lowest cost option for a low carbon heat supply and Network Operators will often demonstrate this at the outset. However, consideration needs to be given to how prices will change over time. A heat network supply arrangement could have an initial term of 20 years and therefore there is a risk that over this time prices could rise in excess of alternative market options and become unaffordable.
The Energy Act 2023 includes the ability for OFGEM to introduce price controls within the market if required but protections should also be built into the contractual arrangements.
Risk 4: Compatibility
There may be some compatibility challenges associated with a heat network connection (see Technical Considerations). Some network operators may push this risk entirely onto the customer and this may also come with financial penalties.
Customers should mitigate this risk through engaging a technical specialist to assess building compatibility but also through the robustness of the commissioning process to ensure that the building compatibility is dealt with at the outset.
Risk 5: Carbon
Carbon reduction of a customer’s heating supply is often a key driver for the connection decision. There is a risk however that the heat supply, whilst low carbon at the outset, does not achieve a net zero standard and therefore leave the customer with the risk of failure to meet their carbon targets.
This can be mitigated by ensuring the network operator has a contractual commitment to develop a net zero plan and preferably minimise the cost impact to the customer.
The contractual arrangements to connect to a Heat Network
To connect to a Heat Network, customers will be required to sign up to a connection agreement and long-term supply agreements.
As part of the Heat Network Investment Project (HNIP), a central Government grant programme to support the rollout of heat networks, Lux Nova were appointed to draft a number of template contracts for use by anyone in the Public or Private sector developing a district heating scheme.
The objective was to produce a set of documents that would help reduce transaction costs for developers of projects (and other stakeholders) and help raise standards across the industry.
These template contracts were updated in 2023 as part of a refresh for the Green Heat Network Fund (GHNF).
The suite of contracts can be found on the Triple Point website
It is commonplace across the market for Network Operators to base their contracts on these Sales, Operations and Maintenance Set ‘SOMS’ templates. These templates cover a wide range of contracts several of which are relevant to heat network customers. The most relevant, and the focus of this guidance is the commercial arrangements covered by a Connection Agreement and a Supply Agreement.
Sometimes the Connection and Supply Agreements are combined into one document and sometimes they are separate, but the purpose of the agreements are as follows;
High level summary of the Connection and Supply Agreement
Below are the key principles of the Connection and Supply Agreements. More detail on the individual terms is provided in the Contract Terms Considerations section.
The Connection Agreement
Under this agreement the Network Operator should commit to;
- Connect the customer to the network based on a capacity and demand forecast specified by the customer.
- Design, build then own and operate the connection to the customer premises.
- Commission the heat connection
- Maintain the connection to ensure heat supply (see Supply Agreement)
The agreement will require the customer to;
- Provide the Network Operator with its demand and capacity requirements
- Provide access for the installation and subsequent operations and grant property rights
- Be responsible for any customer side heating system changes necessary for compatibility (see technical section below)
- Pay a connection fee
- Enter into a supply agreement with the Network Operator
The Supply Agreement
Under this agreement the Network Operator should commit to;
- Supply heat at an agreed temperature up to the capacity installed
- Commit to a carbon intensity of the heat
- Ensure heat is available at all times
- Accurately meter heat usage and bill monthly for both heat use and availability
- Ensure all heat charges are competitive against an alternative low carbon heat source
The agreement will require the customer to;
- Provide access for the maintenance of the network connection and substation
- Pay heat charges
- Maintain the water quality on the customer side of the heat substation and commit to return temperatures or delta T.
- Undertake not to install any alternative heating system.
**Delta T
‘Delta T’ refers to the change in temperature between two points in a system. In the context of heat transfer or thermodynamics, delta t typically represents the difference between the initial and final temperatures, or the temperature difference between two fluids in processes like heating, cooling, or heat exchange.
In the case of District Heating, it is measured as the temperature differential between the heat flowing into the building and temperature out of the building after flowing through the buildings internal heating system.
Ancillary agreements
In addition to the Connection and Supply Agreement the customer may be required to enter into supporting property access agreements such as a Wayleave or Easement***. Furthermore, a customer may require collateral warranties from the Network Operators supply chain.
***Wayleave
A wayleave is a legal agreement or permission that allows a utility company (such as an electricity, telecom, or water provider) to install and maintain infrastructure (like power lines, cables, or pipes) on private land. The landowner is typically compensated for granting this access. Wayleaves are usually temporary and can be revoked by either party, subject to notice periods and terms of the agreement.
Easement
An easement is a legal right that allows one party to use another person's land for a specific purpose. Unlike wayleaves, easements are typically permanent or longlasting and are tied to the property itself, not the landowner. Easements often involve rights of access, such as the right to use a driveway or to lay utility pipes underground. Easements "run with the land," meaning they remain in effect even when ownership of the land changes.
