Review and experiences of price regulation regimes for district heating

Europe is facing a great technical and regulatory challenge in transitioning the energy supply from fossil fuels to sustainable renewables. Within the heating sector, the Heat Roadmap Europe studies have demonstrated great potential and benefits from expanding district heating (DH) throughout the continent. However, as a monopoly structure, DH grids require well-thought-out regulatory regimes to be accepted by cities and consumers. Effective regulation must safeguard consumers against misuse of monopoly prices and set the right incentives to enhance efficiency and to introduce new technologies. Founded upon the approach of concrete institutional economics, this paper contributes to the literature on DH regulation by reviewing and describing regulatory experiences in Denmark and other countries. This article demonstrates that a wide range of regulatory mechanisms are available for implementing DH and describes how regulation must take into account whether the DH companies are privately or publicly owned by municipalities or consumer groups. DH is typically a monopoly supply, which may result in higher consumer prices if proper regulation is not in place. Both privately and publicly owned DH supplies must be guided by various efficiency-enhancing measures. Regulated prices and the use of benchmarks must be carefully prepared in order to work by the book in an often-complicated organisational set-up. The use of private enterprises to develop and operate a public DH enterprise must involve the establishment of proper incentives and performance measures in the contract, etc. A mix of price-setting regimes and ownership models can be determined. The choice of model may depend on the specific circumstances, considering, among other concerns, the scale of the heat market, the local availability of waste heat, existing ownership of housing, access to (cheap) financing, a stable regulatory framework, and confidence-building measures for commercial or public investors.