1. About us
Consumer Scotland is the statutory body for consumers in Scotland. Established by the Consumer Scotland Act 2020, we are accountable to the Scottish Parliament. The Act defines consumers as individuals and small businesses that purchase, use or receive in Scotland goods or services supplied by a business, profession, not for profit enterprise, or public body.
Our purpose is to improve outcomes for current and future consumers, and our strategic objectives are:
- to enhance the awareness of consumer issues by strengthening the evidence base
- to serve the needs and aspirations of current and future consumers by inspiring and influencing the public private and third sectors
- to enable the active participation of consumers in a fairer economy by improving access to information and support
Consumer Scotland uses data, research and analysis to inform our work on the key issues facing consumers in Scotland. In conjunction with that evidence base we seek a consumer perspective through the application of the consumer principles of access, choice, safety, information, fairness, representation, sustainability and redress.
2. Fair pricing
Consumer Scotland supports the introduction of guidance to support heat networks in maintaining compliance as fair pricing regulation comes into effect from January 2026. Any tool which will assist the heat networks industry in driving improvements for consumers should be welcomed. We recognise that implementing fair pricing protections will be a gradual process, and one that will become easier as better evidence and data becomes available, and this guidance will play an important role in the initial phase of regulation. However, it is vital that in addition to this guidance Ofgem continues to develop a more comprehensive approach to compliance monitoring and enforcement. Therefore our support for the guidance, as outlined in our answers below, should be understood within that context.
Questions related to cost-reflective pricing principle
1. Do you agree, partially agree, or disagree with the proposed guidance in relation to the cost-reflective principle?
We agree with the proposed guidance in relation to the cost-reflective principle.
2. How can we improve guidance in relation to the cost-reflective principle?
In our response[i] to the heat networks regulation: fair pricing protections consultation, henceforth ‘the April 2025 consultation’, Consumer Scotland expressed concerns that there could be a gap between prices that are genuinely cost-reflective and prices that are affordable for consumers. For example, we highlighted that consumers experiencing a price shock as a result of increased wholesale gas costs may be genuinely cost-reflective, but not necessarily fair. Whilst this is not addressed directly under the cost-reflective principle, we recognise that this is covered in the link between the cost-reflective principle and the cost-efficiency principle in relation to underlying costs – i.e. prices should be reflective of underlying costs in the former, and that underlying costs should be efficient in the latter, including heat networks’ fuel procurement and hedging strategies. If adhered to, this should ensure that costs which are ultimately borne by consumers are not reflective of inefficient underlying costs.
In response to the April 2025 consultation, Consumer Scotland also encouraged Ofgem to consider the principles as a network or matrix, as opposed to six standalone principles, and we therefore welcome the intersection of the principles in this way.
Questions related to cost efficiency guidance
3. Do you agree, partially agree, or disagree with the proposed guidance in relation to the cost efficiency principle?
We agree with the proposed guidance in relation to the cost efficiency principle.
4. How can we improve guidance in relation to the cost efficiency principle?
In response to the April 2025 consultation, we highlighted that in addition to technical efficiency, consideration should also be given to limiting costs arising from ‘non-technical’ efficiencies. Similarly, Ofgem’s response to the fair pricing protections consultation[ii] references a response which suggested that the regulator focus on enhancing ‘administrative efficiency’ as part of its approach to profitability monitoring. We therefore welcome the inclusion in the draft guidance of ‘other operational efficiencies’ as one of the examples of how heat networks can create cost efficiencies.
References to how other areas of the guidance interact with the cost-efficiency principle are also welcome here in ensuring a holistic approach to fair pricing which is workable in practice – namely restricted pass cost-through, capital cost recovery, and corporate risk.
Questions related to fair and reasonable returns guidance
5. Do you agree, partially agree, or disagree with the proposed guidance in relation to the fair and reasonable returns principle?
We partially agree with the proposed guidance in relation to the fair and reasonable returns principle.
6. How can we improve guidance in relation to the fair and reasonable returns principle?
The expectation that authorised persons should not leverage their monopoly status to earn excess returns is clearly set out and welcome here, but otherwise the guidance does not expand on how heat networks will be expected to apply the fair and reasonable returns principle. Without this, heat network parties may not know what is expected of them in relation to fair and reasonable returns, which in turn could result in sub-optimal outcomes for consumers. Consumer Scotland accepts that the intention of the draft guidance, as set out in its introduction, is for it to be iterative in order to accommodate phased pricing protections and other policy developments – and this is one area which could benefit from that approach. However, we do also recognise that the onus for determining and enforcing fair and reasonable returns ultimately lies with the regulator.
