Tariffs · Methodology

Heat network tariff methodology — what it is and what it must cover

A heat network tariff methodology is a written, documented explanation of how your unit rate and standing charge are calculated. Without one, your tariff cannot be justified to Ofgem, the Energy Ombudsman, or residents who challenge your charges.

What a tariff methodology is

A tariff methodology is not a spreadsheet. It is a written document that explains, in plain terms, the cost basis for every element of what residents pay. It covers how you identified the costs to recover, how you allocated those costs to the heat supply function, and how the resulting figures translate into the unit rate (p/kWh) and standing charge (£/year) on residents' bills.

A methodology document serves three purposes: it disciplines your tariff-setting process, it provides the evidence base if your charges are challenged, and it satisfies the documentation requirements under Ofgem's fair pricing framework.

Why Ofgem's fair pricing framework requires one

Ofgem's fair pricing framework requires heat network suppliers to demonstrate that tariffs are fair, transparent, and based on properly allocated costs. Demonstration requires evidence. A verbal explanation or convention-based pricing ("we've always charged this") is not sufficient. The methodology document is the evidence.

Operators who cannot produce a written methodology are exposed to adverse findings if a resident complains to the Energy Ombudsman, and will face difficulty demonstrating compliance during Ofgem authorisation. The authorisation deadline is January 2027.

What a compliant methodology must cover

Unit rate calculation basis

The unit rate (p/kWh) must be traceable to actual fuel costs, adjusted for plant efficiency and distribution losses. Your methodology must document:

• The fuel or energy source (gas, electricity, biomass, heat pump) and its current contracted rate
• Plant efficiency — what proportion of input fuel becomes usable heat
• Distribution losses — the difference between heat generated at the energy centre and heat delivered to customers' heat interface units
• How these factors combine to produce the cost per kWh delivered to residents

Standing charge components

The standing charge must be broken down by cost category. Each category must be documented and justified as a legitimate overhead of the heat supply operation. See the standing charges guide for what Ofgem's rules permit and what cannot be included.

Cost allocation approach

Where your site has multiple cost types or shared infrastructure, you must document the basis on which costs are allocated to the heat supply function. Common allocation bases include floor area, connected load, or metered consumption. Whatever basis you use, it must be documented and applied consistently.

Annual review process

A methodology that has not been reviewed is a methodology that has drifted from reality. Document the process by which you review your tariff at least annually: what data you use, who reviews it, what triggers a mid-year review, and how changes are communicated to residents.

Resident communication requirement

Your methodology must include a documented process for notifying residents of tariff changes with adequate notice. Ofgem's authorisation conditions set minimum notice requirements. Undocumented or late notification of price changes is a compliance failure.

Common errors operators make

• Tariff set by precedent — "last year's rate plus inflation" is not a methodology. It does not trace the charge to actual costs and cannot be defended.
• No cost base — a unit rate calculated from a benchmark or estimate rather than your actual contracted fuel costs is undocumented.
• Capital costs in the standing charge — including boiler replacement, pipe renewal or major HIU replacement in the annual standing charge conflates capital and operating expenditure. These are separate cost categories.
• Unreviewed methodology — a methodology document that is more than 12 months old and has not been updated against current costs is a compliance risk.
• No distribution loss figure — the difference between heat generated and heat delivered is real, measurable, and must be documented. Omitting it produces an understated unit rate that does not reflect actual supply costs.

How the HNC tariff platform structures your methodology

The HNC tariff platform guides you through each component of your tariff methodology in a structured format. You enter your fuel costs, efficiency figures, distribution loss data, and cost categories. The platform calculates your compliant unit rate and standing charge, and generates the written methodology document that records how you arrived at them.

The output is a document structured for regulatory review — covering unit rate basis, standing charge breakdown, cost allocation rationale, and annual review process — in a format Ofgem can examine.

Frequently asked questions