Heat Networks Market Study: call for evidence
The Energy Systems Catapult welcomes the call for evidence from the Competition and Markets Authority’s (CMA) statement of scope of Heat Networks Market Study.
The CMA is launching a comprehensive study into domestic heat networks to ensure households are getting a good deal. Heat networks – systems that heat multiple homes from one central source – currently supply about half a million UK homes through about 17,000 networks.
They can also be more environmentally friendly than some other sources of heat, delivering lower carbon emissions and resulting in cost benefits to households. As a result, heat networks form an important part of government strategy to reduce carbon and cut heating bills. The number of customers using heat networks is expected to grow significantly to around 20% of all households by 2030.
Whilst heat networks may have these wider benefits, the sector is not currently subject to the same regulation as other forms of energy supply such as mains gas and electricity.
The Competition and Markets Authority (CMA) is concerned that many customers, a large proportion of whom live in social housing, may be unable to easily switch suppliers or are locked into very long contracts – some for up to 25 years – and that there is a risk they may be paying too much or receiving a poor quality of service.
We welcome the CMA’s initiative to conduct a market study on the market for heat networks because of its importance to the future of low carbon heat supply in the UK.
- Creation of a coherent market and regulatory framework for the heat network market is highly valuable to long-term consumer interests. A range of evidence, including that based on whole energy system modelling, points to the high value of heat networks as a key option for the future decarbonisation of heat supply, in line with legally binding carbon targets. Therefore, the creation of a coherent market and regulatory framework for heat networks that can deliver fair and efficient outcomes is of fundamental importance to consumers.
- A coherent economic and governance framework is needed to shape choices around heat network development in ways that are socially optimal and serve consumers’ broad long-term interests. The Statement of Scope understandably focuses on issues of immediate concern in current heat markets, and it is right that focus is given to addressing these. However, the market is currently immature and lacks a coherent regulatory framework, which is key to unlocking its potential to deliver future consumer benefits as the UK moves to decarbonise its heat markets in the decades ahead.
- Markets on their own are unlikely to be able to deliver an efficient outcome for consumers because heat supply has some monopolistic characteristics as well as a range of social and environmental externalities (e.g. enabling reductions in carbon emissions). Future decisions about heat network investments are likely to be collective in character, affecting entire localities, so there is a need for clear governance arrangements which command legitimacy and properly reflect consumers’ views.
- As a general principle, consumer rights and protections for heat network customers should be equivalent to those for other utility services. Once collective choices around local heat supply arrangements for a local market have been made, the networks themselves exhibit natural monopoly characteristics similar to other utilities. In these circumstances, consumers should clearly have similar rights and protections in relation to an essential service.