Accelerating the decarbonisation of district heating networks through mandatory connection

3 October 2022

District heating is becoming an increasingly hot topic for municipalities. Latest revisions of EU legislations and plans to phase out (Russian) gas put it as a strategic component. Without making it a silver bullet, it is clear that district heating has a role to play where heat demand density is high enough to make it cost-efficient, in combination with other solutions. One option to accelerate its development can be to make mandatory to connect to the network for some buildings and areas. However, there are as many opportunities and challenges which arise as countries, and maybe cities in the EU! This is what the Decarb City Pipes 2050 partners and stakeholders learnt during the capacity building session on 6 May 2022. Five speakers, from five countries, shared their own experiences and perspectives to give the best possible answer to the question: is mandatory connection to district heating (DH) your highway towards fossil-free heat?

Starting with the obvious: nothing happens without customers!

To quote Birger Lauersen from the Danish District Heating Association, there must be a district heating network for customers to connect to it, but there has to be customers for a district heating network to be developed. This chicken-egg problem was addressed quite early in Denmark, in the 1970s, as Lauersen presented it. Mandatory connection to district heating was early seen as the best way to reduce the Danish dependency on imported oil. Local authorities were able to define areas in which connection to district heating were mandatory for all buildings, once the network was built. This came with a comprehensive consumer protection. In the 2000’s, under liberalisation’ pressure, the possibility to define new areas for mandatory connection were taken away from municipalities, although within the existing defined areas, new buildings are still obliged to connect. Today, to develop district heating in new areas, cities, still in charge of DH development, need to convince 60% of customers to sign up beforehand and commit to connect once it is built. However, the consumer protection laws are still in place, to limit the potential damages consumers could encounter.

Main highlights
– In Denmark, consumer protection is ensured through the true-cost principle (only costs incurred to deliver the service can be asked to consumers). In addition, district heating companies are mostly citizen- or municipally owned and tend to be less profit-oriented. Thanks to this, consumers are protected against abuse of the natural DH monopoly, because there is a cost-based pricing. To help ensure efficiency, DH companies are voluntarily benchmarked against each other on an annual basis.
– The current energy crisis puts more tension on district heating networks, with an increasing number of citizens who want to be connected – 80% of DH customers haven’t experienced prices’ increase during winter 2021-2022. However, it requires time to make it possible to build the connection or extend the network. Sometimes too much time for people who then opt for another, individual option, which threatens the remaining ones either to be locked-in a fossil system or to see increased costs for the district heating. To address this, regranting power to municipalities to define zones for mandatory connection to DH is under discussion.

Municipalities require the right national and regional frameworks to deliver DH at best

In Germany, local authorities do not have a specific legal instrument for district heating but can use a general tool called ABZ (Anschluss- und Benutzungszwang, or compulsory connection and usage), which was presented by Sören Damm from AGFW, the German Energy Efficiency Association for heating, cooling, and CHP. Each ABZ varies according to municipalities, but they must all depend on a municipal entity and serve a legitimate public objective. Introducing an ABZ for mandatory connection to district heating in Germany is a long and difficult process for a municipality, with the risk of long legal procedures. However, an ABZ can also be enforced at regional level, which was done by the Baden-Württemberg region to make it easier for cities of the region to enforce it on their territories. The region recognised district heating as a key tool to reach climate protection, an evident objective of public interest. However, some conditions apply like having an efficient district heating, as defined by EU regulations.

Main highlights
– The municipal entity in charge of the district heating network defines a scope for the connection to be mandatory (which area, which buildings, what is efficient district heating, etc…), the exemptions, and the enforcement conditions.
– Despite an ABZ, the timing for connection can nonetheless be very long (from 5 to 20 years according to what the city decides and can do), thus cities often use it as an incentive for buildings’ owners, but rarely enforce penalties to them.
– In addition, exemptions are often, in practice, a long and detailed catalogue which significantly limit the implementation of the ABZ, and thus the business model of the district heating system.

Joël Ruffy, from AMORCE, presented the new connection obligation scheme at national level in France. Since 2022, all French municipalities who own district heating networks have to define mandatory connection zonings to district heating if: 1) the district heating network uses at least 50% of renewable or recovered energy sources, 2) heat deliveries are metered (substation), and 3) there is a financial balance in the operations. 550 public networks meet these criteria and can benefit from this tool to be expanded – private networks are not eligible. However, local governments can refuse to use this instrument. Buildings located in the mandatory connection zonings will have to be connected unless they can prove there is another more environmentally friendly solution, the cost of connection and/or of heat is disproportionate, or that it is technically impossible to implement it.

