Energy and Utilities

The Energy Transition | Ofgem made heat networks regulator and SoLR consultation

Published on 10th Jan 2022

This week, we look at Ofgem being appointed as heat networks regulator, government responses to a heat networks market framework consultation, Ofgem's consultation on modifications regarding last resort supply payment claims for electricity and gas, and more.

Ofgem appointed as heat networks regulator as government responds to Heat Networks Market Framework Consultation

The government has recently published its response to the Heat Networks Market Framework Consultation. Within this response, the government announced that the Office of Gas and Electricity Markets (Ofgem) will be the heat networks regulator for Great Britain. Jonathan Brearley, chief executive of Ofgem has said, "Heat networks can play a key role in reducing carbon emissions from heating and helping to achieve the country’s climate goals. We will work with the Government to design a regulatory framework which attracts the investment needed while ensuring heat network customers, especially those in vulnerable circumstances, receive a fair price and reliable supply of heat for their homes as we make the transition to net zero."

The government gave its response to the consultation responses across seven key areas:

1. Regulatory Structure

  • Ofgem will be appointed as heat networks regulator and Citizens Advice will be appointed as the consumer advocacy body for heat networks in England and Wales
  • A cost recovery regime will be implemented that seeks to ensure that Ofgem and Citizens Advice's "total ongoing costs of regulating the heat networks, gas and electricity markets are spread evenly across heat network, gas, and electricity consumers." In line with this, the government has also recently opened a consultation recovering the costs of heat networks regulation. This consultation closes on 16 February 2022.
  • Ofgem will need to report to Parliament in respect of its "monitoring, compliance and enforcement activities, and associated costs," and the "National Audit Office (NAO) will scrutinise Ofgem’s spending,… as will HM Treasury through its Managing Public Money principles."
  • All domestic consumers and micro-business will be protected by legislation including consumer protections on pricing, transparency, and quality of service. The government is considering whether certain small and medium sized enterprises should also have the option to be protected.

2. Enforcement Powers

  • The government will enforce a framework which ensures that cases of non-compliance with regulation are resolved by Ofgem. Where enforcement action is required, the government intends for Ofgem to have recourse to powers equivalent to those it has for gas and electricity, including similar financial penalties.
  • Ofgem, the independent ombudsman service and Citizens Advice will work closely to address compliance issues in the market. This tripartite model will allow Ofgem to use its monitoring and information gathering powers and to share this information with the other bodies. The government sees this model as "similar to and build[ing] from existing practices in the gas and electricity sectors."

3. Step in Arrangements

  • The government sees step-in arrangements as important to the market framework. Given the diversity of network types, the government recognises that multiple step-in approaches will be required. The government plans to introduce new legislation to offer the range of solutions required to be developed through authorisation conditions.
  • The government is considering the development of a supplier of last resort regime and also plans to introduce a special administration regime.

4. Consumer Protection

  • The government intends for consumers to be given a minimum level of information around heat networks at the pre-contractual stages of property transactions. This information and guidance should be provided by heat suppliers, where possible.
  • The government plans to grant Ofgem certain "powers to introduce rules and/or guidance on fair and consistent pricing, powers to take enforcement action against disproportionately high pricing, and the ability to set price comparison and benchmarking methodologies."
  • The government does not currently envisage the introduction of price caps or direct profit regulation, as "the nascent state of the heat networks market will require flexible business and tariff models to encourage investment and growth" . However, the intention is that the Secretary of State will be given powers to allow Ofgem to introduce pricing regulation in the future, should it be necessary.

5. Technical Standards

  • The government intends for technical standards to be mandated, and for compliance to technical standards to be necessitated through the authorisation process.

6. Rights and Powers

  • The government plans to continue with the model which would see heat networks having to apply for a licence to become statutory undertakers, with Ofgem being responsible for reviewing and granting licence applications.

7. Decarbonisation

  • The government intends to use primary legislation powers to set a maximum carbon emissions limit.

