What legal and regulatory frameworks are required to decarbonise heat?

Published: 4th May 2021
Area: Corporate & Commercial

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What legal and regulatory frameworks are required to decarbonise heat?

Heating and cooling is the largest source of energy demand in the European Union, and one of the largest contributors to greenhouse gas emissions.  As a result, the recent energy white paper, along with other current and future government initiatives, recognised the importance of low carbon heating and energy efficient buildings in saving our planet.

Therefore, decarbonising heat that we use in our homes and buildings is crucial to contribute towards achieving no net emissions of greenhouse gasses by 2050.

Sushma Maharaj speaks to Jostein Kristensen (partner at Oxera), Toby Heysham (founder and Managing Director of Pinnacle Power) and Roland de Vlam (head of the energy team at Loyens & Loeff law firm in Amsterdam) about the legal and regulatory frameworks that are required to decarbonise heat.

What is the decarbonisation of heat?

The decarbonisation of heat essentially refers to reducing the amount of carbon produced from heating systems, such as those that use gas and oil, and replacing them with low carbon systems.

There are a number of ways of decarbonising heat, for example:

  • Waste heat recovery - harvested from sources such as power stations and industrial commercial users.
  • Electrification of heat – through the use of heat pumps and direct electric heating to upgrade low temperature heat from sources such as the air, ground and water.
  • Introducing hydrogen into the gas grid –hydrogen, instead of methane, does not produce carbon dioxide on combustion.

Heat networks will play an important part in helping the UK to reach net zero by 2050, which is why it’s essential to link a combination of decarbonising methods together; for example, allowing a series of heat sources to go into a network to be pumped around a city.

What regulatory frameworks and other incentives are currently in place for heat networks in UK and Europe?

Although we have a government grant and loan system to incentivise the development of heat networks in the UK, heat networks are still capital intensive.

Also, very often, there’s a single network provider in the local area, which means consumers may find it more difficult to switch suppliers.

Therefore it’s important to ensure that there’s an appropriate regulatory regime in place, not only so consumers receive a fair deal, but also to ensure that investors have the confidence to invest in heat networks in the first place.

There are typically three types of regulatory regimes currently seen across Europe:

  • Prices/tariffs that can be freely negotiated - Heat networks set their own tariffs, perhaps in conjunction with negotiations with consumers or local authorities, and then a regulatory body can intervene if tariffs are seen to be unfair. This is a light-touch approach and is currently seen in countries such as Finland and Sweden.
  • Reference prices – The end-user price of heat is based on alternative fuels, e.g. the cost of a gas-fired heat-only boiler. This approach is currently used in the Netherlands.
  • Regulator tariffs – Prices are set by the regulator so network operators can recover their capital and operating costs. Although currently seen in Baltic countries, Poland and Hungry, this is currently being considered as a potential future approach for the UK.

There is a significant need for investment to expand heat networks, particularly in the UK. In order to encourage and incentivise investment, while at the same time keeping tariffs affordable for consumers, there needs to be an increase in regulations in the future.

Key challenges of implementing heat networks

In addition to the significant capital investment, there are a number of other key challenges for heat networks:

  • Local authority and consumer acceptance of heat networks - Particularly where substantial amounts of new connections need to be retrofitted to existing buildings.
  • Complex regulations - In order to incentivise investment, regulatory design can sometimes be very complex.
  • Ensuring heat network tariffs are efficient and cost-effective – Tariffs need to be balanced so they’re attractive for consumers and don’t over-compensate suppliers, while also ensuring that investors can achieve a fair rate on return.
  • Brexit – Although the heat networks sector is less impacted by Brexit than others, leaving the EU has presented some challenges. For example, the UK relies on kit (such as pipes, pumps, etc.) from northern European countries. Due to additional checks and regulations there is now longer lead times and increased prices to obtain those supplies.Further challenges further down the line may present themselves, such as reduced or lack of access to finance (for example from the European Investment Bank) or the availability of infrastructure finance.

While there are many challenges still facing the UK, there are a number of EU countries who are leading by example, and who we can learn a great deal from as we move towards 2050.

Contact us

For further details or advice please contact Sushma Maharaj in our energy team.

Our energy team is ranked as a Leading Firm in the Legal 500 2021 edition.

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Jostein Kristensen
Partner, Oxera
Toby Heysham
Founder and Managing Director, Pinnacle Power
Roland de Vlam
Head of the energy team, Loyens & Loeff
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