Zones/RABs and heat networks: The path to an investible infrastructure asset class?

It’s an enticing proposition: guaranteed customer bases in each zone, ripe for financing and scaling.

The Government has been piloting zoning. They have developed models including the golden share and development agreement model.

These are credible and meaningful means to enable zone coordinators to offer oversight over future monopolies.

However, as this nascent regime comes into view with the dual goal of both protecting customers (both commercial and domestic and enabling financeability) a question arises as to whether critical protections could be delivered in additional ways.

Why zoning transforms customer bases into investments

Foundational demand

Within heat zones, new builds and high‑demand buildings (e.g. hospitals, offices, industrial sites) are required to connect, guaranteeing a dense anchor load early on.

Zonal monopoly structure

Zones create natural monopolies for operators – once a zone is awarded via licence or concession, that operator becomes the sole provider, perfectly suited to regulation.

This built‑in demand and exclusivity make zones genuinely investible compared with ad‑hoc network schemes.

The limits of golden share and public‑sector models

The Advanced Zoning Programme (AZP), underway in cities like Leeds, Plymouth, Southwark, and London boroughs, pilots models including golden‑share governance,where local authorities maintain strategic oversight without daily operational control.

These give public agencies visibility and some veto but one wonders about how much they can be used to enable future price regulation or network build out.

Perhaps that is deliberate. Perhaps that is now Ofgem’s job. However much of the initial regulation set out in the draft authorisation conditions was based on (and understandably) focussed on residential customers.

That regime seems less well suited to ensuring that commercial customers – typically charged bespoke tariffs—enjoy some degree of price protection.

Ofgem’s incoming regulatory role (from 2025/26 under the Energy Act 2023) covers consumer pricing, emissions standards, and performance quality.

These safeguards are vital,but may not fully address the commercial‑customer risk, especially where bespoke heat contracts and network expansions are involved.

Could a Regulated Asset Base (RAB) boost investor confidence?

The RAB model – already established in water, energy, nuclear, sewer, and CO₂ networks – offers a compelling third way.

It treats essential infrastructure as evergreen assets, with regulated returns on approved capital, indexed to inflation, and robust mechanisms for cost recovery .

Key RAB features that map neatly onto heat zones include:

Evergreen Asset Model

Networks are funded incrementally and indefinitely, permitting extensions and upgrades over long timeframes.

Shadow/Forward‑looking RAB

Like CCUS, a “shadow RAB” could log investment during build, transitioning to returns once operational.

Regulated Tariffs & Periodic Reviews

Rates set to recover efficient costs, depreciation, and authorised return (WACC)—with regular resets to secure financing and affordability.

Demand Risk Mitigation

In extremis, tools such as difference payments or connection guarantees could protect revenues during early phases or demand uncertainties.

Adapting RAB could solidify investor certainty: heat network operators within zones would know they can recover investment with a regulated yield, even before full ramp‑up. Residential, public‑sector, and commercial stages would all benefit.

A High‑Level Roadmap for Integrating RAB with Zoning

Embed RAB in Zone Concession or Licence

Award zone licences with RAB principles written in: regulated revenue formula, depreciation path, review cycles, and ring‑fence provisions.

Enable Forward‑looking/Shadow RAB

Allow costs incurred during initial build to be logged and yield authorised, lowering early phase financing risk.

Protect Commercial Customers

Ensure regulated tariff oversight extends beyond domestic to commercial users; consider mandatory difference‑payment schemes.

Establish Institutional Framework

Ofgem or a designated Zone Coordinator oversees the RAB regime, administers performance obligations, conducts reviews, and steps in for underperforming operators.

Complement Governance Models

Golden shares and public ownership models remain beneficial for oversight—but RAB provides the financially credible backbone for sustained investment and risk sharing.

Conclusion

Heat network zoning promises a transformative shift – defined zones, required connections, and a mandated customer base – lay the groundwork for a new asset class.

However,  without equally transformative financial models, zones alone may falter in attracting large-scale capital.

Pairing zoning with a RAB-style regulatory framework could be the answer. It aligns incentives, limits risk, ensures cost recovery, and safeguards customer interests – commercial as well as domestic.

By marrying zoning’s capture of demand with RAB’s long-term financing mechanisms, the vision of investible, low‑carbon heat networks becomes within reach,helping the UK heat networks scale effectively on the path to net zero.

Steve Gummer is a partner and Oliver Slater an associate at Sharpe Pritchard