​​Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure​

We are consulting on measures to mitigate the financial failure of heat networks in England, Scotland and Wales (Great Britain). These proposals include the scope of financial provisions and continuity arrangements for heat networks and the regular ongoing financial monitoring of the sector. ## Who should respond The consultation will be of interest to the heat network industry, including: * consumer advocacy groups * industry trade associations * energy supply companies * local authorities * housing associations * managing agents, property management companies and developers * landlords * building owners * heat network consumers The proposals on recovering costs from a Special Administration Regime (SAR) will also be relevant to the gas and electricity sector, including network companies and supply licensees. ## Background The Energy Act 2023 named Ofgem as the regulator for heat networks in Great Britain. Our most recent [Forward Work Programme](https://www.ofgem.gov.uk/our-strategy/forward-work-programme) outlines how we intend to develop a regulatory framework for heat networks which is proportionate, in line with our duties to protect consumers, and which supports: * investment * market growth * meeting the Government’s net zero targets This consultation builds on the approaches proposed in * our 2023 joint consultation with the Department for Energy and Net Zero (DESNZ) on [heat networks regulations for consumer protection](https://www.gov.uk/government/consultations/heat-networks-regulation-consumer-protection) * the 2024 [government response to that consultation](https://www.gov.uk/government/consultations/heat-networks-regulation-consumer-protection) * the contents of the [Heat Networks (Market Framework) Regulations 2025 Statutory Instrument.](https://www.legislation.gov.uk/uksi/2025/269/contents/made) * our 2024 joint consultation with DESNZ on [heat networks regulations for implementing consumer protections](https://assets.publishing.service.gov.uk/media/6735deaef6920bfb5abc7b2c/heat-networks-regulation-implementing-consumer-protections-consultation.pdf) * the [government response](https://www.gov.uk/government/consultations/heat-networks-regulation-implementing-consumer-protections) to that consultation ## Before you start Read the ​'Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure' consultation document. You’ll find it in the ‘Related’ section on this page. Please refer to this document when giving us your views. ## Why your views matter Your feedback will help us develop new regulations to protect consumers and improve network reliability, while allowing growth in the sector. --- Consultation Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure Publication date: Friday 8 August 2025 Response deadline: Friday 19 September 2025 Team: Heat networks team Telephone: 020 7901 7000 Email: heatnetworksregulation@ofgem.gov.uk This consultation follows Heat networks regulation: implementing consumer protections - GOV.UK (referred to as ‘the 2024 joint consultation’) published by the Department for Energy Security and Net Zero (DESNZ) and Ofgem on 7 November 2024. Pages 68-80 of the 2024 joint consultation outlined proposals for ‘Step-in: measures to mitigate the risk and impact of heat network failure.’ The responses to this consultation have been analysed and the government response was published on 8 August 2025. We have gathered more feedback to better understand the responses and how the proposals could be applied across the heat networks sector. Following this work, we are now seeking views on draft authorisation conditions which would support the obligations we propose to introduce. In parallel, DESNZ is bringing forward legislation for a Special Administration Regime which would act as a regulatory backstop if industry-led measures proved insufficient to protect consumers from the risks of losing heat supply. In this consultation we are also providing draft guidance for the sector on our expectations based on the requirements in authorisation conditions and financial monitoring. OFG1164 Consultation – Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure Consultation reference: Authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure. Audiences: The consultation will be of interest to the heat network industry, including: • consumer advocacy groups • industry trade associations • energy supply companies • local authorities • housing associations • managing agents, property management companies, and developers • landlords • building owners • heat network consumers The proposals on recovering costs from a Special Administration Regime will also be of relevance to the gas and electricity sector, including network companies and supply licensees. Territorial extent: Great Britain How to respond This consultation is open until Friday 18 September 2025. You can give us your views by: · completing our online survey on Citizen Space. · sending your response to heatnetworksregulation@ofgem.gov.uk This document outlines the scope, purpose and questions of the consultation and how you can get involved. Once the consultation is closed, we will consider all responses. We want to be transparent in our consultations. We will publish the non-confidential responses we receive alongside a decision on next steps on our website at ofgem.gov.uk/consultations. If you want your response – in whole or in part – to be considered confidential, please tell us in your response and explain why. Please clearly 2 Consultation – Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure mark the parts of your response that you consider to be confidential, and if possible, put the confidential material in separate appendices to your response. © Crown copyright 2025 The text of this document may be reproduced (excluding logos) under and in accordance with the terms of the Open Government Licence. Without prejudice to the generality of the terms of the Open Government Licence the material that is reproduced must be acknowledged as Crown copyright and the document title of this document must be specified in that acknowledgement. Any enquiries related to the text of this publication should be sent to Ofgem at: 10 South Colonnade, Canary Wharf, London, E14 4PU. This publication is available at www.ofgem.gov.uk. Any enquiries regarding the use and re-use of this information resource should be sent to: psi@nationalarchives.gsi.gov.uk 3 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure Contents Heat networks regulation: Authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure .................. 1 1. Introduction and summary ................................................................ 6 What are we consulting on ................................................................... 6 Section 1: Risks of failure and models in the sector .............................. 7 Section 2: Scope ............................................................................ 8 Section 3: Financial resilience ........................................................... 8 Section 4: Continuity arrangements ................................................... 8 Section 5: Special Administration Regime ........................................... 9 Section 6: Further interventions ........................................................ 9 Context and related publications ........................................................... 9 Consultation stages ............................................................................. 9 How to respond ................................................................................ 10 Your response, your data and confidentiality ......................................... 10 How to track the progress of the consultation ........................................ 12 2. Risks of failure and models in the sector ......................................... 13 Questions ........................................................................................ 13 Concessionary model ......................................................................... 