How Ofgem's January 2026 final-determined Authorisation Conditions shape fair pricing and cost allocation obligations for heat network operators and suppliers.
The Heat Networks (Market Framework) Regulations 2025 brought heat network pricing under Ofgem's regulatory authority for the first time. The substantive pricing obligation is split between two Authorisation Conditions: AC A6 (Fair Pricing) and AC A7 (Cost Allocation).
AC A6 requires that charges imposed on Applicable Consumers are fair and not disproportionate. The condition is interpreted in accordance with guidance published by Ofgem for the purposes of A6. The guidance makes provision about how the Authority determines whether charges are fair, and gives examples of methods the Authority may use to make that determination.
The condition does not apply where the authorised person carries on regulated activities only in relation to Industrial Heat Networks or Self-Supply Networks. Where activities are carried on in relation to both Industrial/Self-Supply networks and other relevant heat networks, the condition is construed as not applying to the Industrial/Self-Supply activities.
Note that, unlike the financial-resilience conditions, fair pricing has no exemption for local authorities or registered social housing providers. AC A6 and AC A7 apply to local authority and housing-association heat network operators in the same way as to any other operator; only industrial and self-supply networks are out of scope.
AC A7 requires that charges imposed on Applicable Consumers are structured, and are attributable to costs, in a way that is consistent with the outcome of charges being fair and not disproportionate, having regard to Ofgem's published cost allocation guidance.
Critically, A7 prohibits the pass-through of "relevant payments" — any penalty imposed under Regulation 31, any amount payable to a consumer under a consumer redress order, and any specified compensation amount payable for failure to meet service standards. Charges attributable to relevant payments are presumed unfair and disproportionate, except in exceptional circumstances set out in guidance.
The same Industrial/Self-Supply exemption that applies to A6 also applies to A7.
Heat network pricing is monopolistic by nature — consumers cannot switch supplier — so the regulatory framework substitutes consumer choice with documented justification. Operators need to be able to show, on demand, that their tariff methodology produces fair, cost-reflective charges and that no relevant payments are being recovered from consumers.
A cost-reflective tariff accounts for all legitimate costs of heat production and delivery: fuel costs (gas, electricity, biomass, or other energy sources), plant efficiency (the conversion losses in your boiler, heat pump, or CHP system), distribution losses (heat lost through pipework between the energy centre and the consumer's dwelling), maintenance and repair costs, metering and billing costs, management and administration costs, capital investment recovery, and a reasonable return on investment. Each of these elements must be quantifiable and justifiable.
Ofgem assesses whether prices are fair and not disproportionate through a "fairness test." Rather than setting fixed acceptable price or return levels, Ofgem applies the six fair-pricing principles together with benchmarking — comparing a network's prices against those of similar networks (comparator benchmarking), against alternatives, and against the network's own historical prices — and a profitability assessment. Operators are not required to adopt any single pricing methodology: some set prices directly against costs, while others use a "price promise" (cost-avoidance) model that references a counterfactual. Either is permitted provided the resulting prices are fair and not disproportionate. What matters is that the operator can justify its prices against the fair-pricing principles on demand — if it cannot, the prices may be regarded as not fair and disproportionate, exposing the operator to enforcement.
Operators who cannot demonstrate a defensible methodology face enforcement action including financial penalties of up to £1 million or 10% of annual turnover, consumer redress orders, and reputational damage in a regulated market.
The Heat Network Compliance platform generates an AC A6 fair pricing policy and an AC A7 cost allocation policy as core templates in every licence tier. The accompanying Tariff Review Procedure (operational sibling of A6/A7) documents the annual tariff review cycle, price change implementation, and consumer notification process under AC B3 (Contract Changes Information).
For the underlying tariff modelling — fuel costs, plant efficiency, distribution losses, maintenance, margin, unit rate and standing charge calculation — the free Heat Network Tariff Calculator at tariff.heatnetworkcompliance.co.uk produces a board-ready PDF report aligned to AC A6 and AC A7.
The Heat Networks (Market Framework) Regulations 2025 commenced on 27 January 2026. AC A6 and AC A7 came into effect alongside the rest of the framework on that date. Formal registration with Ofgem must be completed by 26 January 2027.
Free tariff modelling tool — fuel costs, plant efficiency, distribution losses, margin, unit rate and standing charge. Board-ready PDF aligned to AC A6 and AC A7.
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