Q. What is happening?

A. The Heat Network (Metering and Billing) Regulations 2014 (as amended by the 2015 Amendment Regulations, together the Regulations) implement parts of the EU Energy Efficiency Directive which require improvements in the energy efficiency standards of buildings.

Q. Who do the Regulations apply to?

A. The Regulations create obligations for "heat suppliers" and "final customers".

A heat supplier is a person who supplies and charges for the supply of energy to a final customer through a "communal heating system" or "district heat network". In practice a heat supplier is the person who controls the hot water, heating or cooling source in the building. This will usually be the landlord but it can also be a tenant if they control the energy supply to undertenants. Both public and private sector landlords are included within the scope of the Regulations.

A final customer is the person who purchases the hot water, heating or cooling for their own end consumption from a heat supplier. It is usually a tenant.

Q. Do the Regulations apply to all properties?

A. The Regulations apply to all properties with "communal heating systems" and "district heat networks".

The Regulations prescribe that communal heating systems distribute energy for the purposes of heating, cooling or hot water from a central source in a building which is occupied by more than one final customer and so multi-let buildings with two or more tenants will be caught. The Regulations do not apply to owner occupied freehold properties and properties occupied by a single tenant.

Although less common, district heat networks distribute energy for the provision of hot water, heating and cooling from a central source of production through a network to multiple buildings or sites occupied by more than one final customer.

Q. What are the new billing standards created by the Regulations?

A. From 31 December 2014: where individual meters are installed a landlord must ensure that billing is accurate and based on actual consumption, as well as complying with other detailed standards set out in the Regulations. The new standards could create recovery issues for landlords where leases provide that tenants are to pay fixed percentages of hot water, heating and cooling costs. If the annual estimated cost of issuing the bills and billing information is more than £70 per tenant, a landlord will not be required to bill in this way.

Q. What are the primary obligations relating to the installation of meters and measurement equipment?

A. The Regulations require landlords to install meters and measurement equipment as summarised below:

  • From 18 December 2014: existing meters must be replaced with new meters that measure the consumption of heating, cooling or hot water used by each tenant, unless this is technically impossible or the estimated cost would be unreasonable.
  • From 31 December 2016: landlords must install meters to measure the consumption of heating, cooling or hot water by each tenant if it is cost effective or technically feasible to do so. Where these tests are not satisfied, the landlord is required to make a further assessment based on the same criteria at lease every four years.
  • From 31 December 2016: if a landlord falls outside the meter installation criteria, it must install other types of measurement equipment unless it is not cost effective or technically feasible for the landlord to do so. Measuring equipment includes heat cost allocators (which measure energy consumption of radiators), thermostatic radiator valves and hot water meters. Here cost effectiveness is based on a list of specified costs and notional energy savings over ten years. A further determination must take place at least every four years if the equipment is not installed.

Q. What are the notification requirements for landlords?

A. By 31 December 2015: landlords must inform the National Measurement and Regulations Office (NMRO) of specified details of communal heating systems and district heating systems including the annual estimated installed heating capacity, heat generated and heat supplied. Landlords are likely to require assistance from experts to compile this data.

After 31 December 2015: new communal or district heating systems commissioned by landlords must be notified to the NMRO on or before the first day of use and notifications to the NMRO must be updated every four years.

Q. What are the penalties for non-compliance with the Regulations?

A. Breaches ofthe main duties created by the Regulations are subject to criminal prosecution with a fine of up to £5,000 per offence. The Regulations also grant the NMRO a wide remit to impose civil sanctions including a non-compliance penalty and service of a compliance notice.

From 30 April 2015: any failure to comply with the billing requirements could be punished by criminal prosecution.

Q. What will be the wider impact of the Regulations on my portfolio?

A. Landlords are required to comply with the ongoing measurement and notification duties set out in the Regulations. When replacing any existing meters or dealing with new developments landlords will need to be aware of the standards imposed by the Regulations. Following the installation of individual meters and measurement equipment, landlords should review their billing processes and systems to ensure that the new billing standards are met.

Landlords and tenants may wish to review existing leases to determine whether recovery for heating, cooling and hot water costs can take place in accordance with the Regulations. Where new leases and service charge regimes are to be created, the provisions relating to the supply, metering, charging and billing of hot water, heating and cooling should be considered in light of the Regulations.

The Regulations are a complex and evolving area of law. If you would like to discuss the potential impacts on your portfolio, please get in touch with us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.