In summary, a wayleave is usually a temporary agreement, while an easement is a permanent right, both allowing access or use of private land for specific purposes.
Scope of agreements
It is important to understand the delineation of responsibilities within the connection and supply agreements as this will have an impact on the access rights, metering points and technical challenges associated with a connection.
The diagram below shows the typical delineation for a network connection, but this may vary depending on the network operator and the type of building connecting. For example, if this is a new build residential block, some network operators will take responsibility up to and including the heat exchanger within the end customer premises.
Whilst this configuration should apply to both new build and ‘retrofit’ or existing building connections, connecting an existing building can be more challenging to ensure compatibility with the existing secondary network and heat emitters. These technical challenges are discussed in more detail in the Technical Considerations section.
For larger heat networks (see Appendix 3 Case Study Bristol Heat Networks Ltd) the system will connect both existing and new builds and both types of building will need to be configured to ensure compatibility with the networks operating parameters.
In the diagram above the network operator’s responsibility/assets end at the output valve of the substation or heat exchanger. In the arrangement above it would most likely be the customers responsibility to maintain the water quality in the secondary side and the ‘delta T’ of the return temperature. This can be more challenging in an existing building compared to a new build (see Technical Considerations below).
Network Operators may have different approaches and forms of agreement depending on the type of building connecting. This may also vary between a New Build or Existing building or a Residential or non-Residential building.
Technical Considerations
As referred to above there can be some technical challenges associated with connecting to a heat network. The challenges will need to be assessed on an individual building by building basis but generally the areas for consideration are as follows;
- Operating Temperatures: A Network Operator may wish to operate a heat network at a lower temperature (65 – 80 degrees is typical) to minimise their heat losses and maximise the efficiency of their system especially if utilising heat pumps. These temperatures may be lower than the current output set points for the existing heating system.
For new build connections the heat network operating temperatures need to be taken into consideration when designing the internal heating system. The Network Operator should provide developers with a full configuration pack including details of the temperature, pressure, delta T requirements.
As referring to above, connecting existing buildings may be more challenging and require changes to the secondary (internal) heating system. Consideration should be given to undertaking temperature lowering tests during the heating season to understand the challenges in connecting to a lower temperature system.
In addition, if the building is using stored hot water heated by the heat network, then legionella risks need to be considered and if the operator is lowering the temperatures they should operate a frequent pasteurisation routine to raise the stored hot water above the required threshold.
- Delta T: this is the difference between the flow and return temperature into and out of the building. It is commonplace for buildings utilising gas boilers to operate on a 5 – 10 degree C delta T but Network Operators are likely to require a delta T in excess of 20 degrees C. To achieve this, customers will need to undertake ‘secondary side’ works and the costs and disruptions of this work needs to be considered.
Some Network Operators will include financial penalties / incentives to motivate customers to improve the delta T and therefore failure to resolve this can result in higher charges.
Some customers may be eligible for funding to support any internal works required. See Appendix 4 for more information on relevant grant funding section below.
Note: Both the lower temperatures and delta T requirement are not unique to a heat network connection. If a customer chose to install a building level heat pump to decarbonise their heating instead of a network connection, some or all of these challenges would equally apply.
- Losses and heat gain: This is particularly relevant for new build residential properties where the internal pipework runs down corridors to properties. If the Network Operator is supplying to the bulk supply points, the ‘substation’ shown in the diagram above, but the residents are billed for the heat usage within the individual property, the cost of the internal losses may be picked up by the landlord. Furthermore, without proper insulation and installation thermal
losses within a building can make conditions uncomfortable for residents and lead to complaints.
- Space and access: Consideration needs to be given to where a Network Operator can locate their substation and be given access for maintenance. It is commonplace for substations to be located in existing boiler rooms if space is available, but this may not always be the case.
These topics and more are dealt with in detail in the CIBSE Heat Networks Code of Practice. Read Here
This Code of Practice applies both to heat networks designed to supply new developments and to heat networks that are retrofitted to supply existing buildings.
The Code has been developed to raise standards by setting minimum requirements for projects, essentially providing a safeguard against poor systems while also encouraging best practice.
Contractual Terms Considerations
Contract
Term - How long will the contract last?
End of term provisions
- Network operators will look for a substantial minimum term, this is likely to be 10 years or more to ensure the network operator has time to recoup their investment.
