District heating companies welcome new Dutch Heat Act

The Dutch Warmtewet – Heat Act – will pass the legislature at the end of this spring. It is designed to protect consumers from high costs and provide supply security. The contours of the law are now taking shape. Stichting Warmtenetwerk (the Dutch Heating Association) welcomes the result.

Door: Tijdo van der Zee

In: Hot|Cool International Magazine on District Heating and Cooling No.1 – ’11 – pg 22-23 (Weblink)

The law has its background in the liberalisation of the energy market in 2002. Liberalisation presumes the possibility of choosing your own supplier. These suppliers should then offer the best product for the lowest possible price. But households and firms that are heated by district heating networks are deprived of that choice, theoretically giving suppliers the opportunity to charge high prices. This prospect worried the Dutch parliament and in 2003 it began drafting a law that would prevent suppliers from doing so.

The law was completed in 2008. Consumer prices would be regulated by two mechanisms. First, there was a fixed ceiling, set at the price that consumers would pay ‘as if’ they heated their houses with gas. This mechanism is called ‘Niet Meer Dan Anders (NMDA)’ – not more than otherwise. The second mechanism held that suppliers should never charge more than is reasonable for doing sound business, a price that would allow for a maximum 7.5 % on invested capital. This reasonable price was to be determined for each project separately. The lowest of the two prices – the maximum or reasonable price – was to be charged to the customer. Parliament assumed that this reasonable tariff would on average be much lower than the maximum – NMDA – tariff. As we shall see, this assumption proved to be wrong.

A second important element of the law defined its scope. The intention was to protect not only households, but also small- and medium-sized enterprises (SME) from high tariffs. No distinction, however, would be made between small and large consumers as the ceiling was set at 1,000 kW. All of these customers were to be charged the same rate, based on the  NMDA estimate for a household. Stichting Warmtenetwerk submitted a lobby letter protesting this provision, saying that suppliers with many medium-sized and large customers would incur substantial losses, as they would be charged using the same rate structure as households, despite the fact that their NMDA situation differs considerably from a household. In addition, Gijs de Man, Chairman of the association, argues that many large customers, including many greenhouse gardeners, do not like being stuck to a non-negotiable fixed price. “These are professional clients, well capable of making choices and negotiating deals.”

Research done by NMa, the Dutch Competition Authority, in 2009 made things very different. The organization analysed the business results of the four big suppliers, Nuon (subsidiary ofVattenfall), Essent (RWE), Eneco and Cityheating Purmerend. It concluded that the method of two price mechanisms was too complex and, more importantly, the returns on capital were too low, from -0.4 % for Nuon, to 4 % for Eneco – far below the maximum of 7.5 %. This is primarily due to the NMDA-ceiling. This ceiling is low because of low gas prices, and the introduction of high performance gas boilers. Moreover, district heating suppliers have had high costs because of recent investments in decentralized and sustainable nets. “District heating can be attractive for investors, who seek low risk and relatively low, but predictable, returns for a longer period. This law, with its many tricky provisions, scared those investors away”, says Chairman Gijs de Man.

These results embarrassed the parliamentarians: for years they had suspected that heating suppliers were earning unjustifiably high profits, but they were wrong. The Socialist MP Paulus Jansen put it like this: “I wished I had these research results by NMa five years ago.” The parliamentarians, who initiated the law in 2003, asked the Minister to change some aspects of the law in June 2010. In January of this year, the cabinet announced that they had agreed on the text. Now the document will go to the Council of State, which will advise on the matter. From there it will be sent to the parliament, who, as mentioned before, will decide on it by the end of spring. The text will remain confidential for some time, but the cabinet has already communicated several proposed changes.

First, the price determination; the maximum rate will remain in place. The Competition Authority will then monitor the returns on capital on a portfolio basis, not for each separate project. Second, the scope will decrease from 1,000 kW connections to 100 kW; a better approximation of SME. The Stichting Warmtenetwerk welcomes the cabinet’s conclusions.

The next round of lobbying will now take place in the parliament. Having had most of its initial suggestions fulfilled, the association will try to agenda another topic concerning the property of the heat meters. In over 80 % of the cases, the meter is owned by the supplier, but the law allows customers to bring in their own meter (other than with gas and lectricity), which they also may manage and maintain themselves. This enhances the risk of oxygen entering the system, with its unwanted corrosive effects. Warmtenetwerk proposes that the government transfer ownership to the supplier because of its greater expertise.

But Warmtenetwerk should not rest on its laurels, for the subject remains complex, with many different stakeholders having sometimes fiercely conflicting interests. Stimulation of heat is not part of the new Warmtewet. For example, there are no real options for discounting the environmental value of the low carbon heat supply in the NMDA rate scheme. Even so, Warmtenetwerk pleads for the CO2-reducing potential of district heating to reflect somehow in the price. It is yet not clear how this should be accomplished.

Other stimuli could come from the new energy norms for buildings. The Dutch government and the Normalisation Institute are working on sustainable district solutions to quantify energy norms for individual buildings. This will certainly support the role of many district heating nets. The Warmtewet will go into effect sometime in late 2011.

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