Energy Price Cap: Residential Buildings with Communal Heating Systems

Alan Whitehead Excerpts

Wednesday 20th April 2022 Westminster Hall

[Dr Alan Whitehead (Southampton, Test) (Lab)]

I will try to be as brief as possible and I will also try to recall, from what seems like an entire Session ago, the discussion that we had earlier this evening and the valuable contributions that hon. Members made to it.

Of course, I congratulate my hon. Friend the Member for Hackney South and Shoreditch (Dame Meg Hillier) on securing this debate in the first place and indeed on bringing to our attention the real issues of regulation, price and redress that exist in the heat network system.

Before I go any further, I will say that heat networks are a good thing. They are not just a substantial part of the Government’s plans for future decarbonisation of our heat systems but provide—or should provide—a cheaper deal overall as far as heat is concerned for those who get their heat through them. Also, of course, the networks themselves are not necessarily dependent on gas. A particular network can have any particular fuel—for example, as I have said on several occasions, Southampton heat network is fuelled by geothermal means—so it is not necessarily the case that gas goes into the networks. However, it is a fact that the vast majority of the 14,000 networks, either communal or district, are gas-fuelled and will probably continue to be so for quite a while.

This afternoon, hon. Members have emphasised the imperative of getting the whole system regulated properly for the future. It is a bit of an anomaly that this area of heat and power supply, unlike pretty much anything else in the system, remains unregulated. That does not mean that every network is a rogue organisation trying to do the worst thing for its customers; indeed, most heat networks do a very good job.

However, it is essential that customers have access to the proper redress that they have by other means through the regulation of the wider energy network, particularly because energy networks of these kinds do not have the option of exit. They are run on an entirely different basis, which is quite right—there cannot be an individual exit from a collective system—but customers should have a voice. They should have the ability to get a good deal, and arrangements for redress and putting it right if they do not get a good deal. I am afraid there are energy networks that run their systems very inefficiently, put their prices up without proper justification, or do a range of other things that we would expect a regulator to intervene in and put right. The question of regulation is an imperative foundation for the expansion of energy networks, district heating networks and so on that we expect to see over the next few years, as well as putting right a number of the wrongs that are already in the system.

Members have already mentioned how long the Government have taken to get the idea of regulation properly on board. I am pleased that after the CMA inquiry, the Government’s original proposals for consultation, and the response to that consultation—which took over a year to come in—the Government have now committed to proposals in regulation within this Parliament. I am anxious to hear from the Minister what is meant by that. I emphasise, as I have on previous occasions, that we just have to get on with it: we have to do it now, as soon as possible. We have done all the consultations, so there is now no impediment to getting that regulation on the statute books other than ministerial clout and will to make room for this in legislation as soon as possible. I hope the Minister will be able to enlighten us about what will come forward in future.

Of course, the other part of the regulatory process is that because these systems are not regulated, they are not covered by the price regulation that covers the rest of the system at the moment through price caps and so on. When it comes to deciding how we can give customers the benefit and protection of a price cap in a way that is at least partly similar to the rest of the market, we have a particular problem with the difference between the regulation of the system as it stands and the regulation of other systems. That is because the district networks that supply the heat are effectively all miniature energy retailers, in as much as they buy their gas—mainly—on the wholesale market, and then supply the heat as a result of the purchase of the gas, and obviously the purchased gas prices then go through to customers.

If, indeed, we had a price cap regime, without any other activities going on behind it, we may well see a whole series of those miniature retail energy companies collapsing due to being unable to make up the difference between what they were required to pay—as far as the gas prices are concerned—and the price they could charge to supply that heat. They would not be able to balance up their purchase costs.

More would need to be done, in terms of a price cap arrangement within regulation, given the present volatile state of the gas market, and the unlikelihood that prices will fall in the near future. At the very least, it would need a Government arrangement for pooled purchasing of gas by those district network operators, or, perhaps better still, some form of purchase price cap, allowing the wholesale purchased gas to be supplied to the networks at a reasonable and stable rate over the next period.

I think we may well have wider debates about how that works for the market as a whole, but this is one area where we must be clear. An intervention is needed to protect those 500,000 people on district heating networks from the consequences of the volatile gas market for the future, and also to protect those people who are running those heat networks from the consequences of a one-sided price cap. We must appreciate that they operate in very different ways to the rest of the energy market, and need different protections to ensure that they are fit for purpose now, and are available for the future. We will certainly need them to operate effectively within the low-carbon economy, and to provide the low-carbon heat that we all know is desperately needed as we decarbonise our energy systems as a whole.