It is important for any heat network or private utility network to recover costs. The challenge, especially on smaller-scale networks, is to do so fairly and demonstrate value.
There is certainly some benefit of scale, where fixed costs can be divided across a greater number of households and businesses, as well as the ability to secure more advantageous raw fuel costs. This benefit of scale is why numerous heat network operators are selecting service providers for their entire portfolios, or bringing services in-house with solutions like Mabdeck to leverage greater value and minimise costs.
At Sycous we’ve developed intelligent tariff options within Orbit and our Mabdeck Software and Customer Billing Services. We have worked hard to develop comfort tariffs, where the use of IoT metering plus IoT temperature sensors can be used to provide a minimum ‘comfort’ temperature, with the consumer paying a variable rate for consumption above that comfort level. This has many additional benefits, as well as cost savings, for fuel poverty reduction and mould prevention.
Overall, these improvements across the market mean that it is becoming more viable to deliver a fair tariff for supplies such as heat. With Ofgem now regulating heat networks in Great Britain and introducing enhanced consumer protection requirements, heat network operators must be able to demonstrate that their tariffs are fair, clearly communicated and supported by accurate billing and customer service processes. As a result, tariff design is no longer just about cost recovery, it is also an important part of delivering compliance, transparency and positive customer outcomes.
It is important to ensure that your tariff structure and tariff review process comply with Ofgem's heat network regulatory requirements and are reflected within your heat supply agreements. Clearly drafted heat supply agreements help set customer expectations by explaining how charges are calculated, when tariffs may be reviewed and how consumers will be notified of any changes. As part of our services, Sycous can review both your tariffs and heat supply agreements to help support transparency, consistency and regulatory compliance.
Calculating a Heat Tariff
Heat tariffs are not subject to the Maximum Resale Price rules that apply to gas and electricity resales. However, heat network operators are now subject to a new Ofgem regulatory framework that includes fair pricing protections, billing transparency requirements and consumer protection obligations. Operators should maintain sufficient records to demonstrate how tariffs have been calculated and reviewed. This can help evidence that prices are fair, transparent and reflective of the costs associated with supplying heat while supporting compliance with Ofgem's consumer protection requirements.
Heat is generated by one or more sources, potentially utilising a number of different fuels, including renewables. This is further complicated due to the conversion and thermal distribution efficiencies, or heat loss, which can vary on each energy system. These heat losses are normally included within heat tariffs to represent the overall cost of supply. If these were not included the energy network operator would under-recover and this may be unsustainable.
There are two main options for calculating a heat tariff - competitor (or benchmarking) and cost recovery pricing.
Competitor pricing benchmarks the tariff against alternative supplies such as gas to ensure comparable cost for the end consumer. The risk with this mechanism is that the level of recovery may be insufficient to cover the actual costs of the system or over recover, meaning consumers are not benefiting from affordable heat, as well as risks with Ofgem requirements around fair pricing requirements.
An alternative pricing mechanism is cost recovery pricing. This is designed to ensure the associated costs of the system are fully recovered within the consumer tariff.
This pricing mechanism can be the fairest way to ensure the long-term financial sustainability. However, exact costs can be difficult to determine and may sometimes conflict with the affordability of the system.
Cost recovery pricing often has two components, fixed and variable. This allows for the distribution of fixed costs in the most fair and equitable manner, often equally across the number of connected properties and a separate metered consumption charge to recover the variable costs.
The actual tariff may also need to vary depending on the property tenure and the associated statutory obligations. Under section 11 of the Landlord & Tenant Act 1985 there is a statutory obligation implying the landlord shall ‘keep in repair and proper working order the installations in the dwelling house for space heating and heating water’. This cost is deemed to be included within the rent and therefore cannot also be charged within any tariff. It is often the case that some charges, such as maintenance and sinking fund charges are included within the service charges to provide a greater level of comparison and transparency within the tariff.
The pricing mechanism selected will depend on a number of factors and often a hybrid pricing mechanism can be designed to balance the cost and affordability of the system.
Where hot water is installed, which measure in volume not energy, a hot water tariff need to be calculated that accounts for the cost of the cold water and the energy cost of heating the cold water to the supply temperature.