13 Developer led and owned ................................................................... 14 Merchant model ................................................................................ 14 Disaggregated model ........................................................................ 15 3. Scope .............................................................................................. 17 Questions ........................................................................................ 17 Scope of financial resilience provisions ................................................. 18 Social housing- existing arrangements ................................................. 19 Local authority operated networks – existing arrangements ..................... 19 Other heat network sectors ................................................................ 20 Non-domestic, self-supply and industrial networks ................................. 21 4. Financial resilience .......................................................................... 22 Questions ........................................................................................ 22 Introduction – proposed authorisation conditions ................................... 22 Availability of Resource and Internal Capability - rationale ....................... 23 Control over material assets - rationale ................................................ 24 5. Continuity arrangements ................................................................. 25 Questions ........................................................................................ 25 Policy intention ................................................................................. 25 Continuity arrangements – authorisation conditions................................ 26 6. Special Administration Regime ........................................................ 27 Introduction to a Special Administration Regime .................................... 27 Legal framework and approach ........................................................... 27 When a Special Administration Regime may be used .............................. 28 4 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure Restrictions on entering insolvency ...................................................... 28 Funding a Special Administration and recovery of costs ........................... 29 7. Further interventions ...................................................................... 30 Possible future measures ................................................................... 31 Appendices ........................................................................................... 33 Appendix 1 - Draft authorisation conditions .......................................... 34 Appendix 2 – Draft guidance on Availability of Resource and Internal Capability authorisation condition ........................................................ 44 Appendix 3 – Draft guidance on Material Assets authorisation condition .. ........................................................................................................ 50 Appendix 4 – Draft guidance on continuity arrangements authorisation condition ............................................................................................... 52 Appendix 5 – Privacy notice on consultations ....................................... 59 Personal data ................................................................................... 59 5 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 1. Introduction and summary 1.1 The shared ambition of DESNZ and Ofgem is to ensure that in the event of heat network insolvency, or if a heat network operator or supplier needs to leave the market due to financial stress, authorised persons make arrangements to ensure that customers are protected and have a continued source of heating and hot water. We are now taking forward obligations to ensure that heat networks are adequately managing the risk and impact of failure, while DESNZ are putting in place a Special Administration Regime as an ultimate backstop. 1.2 Studies into heat network failure are limited, although surveys of the sector have shown that contractual arrangements between interested parties to ensure continuity of supply in certain circumstances are in place for some existing heat networks. In particular, the DESNZ ‘Heat Network Consumer and Operator Survey 2022’ in 2022 found that 72% of operators who responded reported having no relevant contractual arrangements, though 53% reported some non- contractual arrangements would be made in the event of them leaving the market (see page 62 of linked document). Recent engagement with stakeholders has suggested that financial failure of heat networks is rare, and we have not found any examples of where customers have lost supply following financial failure. However, the sector is expected to change and expand significantly over the coming years, and with change and expansion the risk of failure could increase. The introduction of regulation will allow us to gather sector wide data, including financial monitoring, which will enable us to understand the risk of failure further as the sector develops. We will use this information to consider whether further interventions are justified and required. 1.3 It is estimated that there are currently some 14,000 heat networks in the sector, ranging from communal networks with a small number of customers, to large-scale district projects serving large numbers of customers. There are many different contractual structures in place for the delivery and operation of these heat networks. Whilst there are common features across heat networks, the variety in the sector means that very few heat networks are exactly the same. Accordingly, each heat network has its own risk profile, and measures taken by heat networks to mitigate their own assessment of the risk of financial failure vary. What are we consulting on 1.4 Following two joint consultations with DESNZ in 2023 (Heat networks regulation: consumer protection - GOV.UK) and 2024 (Heat networks regulation: 6 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure implementing consumer protections - GOV.UK), we have identified the initial set of obligations we propose to introduce for heat networks, to ensure they are managing the risk of financial failure and managing their assets responsibly. 1.5 DESNZ has also decided that a Special Administration Regime (SAR) should be put in place, and we have identified some further work we will do to explore whether further intervention is required as the sector changes and grows. 1.6 We are seeking views on the draft authorisation conditions and draft guidance to support the sector in understanding our expectations. 1.7 In this consultation we do not discuss in detail the options we considered but have decided not to progress at this time, and this is covered in more detail in the government response (https://www.gov.uk/government/consultations/heat- networks-regulation-implementing-consumer-protections). In summary, we are not taking forward requirements that all authorised parties must have contractual arrangements in place for another provider to “step-in” if they face financial failure, or to provide for a Last Resort Direction arrangement where Ofgem can direct another provider to do so. These measures were considered disproportionate in view of the burden they would place upon some heat networks, and there were significant implementation challenges in relation to a Last Resort Direction including the speed at which this could be put into effect, and the costs associated with doing so. 1.8 We have deliberately moved away from describing the proposals in this consultation using the language of “step-in”. The authorisation conditions focus on authorised parties managing their resources in a financially responsible way, and having arrangements in place to facilitate the orderly transfer of activity to another provider through a commercial arrangement if they need to exit the market. While there will be a SAR in place as an ultimate backstop, and we describe these arrangements more fully in chapter 6, these are not the focus of this consultation and will be given effect to through a DESNZ led Statutory Instrument which will be laid in the autumn. The following section describes what each chapter covers. Section 1: Risks of failure and models in the sector 1.9 Through analysis of the 2024 joint consultation responses and engagement with stakeholders across the sector, we have considered the risk of financial failure of heat networks in different scenarios across a range of delivery models. 