- Depending on terms such as pricing, termination rights etc it may be advantageous to have a longer term (20 years +)
- Connecting to a heat network usually means removing all onsite heating equipment such as gas boilers and therefore a short-term contract can leave off-takers exposed at the end of the term. (see End of term Provisions below)
- Consideration should be given to the forthcoming protections from regulation that may provide some price protections. (see Regulation section)
- Customer should consider what happens at the end of the initial contract term. The initial term may include price protections such as CPI linked price increases. These protections can sometimes come to an end once the initial term ends.
- In addition, it is likely that on-site heating plant will be removed and
A longer term contract (20 years) may give a customer greater certainty and protection.
• Internal governance restrictions on long term contracts.
• Procurement requirements.
• What are the risks associated with either shorter term or longerterm contracts.
• Under what contract structure is the Network Operator contracting e.g. zone operator, concession operator?
• How is the Network Operator funded?
• What happens at the end of the term (see below)?
Customers should look for ‘roll-over’ provisions within the contract to ensure that the network operator can’t change the terms at the end of the initial contract term.
• Risks associated with removal of on-site heating plant.
• How will prices be impacted at the end of the term?
• Will there be a ‘reconnection fee’?
• Will on-site equipment owned by the network operator
therefore customers should consider how heating will be provided if the contract is terminated at the end of the term.
- The UK Government have indicated that there may be a ban on installation of gas boilers by 2035 and therefore customers may have limited choice in heating options.
Exclusivity - Network operators will look for exclusivity of supply to protect their investment but carve outs may be required for existing hot water taps (tea points).
- Customers should also consider carve outs where the network operator has failed to supply heat allowing the customer the right to install temporary heating.
Exclusivity of supply waived where supplier is failing to meet standards or for the testing of any fall-back/resilience measures that remain installed.
• What happens if the Network Operator fails to meet the standards and how can alternative heating be met.
be removed at the end of the term?
Network Operator Works
- The Connection Agreement should set out the scope of the works to be undertaken by the Network Operator this should include the capacity of the heat network connection, configuration of the connection and details of the programme.
- Customers should engage with a suitably qualified technical party to verify the connection size and configuration is suitable for their existing and future needs. For example, the configuration may include separated heat plates for the hot water supply. Consideration also
The Network Operator should provide sufficient detail for the customers technical support to assess the suitability of the connection.
A weather compensation*** approach will allow for a more efficient network operation potentially improving carbon factors and reducing network losses and therefore costs.
• Access restrictions and timing considerations re other works/ events.
• Building heat capacity requirements both now and into the future.
• Resource required to supervise /provide access etc.
• CDM requirements.
• Building compatibility and secondary side work required.
• Impact of delay.
• Impact of onsite works.
• What provisions are in place for the use of temporary heat if supply fails?
• What about on-site Tea points or other existing heating provision?
• Can existing boiler plant be retained?
• What temperatures will the network be operated at?
• What is the source of the heat?
• What is the resilience in the system?
• What is the carbon content of the heat supplied?
• What is the plan to achieve net zero and by when?
• What business continuity and
needs to be given to compatibility of the building to take heat from the network as discussed in the technical section above.
- The supply and connection details should provide information on the supply temperatures which may vary depending on the weather (weather compensation), flow rates etc
- The contract should also provide details of the delivery/ connection programme and include provisions to cover delay in the delivery. Please note that delay in connection caused by the customer may lead to delay penalties arising, although some flexibility in the timing may be beneficial for both parties.
- When considering the connection timing consideration should be given to related grant funding, if applicable, or construction programmes for new build.
- The Network Operator works process should also include details of the commissioning process. This is important to ensure that both parties are satisfied that the system will meet the requirements set out within the contract at the outset.
Customer Works - The Customer Works set out in the Connection Agreement may include the requirement to provide preparatory works to allow the Network Operator to undertake its works (e.g. Safe access to plant room, with suitable
***Weather Compensation refers to operating the network at different temperatures depending on the weather temperature. The network temperature will increase when it is colder outside and vice versa.
Where on site hot water storage is included the Network Operator should include a regular pasteurisation to support the customer with their legionella risk management
Network operators should support customers in assessing the level of works required.
Some network operators will support customers with funding applications.
• Funding options for customer works?
• Future plans for the buildings and timing of connections?
disaster recovery plans are in place?
• Qualifications of contractors coming to site?
• What are the legionella management plans?
• What is the commissioning process /plan?
• What laydown requirements are necessary (i.e. to temporarily store materials / equipment during construction)?
• What are the requirements for the secondary side?
• Is there a bedding in period?
lighting and ventilation) but this category of work is also likely to include the Secondary side works to ensure the building heating system (the secondary system) meets the customer obligations within the contract in terms of delta T but also is compatible with the network operating regime ( e.g. flow temperatures).
