For enabling district heating (DH), consumers’ trust and acceptance are necessary. Therefore, DH projects should be based on socioeconomic viability and an aim for the societal common good. Price and ownership regulation should address consumer acceptance and protection, companies’ access to capital and associated risk, and the need for long-term, strategic energy planning at a local level.
By Søren Djørup, NORCE Norwegian Research Centre
The article was published in Hot Cool, edition no. 3/2021.
The green transition of energy systems is putting DH on the agenda worldwide. This quickly leads us to the question of DH regulation. This policy question is vital for establishing new DH areas due to the tremendous technical potentials for more efficient and sustainable energy supplies. For example, several studies have documented vast possibilities across the European continent.
When implementing DH systems, consumers’ trust in the project and their acceptance of connecting to the grid as a technical monopoly is necessary. Denmark has a high share of DH and many years of experience with DH regulation. This short piece will describe some overall regulatory measures that have been in place to create social acceptance of Danish DH systems. For example, the ownership models have played a central role and created synergies with other regulatory measures to create a well-functioning, widespread, and publicly accepted infrastructure. One may wonder if the sector has been so successful that its regulators sometimes forget its regulatory roots.
The Danish DH consumer ownership model often gains international attention as it is super efficient in Denmark. At the same time, private commercial companies have avoided the monopoly price regulation and inflated consumer prices. The consumer ownership model has played a vital role for the price regulation to succeed, thereby helping consumers trust and accept the DH systems in Denmark.
- While a sustainable transition of the energy systems is dependent on DH, the Danish experiences show that
DH is dependent on consumers’ trust - Consumers’ trust is dependent on an efficient price regulation
- An efficient price regulation has been dependent on ownership
However, besides understanding the mechanisms of ownership models, it is also essential to know how these ownership models work in an ‘ecosystem’ of regulatory measures — a system of measures that, through their synergies, have promoted a socioeconomic and environment-friendly use of energy.
A key message for building a well-functioning heating regulation that serves the purposes of society is that it should have a legislative basis that explicitly states this purpose. National legislation for the heating sector plays an essential role in creating the foundation for the DH economy. As an overall national frame, part of a national heat supply act is to outline the societal purpose of DH systems. In the Danish Heat Supply Act, the societal purpose is explicitly stated:
§ 1. The law aims to promote the most socioeconomic, comprising environment friendly, use of energy for the heating of buildings and supply of hot water and within this framework to decrease the energy supply’s dependence on fossil fuels (The Danish Heat Supply Act)
Thus, the primary purpose of DH grids is not business and profit. The primary goal is to fulfill a role as urban infrastructure and, as such, contribute to an efficient energy system for society.
The next question is then where this infrastructure should be built. Although DH systems are local, national procedures for identifying viable DH areas are beneficial. EU member states may also look to the European framework for a comprehensive assessment of heating and cooling under the Energy Efficiency Directive. This may serve as a welcoming opportunity to establish an ambitious national screening of DH potentials.
Based on socioeconomic screening, designated areas for DH systems can be established through zoning policies. For the political legitimacy and energy economic rationale, the zoning policies must be rooted in an aim of the common good and socioeconomic screening.
Once the “where question” is answered, an enabling regulatory framework must address the “how question”. The answers to this question are many related to building policies and general energy sector policies. Likewise, the single heating project will be embedded in local, national, and European levels of legislation and planning. However, the rest of this article will focus on some selected elements of the how question. The central factors include the price and ownership regulation since the monopolistic nature of energy grids is often a showstopper for DH projects. Consumers’ trust is vital for DH development, and price and ownership regulations are critical.
The regulatory challenge
If we approach the question in a simplified but systematic way, the regulatory challenge can be seen from two perspectives. From a company perspective, the regulation of DH systems must address that 1) High upfront capital costs necessitate a long-term investment perspective, and 2) the risk associated with that including 3) access to capital. From a societal perspective, the regulation of DH systems must be able to deliver 1) consumer acceptance and protection and, not less important, 2) the ability to support long term strategic energy planning. The second point might appear a bit diffuse, but it is vital that the DH company – as responsible for an important societal infrastructure in urban areas – is willing and able to collaborate with local authorities in the long-term planning for sustainable cities.
Four basic forms of regulative measures
For finding a regulatory balance that solve the regulatory challenges, it has been helpful to open a toolbox of regulatory measures more diverse than a simple “market or state” dichotomy. The theoretical approach to regulation could instead be based on four basic dimensions of regulation through which citizens are empowered, namely 1) ownership power, 2) buying power, 3) state regulative power and 4) communicative power which relates to openness of information. While buying power of consumers and the state regulative power are often in focus in mainstream economic textbooks, the ownership power and communicative power dimensions have been key features of the well-functioning Danish regulation.