7 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure Stakeholders have consistently told us that the risk is low given existing protections and commercial incentives for other entities to assume the delivery of authorised activity in the event of financial failure. This section explores these issues. Section 2: Scope 1.10 As set out in the joint 2024 consultation and response, there are existing obligations on providers in the registered social housing sector, including financial monitoring and reporting to the relevant housing regulator, and regulatory tools to manage failures. We concluded that also applying financial resilience obligations through heat network regulation would lead to unnecessary duplication should those bodies also be subject to financial monitoring under the proposed heat networks financial resilience framework. Local councils are unable to enter into insolvency and are subject to other arrangements which place obligations on them in relation to their financial resilience and we therefore propose that our full financial resilience provisions will also not apply to heat networks where local authorities are the authorised entity. We also set out our thinking about mixed tenure models and more complex models of housing and energy arrangements such as Special Purpose Vehicles and Energy Supply Companies, and our proposal that all financial resilience provisions should apply in these cases. Section 3: Financial resilience 1.11 There was broad support for introducing measures to promote financial responsibility and our proposed indicators for financial monitoring. In this consultation we seek views on draft authorisation conditions on ‘Availability of Resources and Internal Capability’ and ‘Material Assets’. We have further developed the information we will request as part of our regular data reporting cycle and have provided guidance on how authorised persons should provide it. Section 4: Continuity arrangements 1.12 There was broad support for introducing requirements on relevant authorised entities holding a continuity plan and we intend to proceed with requirements to have these arrangements in place. The requirements of the plan are outlined 8 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure within the authorisation condition entitled ‘Continuity Arrangements’ and are described within guidance. Section 5: Special Administration Regime 1.13 There was broad support for introducing a Special Administration Regime in the 2024 joint consultation, and DESNZ are taking forward work to introduce the necessary provisions through secondary legislation. We describe this regime, and also how it would be funded if needed. Section 6: Further interventions 1.14 This consultation outlines the measures that we consider appropriate to protect consumers from the impact of the financial failure of heat networks when the regulatory framework is introduced. Following the 2024 joint consultation and stakeholder engagement, we consider these measures proportionate to the current failure risks across the sector. We will continue to monitor the risk of financial failure for different models of heat network as it adjusts to regulation, and as the sector develops and expands. It may be necessary in the future to consider the introduction of additional measures if there is evidence of increased risk of financial failure in the sector. We seek views from stakeholders on whether they consider further measures should be developed and introduced. Context and related publications 1.15 We have consulted on the approach in joint consultations with DESNZ in 2024 and 2023. Following the 2024 government response, this consultation provides the draft authorisation conditions and accompanying guidance on these obligations which will be introduced from January 2026. Consultation stages 1.16 We will publish a response to this consultation, and final versions of the authorisation conditions ahead of regulatory commencement in January 2026. 9 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure How to respond 1.17 We want to hear from anyone interested in this consultation. Please send your response to the person or team named on this document’s front page. 1.18 We’ve asked for your feedback in each of the questions throughout. Please respond to each one as fully as you can. 1.19 We will publish non-confidential responses on responses on our website at https://consult.ofgem.gov.uk/. Your response, your data and confidentiality 1.20 You can ask us to keep your response, or parts of your response, confidential. We’ll respect this, subject to obligations to disclose information, for example, under the Freedom of Information Act 2000, the Environmental Information Regulations 2004, statutory directions, court orders, government regulations or where you give us explicit permission to disclose. If you do want us to keep your response confidential, please clearly mark this on your response and explain why. 1.21 If you wish us to keep part of your response confidential, please clearly mark those parts of your response that you do wish to be kept confidential and those that you do not wish to be kept confidential. Please put the confidential material in a separate appendix to your response. If necessary, we’ll get in touch with you to discuss which parts of the information in your response should be kept confidential, and which can be published. We might ask for reasons why. 1.22 If the information you give in your response contains personal data under the General Data Protection Regulation (Regulation (EU) 2016/679) as retained in domestic law following the UK’s withdrawal from the European Union (“UK GDPR”), the Gas and Electricity Markets Authority will be the data controller for the purposes of GDPR. Ofgem uses the information in responses in performing its statutory functions and in accordance with section 105 of the Utilities Act 2000. Please refer to our Privacy Notice on consultations, see Appendix 5. 1.23 If you wish to respond confidentially, we’ll keep your response itself confidential, but we will publish the number (but not the names) of confidential responses we receive. We won’t link responses to respondents if we publish a summary of responses, and we will evaluate each response on its own merits without undermining your right to confidentiality. 10 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure General feedback 1.24 We believe that consultation is at the heart of good policy development. We welcome any comments about how we’ve run this consultation. We’d also like to get your answers to these questions: 1. Do you have any comments about the overall process of this consultation? 2. Do you have any comments about its tone and content? 3. Was it easy to read and understand? Or could it have been better written? 4. Were its conclusions balanced? 5. Did it make reasoned recommendations for improvement? 