The April 2025 consultation indicated that guidance on elements of the fair and reasonable returns principle would be developed as part of a separate workstream, and we would welcome clarification on whether this is still the case.
Questions related to affordability guidance
7. Do you agree, partially agree, or disagree with the proposed guidance in relation to the affordability principle?
We agree with the proposed guidance in relation to the affordability principle.
8. How can we improve guidance in relation to the affordability principle?
Consumer Scotland has repeatedly stated that heat networks need to be affordable in order to be considered a viable alternative heating solution and so we welcome any action which promotes affordability in the sector. We are particularly supportive of how the guidance outlines expectations on authorised persons to minimise the likelihood and impact of shock bills, knowing as we do that this has been a cause of significant detriment to some heat network consumers in recent years.[iii] The inclusion of examples will be useful in practice, such as communicating the expected costs to consumers in a clear and timely manner, and offering flexible payment and instalment options.
Future iterations of the guidance in relation to the affordability principle could look to expand on the information that is provided on debt, and the inclusion of best practice would be useful here in upskilling the sector on the variety of approaches that are available. Similarly, guidance on the provision of crisis support – such as prepayment fuel vouchers – would also be beneficial here, and would hopefully increase their use by heat network parties.
Affordability is a very important area for consumers and Ofgem should give particularly close attention to monitoring how well heat networks implement the guidance on this issue. The regulator should stand ready to take further action if the guidance isn’t proving sufficient in achieving affordability for consumers.
Questions related to regulatory control guidance
9. Do you agree, partially agree, or disagree with the proposed guidance in relation to the regulatory control principle?
We agree with the proposed guidance in relation to the regulatory control principle.
10. How can we improve guidance in relation to the regulatory control principle?
Consumer Scotland is aware through industry engagement that there are often numerous parties involved in the operation of a single heat network, so it is important the authorised person retains control over the regulatory outcomes. The guidance in relation to this principle is clear because it provides examples of how Ofgem expects authorised persons to achieve this – from having clear contracting obligations with outsourced parties and robust tendering criteria, to strategic alignments through shared objectives. Future iterations of the guidance here will also benefit from learnings post regulation go-live, and the ability to develop examples of best practice.
Questions related to price transparency guidance
11. Do you agree, partially agree, or disagree with the proposed guidance in relation to the price transparency principle?
We partially agree with the proposed guidance in relation to the price transparency principle.
12. How can we improve guidance in relation to the price transparency principle?
In our response[iv] to the heat networks regulation: consumer protection guidance consultation, we welcomed Ofgem’s draft guidance in relation to billing and transparency. We stated that we found this to be relevant to the associated authorisation conditions and useful for addressing many of the challenges consumers may encounter. However, we proposed a correction to the guidance to ensure that consumers in Scotland are signposted to the correct organisation, and requested that Ofgem reviews the guidance within one year of regulation, working closely with Consumer Scotland, Citizens Advice and the Energy Ombudsman.
We welcome the consumer outcomes-focussed approach in the fair pricing guidance in relation to the price transparency principle, but would like to see further detail in future iterations on how industry should apply the principle.
Questions related to the ‘fairness test’
13. Do you agree, partially agree, or disagree with the proposed ‘fairness test’?
We partially agree with the proposed ‘fairness test’.
14. How can we improve guidance in relation to the proposed ‘fairness test’?
The proposed ‘fairness test’ is unchanged from how it was presented in the April 2025 consultation,[v] other than a reference to Ofgem’s response to the consultation regarding the proposed use of statistical and economic models to ensure objectivity. In our response to the April 2025 consultation we stated that the fairness test appeared to be a useful tool for operationalising the fair pricing principles, and this remains our position. Incorporating other key aspects of the proposed protections into the identification stage – i.e. price comparison and benchmarking – helps to envisage the process through which disproportionate pricing could be identified.
Like all aspects of this guidance, we recognise that it is a work in progress, but would suggest that future iterations could be improved by including worked examples of how the fairness test would be used in practice – for example, who is contacted, what data is gathered, what internal analysis is undertaken, and how/what conclusions are ultimately reached.
Questions related to market segmentation
15. Do you agree, partially agree, or disagree with the proposed guidance in relation to the proposed market segmentation approach?
We agree with the guidance in relation to the proposed market segmentation approach.