- As shown in the diagram on page 7, it is often the customers responsibility to ensure the secondary side is compatible with the temperatures, pressures, delta T and flow rates associated with the connection to the Heat Network.
- Achieving these requirements may be challenging for some older buildings and therefore customers should not enter agreements to connect without due consideration of the time and cost of these secondary side works.
- Consideration should be given to funding these works (see funding options)
- Failure to complete these works to the appropriate standard or to the agreed timescales may lead to the customer incurring penalty costs
- Secondary side works are likely to be less onerous on a new build property.
- As with the Network Operator, Customer Works will need to be commissioned to ensure they meet the contractual obligations at the outset.
• How will performance be monitored and communicated?
Customer Obligations
Access rights / property rights
- Once the project enters the operational or supply stage the Customer is very likely to be obligated to ensure they maintain the water quality and return temperatures in the secondary side of the network. (note: this is focused on bulk supply points only and not residential direct supply)
- The water quality on the secondary side is important to the Network Operator as it can impact the ability to supply heat to the customer. Failure to maintain the water quality can impact the Network Operators standards of service and undermine the ability to hold the Network Operator to these standards.
- It is increasingly commonplace for Network Operators to penalise (or incentivise) customers to achieve the required delta T requirements. Customers should consider how this will be monitored to avoid incurring penalties.
- In addition, the Customer will be obligated to maintain the secondary side so as not to detrimentally impact the heat network. Customers should consider how this can be accommodated.
- The Connection and Supply agreements will provide some access provisions to allow the Network Operator to install their equipment and then maintain it.
- The access rights may take the form of a simple licence provided as part of
Some Network Operators will also provide a secondary side maintenance and monitoring service The reporting requirement placed upon the Network Operator should provide the customer with regular information to identify if the water quality or delta T are deteriorating and some Network Operators will provide a bedding in period to monitor performance and waive penalties.
• Resourcing and funding the obligations under the contract.
• Are risks of failure to meet customer obligations understood
• What information will the Network Operator provide during the supply period to allow the customer to monitor the performance of the secondary side?
• Will rectification periods be available?
For a simple single customer connection, a ‘licence’ arrangement should be sufficient.
Customer should expect any Network Operator to meet site rules.
• Any site-specific access requirements, such as signing in / out.
• DBS checking.
• What background checks are carried out on operatives?
• Who will own assets after installation and demarcations?
Supply standards
– incl. carbon, net
zero etc
the Connection / Supply agreement, a Wayleave, an Easement or a Lease.
- The choice on access instrument may vary between Network Operators with some being comfortable with a simple licence arrangement but other requiring a lease.
- Consideration should be given to the pipe routes and whether a network is utilising customers land to provide heat to other customers downstream –in which case a Network Operator may require an Easement.
- Currently Heat Network Operators do not have Statutory Undertaker**** status but this is set to change through the Energy Bill 2023. Statutory undertaker rights may change the Network Operators requirements for access.
- Customer should consider how they control access to their sites with notice provisions and ensuring adherence to site rules. Although separate arrangements will be required for emergency response.
- The Supply Contract should include Guaranteed Standards of Service.
- The standards should cover at least
o Guaranteed levels of heat availability
o Planned interruption periods and notice
o Unplanned interruptions
o Multiple unplanned interruptions
****A statutory undertaker is an organisation with legal authority to carry out certain essential services or works, typically related to public infrastructure. These entities are usually granted powers by law to undertake activities that are critical to the public good.
Statutory undertakers have special rights to carry out their activities even if it involves entering private land or carrying out works that may disrupt public areas. For example, a statutory undertaker may have the right to dig up roads to maintain water pipes or electricity lines without needing permission from the local authorities.
The inclusion of a carbon standard for the heat supplied with a trajectory to net zero carbon.
• Provision of Risk Assessment Method Statement (RAMS).
• Compliance with any organisation or site specific safety policies
• Insurance impacts, including evidence of Public Liability Insurance.
• What insurance will be taken out?
• What are the system maintenance requirements and access requirements?
• Implications of failure to receive heat.
• Carbon targets and how will the system meet them.
• What standards of service are offered?
• What is the penalty for not meeting them?
• How will the system decarbonise over time?
• What are the contingency arrangements should
Metering and billing
o Heat meter repair and replacement
o Fault investigation
o Complaint management
- In addition, customers should expect a performance standard regarding carbon content.
- Each service standard should come with a suitable service failure payment and provision for termination for persistent breach of standards.
- The contract should ensure that the metering provided within the heat supply agreement meets the Heat Network (Metering and Billing) Regulations 2014
- Most network operators will bill monthly in arrears.
