Oxera’s advice on the regulation of district heating pricing taken up by Dutch government
Oxera was invited by the Ministry of Economic Affairs and Climate to carry out a review of the price regulation of district heating networks (DHNs) in the Netherlands.
As climate policy debates continue to take centre stage, we took a closer look at heating, one of the key points in the road to decarbonisation.
Domestic heating is a hot topic in the debate around climate policy. The 2019 Climate Agreement sets out goals to reduce CO2 emissions from the Netherlands by 49% by 2030. Decarbonisation of heat supplied to buildings will play an important role in achieving this. The Climate Agreement specifies that 1.5m existing houses should be made sustainable (i.e. not consuming natural gas) by 2030. The Dutch government has set ambitious targets to roll out district heating networks (DHNs) in the Netherlands as part of this endeavour. DHNs can supply heating to residential buildings, offices or other premises that need it. These networks consist of underground circulation pipelines that carry hot water from one or more heat sources—such as power stations, or industrial facilities—and can replace individual gas-powered boilers. The Dutch government is seeking to regulate the price that private DHN suppliers can charge.
Oxera was appointed to advise the Dutch government on how best to regulate the price that DHNs can charge consumers. We have drawn on our knowledge of district heating sectors in other countries, as well as our experience of price regulation in other sectors in the Netherlands to produce our advice.
We analysed several alternatives for pricing, assessing each one against the key policy objectives set out by the Ministry. In this way, we identified an approach which provides the best balance between administrative costs and the benefits from reduced risks and efficiency incentives. We point out, however, that this cost-reflective price regulation would mean a large change for the domestic heating sector, and would need to be implemented over an extended period of time in order to smooth the transition.
Oxera Partner Jostein Kristensen and Principal Matthew Shepherd said:
“District heating networks will play a vital role in decarbonising the provision of heat in the Netherlands and elsewhere. Given the characteristics of these networks, appropriate regulation is important in ensuring that investors have the confidence to invest and consumers receive a fair deal. Our recommendations to the Ministry of Economic Affairs and Climate Policy provide a robust framework for this to be achieved in the Netherlands.”