In other news, the government has also announced £19.1 million investment towards setting up five new heat networks: two in Bristol, and three across Liverpool, London and Worthing. This funding comes from the government's £320 million Heat Networks Investment Project, which supports the development of heat networks across England and Wales.

Ofgem consults on modifications regarding last resort supply payment claims for electricity and gas

In response to the unprecedented rise in gas and electricity prices over recent months, which has triggered a number of supplier failures, Ofgem has launched a consultation relating to modifications of last resort supply payment claims for electricity supply, gas supply, electricity distribution and gas transportation licence conditions. According to Ofgem, the proposed modifications to last resort supply payment claims would "protect the short and long-term interests of consumers", and ease the strain on the energy markets. This news follows a suite of other recent Ofgem consultations regarding the modifications to the energy price cap (reported on in an earlier Energy Transition update).

Where a supplier fails, Ofgem protects consumers predominantly through the Supplier of Last Resort (SoLR) process. The SoLR process allows the SoLR taking on customers to claim their net costs of doing so via the Last Resort Supply Payment. However, it can take months, or even years, for these payments to materialise and SoLRs must find alternative means of financing the costs in the meantime. In the current climate, it is thought that this could lead to steep rises in household gas and electricity bills in the coming year.

Ofgem is proposing to establish a clear route by which suppliers can rely on third-party financing to cover the additional costs of becoming a SoLR. This would enable a wider pool of suppliers to act as SoLRs, and allow those who have already acted as SoLRs to take on more customers. Further, if third-party (re)financing was available for already-incurred SoLR costs which have been approved by Ofgem for future recovery, suppliers would be able to spread the additional cost to consumers over multiple years in more manageable payments.

Stakeholders have until 27 January 2022 to submit their views on the proposals contained in the consultation.

Government launches consultation on the design of new oil and gas climate compatibility checkpoint

The government has launched a consultation on the design of a new climate compatibility checkpoint for the oil and gas industry, which will ensure that the UK's climate objectives are taken into account in future licensing rounds.

In March 2021, a government-commissioned review concluded that continued licensing for oil and gas is not necessarily incompatible with the UK's climate goals. However, the review recommended that a formal climate compatibility checkpoint be introduced to evaluate and ensure the compatibility of future licensing with the transition to a lower carbon future.

The checkpoint will ensure that new licences are only awarded where it can be established that they are aligned with the UK's climate ambitions, including the goal of being net zero by 2050. The checkpoint will be exercised before a new licensing round is offered, and the Oil and Gas Authority will not launch a new licencing round until the checkpoint has been designed and implemented for the first time.

Energy and Climate Change Minister Greg Hands said, "This new checkpoint will be key to our plans to support the oil and gas sector during its net zero transition. It helps safeguard the future of this vital UK industry as we create more opportunities for green jobs and investment across the country."

The consultation asks interested parties to comment on the proposed principles, structure, content and implementation of the checkpoint. Responses must be submitted by 28 February 2022.

Go-Ahead signs major green hydrogen supply deal with Air Products

Go-Ahead, one of the largest transport operators in the UK, has announced a new deal with Air Products, a world-leading industrial gases company, for the supply of green hydrogen. This 15-year agreement will see hydrogen being used to power a fleet of 20 single-decker fuel cell buses for deployment in the Gatwick Airport, Crawley and Horley area. Go-Ahead's first hydrogen powered vehicle, which is set to be manufactured in Northern Ireland by Wrightbus, is expected in June 2022.

It is possible that Go-Ahead may purchase an additional 34 hydrogen buses, taking the hydrogen fleet to 54 vehicles, which would create"the largest local fleet of hydrogen buses deployed in Europe to date". Christian Schreyer, Group Chief Executive, The Go-Ahead Group, said, “This is our first hydrogen supply deal, and it represents a milestone in our plans to transition Go-Ahead’s entire fleet of buses to zero emission fuel… This is an example of what can be achieved through a mixture of public and private funding, and of co-operation between different environmentally responsible partners."

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