- Meter should meet accuracy in accordance with Measurement Instrumentation Directive (2014/32/EU) for class 2 meters
- Network operators may also charge for volume charges, and this should also be metered monthly.
Pricing - The Connection Agreement should set out the Connection Charges payable by the Customer to connect to the network.
- Supply Agreement should set out the pricing structure for the ongoing heat supply for the duration of the contract.
- The agreements should also include details of how prices will change over
Some Network Operators will provide access to on-line portals provide real time data on demand, capacity, flow and return temperatures and volumes.
• Data requirements for internal reporting including carbon accounting.
the primary heat supply be interrupted?
Customer should expect to know the fixed cost for the connection to the network at the outset. It is increasingly commonplace for network operators to publish their connection charges.
The indexation of the supply charges should be transparent and auditable to the customer. It is best practice for the
• How does the cost of both connection and supply compare to BAU and alternative options.
• Internal approval process required for costs.
• Will real time meter data be available?
• What data will be provided and to what frequency?
• How will accuracy be assured?
• What is the proposed pricing structure?
• How and when will prices by indexed and/or revised?
• How does the connection/supply represent value for money? Is it possible
time whether through indexing or movements in underlying commodity costs.
- Consideration should be given to how the heat network prices compare to alternative forms of low carbon heat provision both at the time of contract and into the future.
- The contracts should also deal with change in law provisions and the implications for customer pricing. As district heating is a nascent market there is a reasonable expectation of further government incentives to support growth and therefore change in law provision should also include the potential for price reductions.
- Does the contract allow the customer to switch to an alternative contract with the same supplier in the future? This may be the case should the supplier join a supply Framework, under which terms may be different.
tariffs to be set annually to run from the 1st April to 31st March – this allows a summer period to prepare if price do rise.
Customers should be notified 1 month in advance of the annual prices changes. (i.e. notification by end of February each year.)
Each tariff element may have its own indexation /price revision mechanism, and these mechanisms should be appropriate and transparent to customers. For example, it is increasingly common for the fixed charges to be indexed by CPI (or similar published indices) for the duration of the contract.
For the variable charges it is considered best practice for the annual tariffs to be calculated by a pricing formula linked to the movement in the input commodity costs. The Network Operator should provide transparency of the pricing of those input fuels to ensure market competitiveness. This formula approach may include efficiency factors and other parameters such as network losses. Any fluctuation in these parameters should be a risk taken by the Network Operator and not the customer otherwise the Network Operator will not be incentives to operate the system efficiently.
• How will this change over the duration of the contract. to benchmark the cost against the market?
• How does the offer compare to alternative heating options both now and throughout the duration of the contract.
Performance reporting
- The supply agreement should include reporting requirements to be placed upon the Network Operator
- These may be include in the monthly billing cycle and/or additional scheduled reports to ensure the customer has sufficient information to understand areas such as;
o Demand profiles
o Peak capacity’s
o Delta T’s and volume used (if applicable)
o Carbon the of heat supplied (this may only be possible on annual basis to take into account seasonal fluctuations)
o Maintenance scheduling
o Performance against KPI’s
Parent Company Guarantee (PCG) and change control
-
- It is commonplace for a locational network operator to be set up as a Special Purpose Vehicle (SPV) entity to hold the assets and grant funding (if applicable)
- Consequently, customers should consider the financial standing of the
Customer should not expect to have a take or pay arrangement as part of their contract unless it is a very limited scope network.
Customers should expect a transparent cost comparator to alternative low carbons forms of heating.
Some network operators will provide customers with a real time portal to see live data regarding the heat supply and historic performance data.
• What information is required and to what frequency.
• What information is provided and to what frequency?
A suitable PCG for an SPV and restrictions on change of control to ‘unsuitable parties’.
• Protections if the Network Operator becomes insolvent.
• What is the financial standing of the Network Operator?
• Who is the Network Operator?
• Is the Network Operator an SPV?
• How is the Network Operator funded?
• Is a PCG available?
Liability caps and termination penalties
SPV and protections in the form of a parent company guarantee.
- Forthcoming regulations are expected to introduce a Supplier of Last Resort mechanism to allow a heat network to continue operating in the event of a network operator insolvency although this may not protect customers agreed pricing arrangements.
- Furthermore, customers should consider any change of control provision they may require. As the heat network grows and expands it is likely there will be a number of consolidations and network operator change of control events. It is generally acceptable to allow protections to avoid a transfer to an ‘unsuitable party’.
- Change of control provisions exist within the GHNF grant conditions and are likely to be included in any network operator licencing arrangements under the forthcoming regulations.
- Both the Connection and Supply agreement should include liability caps and specific penalties associated with termination.
