Question:
If several pots are sitting on a blech, may one place a single large towel around all of the pots together, covering their sides in order to help retain the heat?
Answer:
On Shabbos itself this is forbidden to do so due to the prohibition against performing any form of Hatmana on Shabbos, which prohibits even covering a single pot on top iof its cover with a towel. However, regarding if this may be done before Shabbos, this matter is subject to debate among the Poskim.
Some Poskim record a custom of being lenient and argue that perhaps it is permitted to do so. They suggest that the decree of hatmanah applies only when the insulation directly surrounds the sides of an individual pot. In the case of multiple pots covered together, one can argue that this was never included in the original Rabbinic prohibition.
However, these same Poskim question this ruling and custom and argue that perhaps it is forbidden to do so and so indeed conclude other Poskim of today. They explain that although the towel does not surround each pot individually, this nevertheless resembles a normal form of insulation (hatmanah). Accordingly, all of the pots are viewed collectively as one large vessel, and since the towel surrounds their outer sides while they sit on a heat source, this falls under the prohibition of Hatmanah B’davar Hamosif Hevel (insulation in a heat-enhancing manner).
Practical Ruling
Since this matter is subject to debate and remains in doubt, one should preferably avoid even before Shabbos wrapping a towel around multiple pots on a blech in a manner that covers around the entire sides of the pots but rather only up until half way of their walls. On Shabbos itself even this remains forbidden to be done.
Sources
Regarding Issur Hatmana before Shabbos: Admur 257:1, 10; Mahadurah Basra 259; Shulchan Aruch O.C. 257:1, 8; Magen Avraham 257:18; Mishnah Berurah 257:43, 69; Chayei Adam 4:22;
Regarding Specific Question of many pots in one towel: Ketzos HaShulchan 71 footnote 48 records both sides of the debate in theory being Milameid Zechus on those lenient although then concludes in parentheses with a Tzaruch Iyun; Piskei Teshuvos 257 footnote 14 and Orchos Shabbos 2:85 rule stringently