16. How can we improve the proposed market segmentation approach?
Consumer Scotland welcomes the inclusion of the ‘pricing methodology: cost recovery’ segment here. In response to the April 2025 consultation, we recommended that Ofgem provide clarity on the pricing methodology segment, highlighting that a significant proportion of the heat networks sector operates on a ‘cost recovery’ basis, and therefore questioning whether a ‘profit versus non-profit’ segment realises the policy intention. The inclusion of the ‘pricing methodology: cost recovery’ segment will root the fair pricing guidance in the operational realities of the heat networks sector, making the guidance more useful for users in practice. References to how this applies to features of heat network practice – such as the use of sinking funds – are also useful and have the potential to be further developed over time.
The ‘charges are bundled into rent or service charges’ segment is again welcome on the basis that it reflects the operational reality of the heat network sector – knowing, as we do, that this practice is common. Highlighting the intersection with housing legislation – and the engagement that is being undertaken with UK Government departments to overcome the challenges associated with progressing a policy of unbundling – is appropriate, but it is vital that Ofgem does not overlook the relevant Scottish legislation here. Ofgem has previously committed to work with Consumer Scotland to progress these discussions with stakeholders in Scotland, and it is imperative that this is taken forward at the earliest opportunity.
We do not have specific comments on the other segments, but would generally state that the characteristics included are the correct ones in terms of their relevance to the fair pricing protections.
17. Do you agree, partially agree, or disagree with the proposal that the fair pricing framework would cover all non-domestic consumers, including larger non-domestic consumers?
Consumer Scotland does not take a view on the inclusion of larger non-domestic consumers as this is outside of our remit.[vi]
18. If you disagree with the proposal to include all non-domestic consumers within the scope of the fair pricing protections, please specify what changes you would like to see and provide a justification.
Not answered.
3. Cost allocation
Consumer Scotland has recommended that prescriptive rules should be introduced to determine how metered heat networks allocate costs on bills, including on unit rates and standing charges. This would provide much needed transparency for consumers in an area where practices and service standards vary greatly throughout the sector. This is not currently Ofgem’s position, but we welcome the acknowledgement in the draft guidance[vii] introduction that there is a need for flexibility to keep developing policy, with the balance between prescriptive rules and guidance open to change over time if required. The consultation[viii] states that it does not revisit matters that were settled in the previous publications, with the focus instead being the development of this first iteration of guidance to support the market’s adjustment to the authorisation conditions, and our response to the questions below should be understood within that context.
Questions related to general cost pass-throughs
19. Do you agree, partially agree, or disagree with our approach to cost allocation related to general cost pass-throughs?
Yes we agree with the approach to cost allocation related to general cost pass-throughs.
20. How can we improve guidance for cost allocation related to general cost pass-throughs?
In relation to the cost reflectivity principle, Consumer Scotland’s main concern relates to how costs incurred at portfolio level are ultimately passed-through to end consumers, and whether this is appropriate/fair. We therefore welcome the expectation which is outlined here on authorised entities to ensure that there is a balance between cost reflectivity and affordability. In relation to the cost efficiency principle, we are pleased that Ofgem has highlighted that pass-through costs must be reflective of running the heat network efficiently, and that final consumers must not be disadvantaged by having to pay charges incurred due to inefficient management.
In future iterations of the guidance, the inclusion of examples under the related principles may help to illustrate the policy intention.
Questions related to tariff structure
21. Do you agree, partially agree, or disagree with our approach to cost allocation related to tariff structure?
As per our introductory paragraph to this section, we only partially agree with the approach to cost allocation related to tariff structure.
22. How can we improve guidance for cost allocation related to tariff structure?
The guidance at 2.24 in relation to the cost reflectivity principle is useful as a high-level outline of what costs should be allocated to the standing charges and the unit rate. However, in relation the affordability principle, the reason for the focus on how profit margins are allocated is not immediately obvious and could benefit from clarification. A simpler point around broader cost recovery and financial vulnerability may help to achieve this.
Questions related to depreciation/capital cost recovery
23. Do you agree, partially agree, or disagree with our approach to cost allocation related to depreciation/capital cost recovery?
We agree with the approach to cost allocation related to depreciation/capital cost recovery.
24. How can we improve guidance for cost allocation related to depreciation/capital cost recovery?
Consumer Scotland does not have substantive comments here, but we agree that depreciation methods and how these impact pass-through costs to consumers merits inclusion. We also agree that segmentation is likely to be a useful tool here given the variance in physical assets, and therefore the nature of depreciation, across different network types.
Questions related to bad debt
25. Do you agree, partially agree, or disagree with our approach to cost allocation related to bad debt?
We partially agree with the approach to cost allocation related to bad debt.