- If the Customer needs to terminate the Connection Agreement with the Network Operator due to breach of contract during the works period and prior to the commencement of supply, the customer should look to recover connection fees paid but consideration also needs to be given
Customers should look to recover the costs associated with installing a replacement heating system if the customer terminates the Network Operator for breach during the supply period. This is likely to be the cost of reinstating the customer back to their original position prior to connection. This may be tapered over the duration of the agreement to reflect the utility of the service provided.
• What protections can be offered?
• What certainty is there that the network will proceed?
• How progressed is the network?
• What track record does the Network Operator have?
• What liability sits with the customer?
• Does the Network Operator have sufficient financial standing to cover the liabilities under the contract?
• How will heat be restored in the event that the network fails
• What is the liability / compensation on term offered by the Network Operator?
• How is this calculated and how does it change over time?
any wider costs and issues associated with funding grants such as PSDS.
- Termination by the Network Operator during the works period may lead to the Network Operator looking for recovery of costs incurred and breakage costs.
- If the Customer terminates the Network Operator during the supply period for breach of contract, the customer needs to consider how they are going to reinstate an alternative heating system if the existing system has been removed.
- Termination by the Network Operator for breach by the customer may lead to recover of both breakage costs but also a proportion of future charges forgone.
In 2019, the UK Government and the devolved administrations committed to a national target of Net Zero emissions by 20501, as recommended by the Climate Change Committee (CCC).
Since October 2021 the UK Government has developed a range of policies and interventions to decarbonise all sectors of the UK economy by 2050. These can be found in the following documents:
• Net Zero Strategy: Build Back Greener2
• The Heat and Buildings Strategy3
• Energy Security Strategy4
Heating buildings constitutes around a quarter of all UK emissions. Heat Networks are a key part of the Government’s low carbon strategy. The Government Strategies highlight the need to move away from burning fossil fuels for power and heating and continue to grow and decarbonise the UK Heat Network market.
New Regulation
The Energy Act 2023 (Act) was passed in October 2023. The Act, which has now become law, aims to improve security of energy supply in the UK and introduce sector regulation, through consumer protections and frameworks, with Ofgem appointed as the UK’s official regulator of heat networks.
The Act formally appoints Ofgem as the heat networks regulator and establishes an authorisation regime for regulating organisations that supply heat through a heat network or operate a heat network.
The key areas covered by the Act are:
1. Licensing and Regulation
• Heat Network Operators: The Act introduces a licensing regime for heat network operators. This means that operators must obtain a license to run a heat network, ensuring they meet specific standards and requirements.
• Technical Standards: It establishes requirements for the technical standards and operational practices of heat networks to ensure they operate efficiently and reliably.
2. Consumer Protections
• Transparent Billing: Operators are required to provide clear and transparent billing to consumers, including detailed information on how charges are calculated and the basis for any changes.
1 Climate change targets: the road to net zero? - House of Lords Library (parliament.uk)
• Complaints and Dispute Resolution: The Act mandates procedures for handling consumer complaints and disputes, ensuring that consumers have access to mechanisms for resolving issues related to their heat supply.
3. Regulatory Oversight
• Ofgem’s Role: The Act grants powers to Ofgem (the Office of Gas and Electricity Markets) to regulate heat networks. Ofgem is responsible for overseeing compliance with the Act, enforcing standards, and ensuring fair treatment of consumers.
• Monitoring and Reporting: The Act requires heat network operators to report on their performance and compliance, enabling effective monitoring by the regulator.
4. Enhancing Efficiency and Reducing Carbon Emissions
• Energy Efficiency: The Act supports initiatives to improve the efficiency of heat networks, aligning with broader government goals for energy efficiency and carbon reduction.
• Integration with Renewable Energy: There are provisions to encourage the integration of renewable energy sources within heat networks, contributing to the UK’s climate targets.
5. Future Amendments and Reviews
• Ongoing Development: The Act includes provisions for periodic review and updates, allowing for adjustments based on evolving industry practices and technological advancements.
The Act also provides the Secretary of State with powers to introduce various forms of price regulation, including a price cap, should it be necessary to protect consumers whilst growing and decarbonising the market.
The Bill contains powers to introduce a licensing regime through which Ofgem will be able to grant licences that give heat network developers rights and powers similar to those held by other utilities. It is proposed that a licence will grant access to particular permits, for example for street works, and allow the same use of land when building and maintaining heat networks as electricity, gas and water companies. This will reduce costs and accelerate market growth.
The Bill provides for the appointment of the Energy Ombudsman and Citizens Advice as the sector’s Alternative Dispute Resolution Body and consumer advocacy body respectively through secondary legislation.