6. Any further comments? Please send any general feedback comments to stakeholders@ofgem.gov.uk 11 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure How to track the progress of the consultation You can track the progress of a consultation from upcoming to decision status using the ‘notify me’ function on a consultation page when published on our website. Choose the notify me button and enter your email address into the pop-up window and submit. ofgem.gov.uk/consultations Once subscribed to the notifications for a particular consultation, you will receive an email to notify you when it has changed status. Our consultation stages are: Upcoming > Open > Closed (awaiting decision) > Closed (with decision) 12 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 2. Risks of failure and models in the sector Section summary In this chapter, we share our assessment of the risks to continued supply in the case of failure of the authorised entity in common heat network delivery models. By understanding the common features of different types of delivery model, we have sought to assess how financial failure might be addressed in different scenarios, through commercial outcomes and incentives for other entities with an interest in the continuity of the heat network. This has also allowed us to understand where gaps exist which may hamper commercial outcomes, and where regulatory intervention might still be required. Questions Q1. Do you agree with our assessment of the risks to continuity of supply where operators face financial failure in the sector? Please explain your answer. Q2. Are there any other models which we have not explored which merit assessment of the risks to continuity of supply in case of financial failure? Please explain your answer. Introduction 2.1 Some of the most common commercial delivery models for heat networks are outlined below, with an assessment of how the financial failure of entities involved might be managed to safeguard continued operation. Concessionary model 2.2 A concessionary arrangement is any scenario under which a contracted heat network operator takes the operational risk under contract with a site developer. In this model we expect the Energy Supply Companies (ESCo) to be the authorised operator. 2.3 An example of this model would be a scenario in which a developer or local authority selects an ‘energy partner’ to build and operate the energy centre for a district heat network. 2.4 In such cases, it is common for the developer to secure ‘step-in rights’ in case of operator failure. We consider that in this scenario, the developer will be driven by commercial forces and incentivised to ensure continuity by seeking a new operator. 13 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 2.5 Similarly, if the heat network operator in a concessionary model is partly or wholly owned by the developer, the developer will be incentivised to ensure continuity and will commonly have controls under the contractual agreement for dealing with failure of the operator. Developer led and owned 2.6 In developer led and owned models, the heat network is directly owned and operated by the developer of the wider site. These can be both large-scale developments and residential communal heat networks also typically follow this delivery mode. 2.7 Examples of this model include district heat networks where the site developer builds and operates the heat network, and communal heat networks in owner- managed buildings. 2.8 If a developer becomes insolvent in this scenario, there would likely be sufficient commercial incentive for an interim operator or administrator to continue operation and supply, since this would be important to securing a long-term commercial outcome. However, we consider that a regulatory backstop in the form of a Special Administration Regime (SAR) may still be needed in this circumstance. 2.9 In the event of insolvency of a residential communal heat network operator, we expect that the heat network would not be considered in isolation given the range of other utilities and services needed for the building to continue to be habitable. We consider that there would be sufficient commercial incentive in this scenario for an alternative operator to be found, or for leaseholders to assume greater control of the building management. Merchant model 2.10 In a merchant model, a heat network operator takes full operational and revenue risk without the oversight of a developer or sponsor. A merchant model is likely to come about when a heat network operator speculatively takes the opportunity to develop a heat network for a district, securing customers as the network is developed and expanded. 2.11 An example of this model would be an ESCo building a heat network in an area where they consider that they can attract customers from existing and new 14 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure properties to connect to the new network through offering improved cost effectiveness for the supply of heating and hot water. 2.12 In the event of insolvency or financial stress of a heat network in this scenario, there is unlikely to be another entity ready to step in to continue the regulated activity. If a commercial sale cannot be achieved through market engagement, protection of customers via a SAR may be required. 2.13 We understand this is the common delivery model used within zones, although they can also be developer led and owned. Where a zone operator faces financial failure, another operator may purchase the network along with zone rights and responsibilities, or the zone assignment process may be re-run. We expect the Zone Coordinator or Central Authority would act to ensure zone delivery and customer supply remains in place. Disaggregated model 2.14 There is significant variety of commercial models across the heat network sector. Some existing heat networks are effectively disaggregated, with different entities owning and operating different parts of the network, with supply often being carried out by a further separate entity. 2.15 An example of a disaggregated heat network model would be where two or more entities own and manage different parts of the heat network, such as in a ‘PipeCo’ arrangement where the ‘PipeCo’ owns and manages the heat distribution network, but one or more other entities own and manage the means of heat generation, and are undertaking the regulated activity of operation. 2.16 This interdependency may provide some commercial incentive for one entity to assume the obligations and activities of another in the event of their financial failure, but we consider that statutory protection of customers through a SAR could be required in some circumstances. 2.17 From January 2027, under the requirements of authorisation applications, we expect new heat networks will have one authorised operator per heat network and as such, we do not expect this model to be prevalent except in a small number of existing networks. Summary, next steps and good practice 2.18 Stakeholders’ views have consistently been that the risk of financial failure is low across the heat network sector, due to the range of existing protections and 15 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure commercial incentives for them to be managed sustainably and for operation to continue. 2.19 We have seen very limited examples of financial failure in the sector, and in the examples provided to us, another entity has “stepped in” to ensure that customers continued to be supplied. We have also seen a small number of examples of public sector intervention having been made to avoid heat network insolvencies. We will continue to gather data and evidence of the risk of failure as the sector develops. 