Communicating with consumers can be challenging and as part of our Customer Billing Services we regularly engage with consumers at open-days and other events. It might also be worth checking out some of our FAQ’s that we have developed for consumers at mySycous.com. Including our 'What is a Tariff?' explainer video below, which can help explain tariffs to consumers.
Water, Electricity and Gas Tariffs
The cost to consumers when reselling electricity, gas and cold water from an authorised supplier is regulated. The regulating body for electricity and gas supplies is Ofgem. The regulating body for cold water supplies it is Ofwat.
‘Maximum
Resale Price’ regulations require the reseller, or network operator, to
charge domestic consumers the same as what they have been charged by
the authorised supplier. This includes both the consumption and fixed charges.
These regulations mean it is especially important to regularly review tariffs to ensure compliance with these regulations.
These regulations do not apply to commercial supplies and energy that is generated, or sourced, locally.
It
should be noted an increasing number of energy networks have local
generation, such as PV arrays or CHP, supported by a connection the
grid. It can sometimes be difficult to accurately calculate the correct
tariff and as such it is advisable to calculate tariffs in the most
fair and transparent manner, alongside regular reviews to ensure correct
recovery.
Fixed Charges
There can be fixed costs associated with any supply, from administration through to standing charge.
When these relate to water, electricity and gas utilities, you should check whether the maximum resale price applies and the maximum associated administration cost for the supply.
Otherwise, and for heat and hot water supplies, you can charge a fixed administration fee which can recoup fixed costs associated with providing a supply. This can include billing, software, licenses and other costs.
To support fair pricing and transparency, fixed charges should be allocated using a clear and consistent methodology that can be explained to consumers. Heat network operators should be able to demonstrate how fixed charges have been calculated, what costs they recover and review them regularly to ensure they remain reasonable, proportionate and reflective of the actual costs of supplying heat.
How many days’ notice do I need to give when implementing a tariff change?
Heat network operators should provide customers with at least 30 days' notice of any tariff increase or other change to charges. Under Ofgem's consumer protection framework, tariff increases should not normally occur more than once every six months, and customers should receive clear information about the change, its effective date and its expected impact on their bills.
Raising compliant monthly statements for all credit billing customers
Heat network operators should issue regular and timely statements to credit billing customers, using actual meter readings wherever possible. Where actual readings are unavailable, bills may be based on estimated consumption, but operators should clearly explain how charges have been calculated and whether the bill is based on actual or estimated usage. Customers should also be provided with clear information about tariffs, consumption, account balances and how to raise billing queries.
In addition, the Citizens Advice Heat Networks Billing Best Practice Guide recommends that bills should be clear, timely and accessible, with transparent pricing information, clear explanations of charges and proactive support for customers experiencing payment difficulties. The guide also encourages suppliers to provide accessible communication channels, clearly signpost complaints and redress processes, and help customers understand whether bills are based on actual or estimated consumption.
Sycous recommends issuing regular bills using actual meter data wherever possible, ensuring customers have access to detailed consumption information and clear explanations of how charges have been calculated. Sycous customers can provide meter readings at any time through mySycous.com, the mySycous Mobile App or by contacting our Customer Support Team. This supports both regulatory compliance and industry best practice.
Wanting a review of your tariffs?
If you know, or believe you might be, under or over recovering on tariffs then we can investigate and provide a tariff analysis, utilising all metering data and current known or estimated costs. We can also help demonstrate the rationale behind tariff calculations, supporting greater transparency and helping operators meet evolving regulatory expectations.
As part of this analysis we will estimate efficiencies of your system based on all available data, helping you understand where further technical investigation may be required as well as recommending a tariff that is in line with your strategy.
We can also help monitor your tariff across a year, to ensure accurate and expected cost recovery occurs, as well as recommending updated tariffs whenever necessary.
Want some more help?
Don’t
worry, we’re happy to spend time supporting you to develop the right
tariff strategy and calculation for your application. Just Get in Touch
with our team and we’ll go through your options, as well as looking at
any ideas or innovations we might be able to incorporate into our Mabdeck Software.