Heat Network Zoning
The Act also provides powers for the government to implement Heat Network Zoning in England, a policy solution which aims to support the development of district heating networks by identifying and designating where heat networks could provide the lowest-cost, low carbon heating option.
This policy will mandate larger, non-domestic heat demands (currently the threshold is set at 100MWh heat demand p.a.) to connect to networks within certain designated zones (to be
defined by a process set up by DESNZ) where heat network heat provision can be demonstrated to be the least-cost low-carbon option.
By targeting specific areas for heat network development, heat zoning helps to ensure that networks are economically viable and can operate at high efficiency. It reduces the likelihood of underutilised infrastructure.
Concentrating heat network development in high-density or high-demand areas can lower costs for both installation and maintenance. Zoning also supports the integration of low-carbon and renewable energy sources by focusing on areas where they can be most effective.
Appendix 2: Key drivers for a Heat Network Connection
The primary reason for customer connection to a heat network is to cut the carbon associated with their heating. A heat network connection should also represent the lowest cost form of decarbonising heat.
Carbon Considerations
If the Network Operator has been funded by the Green Heat Network Fund (GHNF) then the grant conditions will require the heat supply to meet 100gCO2e/KWH or lower within 5 years of operation.
This may represent c50% - 60% carbon saving compared to a gas boiler, but consideration needs to be given to how this system will then go on to meet a net zero standard over time and/or beat an on-site low carbon alternative such as an ASHP or even direct electrical heating.
Connecting to a heat network is a long-term decision and is very likely to lead to the removal of any alternative method of heating at the customers premises. If a customer has net zero targets for their heating this obligation will need to be met by the heat Network Operator. Network Operators should have ambitions to convert their networks to net zero over time, or may have adopted a target date, although this may come at additional cost.
Cost and Pricing
A heat network connection and supply are unlikely to be cheaper than a gas supply, but it should represent the lowest cost form of low to zero carbon form of heating. Before connecting to a network, it is important for customers to understand how the cost of connecting and supply compares to alternative options. Some Network Operators will provide comparisons including a ‘levelised costs of heating’ comparison that looks to compare the costs over the lifetime of the network connection and supply. This approach combines the two key elements of connecting to a heat network: the upfront cost of connection and then the ongoing supply charges.
The diagram below shows how the various cost components may compare to a building level heat pump or direct electrical heating – low carbon alternatives to connection to a district heat network. The relative comparison between heating options will vary depending on individual buildings capacities and demands so the diagram below is simply to demonstrate the component parts for consideration. This diagram is indicative only and will depend on the prices and charging structure offered by the Network Operator
As referenced above, the connection to a heat network is a long term decision and the heat supply arrangements may be for an initial term of up to 20 years and therefore customer not only need to understand how the cost of the heat connection and supply compares to alternative low carbon heating options at the outset, but also how prices will be varied over time.
Note: While the capital cost of direct electrical heating may be low this does not consider the cost of any grid reinforcement that may be required. Direct Electrical heating is not an option for mass roll out as the grid system is unlikely to be capable of meeting this level of demand.
Pricing Structures
Whilst there is no standard or regulated pricing structure across the market, most Network Operators will charge;
a. A Connection Charge often based on the capacity of the connection (i.e. £/KW). This is a one-off initial connection fee.
b. A Fixed or Standing Charge often based on the capacity of the connection. This is charge levied irrespective of whether the customer draws any heat from the network and covers the fixed costs of operating the network such as maintenance, insurance etc.
c. A variable or usage charge as p/KWh of heat drawn from the network.
In addition, as shown in the diagram above some network operators have a volume charge. This is a charge based on a £/M3 of volume flowing through the substation. The purpose of this charge is to encourage customer to maintain their delta T at the required level. The theory behind this charge is that it takes a certain amount of energy to heat a building to the required level, if the customer has a low delta T and is therefore not extracting sufficient energy from the water that flows through their building, they will need to flow more to achieve the full energy requirement. So, customers with a low delta T will have a higher flow and therefore volume charge.
Appendix 3: Case Study: Vattenfall, Bristol Heat Networks Ltd
In early 2023, Bristol City Council launched Bristol City Leap, a world-first city partnership to bring in £1bn of investment to decarbonise the city.
Bristol was the first UK city to declare a climate emergency, setting the ambitious target of carbon neutral emissions by 2030. To meet that ambition the city needed an energy partner. Vattenfall is working with Bristol City Leap, a Joint Venture between Bristol City Council and Ameresco to accelerate green energy investment in Bristol and help towards decarbonising the city. Working with customers, involved organisations will collaborate to tackle both energy efficiency and the heat decarbonisation of buildings, by assessing and rolling out the right lowcarbon solutions for the right properties, such as energy efficiency measures and of course district heating.
