New homes trap owners in high-cost energy deals

Esther Press, 33, with her son Cassiel, pays a standing charge of £1.02 per day for the one-bedroom flat she owns in a development in London
Esther Press, 33, with her son Cassiel, pays a standing charge of £1.02 per day for the one-bedroom flat she owns in a development in London

Thousands of homeowners are locked into expensive heating contracts with no option to change providers because of an unregulated government green-energy initiative.

People whose homes have communal heat networks are being charged up to four times their previous energy bills because their development has one communal heat source, usually a biomass boiler or heat pump.

The tariff is set by developers or managing agents and energy providers and, in some cases, is locked for ten years. There are more than 14,000 heat networks providing warmth and hot water to nearly half a million consumers. In London, all new large developments must be attached to a heat network, and by 2025, all new homes nationwide must be powered by low-carbon systems. The rules aim to help to hit the government’s 2050 target for net zero emissions.

Last year Kwasi Kwarteng, who was minister of state at the Department for Business, Energy and Industrial Strategy, said that they were “playing a vital role in decarbonising the way we warm our homes and businesses”, with funding available from two sources.

Industry experts, campaigners and residents are now calling for ministers to regulate the industry to ensure fair pricing for all consumers. Residents’ costs are split into a charge per kilowatt-hour (kWh), for the energy used, and a standing charge. In some cases the standing charge is £1 a day, meaning residents are facing bills of at least £30 a month before they have switched on their heating. Suppliers say that the standing charge reflects the cost of maintaining the systems and that it is cheaper than running a gas boiler, but a comparison of prices suggests that this is not always the case.

There are caps on how much energy companies can charge the wider public for electricity and gas. Campaigners want a cap for the cost of heat for communal heat networks.

This is the latest problem to hit leasehold owners of flats, many of whom are also facing big bills to replace flammable cladding. Many must also pay higher insurance premiums to cover “waking watch” fire wardens to patrol their buildings 24 hours a day. These charges, and delays in getting certificates to sign off buildings as safe, have left many struggling to sell their flats or needing to borrow money to pay for repairs.

An investigation into the Phoenix Works development in Tower Hamlets, east London, by Fuel Poverty Action found that residents were paying 13.77p per kWh for heat, which for the average two-bedroom flat would cost £822 a year, although some residents were paying more than £1,200. The average annual cost of gas for a three or four-bedroom house is £572.

Fuel Poverty Action is urging the managing agent, KFH, the developer, Fairview Homes, and the energy provider, Ista Energy, to reduce the costs to make the heating cheaper.

Ruth London, of Fuel Poverty Action, said: “Legislation is urgently needed to bring more transparency and prices must be linked to what residents can afford . . . Cold destroys health and relationships, and it kills thousands every year, even more in a respiratory pandemic.”

The managing agents say that heat networks can be an affordable, energy-efficient alternative to gas boilers when installed correctly, but they suggest that high charges in some developments are a result of having to recoup the costs of inefficient and poorly designed and implemented systems.

Steve Turner, of the House Builders Federation, said: “Developers don’t have a choice but to install these networks because of government regulations so they go into agreements with energy providers who want a return on their investment. They won’t invest half a million in upfront cost unless they can tie people in for X number of years to get the funding back. From a consumer perspective you can see how there could be a frustration because they are tied in but from the energy provider’s perspective, they wouldn’t be funding it unless they have a secure return.”

One of the key complaints is a lack of transparency about who is responsible for setting tariffs, and many residents are passed back and forth between the energy providers and their management company when complaining.

Ista said: “We are the billing agent and therefore have no control or responsibility for the tariff — this is set by the supplier.

“We take our instruction from the controllers of the management company – this will include tenant representation. Therefore there is no ‘dispute’ with Ista due to the fact we have no direct commercial relationship with the tenant – all monies collected are on behalf of the management company.

“When residents make contact with Ista we are able to advise them with regards to their energy consumption or their understanding of the bill, but all issues relating to the charges themselves are the responsibility of the management company.”

KFH said that it was wrong to compare heat network prices with standard gas tariffs. “We understand that the gas was arranged during the build by the then management company directors, with an estimation for the communal system efficiency,” it said.

“Initial heat tariff rates for Phoenix Works were based upon a number of factors in line with the Heat Network (Metering and Billing) Regulations 2014. KFH has been provided with the billing agent data upon which the initial heat tariff appears to have been set. We can confirm that following building completion and the initial full occupancy period, a full review of the heat charges was undertaken during February 2020 and approved by our client.

“The review indicated the plant efficiency being closer to 45 per cent, rather than the initial estimate of 37.5 per cent. In line with the renewal of the gas supply agreement, the heat tariff was further reviewed in September 2020 which resulted in a further reduction in the heat tariff rate. This will subsequently be reviewed annually.”

A government spokesman said: “Heat networks play a vital and cost-effective role in our efforts to decarbonise heat and we are committed to supporting their development and deployment as part of our plan to end our contribution to climate change by 2050.

“We are looking to regulate the heat networks market, which will include consumer protection rules to ensure a reliable supply of heating and hot water at a fair price.”

Case studies
Shapla Ali, 38, had to move out of her flat in the winter of 2019-20 as she could not afford to heat it (Andrew Ellson writes).

Ali, who has five children, was spending up to £150 a month on heating her three-bedroom flat in east London. “I was hardly putting the heating on as these new-build flats are warm enough, but I was still having to top the meter up with £20 every couple of days.

“After a while I couldn’t afford to keep paying so I moved in with my brother.”

She was away for two months but when she returned owed £300 on her meter. “I called the energy provider, Ista, but they just said they could see there had been usage on their system. They couldn’t explain it.”

Ali and other residents complained to KFH, the management company, who directed them to Peabody, their housing association. It said it had nothing to do with setting the rates and referred them back to KFH and Ista.

“Nobody would give you an answer and you’d just be going around in circles and being passed from person to person, all the while feeling anxious about paying your heating bill,” Ali said.

Residents were eventually told they had been overcharged and were promised a refund and a lower tariff. Ali received a partial refund of £192 a year later, but even on the amended tariff she pays more than double the average monthly gas bill for a comparable property.

Esther Press, 33, owns a one-bedroom flat in a London development where residents are charged £1.02 per day standing charge. She said: “I spend about £45 a month on heating and I only have a small flat.”

Her development contains 252 homes, all paying the charge, meaning the management company gets almost £94,000 a year, which experts say is not representative of the cost of maintenance. After complaining about the cost to her management company, which is owned by the developer Linden Homes, Press, was told that the standing charge was so high due in part to “the cost . . . of chasing debts”.

She was also told that after taking boiler maintenance and installation into account, the network was cheaper. “But even if you buy insurance and have an annual service you’re still not anywhere near the amount we pay,” she said.

Although the high standing charge came as surprise to Press when she received her lease, she says her biggest complaint is that the heat network was sold as a competitive, affordable and ecologically better alternative to a gas boiler, which she believes is misleading.

Linden Homes said: “The standing charge and rate per kWh reflects the supply and maintenance of the system.

“The energy centre is a planning requirement, imposed by the local authority, and St Clements Site Management makes no profit from the energy centre.

“The standing charge and rate per kWh reflects the supply and maintenance of the system and all money goes into the running and maintenance of the service.

“This development has a number of sustainability features of which the energy centre is one, feeding a district heat network to supply communal heat and hot water to 252 homes.

“As per the plans, the energy centre will eventually be handed over to residents via the transfer of St Clements Site Management when the development is completed later in the year.”