2.20 Given the limited support from stakeholders for mandated contractual step-in across the sector, we do not intend to proceed with a universal requirement for contractual step-in. However, we have identified that in larger scale developments, it is common for building owners, developers or funders to secure contractual ‘step-in’ rights to ensure that heat network concessions on their developments can continue to be operated in the event that their contracted heat network delivery partner needs to exit the market due to financial stress or insolvency. We consider these kinds of contractual arrangements to be good practice to manage the risk of heat network failure and expect that they will continue to be put in place where appropriate to mitigate risk. We also expect that heat networks and parties who are contracting with a heat network should consider putting such arrangements in place to manage risks of financial failure resulting in loss of supply. We want to see the sector building on existing practice, where stakeholders with an interest and incentive to step in to support the continued operation of networks, do so. 16 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 3. Scope Section summary As set out in the 2024 consultation and response, we are continuing to propose that the majority of our financial resilience provisions (including SAR) would not apply where the authorised party is a registered provider (RP) of social housing or a local authority. There are existing financial obligations on registered providers of social housing, and regulatory provisions exist to ensure the financial viability of social housing providers, which would include the heat network where the authorised heat network is also in scope of the housing regulatory regime. Where these networks have a separate supplier which is not a registered provider of social housing or local authority, we are proposing that they would be expected to comply with the provision that in the event of supplier failure, the operator of that network would be expected to take on the role of supplier, or ensure another supplier takes on the authorised activity. We consider existing protections are not as strong in privately operated networks. Whilst there are obligations on landlords under the Landlord and Tenant Act (1985), this only extends to the installation of heating and hot water and not the provision of heating and hot water itself. In Scotland, the Housing (Scotland) Act 2006 sets out the duties placed on private landlords by the Repairing Standard which provides for the installation of heating and hot water. Reliance on these protections for the continuation of heating and hot water in the event of a regulated heat network entering insolvency may rely on tenants organising and applying to the courts which could prove expensive and slow. Where entities are using Energy Supply Companies (ESCos) or Special Purpose Vehicles (SPVs) to carry out a regulated heat network activity, we propose that our financial resilience provisions would apply. We are seeking views on this proposed approach. Questions Q3. Are there other segments of the heat network sector which have clear continuity of customer supply arrangements in the event of a market exit which we have not considered? Please explain your answer. Q4. Do you agree that our financial resilience provisions should apply where registered providers are using separate entities to carry out regulated heat network activity? This can include subsidiaries that are not regulated by a social housing regulator, like energy supply companies or special purpose vehicles. Q5. Do you agree that self-supply and industrial networks should be out of scope of the financial resilience requirements? Please explain your answer. 17 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure Scope of financial resilience provisions 3.1 Of the estimated 14,000 existing heat networks which will be covered by the scope of regulation, it is estimated around 60% are in social housing. 3.2 The aim of the financial resilience provisions is to ensure continuity of supply to heat network customers in the event of the authorised entity operating or supplying on the heat network entering insolvency. 3.3 In the 2024 joint consultation we proposed that these provisions should not apply to two types of authorised entity: • registered providers of social housing who are registered with either The Regulator of Social Housing for England, the Scottish Social Housing Regulator, or the Welsh Social Housing Regulator • local authorities 3.4 The rationale for this is that there are already existing provisions in these sectors which mitigate the risk of an interruption in continuity of supply where the entity faces financial difficulties. 3.5 We recognise there are existing obligations on providers in the registered social housing space in terms of financial monitoring and reporting, and established arrangements to intervene if the entity is at risk of financial failure. Including these parties in scope of the heat network measures would lead to unnecessary regulation and duplication. We also consider it would be in the best interests of consumers for any intervention, including an administration regime, to take place at the organisational level rather than seeking to separate out the heat network assets from the general housing assets, and therefore this is best led by the relevant social housing regulator. 3.6 A number of respondents to the 2024 joint consultation queried which provisions this approach would apply to. We wish to make it clear that this would only apply to the provisions consulted on within this consultation. Registered social landlords and local authorities who either supply or operate heat networks in Great Britain will be required to comply with other relevant heat network authorisation conditions including consumer protection measures. 3.7 We also wish to be clear that when referring to the failure of heat networks in registered providers of social housing and local authorities we are referring to insolvency or financial failure impacting the ongoing provision of heat to consumers. We are not referring to the ability of the registered provider of social 18 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure housing or local authority to meet other housing standards or maintenance requirements as these sit outside the remit of Ofgem’s heat network regulation. Social housing- existing arrangements 3.8 Social housing providers are already subject to significant regulation and monitoring under existing social housing regulation. Across England, Scotland and Wales the respective regulators have a series of standards against which social housing providers are assessed which include governance, consumer standards and economic standards. 3.9 The social housing sector is subject to robust regulation, and has a strong track record of performance. In England and Wales, there is a Housing Administration Regime in place set out under the Housing and Planning Act 2016. In Scotland, these powers are set out in the Housing (Scotland) Act 2010. Where major failures have occurred, housing regulators have intervened to protect tenants, secured creditors and public money using their regulatory and enforcement powers. Across Great Britain, there are moratorium arrangements which are triggered by an insolvency event to create a period of time to seek a solution which protects social housing assets and the interests of tenants. 3.10 Guidance on how the Regulator of Social Housing approaches the regulation of social landlords can be found on their web page: How we regulate - GOV.UK (www.gov.uk) 3.11 We are proposing that where a heat network operated by a local authority or social housing provider has a separate supplier, in the event of supplier insolvency, they will have to put in place arrangements to either take over the supply activity directly or secure another supplier to do so. 3.12 We recognise that some social housing providers offer mixed tenure housing, e.g. including homes for affordable rent and shared ownership. As we are focused on the overall financial health of the housing provider, we expect where the heat network is operated by the failing entity, this would be an integral part of any intervention as the ongoing provision of heating and hot water will be vital to the commercial value of the entity and meeting ongoing statutory obligations. Local authority operated networks – existing arrangements 3.13 Where local authorities face financial stress and are not able to publish a budget which meets their statutory obligations, in England a Section 114 notice can be 19 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure issued. Local authorities in England fall under the Ministry of Housing, Communities and Local Government in England, and the Scottish and Welsh Governments respectively. Once a Section 114 notice is published, local authorities are unable to make new spending commitments and must meet within 21 days to discuss what to do next. They may take action such as reducing spending or seeking permission to use capital funds for service spending which may result in the selling of assets or property. They may also be subject to Government intervention. We understand a similar approach would be taken to a local authority being unable to balance their budget in Scotland or Wales. These actions are designed to prevent local authorities from insolvency. 