Vattenfall’s role is to make district heating happen in Bristol. As part of Bristol City Leap, Vattenfall acquired the heat networks in operation and construction from Bristol City Council, and building on this great work, we are now delivering heat to the equivalent of 5000 homes. This includes the UK’s largest single harbour water source heat pump at Castle Park Energy Centre, where water is taken from the nearby floating harbour to provide heating to local homes and businesses. Vattenfall plans to expand the city’s existing heat networks, ultimately linking them to create a citywide network.
Bristol City Leap is expected to contribute an estimated £61 million of social value, supporting Bristol City Council’s ambitions for communities to thrive. This includes the creation of local jobs during the construction of the heat network, part of an estimated £55 million worth of contracts delivered by local suppliers. A £1.5 million Community Energy Fund, funded by Vattenfall and Ameresco, has also been established for the development of low carbon energy
initiatives. This includes the opportunity for local organisations to develop connections or supply heat to the Bristol Heat Network, considered to be a UK first for community funding and the industry. It’s a huge opportunity for the city.
Over the 20 year-long Bristol City Leap term, Vattenfall will expand the Bristol Heat Network to deliver heating to homes and businesses across the city. This work will deliver jobs and economic growth, stimulating the development of a specialist supply chain to support network installation. Taking care of local communities is important when installing infrastructure, and we are working with key stakeholders to minimise the disruption to residents by combining the installation of heat pipes with other developments, like planned road works.
Appendix 4: Funding Opportunities
There are several funding streams available to support both the development and connection to a heat network. The key ones are described below.
Public Sector Decarbonisation Scheme (PSDS)
• Description: The Public Sector Decarbonisation Scheme supports the aim of reducing emissions from public sector buildings by 75% by 2037, compared to a 2017 baseline.
The department’s delivery body, Salix Finance, manages the Public Sector Decarbonisation Scheme.
In September 2024, the Department for Energy Security and Net Zero (DESNZ) confirmed the continuation of the Public Sector Decarbonisation Scheme (PSDS) with the launch of Phase 4, supporting more public buildings such as schools and hospitals to switch to cleaner heating and cut their emissions, accelerating to net zero.
PSDS Phase 4 encourages (though does not specifically require) applicants to consider whether connection to a heat network is possible now or at a future date. Guidance is provided on how to implement decarbonisation measures in a manner which supports later connection to a heat network.
• Eligibility: Public sector organisations in England, where they own or have a lease arrangement on the relevant building which includes responsibility for operation and maintenance of building services. Organisations must meet the definition of a ‘public authority’ as defined by the Procurement Act 2023. This may impact the eligibility of higher education institution compared to previous rounds.
Low Carbon Skills Fund (LCSF)
• Description: The LCSF is a UK government initiative aimed at supporting the public sector in reducing carbon emissions from their buildings. The fund is part of the broader Public Sector Decarbonisation Scheme (PSDS), which helps local authorities, schools, hospitals, and other public sector organizations transition towards cleaner, more energy-efficient operations.
The LCSF primarily supports the creation of heat decarbonisation plans for public sector buildings. These plans lay out how organizations will reduce carbon emissions, particularly by phasing out fossil fuel-based heating systems.
• Eligibility: The fund is open to public sector bodies, such as local authorities, NHS Trusts, academies, schools, and emergency services. Applicants must demonstrate a commitment to decarbonising their buildings and transitioning to more sustainable energy sources.
Green Heat Network Fund (GHNF)
• Description: Launched in 2022, the GHNF provides funding for the construction of new and existing low-carbon heat networks. This is focused on the development on the heat network rather than the heat network connection but through this funding the customer connection cost can be subsidised.
• Focus: GHNF supports heat networks using technologies like heat pumps, geothermal heat, and solar thermal.
• Eligibility: Local authorities, private developers, and housing associations can apply for this grant.
Heat Network Efficiency Scheme (HNES)
• Description: Launched by the government in 2023, HNES offers funding for improving the efficiency of existing heat networks. While it is mainly focused on retrofitting, it may also provide assistance for optimising connections to new networks.
• Eligibility: Operators of existing heat networks, including local authorities, housing associations, and private owners.
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This report has been produced and published in good faith by Local Partnerships and Local Partnerships shall not incur any liability for any action or omission arising out of any reliance being placed on the report (including any information it contains) by any organisation or other person. Any organisation or other person in receipt of this report should take their own legal, financial and/or other relevant professional advice when considering what action (if any) to take in respect of any associated initiative, proposal or other arrangement, or before placing any reliance on the report (including any information it contains).
