Heat Networks: Greenwich and Woolwich

Matthew Pennycook Excerpts

Tuesday 19th February 2019 Westminster Hall

[Matthew Pennycook (Greenwich and Woolwich) (Lab)]

I beg to move,

That this House has considered heat networks in Greenwich and Woolwich.

It is a pleasure to serve under your chairmanship, Mr Davies. I am grateful to the Minister for responding to the debate and for previously finding time in her busy diary to discuss the issue with me.

This is not the first time that I have expressed concerns about systemic problems in the UK heat network sector and I suspect it will not be the last. In the comparatively short time that I have been a Member of the House, I have raised the issue on numerous occasions and I have repeatedly made the case for statutory regulation of heat networks, particularly those that supply domestic customers.

For a long time, it felt as if those of us calling for greater protection for heat network customers were making no headway. When asked, former Energy Ministers would nod sympathetically and politely explain that statutory regulation was not appropriate and risked strangling an emerging industry in red tape. When I turned to the Competition and Markets Authority a few years back and made the simple request that it open an area of investigation into the industry, I was told that it had no plans to do so.

Thankfully, the situation has changed. The CMA was persuaded to carry out a detailed market study into heat networks and it published a final report in July that made several sensible recommendations. Ministers have now accepted the need to introduce a regulatory framework for the sector.

Of course, that is welcome, but it provides little comfort to heat network customers who are not getting a fair deal and for whom every month that passes without effective protections being put in place means continued poor service and expensive bills. That should concern us all deeply, and I know it concerns the Minister, not only because of the Government’s avowed aim to keep customer bills as low as possible, but because of the possibility of the widespread loss of consumer confidence in heat networks, which would make it harder for the UK to decarbonise heat and reduce overall greenhouse gas emissions.

As the Minister is aware, if the UK is to meet its future emissions reduction targets, we have to do more to decarbonise heat. The Committee on Climate Change estimates that about 18% of UK heat will need to come from heat networks by 2050 if the UK is to meet those targets cost-effectively. From a consumer protection and an environmental perspective, we cannot allow the benefits of heat networks to be tainted as a result of our failure to address promptly the flaws in the sector before it grows significantly over the next decade.

My purpose in securing the debate is to highlight the impact of the current absence of a regulatory framework on heat network customers in my constituency, to make the case for the urgent introduction of statutory regulation, and to urge the Minister to give some thought to what might be done in the interim to protect the minority of customers at the sharp end of industry practice.

For many customers, heat networks offer an efficient supply of heat and hot water at prices close to or lower than other sources of supply such as gas and electricity, with comparable service standards. It is not in dispute, however, that a significant minority of heat network customers are being badly let down. In London, as the Minister knows, the number of heat networks is growing rapidly, partly because developers are incentivised by London’s planning framework to install onsite systems, and partly because their use makes a huge amount of sense given the density of new build developments in the capital.

In my constituency, every large new build development, of which there are a great many each year, invariably includes a communal gas boiler, a combined heat and power engine, or a biomass boiler. That should be something to celebrate, and it would be, were it not for the fact that many of those networks and their operators are badly failing those who have no choice but to be served by them.

Since my election in 2015, not a month has gone by in which at least one constituent, served by one of the at least 13 communal heating schemes in my constituency, has not written to me with a complaint. Those served by privately operated schemes are at a much greater risk of poorer outcomes in terms of price and service, which, along with other factors that are specific to London or more prevalent there, explains why so many heat network customers in constituencies such as mine are suffering.

I will touch briefly on the three main drivers of the problem. First, while the London planning framework deliberately incentivises the installation of heat networks, more general planning requirements often lead to the installation of poor quality infrastructure or systems that are inherently expensive to operate. The situation is exacerbated by the lack of enforceable technical standards. The result is that communal heating systems are prone to failure and cost consumers more than they should.

Secondly, there is a very real problem with the choice of heat network operators. In my constituency, this issue relates almost exclusively to new build developments, so there is no existing body of residents to put pressure on the building owner to provide a customer-focused heat supply. In the absence of consumer pressure of that kind, the developers, which have no long-term interest in a site, have almost no stake in which operator they award a contract to. If the anecdotes I have heard from those involved in the local property market are to be believed, the selection of an operator is more often than not determined by which commits to giving the developer the largest up-front capital contribution to offset the capital costs incurred in having to install the network.

Even developers that have a long-term interest in the site complain to me that they have a limited choice of who could operate the network. The result is that developers invariably turn to one of the small number of large, established suppliers, or one of the growing number of much smaller, less established operators, both of which can be problematic.

Thirdly, heat networks are natural monopolies. They require a relatively large up-front capital expenditure. When a contract is awarded to an operator, it tends to last for decades. The operators for most of the communal heating systems in my constituency have contracts lasting for more than two decades. Some last for 30 or even 35 years. There are, of course, good suppliers out there, but if the group of customers has no freedom to switch to an alternative heating system until the mid-2030s or even 2040s, there is little or no competitive pressure to offer reasonable prices, a reliable supply and a high quality of service.

