On 30 April 2025, Ofgem published a consultation on the fair pricing rules that will form part of the heat network regulatory framework. The consultation includes proposals for rules on cost allocation, price benchmarking, profit-making and central price transparency.
Engage Consulting has analysed the document and attended Ofgem’s workshops on the consultation to understand the direction of travel. Below, we provide five key takeaways for heat network operators and suppliers to consider in preparing for regulation.
1. Ofgem is targeting excessive profits more than high cost passthrough
Ofgem’s principal objective for its fair pricing framework is that ‘consumers pay fair and not disproportionate prices’. Key to understanding this objective are two of its underlying principles – ‘cost-reflective pricing’ and ‘cost efficiency’ (paragraph 2.10 of the document).
Cost-reflective pricing means that prices should reflect the cost of providing heat, which captures heat network build, operation and maintenance. Cost efficiency relates to operational efficiencies that minimise cost. However, Ofgem makes clear that the pricing framework will not introduce technical efficiency requirements, which will instead be covered by the Heat Network Technical Assurance Scheme (HNTAS) (paragraph 2.22). Although the Government’s HNTAS consultation is not yet published, signals from DESNZ suggest that technical standards for existing heat networks will be phased in to accommodate older, inefficient schemes.
The pricing framework is , therefore, unlikely to target heat networks charging high prices due to high cost passthrough resulting from technical inefficiencies. To understand Ofgem’s aims for pricing regulation in the early years, operators should focus on the profitability analysis proposals, which set out Ofgem’s approach for identifying and addressing heat networks earning excess profits.
2. Focus preparations on data requirements
Ofgem makes clear that the first phase of the pricing framework will be data collection from the point a heat network authorises and regularly thereafter. Operators and suppliers will need to provide information on standing and unit charges, costs recovered through charges, cost drivers, and financial data, either quarterly, annually, or on an ad hoc basis. The consultation also states the need for data on heat source and fuel input costs to inform benchmarking methodologies.
Ofgem reaffirmed its market segmentation proposals, including reduced reporting requirements for small heat networks. However, such a segmentation exercise will, in itself, require heat networks to provide data on characteristics such as size, commercial arrangements, and pricing methodology. Operators and suppliers should, therefore, begin to understand the data they will need to submit to Ofgem, with data requests potentially starting in January 2026.
3. Pricing rules will take time to bed in
Linked to the above point on data requirements, Ofgem’s consultation makes clear that, although the pricing framework will start taking effect from January 2026, complex regulatory activities will not be possible until the regulator has received sufficient data from heat networks. Data collection will not begin in earnest until early 2026, when Ofgem expects to launch a digital service to administer the authorisation regime. Its focus for 2026 is likely to be data gathering and analysis to inform the development of benchmarking methodologies, profitability assessments and price investigations. In fact, Ofgem states that investigation activity is not expected to start before January 2027 at the earliest, which perhaps serves as an indicative timeframe for other parts of the pricing framework.
4. No plans for a price cap for now
Ofgem’s position remains that direct price regulation, including a price cap, is not appropriate for the sector. However, the option is being kept under review, and it remains to be seen whether DESNZ and Ofgem’s views change as data starts to flow in.
5. The regulatory framework can only go so far
Although Ofgem should soon be able to tackle instances of excessive profit-making, it may find that it struggles to address the root causes of high prices in the sector. We have already mentioned that it will be for HNTAS to address high operational costs due to technical inefficiencies. In addition, there is the issue of heat networks varying significantly in their fuel procurement and hedging strategies, which resulted in price spikes for heat networks that had to renew gas supply contracts amidst Russia’s invasion of Ukraine in 2022. Ofgem floats the idea of publishing guidance on best practice for fuel procurement and hedging, but ultimately, its remit as heat network regulator does not extend to wholesale gas supply to non-domestic entities. Nor can Ofgem do anything about rebalancing gas and electricity bills, which remains a barrier to heat network decarbonisation and a matter for policymakers in Whitehall.
Engage Consulting
At Engage, we have a team of expert consultants with extensive and direct experience in:
- Designing and interpreting the incoming heat network regulations
- Supporting regulated entities to ensure compliance with regulatory requirements
We offer a range of services that provide end-to-end compliance process coverage; find out more from our Heat Networks expert, Lorenzo Wong.
Consultation details
The consultation runs until Wednesday, 9 July 2025.
