On 7 December 2017, the Competition and Markets Authority (CMA) launched a market study into domestic heat networks in the UK. The CMA is seeking to identify whether there are any significant impediments to competition in this market, particularly in relation to conditions of supply – both price and non-price terms. Comments on the CMA’s draft market study scope are requested by 12 January 2018.
We examine below what the CMA intends to focus on, and what this might mean for the industry. Please contact one of the authors if you have any questions.
Heat networks involve the generation and distribution of heat from a single central source to buildings, either as district heating (covering entire communities or industrial areas) or communal heating (covering single buildings with multiple occupants, such as blocks of flats). These heat networks have significant environmental benefits, delivering lower carbon emissions than some other sources of heat.
Currently about half a million homes in the UK are served by heat networks. Given their environmental benefits they form an important part of government strategy to reduce carbon and cut heating bills. In 2015 the Government announced £320m of funding for heat networks over five years.
With significant growth expected (with estimates that the number of customers using heat networks will increase to around 20% of all households by 2030), the CMA is concerned that households are getting a good deal.
Currently heat networks are not subject to sectoral regulation, unlike that seen in other forms of energy networks and supply (e.g. gas and electricity networks and, to a lesser extent, retail energy). The CMA is concerned that this, together with other factors, may have resulted in negative impacts for consumers. The CMA is particular concerned that customers may be unable to easily switch suppliers, or may be locked into long-term contracts, with the risk that they may be paying too much or receiving a poor quality of service. The potential downside characteristics of the heat network sector which concern the CMA may be exacerbated by the fact that a large proportion of heat network customers live in social housing.
What is the focus of the CMA’s market study?
The CMA’s market study will focus on three broad themes:
- Transparency of information: whether customers are aware of the costs of heat networks both before and after moving into a property.
- Heat networks as monopolies: whether heat networks are national monopolies given the inability of customers to switch, and the impact of incentives of business, operators and customers of heat networks.
- Outcomes for heat network customers: specifically reviewing prices, service quality and reliability of heat networks.
The CMA will focus on residential consumers, rather than businesses (such as shopping centres and public sector customers). Further, whilst the study will cover the whole of the UK, heat policy is a devolved policy matter. The CMA will therefore take into account the differences in relation to each nation’s policy framework.
The launch of this market study is unlikely to be a surprise for those involved in the sector, which has been under scrutiny for some time.
For example, in March 2015, consumer champion group Which? highlighted to the CMA it’s concerns that heat customers could not switch suppliers, and lacked an effective redress mechanism. More recently, in May 2017, Citizens Advice published a report recommending that the CMA undertake a market study. In addition earlier this year the Association of Decentralised Energy (ADE) launched a task force to produce recommendations on how the industry and Westminster could better work together to reduce the costs of investment, with a consequential reduction in the cost of heat to customers.
Similarly, the areas of focus for the market study are unsurprising. That heat network customers have limited ability to switch to alternative energy providers – and often have limited information in this regard – is well known. Indeed, developers and operators often consider the competition issues associated with the establishment and operation of heat networks as part of new development projects.
Timing and potential outcomes
The CMA expects to publish interim conclusions within the next six months. The final report of the CMA’s current market study will be published in late 2018.
The CMA’s terms of reference set out potential remedies for each of the main issues under review. These include:
- the option for the development of a regulatory regime to provide customers with sufficient transparency over metering and billing;
- the introduction in competition for the market to address monopoly concerns; and
- rules on how prices are set and how providers should monitor quality of service.
If the CMA concludes that competition is not working well in the current market study, it may refer the maker for an in-depth 18 month market investigation. Should the CMA make a market investigation reference, it would have wide-reaching powers to intervene and address any competition issues it identifies, for example by imposing market-wide or firm-specific remedies, or recommending legislative or regulatory reforms.
Whether or not the CMA opens a full market investigation reference, it would have the ability to open individual consumer or competition enforcement cases against individual firms where it identifies suspected breaches of consumer or competition law.
What this means for the industry: an opportunity to engage
The CMA’s proposals for review, and the indicative remedies that has been set out are potentially very significant. Depending on the precise scope of any remedies, the industry could face the introduction of mandatory competitive tendering processes in which a heat network solution for any project would need to be chosen against objective efficiency criteria. There may also be information obligations, and potentially some form of price monitoring / regulation. This would bring the heat networks sector much more into line with the mainstream gas and electricity sectors.
The CMA’s terms of reference are open for comments until 12 January 2018.
The CMA will then commence a period of information gathering. Stakeholders, including developers, energy companies and those running heat network schemes (such as councils and housing associations), should expect to receive detailed requests for information and invitations to roundtable sessions with the CMA in the next few months.
We have significant expertise advising parties on CMA market studies and investigations. Please do contact us if you have any questions or would like to discuss options for engaging with this market study.