3.14 It is our understanding that during this time, the expectation is that where the landlord either operating or supplying the heat network is the local authority, the provisions in the Landlord and Tenant Act 1985 or the Housing (Scotland) Act 2006 would continue to apply. The requirement to provide statutory services including “housing services” would therefore include compliance with this provision. 3.15 We are therefore maintaining our proposal that where local authorities are the authorised person, the majority of our financial resilience authorisation conditions and the SAR for heat networks would not apply. As with social housing providers, we expect that where a separate supplier enters insolvency, the local authority operator would make arrangements to continue the supply activity. Other heat network sectors 3.16 A number of respondents to the 2024 consultation highlighted other sectors where there were some mitigations in the event of insolvency to ensure continued supply, however these mitigations lack a formal statutory or regulatory footing. While we have identified a number of reasons why the risk of losing supply in private housing has been low, these commercial forces and legal obligations under the Landlord and Tenant Act, or the Housing (Scotland) Act 2006 are not comparable to the regulatory frameworks that protect consumers in social housing and local authorities. They can also rely on tenants having to navigate legal processes to provide the safeguards which can be challenging. 20 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 3.17 A number of respondents also raised mixed models of housing and energy provision, and we have sought further advice in this area. We are proposing that where organisations are established to provide heat network services as distinct entities from their parent organisation, these would remain in the scope of our financial resilience provisions. This includes Special Purpose Vehicles and Energy Supply Companies, even if their parent organisation is a local council or a social housing provider. Non-domestic, self-supply and industrial networks 3.18 We are proposing that heat networks defined as self-supply networks as well as industrial networks will not be scope of the authorisation conditions on financial resilience consulted on here. This means networks that are supplying exclusively industrial customers, or meet the definition of self-supply. In industrial networks we expect that insolvency of the heat network will be covered by contractual arrangements and would expect these risks to be managed in this context. In self-supply, it is for the operator of the network, who is also the customer, to manage the risks to continuity of supply. 3.19 As such, we do not consider it proportionate to extend the financial resilience and monitoring requirements to these types of networks. We also would not expect government to seek to put a Special Administration Regime in place if these types of networks did face insolvency. 3.20 We seek views on this position. All other domestic and non-domestic networks will be in scope of these requirements, except, as discussed earlier in this chapter, those social housing and local authority heat networks, where our financial resilience provisions would not apply. 21 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 4. Financial resilience Section summary The aim of our financial resilience obligations is to ensure that the heat networks are acting responsibly and proactively managing their finances to mitigate the risk of financial failure. Those operating and supplying heat networks are providing an essential service to customers, with monopoly power, and it is essential that authorised entities actively manage their finances and are set up in a way to support the orderly transfer of their network and authorisation to another party if this was required. In the 2024 joint consultation we proposed to introduce authorisation conditions on a ‘Financial Responsibility Principle and Availability of Resources’ and on ‘Control over Material Assets’ and we have developed these proposals further and provide draft conditions for feedback. We also proposed to introduce financial monitoring questions that would provide a high-level indication of an authorised entity’s financial health. Questions Q6. Do you agree with the policy intent and authorisation condition ‘Availability of Resources and Internal Capability? Please explain your answer. Q7. Do you agree with the policy intent and authorisation condition ‘Material Assets? Please explain your answer. Q8. Do you agree with the approach to financial monitoring and the regular reporting requirements? Please explain your answer. Q9. Do you have feedback on the proposed guidance outlined in Appendix 2 that would improve its use for your organisation? Q10. Do you have feedback on the proposed guidance outlined in Appendix 3 that would improve its use for your organisation? Introduction – proposed authorisation conditions 4.1 We are proposing an authorisation condition on Availability of Resource and Internal Capability (AoRIC) to ensure authorised entities are acting responsibility and managing their finances to minimise risks to consumers. The obligation will apply to operators and suppliers, though compliance with the condition will vary to reflect the different responsibilities of the authorised activities. 4.2 In this consultation we have produced a first version of draft guidance to provide further details on how we expect authorisation conditions on financial resilience to be met. Feedback from the previous consultation indicated agreement for 22 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure implementing financial oversight of the sector but stakeholders said they would benefit from guidance on meeting regulatory requirements. 4.3 Guidance will include information on the principles around how we expect the authorised entity to act, and also outline the data we will require as part of our financial oversight of the sector. 4.4 The guidance will also outline what financial data must be submitted to Ofgem on an ongoing basis. Financial monitoring data will help Ofgem to identify any suppliers and operators at risk of financial failure, though we expect that this should be notified to Ofgem directly. Information requirements will include financial data that would be included within annual audited accounts, however we are not requiring the audited accounts themselves to be provided on a routine basis. We may request further financial information through an audit, or where concerns are raised and we consider we need to engage further. Financial data provided as part of our financial monitoring supervision will be treated securely and in line with the legal requirements of how we treat confidential information. Availability of Resource and Internal Capability - rationale 4.5 The Availability of Resource and Internal Capability (AoRIC) authorisation condition will act as an overarching obligation to ensure authorised entities act in a financially responsible manner that is appropriate for business specific risks. Due to the essential role heating and cooling plays for consumers we are proposing to have an authorisation condition to ensure authorised persons are acting in such a way to secure they have the resources to continue carrying out supply or operation of the network. 4.6 We expect heat networks to engage with us annually to validate their financial health through the financial monitoring data points in Appendix 2. We will also expect heat networks to notify us if they experience financial distress in line with the Open and Cooperative authorisation condition. 