Levelling up energy price support for heat network customers

By Ian Allan, Head of Market Strategy, Switch2

Many of you reading this article will be involved in managing buildings with communal heat networks, and with the number of heat networks expected to significantly increase in the coming years under Government plans to decarbonise heat, it’s important to understand the current landscape and what to expect in the future.

The recent energy crisis has acted as a catalyst for change, with energy prices for heat network customers and operators reaching eye-wateringly high levels. This coupled with the urgency for decarbonising heat, is placing a new focus on heat network management best practice, with particular emphasis on cost reduction and customer protection.

In April 2023, the UK Government launched their latest gas and electricity price support package, known as the Energy Bill Discount Scheme (EBDS). In this article we’ll explain how this works, discuss the implications around the realistic level of support that your residents can expect, and we’ll suggest how you can significantly reduce costs for residents living on communal heat networks.

The Energy Bill Discount Scheme – what is it and how does it work?

The EBDS replaced the Energy Bill Relief Scheme (EBRS) on 1st April 2023, and will continue to provide support to heat network residents until March 2024. The EBDS, which has specific support for the heat network industry, supports the cost of the gas and electricity being purchased by the building owner or heat network operator. The commercial rates are capped at 7.83p/kWh for gas and 34p/kWh for electricity. These rates have been set to provide equivalent support for heat network customer as the customers with individual gas boilers receive through the EPG. But there is a catch that we will address in a moment.

For customers to receive the benefit, heat suppliers (e.g. any person or organisation that supplies and charges for the supply of heating, cooling or hot water to customers through a heat network) must register their heat networks no later than 25th July 2023 via the dedicated Government portal, which opened on 26th April 2023. Heat suppliers must register all the heat networks they manage, regardless of whether their gas and electricity input costs are below the capped rates.

Once the heat networks are registered, verified heat suppliers will receive a qualifying heat supplier certificate which is then passed on to the energy supplier who applies the discount to the bills. Although the portal didn’t open until late April, the support received through the EBDS should be backdated to cover bills from the 1st April 2023, to ensure customers living on the heat network receive the full benefit.

Energy suppliers must apply the discount no later than 45 days after receiving the verification. This means that eligible customers on heat networks are unlikely to see any discount on their bills until August 2023 at the earliest.

Figure 1: EBDS Application Timeline

How does the EBDS weigh up against the EPG (Energy Price Guarantee)?

So, what is the catch? As we mentioned earlier; the EBDS aims to level up support for heat network customers so that it is comparable with the support which domestic customers with a standard supply and individual gas boilers receive via the EPG, something which the EBRS did not address.

Under the EPG, domestic customers receive capped gas rates of 10.3p/kWh and 32p/kWh for electricity, which at first glance appears that customers on heat networks benefit from a better deal.

However, on a heat network, the heat price (p/kWh) is calculated by using the gas input price plus the system losses. For example, in simplistic terms, if your gas input price is 10p/kWh and your scheme is 50% efficient, your heat tariff is likely to be around 20p.

However, losses on heat networks vary greatly depending on factors such as age, design and the operation and maintenance regimes in place. In our experience the best heat networks run at around 60-65% efficiency, and the worst as low as 24% efficiency.

Unfortunately, many communal heat networks currently fall into the lower half of that range, and this has implications for the EBDS support, as the Government have based the equivalent support to the EPG on a communal heat network which runs at 65% efficiency.

What is the impact of efficiency on cost for residents on communal heat networks?

Based on an input price of gas at 8p/kWh (for the purposes of this example), a scheme running at 20% efficiency will cost per annum, based on 3,500kWh of heat consumption per property, would be £1,365.

Running at an efficiency of 65%, the heat charge on the same heat network would be £420 per property. This is a huge difference.

Older buildings, and even some reasonably new buildings, may still not be able be to achieve an efficiency of 65%. However, even buildings with operating efficiencies at the lower end of the spectrum, can be improved to around 50% in most cases. When compared to a scheme operating at 20% efficiency, improving to 50% can equate to an annual saving of £805 per property.

What do you need to do to measure and improve the efficiency of your heat network?

There are two ways to assess the efficiency of your heat network. The first is to compare the amount of gas used in your boilers over a year to the amount of heat sold measured at the apartment heat meters. This will give you the system efficiency.

The second, if you don’t have customer heat meters, is to benchmark the annual gas consumption per property against a similar type of building. For example, we would expect a well operating heat network to use about 6,000kWh of gas per apartment per year as a rule of thumb.

A note on final customer heat meters (or apartment level heat meters) – they are now mandatory unless you have proved they are not feasible. However, in many cases the reduction in heat demand resulting from residents being more careful about their heat usage should not be underestimated. At Switch2 we regularly see gas reductions of up to 50% simply by installing and billing on metered consumption!

Once you understand your current efficiency, you need to look at where you are on the “efficiency ladder” and what improvements can be made.

Figure 2: Efficiency Ladder

If your heat network is operating anywhere below 55% efficient, consider who is operating and maintaining your heat networks, and what they are doing as part of that maintenance regime to improve efficiency.

Often, generalist gas contractors do not have the specialist skillset required to understand how heat networks operate, and what needs to be done as part of the maintenance regime to improve efficiency and performance. By employing a specialist who has the engineering capabilities to effectively maintain and proactively improve the heat network as part of regular maintenance, a significant difference can be made while only requiring minimal outlay in terms of cost.

In addition, a specialist maintenance provider can capture, analyse, and use data to inform decisions on where interventions are needed on the network. At Switch2, we know that accessing properties is a huge issue for anyone who manages a heat network. However, by using data to identify problematic properties or issues in the plant room, the need to access every individual property is reduced significantly, meaning you can efficiently spend time on the areas from which you are going to see the biggest improvements in costs and carbon savings.

By implementing these changes, operators can expect to see efficiency levels rise from levels between 20-35% to 55% efficient. These efficiency increases can result in significant savings for the heat supplier (up to £87,273 on the input gas cost and £291 per property per annum) and significant savings for the customer, who under the EBDS, will be paying a comparable cost to domestic customers under the EPG.

If your heat network is still under performing, it’s likely that you will require more significant interventions to improve your heat network efficiency. Schemes such as the Heat Network Efficiency Scheme (HNES) are available to support such improvements.

To summarise, although the Government are trying to level up support for heat network customers, the expectations of efficiency are quite different to the reality. Despite this, there are many different options available to managing agents, and having the right maintenance partner in place can help reduce the efficiency gap, reduce gas bills, reduce repair and replacement costs, ensure better reliability, and ultimately cut the cost to residents.

If you would like any more information on the EBDS, you can watch Switch2’s webinar here.