08/05/2026
One of the major positive aspects of heat networks is that they are technology agnostic, which means they can use wide variety of heat sources.
Historically, heat sources have tended to be predominantly gas-fired CHPs and heat derived from energy from waste plants (“EfW”). However, the future direction (which is supported by policy and heat network zoning) is to reduce reliance on gas and to increase the use of heat pumps (air, ground and water source) and waste heat (including from EfW, industrial processes, data centres, waste water, and underground rail).
The recent consultation response about heat network zoning and the draft heat network zoning regulations that are currently in circulation (referred to here as the “Draft Regs”) have provided some interesting insights into ways in which diversification of heat sources may be achieved.
The sector will be pleased to see that the Draft Regs indicate that both high temperature sources (e.g. EfW) and low temperature sources (e.g. waste water / sewerage) could be required to connect to heat networks, since there have been challenges with securing connection of each of these.
It seems likely that local zone coordination bodies will take a leading role in investigating potential heat sources in a zone and details of their findings will be included in Zonal Market Prospectuses. Developers will not, however, be limited to the sources identified and can identify other heat sources for their network.
Many in the sector had hoped that forthcoming regulations would mandate heat sources in zones to connect. However, the Draft Regs indicate the point of departure will be a negotiated commercial agreement between heat source owners and heat network developers.
That said, the Draft Regs indicate there will be a backstop if no commercial agreement can be reached. In that situation, the zone coordination body will be empowered to require connection of a heat source and to require provision of (and off-take of) heat where certain conditions are met, and the central heat zoning authority will support local zone coordination bodies with guidance and advice on negotiation with heat sources.
The procedure appears likely to be:
- Negotiation between the heat source and zone developer in the first instance;
- If negotiations are not successful, the zone coordination body can require the heat source to connect and can impose a contract;
- The zone developer and heat source owner have right to make representations to the zone coordination body regarding the requirement to connect and the terms of the mandated contract;
- There will be an appeals process regarding the zone coordination body’s decision – initially to the central heat network zoning authority and ultimately to the First Tier Tribunal.
Where the zone coordination body intends imposing a contract on the heat source owner and the heat network developer, the Draft Regs also set out a list of provisions that must be included in the mandated contract regarding price, compensation for breach of contract, grounds for termination, and compensation on termination.
In addition to those provisions, there are, of course, a number of further commercial considerations that need to be factored in when negotiating a heat off-take agreement including:
- Guarantee of heat – how reliable is the heat source (for example with EfWs there may be interruptions due to planned shutdowns of the plant, whereas heat from data centres and waste water may be more consistently available)
- Ongoing maintenance / condition of the heat source – who is responsible and who pays?
- Priority of heat – is heat being supplied to more than one customer?
- Works to connect the heat network to the heat source – who pays, and what if the works are not completed on time?
- Cessation of the heat source - what if heat source (or heat source operator) ceases to operate, or the primary activity (industrial process, EfW waste treatment) is no longer financially viable? How would compensation on termination be addressed in these situations?
It is also worth considering the potential impact of the UK Emissions Trading Scheme (“UK ETS”). This is a scheme to reduce greenhouse gases in certain energy-intensive sectors and from 2028 the scope of UK ETS is to be expanded to include EfWs. This is likely to increase operating costs for EfWs, but there are also likely to be incentives to encourage EfWs to connect to heat networks (e.g. free allowances). Detail of how these incentives will function has not yet been finalised, but it seems that there may be a significant commercial benefit to an EfW from connecting to a heat network. Therefore, where a heat network developer is considering an EfW as a heat source, it would be prudent to include potential ETS benefits in the negotiations.
The consultation response indicates that further guidance will be issued about the approach to mandated connection of heat sources and this guidance will certainly be very important to enable all parties to understand more about the approach to the contract terms that could be imposed.
Our Energy and Resource Management team has extensive experience of advising operators and developers of both heat networks and potential heat sources, and of supporting in the development of viable heat off-take arrangements.
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