4.7 This is a high-level principle, and the resources that heat networks require will vary depending on the scale of the network. We will provide guidance to support this but expect this is an assessment that networks should undertake as part of their prudent financial and resource management. 4.8 This condition draws on the requirements on gas and electricity network companies, where they are providing infrastructure which provides an essential 23 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure service for customers, and which we consider has strong parallels to heat networks. 4.9 As specified in the condition, we want to ensure minimal disruption to the service in the event of a successor authorised entity taking over. This includes notifying Ofgem immediately if the authorised person does not believe it has the resource available to continue carrying out the regulated activity. 4.10 We will keep under review whether we need to further develop this obligation and will consult at a later date on the entry (authorisation) requirements for new heat networks, including what they should be able to demonstrate in terms of their access to resources and financial health. Control over material assets - rationale 4.11 The material assets of a heat network would also need to be transferred to a successor authorised entity to ensure continuity of supply to customers. We propose a similar requirement to the gas and electricity supply market of authorised entities having sufficient control over those material assets to consequently ensure the smooth transfer of the authorisation to a successor if required. 4.12 We are using the term Sufficient Control within the condition to define the level of control we expect authorised entities to have over their material assets. “Sufficient Control” means having either direct ownership or legally enforceable rights so that the authorised person can legally rely on them and enjoy the benefit of them. 4.13 We will keep under review whether we need to further develop this obligation and will consult later on the entry (authorisation) requirements for new heat networks, including what they should be able to demonstrate in terms of their access to resources and financial health. 4.14 Draft guidance for the AoRIC and ‘Material assets’ condition will be provided in Appendix 2 and 3 respectively. 24 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 5. Continuity arrangements Section summary As stated in the 2024 joint consultation government response, we are intending to require relevant authorised persons to have a continuity plan in place. This plan would support the orderly transfer of the heat network authorisation to a successor and would contain details on the methodology for gathering outlined information for this process. We are proposing to introduce an authorisation condition on ‘Continuity arrangements’, that alongside guidance will outline the necessary requirements. Due to the diversity of the sector we do not expect a one size fits all approach and expect plans to vary in scale. Where suppliers and operators of a heat network are separate, we would expect separate plans to be available for each role. The draft guidance supplements the requirements outlined in the authorisation condition and is intended to further clarify the contents of a plan such as how other business- related plans the authorised person holds may be integrated. Questions Q11. Do you agree with the policy intent and authorisation condition, ‘Continuity arrangements’? Please explain your answer. Q12. Do you agree with the proposal for operators to carry on the supply of heating, cooling or hot water if the supplier ceases to? Are you aware of any examples where this would not be feasible? Q13. Do you agree with the proposed contents and breakdown of the plan? Please explain your answer. Q14. Do you have feedback on the proposed guidance outlined in Appendix 4 that would improve its use for your organisation? Policy intention 5.1 The operation and supply of a heat network delivers an essential service to customers, and we expect authorised entities to have arrangements in place to support the transfer of activity to a successor organisation if required, to minimise risks of customers losing supply. We propose that heat networks have continuity arrangements in place to support the transfer of activity if required. 5.2 This includes the maintenance of a continuity plan that would track the information and assets to be transferred. It would enable a timely transfer of responsibilities to ensure that consumers do not experience a disruption in 25 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure heating or cooling supply. Requirements to be met will depend on whether the authorised person holds the role of supplier, operator or both. 5.3 This proposal builds on existing good practice within the sector, with networks having arrangements in place such as Disaster Recovery Plans, and Business Continuity Plans. Some of these practices will be adopted in the continuity plan, and networks will be able to cross-refer to existing material. 5.4 Stakeholders were broadly supportive of this proposal in response to the 2024 joint consultation, with many requesting further information on what should be included in the plans. We provide further detail in the draft guidance in Appendix 4, confirming the contents that were set out in that consultation, with the exception of contractual step-in which we are no longer mandating. We address how contractual step-in alongside other data and arrangements may be included as part of best practice procedures. Continuity arrangements – authorisation conditions 5.5 We are proposing the introduction of a continuity arrangements authorisation condition to ensure the relevant authorised persons have a plan in place to support the transfer assets and key data in the event of insolvency or a commercial transaction which results in the transfer of their authorisation. 5.6 The condition will also obligate the authorised persons to keep the plan up to date. The condition also includes a summary of the information we will require to be contained within a continuity plan. 5.7 The condition will also outline requirements for both the operator and supplier to ensure arrangements are in place in the event where they are separate entities. These obligations address the operator or a third party carrying out the supply in the event the supplier ceases to. 26 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 6. Special Administration Regime Section summary A Special Administration Regime (SAR) provides a framework for an insolvency practitioner to continue the supply of an essential service as a key duty alongside their obligations to creditors. It ensures that heating and hot water is continued and resources within the existing company are utilised to support this, supported where necessary with government funding. There are powers in the Energy Act to recover any taxpayer funding at the end of a Special Administration from the heat networks sector, and also from the gas and electricity sector, if this is considered necessary to manage the burden. The SAR is being introduced through secondary legislation in the autumn, and as such we do not ask any specific questions in this consultation, but provide further explanation of how the regime would be used. Introduction to a Special Administration Regime 6.1 A Special Administration is a bespoke insolvency process that differs from standard administration under the Insolvency Act 1986 in that it is designed to address sector-specific risks and public interest concerns. 6.2 The regime is designed to protect customers and ensure continued provision of heating and hot water, rather than just creditors or shareholders. 6.3 There was broad support for introducing a Special Administration in the 2024 joint consultation, and DESNZ are taking forward work to introduce the necessary provisions through Statutory Instruments. 