carbon limited

I posted this on LinkedIn on 8 July 2026. Adding here for completeness. Utility Week then picked up the story and wrote this.

Remember the first time ESCOs appeared in the UK?

It was around 2007. Building regulations had begun to tighten and the government set out plans for all new homes to be zero carbon by 2016. Audacious planners began to flex their muscles, ratcheting up targets for onsite renewables. Developers, riding high on a property boom with no end in sight, were desperate to get on and build – in the same old way as they’d always done. They hated these new requirements for higher efficiency and low carbon energy.

Enter the ESCOs: onsite energy companies, big and small, promising to take the cost and headache away. They would design, build, own and operate onsite energy schemes for 25 years or more. And best of all, many ESCOs promised to pay the developer a cold lump of hard cash (called a capital contribution) for the privilege.

Everybody was a winner.

Except the resident.

Because the money for the capital contribution didn’t come from nowhere. It came from future heat customers, trapped on monopoly heat networks, repaying that contribution through standing charges for 25 years or more. Sounds bad enough. But it gets worse because there’s interest on top. In other words, the cash that the ESCO gave to the developer was really a loan, but it was the residents who had to repay it, at a potentially exorbitant rate of interest.

Following its investigation into the heat network market in 2018, the Competition and Markets Authority (CMA) warned that this arrangement gives developers an incentive to choose the ESCO offering the biggest cheque, rather than the best long-term price and service for customers.

The capital contribution model whispers in the developer’s ear: don’t worry so much about lifetime cost, customer service, resilience, efficiency or transparency. Look at the cheque! Don’t worry, the people who will ultimately pay aren’t in the room. They’ve not bought the flat yet. They don’t know the tariff yet. They won’t be able to switch supplier later.

In their 2018 report, the CMA considered calling for an outright ban on capital contributions, but in the end pushed for the establishment of a heat network regulator instead and left the problem to them.

Ofgem is now that regulator.

Since the CMA report, many ESCOs have moved away from using capital contributions. But there are signs that the practice is creeping back into parts of the market. If Ofgem doesn’t act, there’s a risk that the well-behaved ESCOs will be forced to start offering capital contributions just to stay competitive.

The new regulatory regime already prohibits unfair and disproportionate pricing in principle. Ofgem’s Heat networks fair pricing and cost allocation guidance includes a sentence that suggests capital contributions could fail its fair pricing test, but it leaves too much room for interpretation:

“As explored in the 2025 fair pricing consultation, disproportionate corporate risk includes practices such as…  improper recovery of significant initial capital costs during the development phase.”

This is unhelpfully loose. What counts as improper? What counts as significant? Ofgem should clarify that capital contributions of any size from ESCOs to developers cannot be recovered from domestic heat customers.

Developers should pay for and deliver the infrastructure required by their planning consent and building regulations. They already recover development costs through land value, sale price or rent. And residents already have a low-interest way of financing the cost of their homes and the infrastructure that comes with them: their mortgages.

ESCOs should compete on what residents actually need: low cost, reliable service, good metering and billing, transparent tariffs, competent operation, decarbonisation and the ability to be replaced should they fail.

They should not compete on how much money they can advance to the developer and claw back from captive customers over the next quarter century.

This is an important test for the new heat network regulations. We shouldn’t dance around the issue. It’s not enough that capital contributions should be disclosed, benchmarked or somehow reflected more transparently in tariffs. The question is whether charges to domestic heat customers should include the recovery of payments made to developers in order to win long-term monopoly concessions.

The answer must be no.