20/03/2026
The question of what this year means for the heat network sector is one we have been considering for some time. With the Energy Act and the Heat Networks Market Framework, the government has set the stage for heat networks to take their place as major contributors to decarbonising building heat and helping the country reach net zero.
The Warm Homes Plan and recent consultation response about heat network zoning show the sector is key to the government’s plans to decarbonise heat. All this means that the sector is becoming more regulated and is expanding, making it an exciting time to be in the sector.
Regulation and the role of Ofgem
From a legal point of view, we expect to see a raft of regulation around consumer protection, zoning, installation and maintenance of pipework, and technical standards during 2026.
The designation of Ofgem as regulator and the desire to see heat networks as something akin to regulated utilities is going to bring challenges but also opportunities, especially for those heat networks that are already operational. The sector is likely to broadly welcome an end goal of having a sector where customers are protected and for there to be consistent standards across the industry. Achieving this should build confidence and credibility and help with growth in the medium to long term.
Key requirements for sector growth
For the sector to take advantage of these opportunities and grow it will need:
- sources of low carbon, low cost heat,
- operators to get that heat to customers in a reliable and consistent way, and
- customers to use and pay for the heat.
This is a sector where the up-front infrastructure costs are high, and returns are long term with relatively modest IRR meaning that securing investment can be challenging. It is also a sector that is somewhat monopolistic in nature because of the type, scale and cost of initial investment and the infrastructure involved. As a result, there are a lot of inherent tensions in structuring heat networks as a regulated utility delivered with private funding. Fundamentally, for the government’s objectives of decarbonising heat through heat networks to be achieved, there needs to be confidence in the sector, demand assurance and available financing.
The government’s policy and regulatory approach is designed to try and address several systemic problems in a sector which has seen:
- high levels of local authority involvement,
- multiple small heat networks,
- lack of interconnection,
- lack of skills, and
- concentration in a small number of players in the market.
Heat network zoning and investment opportunities
The government anticipates that a move towards a private sector led model delivered according to uniform standards will address these systemic issues and its policy and regulatory approach is therefore predicated around zoning of heat networks. The designation of zones is intended to create a sound economic basis for sustained private sector investment in expandable, fundable networks across larger geographic areas, with opportunities to interconnect.
Much about the ways heat network zoning will accelerate the growth of the sector depends on the approach local authorities intend to take and the extent to which they opt to become zone coordination bodies. For those local authorities that are not part of the Advanced Zoning Programme (AZP), and do not yet have experience of heat networks this may be somewhat daunting particularly considering Local Government Reorganisation which is underway. It seems likely that, outside of the AZP, the zoning process may begin slowly, which is arguably a positive in that it should give the sector time to grow organically and build the skills needed.
What is clear is that a lot of aspects, including connection of both buildings and heat sources will be open for the market to determine, which means that the key sorts of legal and commercial issues we are already familiar with, will continue to be relevant. For example, it appears from the consultation response that those responsible for public buildings will continue to need to consider whether contracts for connection and/or heat supply are “covered procurement” or whether they can directly award a connection and supply agreement to a zone developer ESCO. Since public buildings are often key anchor loads, making sure that they can connect and take heat is going to be essential.
Looking ahead to 2026
In summary, we expect that over the coming years more buildings will be invited to or required to connect to heat networks and we expect that the owners and occupiers of those buildings will need to think about their future position as heat network customers.
In conclusion, this may not be the year of the heat network it undoubtedly is a year of the heat network, and we hope it is the first of many, as the sector goes from strength to strength.
We recognise that this transitional period is going to be challenging for many of those already involved and for those who will become involved and our team of specialist heat network lawyers are available to support with thinking through strategic responses, reviewing existing documents and considering how to make the best of what is an exciting time.
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