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NETWORK / 10 / FEBRUARY 2017 DISTRICT HEATING Regulation Regulation is oen put forward by the GB district heating sector as potentially being the silver bullet to many of the industry's current problems, such as attracting institu- tional investment, lowering prices and pro- tecting customers. All of these are achieved by the model of regulation operated by the GB electricity and gas networks; a model the DH sector would also like to adopt. Gas and electricity networks in the UK are very attractive investments – last year National Grid sold a 61% stake in its gas dis- tribution business for £13.8 billion. As the UK government is hoping to attract £2 bil- lion of private investment to the GB district heating sector, regulation seems the obvious answer. The Danish Energy Regulatory Author- ity (DERA) operates a not-for-profit model, where heat companies are allowed to cover only necessary costs. Achieving a return on capital is an option but this has to be approved by the regulator, and few heat companies choose to do so. This is because 60% of Danish heat companies are owned by municipalities, and another 36% by con- sumers. Regulation ensures heat companies cover their costs and customers pay reason- able prices. But the system is not without its prob- lems. The operating model does not allow for any cash buffer to be held by the com- pany, so despite assured costs in 2012/13, 294 of the 400 total heat companies exceeded their costs two years in a row, by Fuel Source 100% 80% 60% 40% 20% 0% 1990 '95 '00 '05 '10 '14 Renewable energy Waste, non-renewable Coal Natural gas Heat pumps and Electric boilers Oil NeceSSary coStS l Fuels l Installations l Grids and pipelines l Buildings and inventory l Installations and grid maintenance l Operation/administration salaries l Insurance l CO2 taxes, energy taxes and sulphur taxes on fuels l Depreciations l Return on capital (only with DERA approval) 2012/13 400 heat companies 294 exceeded costs two years in a row – £186m 133 exceeded costs by more than 10% – £116m a combined total of £186 million. 133 com- panies' income exceeded their costs by more than 10%, a combined total of £116 million. DERA's Renee van Naerssen says the regula- tor would struggle to cope if there were more heat companies. The GB sector is likely to far exceed 400 companies. Heat networks in Denmark have developed to be far bigger and more integrated than anything the UK is likely to achieve. For example Copenhagen is served by just four district heat networks. With local councils, universities, social housing schemes and private developers all likely to develop schemes, this could present a regu- latory nightmare. Planning Denmark has a stringent planning system in place for the development for heat net- works, which puts local authorities, called municipalities, in control. Importantly, municipalities are able to force the connec- tion of end-users to a heat network. Being able to secure this future capacity would lower the investment risk for GB developers and help the formation of larger, more effi- cient schemes. However, the planning system in Den- mark does not prioritise the cost to the con- sumer, as would be expected in GB. Instead municipalities are obligated to approve heat supply projects that ensure the high- est benefits to both society as a whole and to the utility and customers connected to the network. This means social-economic factors can significantly affect consumer prices in differ- ent areas, and some consumers find it diffi- cult to sell their properties because of high energy costs. DERA ensures transparent prices by pub- lishing price lists up to three times a year, but customers are subjected to monopolies and prices are reflective of costs in that area, so the lists serve little practical purpose. While much of the press in GB focuses on driving up switching rates and ensuring cus- tomers get the cheapest deal, prices are not a topic of discussion for the average Dane, and switching is not a priority. Investment Although the UK government has pledged £320 million of funds to kick-start private investment in the DH sector, heat companies in Denmark have no such worries. There, heat companies can start gathering capital through customer bills up to five years in advance of an extension to a heat network to cover 75% of the cost. They are also able to get municipal secu- rity for loans, allowing them easy access to finance. The loans have a long payback period of about 25 years and an almost zero interest rate.