The state regulative power is fundamental by for example setting the overall aim of DH in the Heat Supply Act. But the state regulative power has also been used to enable ownership power and communicative power. This have empowered consumers and local communities to gain sufficient control of the monopoly companies to trust it.
The synergies of Danish district heating policies
In the Danish heat planning, strong regulative measures that addresses both the company and consumer perspective has been the key to enable DH. Four central elements are here highlighted.
First, zoning policies with obligation to connect in areas with a good socioeconomic basis for DH has created a guarantee for consumer demand to the producer. Thereby, the risk of high upfront capital costs for the company is handled. To be legitimate, these zoning policies must be based on high-quality socioeconomic assessments which is connected to strategic energy planning in line with overall societal goals (such as decarbonisation).
Figure 1. An illustration on how different solutions for meeting investor and consumer interest. A combination of consumer obligation to connect to the grid and a strong price regulation provides the best conditions for implementing DH systems.
Second, an efficient and trust-worthy regulatory framework to control the monopoly prices has provided the trust and acceptance from the consumers obliged to connect to the network. This has been done through the Price and ownership regulation. The problem of monopolies is that the buying power of consumers is suspended. This loss of consumer empowerment has then been counterbalances through a combination of state regulatory price regulation and ownership policies. The latter implies consumer ownership for most companies but also municipal ownership. In consumer owned companies the citizens have direct ownership control of the company which formally can be exercised through election of the board on general assemblies. In the municipal companies, the ownership power is indirect through the municipality.
Figure 2. The function of ownership power in a monopoly situation. In a normal market condition, the interests of companies are not in line with consumer interest but are kept in check by a combination of state regulative power and consumers’ buying power. In the monopoly situation (A) the buying power is suspended. In situation (B), the loss of buying power is counterbalanced with ownership power – aligning interests between state price regulation, company and consumers.
An essential aspect of the ownership policy is that it has made the state’s price regulation more efficient. It is an empirical fact that the few cases of commercial ownership in Denmark have created severe problems for the state’s ability to enforce its regulation of monopoly prices. Even though all DH companies have been subject to the same price regulation, commercial companies have a track record of excessively high consumer prices and different tactics for avoiding and confusing the state’s price control. Without the openness of information and willingness to collaborate from DH companies, the state regulatory power has proven unable to control the monopoly prices – leading to high heat prices and dissatisfaction among consumers.
On the contrary, as a third point, the prevalent ownership and company model have been characterized by reasonable levels of openness of information and willingness to collaborate with public authorities (as well as industry suppliers for technological innovation). The openness has supported efficient enforcement of the state’s price regulation to ensure consumer satisfaction. It has also created a better environment for collaboration with municipalities in the long term urban planning.
As a fourth point, the low prices for consumers and the overall aim for clean and efficient energy have created political legitimacy for public mechanisms that provide cheap and patient capital, reinforcing the basis for low heat prices and long-term planning.
Figure 3. A model for national regulation of DH. A) A national framework for socioeconomic viability rooted in the very aim of legislation as well as basis for zoning policies. B) Regulation of prices due to natural monopoly and C) ownership models that supports price regulation and general willingness to collaborate with society. These company structures then D) create the basis for collaboration in local energy planning. The rooting of DH in societal purposes and its public acceptance then creates political legitimacy of E) state mechamisms for stable, long-term financing of hugh up-front capital costs.
Summing up
- A consumer obligation to connect to DH grids in specified urban areas combined with a firm price regulation has provided the best conditions for implementing DH systems in Denmark.
- A regular market with ‘free choice’ for connection and no price regulation is not likely to succeed to a great extent since it does not consider the risk and worries among consumers and investors. Investors are not expected to invest if there is no reasonable certainty of demand. Consumers are not likely to create demand if there is no guarantee of controlled prices.
- The ownership structures are highly influential. The Danish ownership models have aligned interests between society, company, and consumers and strengthened the willingness to collaborate for strategic energy planning while keeping consumer prices low.
- The state – and its regulation – has a central role in establishing a framework removing uncertainty among producers and consumers. In DH, state regulation does not hinder the market – its function is to create it.
For further information, please contact: Søren Djørup, sodj@norceresearch.no
“Enabling policies for District Heating” was published in Hot Cool, edition no. 3/2021. You can download the article here:
