District heating (DH) tariffs vary between heat networks, between cities, and between the EU-Member States. This article compares average tariffs in four Member States: the Netherlands, Denmark, Germany, and Sweden.
By Pieter Verstraten, Junior Scientist Innovator at TNOand Annelles Huygen, Professor at the University of Utrecht and Principal consultant at TNO
International comparisons are useful for various reasons. First, comparisons empower consumers, who spend a substantial portion of their energy on energy. Second, comparisons of tariffs may provide preliminary insights into differences in the energy supply costs, the energy companies’ efficiency, the effect of local or national policies, and the effect of innovations.
But comparing is hard.
Comparing tariffs for DH is more complicated than for other commodities, such as gas and electricity. Gas and electricity have international markets, and it is easy to separate unit costs from infrastructure costs. On the other hand, heat markets are local, and separating unit costs of energy from the infrastructure costs is difficult.
Although heat companies split their tariffs into variable and fixed parts, different companies calculate these using other methods. As a result, fixed tariffs do not necessarily reflect infrastructure only, and variable tariffs do not necessarily correspond with unit heat costs.
The variable part is the tariff per heat unit (e.g., per MWh or GJ). In many networks, variable tariffs are constant throughout the year. Still, in other networks, they depend on the season, outside temperature, or peak or off-peak timing of the energy consumption.
Fixed tariffs are also determined in different ways: the same for every residential consumer, dependent on the surface of their houses, the maximum capacity of their connection, or the efficiency of the user’s installations (the so-called ‘bonus-malus scheme,’ delta T or spread).
Methods to set tariffs vary between companies and between the Member States. The Netherlands, for example, has maximum tariffs based on the tariffs for natural gas, Denmark has cost-based tariffs, and Germany has no regulation at the national level except the general competition rules.
How to compare the tariffs?
Member States and branch organizations regularly publish the average yearly heat bill, albeit with many differences in reporting. The Netherlands reports the average demand of a DH customer (7 MWh) and the tariffs (fixed and variable separately), which are more or less the same throughout the country. DH companies generally use the same methodology of heat pricing as the regulator ACM sets them. Therefore, it was possible to calculate the average annual heat bill. Germany and Sweden report the average yearly bill for the average annual demand by residence type. As most DH customers live in apartments, we chose this category (heating demand of 9 MWh for Germany and 13 MWh for Sweden). Denmark reports the average bill for the standardized demand of 18 MWh, a higher figure than the actual average demand for heat. Since all reported data in Denmark is based on this standardized demand, this was still used and not the actual average demand.
For our first analysis, we compared the average yearly bill for the demand reported by the country. Figure 1 shows that countries with lower temperatures in winter and higher demand have higher annual heat bills. This makes sense; buying more units of energy costs more. The Netherlands and Germany have the lowest heating bills, reflecting their low demands. Apartment buildings are the most common residences connected to DH.
Annual heating bills need to better reflect the cost of DH. The main reason for the differences seems to be the differences in heat demands. To have a fairer comparison, we compensate for the differences in heat demands. We divide the average yearly bill by the associated demand to give us the tariff per MWh. Table 1 and Figure 2 show the results: the tariffs per MWh are the highest in the Netherlands (€144), followed by Germany (€104) and Denmark (€93), and lowest in Sweden (€ 87).
Although these tariffs are standardized, the comparison is still somewhat sensitive to differences between countries. If the heat usage is high, the fixed part of the tariffs is divided over many units, resulting in a lower average tariff per unit. Fixed costs then have a smaller effect on the unit price. Further, heat losses may be lower. Due to the variation in reporting, we could not account for these differences. However, the ratio between fixed and variable costs typically has a 30/70 distribution: 30% of the annual heating bill comes from fixed costs and 70% from variable costs. Therefore, the tariff differences in Table 1 and Figure 2 are unlikely to be fully explained by these differences in heat usage between countries.
What can we conclude?
The observed variations in integral heat tariffs per MWh are rather high: the highest integral tariff (The Netherlands) is 65% higher than the lowest (Sweden).
Identification of this difference is the first step towards understanding it. Comparing heat tariffs is already tricky, let alone investigating the root causes of these reasons. The root causes probably include the costs of heat sources, capital, and networks; these vary per heat network and country. Other root causes are the used techniques and efficiencies. The type of buildings influences infrastructure costs: supplying detached houses is more expensive than supplying apartments. Local and national subsidies and taxes also play an essential role.
Our ideas for further research
In an ideal world for economists, the prices of a product reflect their costs. This research shows that average DH tariffs in the Member States differ considerably. The first question is: do the costs of heat supply also vary to such an extent between the Member States? Are they the result of differences in heat sources, capital costs, costs of the infrastructures, heat density, heat losses, temperature differences, the efficiency of companies, profit margins, and so on?
Or are the differences the consequences of other factors, such as subsidies or taxes? An inquiry into the costs of heat networks in different Member States would be a valuable next step. Such a study will undoubtedly provide valuable lessons for all Member States.
For further information, please contact: Pieter Verstraten, email@example.com
This article is based on: Annelies Huygen, Jacob Janssen, Pieter Verstraten, Eva Winters (2021) Warmte in Nederland is een stuk duurder dan in andere Europese landen, ESB, 30 april 2021.
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