26. How can we improve guidance for cost allocation related to bad debt?
The guidance does not include a definition of bad debt, and including one would be useful for guidance users who are engaging with the concept for the first time.
As per 2.52 of the guidance, consideration needs to be given to how bad debt costs are recovered across the broader customer base. In the gas and electricity sectors, bad debt is socialised across the entire market through an allowance in the price cap – an approach which cannot be replicated in the heat networks sector. For example, recovering bad debt costs through customer bills on a small communal scheme would have different impacts on the broader customer base than it would on a larger district heating scheme. Whilst guidance here is welcome, and will be useful to heat network parties having to tackle the issue of bad debt in the initial stages of regulation, we recommend that Ofgem needs to take a lead in developing a longer-term solution on this issue, with less onus on authorised persons being expected to take appropriate actions.
Questions related to corporate risk
27. Do you agree, partially agree, or disagree with our approach to cost allocation related to corporate risk?
Not answered.
28. How can we improve guidance for cost allocation related to corporate risk?
Consumer Scotland does not take a view on the validity of the guidance on corporate risk other than to highlight that the recovery of any capital costs should be efficient and done fairly – including the use of sinking funds and other such mechanisms.
Questions related to fuel procurement
29. Do you agree, partially agree, or disagree with our approach to cost allocation related to fuel procurement?
We agree with the approach to cost allocation related to fuel procurement.
30. How can we improve guidance for cost allocation related to fuel procurement?
In response to the April 2025 consultation, we stated that Ofgem should set out its approach to monitoring input fuel costs in order to start driving down prices across the sector. We therefore welcome the focus on fuel procurement in the fair pricing guidance. As alluded to in our response to question 8, shock bills arising from poor fuel procurement practice has been a feature of the consumer experience of heat networks in recent years, and therefore efforts to start driving improvements in this area are a positive first step. The examples outlined in the guidance under the associated fair pricing principle will be useful to heat network parties engaged in fuel procurement activity, and this is an area where guidance can continually evolve – including best practice – as Ofgem’s understanding of the array of approaches used in the sector improves.
Questions related to fair and reasonable returns
31. Do you agree, partially agree, or disagree with our approach to cost allocation related to fair and reasonable returns?
We partially agree with the approach to cost allocation related to fair and reasonable returns.
32. How can we improve guidance for cost allocation related to fair and reasonable returns?
Please see our answer to question 6 for feedback on how the guidance in relation to fair and reasonable returns could be improved. As per our answer to question 16, we welcome the confirmation here that the guidance in relation to fair and reasonable returns will not apply to heat networks which operate on a strict cost recovery only model.
Questions related to penalties and redress
33. How can we improve guidance for cost allocation related to penalties and redress?
We are satisfied with the guidance for cost allocation related to penalties, redress and fines, and how this interacts with the prescriptive rule. For our views on the policy content, please see our response[ix] to the heat networks regulation: enforcement guidelines and penalty policy consultation.
Questions related to legacy arrangements
34. Do you agree, partially agree, or disagree with our approach to cost allocation related to legacy arrangements?
We agree with the approach to cost allocation related to legacy arrangements.
35. How can we improve guidance for cost allocation related to legacy arrangements?
Consumer Scotland accepts that some heat networks will have legacy arrangements that may require them to deviate from the proposed approach to cost allocation. We agree with the guidance at 2.103 which states that authorised persons should consider evaluating to the best extent possible whether there is a need to deviate from the proposed guidance in order to comply with a temporary legacy arrangement or requirements, with the goal of moving towards the proposed cost allocation guidance approach as soon as possible. Something which would take this one step further, and may be worthy of consideration as the fair pricing protections evolve, is a requirement on authorised parties to work with Ofgem on a timescale for resolution of the legacy arrangement and, in turn, the end of the deviation from the proposed cost allocation approach.
Questions related to connection charges
36. Do you agree, partially agree, or disagree with our approach to cost allocation related to connection charges?
We agree with the approach to cost allocation related to connection charges.
37. How can we improve guidance for cost allocation related to connection charges?
Consumer Scotland agrees that where connection charges are being recovered through bills – and where this approach has been agreed by the consumer – this should be allocated to the standing charge as it is a fixed cost.
In response to the April 2025 consultation, we welcomed Ofgem’s commitment to collect data on connection charges, as we felt that this is an area where industry practice could be better understood. For example, what costs are levied to new and existing customers and what does this/does this not pay for. As the evidence base on connections charges improves, there will be an opportunity to further develop the guidance in this area.