6.4 It is intended to be a backstop where commercial outcomes have been exhausted or failed to secure the continued operation of a heat network and where there is a risk that customers will lose a critical supply without government intervention. Legal framework and approach 6.5 A Special Administration provides a legal framework for the insolvency process which allows for: • The administrator to fulfil specific objectives that go beyond a standard administration process, namely protecting a critical service or supply; • The rescue of the heat network as a going concern and/or the transfer of whole or parts to another provider as appropriate. 27 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 6.6 The powers to create a heat network SAR were granted in the Energy Act 2023. It is expected that the objectives of a heat network SAR will be to: • secure supply of heating, cooling and hot water at the lowest possible cost • ensure the heat network continues to be maintained and developed; and • make it unnecessary for the SAR to remain in force; and this might be achieved by: o o rescuing the company as a going concern; transferring the heat network as a going concern; or o providing for customers to be supplied by an alternative means 6.7 The Secretary of State will have powers to apply to the Court and seek to put in place a SAR. Ofgem will also be able to apply to the Court with the consent of the Secretary of State. When a Special Administration Regime may be used 6.8 The intention is that the SAR will be used in instances of insolvency in order to effectively manage the customer supply of heating and hot water until a new authorised party is found. 6.9 It should be noted that the SAR will only be used in cases of insolvency where commercial solutions cannot readily be found, and not to rescue networks which, for example, have been inadequately or improperly maintained or in cases of catastrophic technical failure. While it is possible that these, and other circumstances, could ultimately result in insolvency, the SAR is not a measure to prevent insolvency and will not be used in this way. Heat networks will be required to conform to standards of maintenance which DESNZ will consult on later this year though the heat networks technical assurance scheme (HNTAS). Restrictions on entering insolvency 6.10 The SAR framework will also place restrictions on all authorised parties from entering an insolvency procedure until 14 days after service of notice on GEMA and the Secretary of State, unless GEMA and the Secretary of State waives this constraint. This is to allow GEMA and the Secretary of State time to consider if it is necessary to apply to Court for a SAR Order. 28 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 6.11 If the authorised party, and the proposed administrator, can demonstrate that customers will continue to be supplied, it may be appropriate to allow the company to enter normal insolvency proceedings. Funding a Special Administration and recovery of costs 6.12 The Secretary of State may, subject to HM Treasury consent, decide to provide financial support to a company in energy supply company administration. 6.13 The Secretary of State will also have powers to direct the recovery from the wider heat networks sector of any shortfall in repaying costs incurred by the Secretary of State at the end of a Special Administration, and the gas and electricity sector. Any decision to use these powers will be based on an assessment of the following • the level of shortfall costs, and whether any or all of these should be recovered from consumers, or met by taxpayers • an analysis of the impacts of recovering from heat networks, or extending to share a proportion from gas and electricity customers • the length of time which these costs should be recovered over 6.14 The Energy Act 2023 provides powers for these costs to be recovered via such a Direction from gas and electricity network licensees, replicating similar provisions for an energy company supply SAR. We intend to replicate these provisions to recover costs from authorised heat network parties, once a cost recovery mechanism is in place to facilitate this. 6.15 There will be further consultation on these proposed arrangements at a future stage. 29 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 7. Further interventions Section summary This chapter explains our approach to the future monitoring of the sector once regulation has come into force, and outlines possible further interventions which could be developed and introduced if evidence suggests that the risk or incidence of financial failure justifies it. This chapter also outlines potential funding mechanisms for those additional interventions if these were to be developed. 7.1 We do not consider that there is currently sufficient evidence of risk of financial failure of heat networks to warrant the introduction of some of the measures proposed in the 2024 joint consultation. In particular, the joint consultation had outlined the following. • a proposal that heat network operators be required to have in place, on an ongoing basis, a contractual arrangement with an entity to continue the authorised activity, which could be triggered in the event there was an imminent risk of insolvency • a ‘Last Resort Direction’ process whereby Ofgem could appoint a new entity to continue the authorised activity where commercial solutions to financial failure had been exhausted 7.2 There was some support for these measures, but many stakeholders agreed with, and reinforced our assessment that for many heat networks, the obligations that these measures would place on them would be onerous, time- consuming and burdensome to put in place and maintain. Given the lack of evidence of risk of financial failure across the sector, we consider that it would be disproportionate at this time to put these measures in place. We also recognise the legal and administrative challenges to putting in place a Last Resort Direction process in the timescales that would be required in financial distress situations. 7.3 We are mindful that some stakeholders have indicated support for a centrally managed arrangement to intervene and secure the continued operation of heat networks in cases where authorised entities are at risk of insolvency, and we will continue to assess the need for such measures as the sector grows and matures, and as we gain evidence and understanding of how the sector reacts to the requirements associated with regulation. Such arrangements would require funding from the heat networks sector. 30 Consultation - Heat networks regulation: authorisation conditions and guidance on measures to mitigate the risk and impact of financial failure 7.4 Proceeding with an approach that neither requires heat networks to have contractual step-in arrangements, nor provides for Ofgem to nominate and appoint a replacement authorised entity an operator or supplier for a heat network entering insolvency, does potentially leave a regulatory gap between our proposed financial responsibility and monitoring requirements, and the SAR backstop, in cases of insolvency for which commercial solutions cannot be found. 7.5 We want heat networks to learn from and build on existing practice within the sector that provides effective mitigation against consumers losing access to heating and hot water, by incentivising authorised entities to step in and support the continued operation of networks. We will continue to work with the sector to explore ways to promote and share such best practice. Possible future measures 7.6 Respondents to the 2024 joint consultation provided a number of ideas for mechanisms to ensure heat network continuity, including suggestions such as: • a central, managed and funded service to assess and take on the operation of smaller heat networks which may not be able to make their own arrangements for continuity in the event of financial failure • a registry of pre-authorised replacement operators with capacity to step in