In my experience, the result is that the majority of heat network operators are totally unresponsive to their customers. The large operators seem not to care particularly about what amounts to a very small part of their business model, and many of the smaller operators are—to put it bluntly—a law unto themselves, because they do not even have to worry about the reputational impact of providing a poor service.

The combination of those three factors on a significant minority of heat network customers is well documented. A minority of privately owned heat network schemes offer extremely poor value for money. Even allowing for the fact that heat charges cannot be directly compared with standard gas and electricity prices, the tariffs levied on some of those customers cannot be justified. Moreover, unit prices and average bills vary significantly between schemes. I have seen evidence of discrepancies in charging between customers on the same scheme and in the same development, and significant month-by-month variation for individual customers when it comes to standing charges, which are supposed to be set annually.

There is a lack of transparency in billing for many heat network customers. Over the years, I have been sent many examples, and the vast majority of the bills are barely penetrable. Is it any wonder that most customers do not feel able to challenge their supplier on cost, prices and services? I suspect that a number of heat network operators prefer it that way, because it reduces the pressure on them to provide reliable, value-for-money heat.

Those problems are exacerbated by the fact that heat network customers do not have the same regulated consumer protections as domestic gas and electricity customers. It is true that some communal heating schemes are registered with the Heat Trust, but there is no requirement for individual heat network operators to register themselves with the trust or to register all their schemes. As a result, the Heat Trust provides only limited protection to consumers, and operators can pick and choose which of their heat network schemes they wish to be held accountable for and which they do not.

To illustrate what that perfect storm means for individual customers served by privately operated schemes in London, let me take a concrete example from my constituency. There are many that I could choose from, from the E.ON-run scheme at New Capital quay in Greenwich to the Evinox-run scheme at Wick tower in Woolwich. I will focus on the most recent case that has been brought to my attention: a scheme operated by a company called Vital Energi in a development called the Movement in central Greenwich.

The 530-unit development was constructed in 2015, and after—one hopes—an open, competitive tendering process, the operator was awarded a decades-long contract to operate the onsite communal heating system. Residents of Bellville house, the main block on the development, recently wrote to me en masse with a series of complaints relating to heat and hot water outages, a lack of transparency in billing, misinformation from their supplier and dire customer service. All those areas of concern are echoed in the findings of the CMA’s final report. However, their main grievance was the price hike that Vital Energi landed them with on 1 October last year. Not only did the operator increase the standing charge and what is itemised in the bills as “Separate capital replacement 1” and “capital replacement 2” charges—whatever that might mean—but the unit charge was increased by a staggering 96%.

As the Member of Parliament, I have no way of ascertaining whether the operator had valid grounds for that price hike, or whether Vital Energi simply priced in an exorbitant profit. The problem, however, is that residents of Bellville house and the rest of the development cannot submit a complaint to the ombudsman for it to adjudicate on the matter because Vital Energi has chosen not to register the scheme with the Heat Trust. Vital Energi has registered a scheme in Bristol, but for some reason has chosen not to cover the scheme on the Movement development, so residents have no protection other than the limited protection afforded to them by the Heat Network (Metering and Billing) Regulations 2014 and general consumer protection and competition law.

The hundreds of residents on that one Greenwich development are not alone; thousands of heat network customers in my constituency face similar problems and are not getting a fair deal, undoubtedly with tens of thousands more across the country. Their ranks swell with every high-density new build development constructed in my constituency, across London and in other parts of the country in urban areas.

I would be grateful if the Minister addressed two specific questions in her response. First, how long will it be before heat networks are regulated? The Department welcomed the recommendations in the CMA’s final report and made it clear that it intends to consult on more detailed policy proposals later this year, with any subsequent legislation to follow as parliamentary time allows. I appreciate that policy needs careful preparation and that any legislation required cannot be rushed, but any heat network customers watching our proceedings today will be forgiven for worrying that they will still be without effective protection for years to come. I know that the Minister will do everything she can within Government to address their concerns, but will she provide more detail with regard to the outlines of the regulatory framework that the Department believes is necessary and, more importantly, the estimated timeline for implementation?

Secondly, what, if anything, can be done in the short term, before a new regulatory framework is established, to give heat network customers greater protection? For example, will the Department do more to persuade and, if need be, cajole suppliers and operators to ensure that all of their heat networks are registered with the Heat Trust? Will Ministers write to operators such as Vital Energi to make it clear that they are expected to register each of their schemes with the trust? Such a step would not be a panacea, but it would at least ensure that all customers received minimum service standards and had access, if they felt it necessary, to the energy ombudsman. Will the Minister touch on that and on what steps might be taken to protect customers in the here and now, before the introduction of a regulatory framework?

The Minister knows what the problem is, she knows what needs to change and I know that she is doing her best to push the process along, but I urge her to redouble her efforts. Heat network customers are not getting a fair deal now, and are being ripped off in many cases. They are not being well served and cannot wait another year, or possibly two years, for those protections to be introduced.