Main highlights
– The mandatory connection to district heating framed at the national level will help France accelerate the deployment of its networks, which should be doubled or tripled by 2030 to meet the national targets.
– Local authorities have thus a legal mandate to make it mandatory for buildings to connect to the network. Respecting the obligation becomes a sine qua non condition to obtain the construction permit for new buildings.
– For existing buildings, the obligation only applies if there is a need to change the main components of the current heating system. However, as buildings’ owners don’t have the obligation to declare their heating system changes, cities are unable to control, and the enforcement relies on the goodwill of buildings’ owners, despite cities’ publicity of the measure.

Municipalities are central actors to organise the market

The question of investment is always a sensitive question when discussing district heating networks. Mai Muhammad, from the City of Aberdeen City, presented the freshly designed strategy of the Scottish government to tackle this issue. Scotland published a Heat Networks Act aiming at fostering the development of heat networks in the country. It introduced the notion of heat network permits, which were intended to help de-risk investment by providing a degree of certainty with regards to the likely customer base. Permits would be awarded, following a competition, to a single, winning bidder providing exclusivity to develop heat networks in some districts for a specified number of years. In parallel, the Act also introduced transfer schemes, to ensure continuity of supply for consumers and enabling a smooth transition between operators if an operator would cease activity. In parallel, the Heat Networks Act tasks municipalities to assess techno-economic feasibility of buildings to be connected to district heating and to deliver licences to DH operators to guarantee their capabilities. Only licensed DH companies can join bidding competition to get DH permits.   

Main highlights
– The Scottish Heat Networks Act will give a solid reference framework for investors and operators, and gives additional powers and tasks to municipalities.
– To cover the costs of these activities, the Sottish government will publish a Local Authority Cost Strategy before the whole regulatory system becomes operational in 2024. It will favour cooperation between local authorities and stakeholders to ensure the provision of relevant resources, for local authorities to meet their duties under the Act.

The tricky question of acceptance

Municipalities can set up all the conditions to make connection to district heating mandatory, but one challenge remains: the acceptance of this obligation. This can prove more complex when private companies are the grid owners and operators. Niels Hanskamp, from the Association of Dutch Municipalities (VNG), gave an overview of how this issue could become a major one, should mandatory connection to district heating be voted in the Netherlands.

Currently, the district heating infrastructures are mostly owned and operated by private district heating companies. It makes it very complicated to quantify the profits made by those actors, and municipalities have no other solution but to rely on those companies to develop the network. To accelerate the gas phase-out, a new district heating law is discussed in the Netherlands, which may decide to introduce mandatory connection to district heating. However, public opinion is reluctant, and regulators are cautious not to ensure monopoly rents to private actors. Municipalities are calling for installing cost-based tariffs and for transferring grid ownerships to public actors to provide more transparency. This could be made progressively during a transition period of 20 years.

Main highlights
– Mandatory connection to district heating can be a way to expand the network but should be associated with transparency measure to foster public acceptance, such as cost-based tariff.
– This increased transparency may encounter resistance amongst private companies, lead to an increased renationalisation of the network, and push district companies to focus on grid operations without being the grid owners. However, the period covering the transition may bring to delayed investments from part of the private sector and thus make the costs for the municipalities more expensive, with a decreased efficiency.

So, what’s in it for municipalities?

  • Mandatory connection to district heating can encourage the development of renewable heating, as seen in France, Denmark, and Germany. However, there are still barriers to be overcome. Those obstacles and opportunities especially vary from one national framework to the other.
  • Despite the different exemptions which may exist, mandatory connection can really help steering the process and rethinking supply in cities. However, this is no silver bullet. Access to data and enough human resources for cities to enforce this obligation is especially key.
  • Beyond national regulation, cities must have a proactive approach to the topic to really accelerate the transition. A strong EU political framework can also help support cities in this process, such as the revision of the Energy Efficiency Directive, which gives an important role to district heating to reach higher targets of heat decarbonisation. In addition, the revision of the Energy Performance of Buildings Directive may also be a catalyser to better frame the conditions under which connection to district heating networks should be mandatory.
  • This is not only about making the connection mandatory, but about a holistic approach. The system cannot be successful if it does not consider the planning, economic, business, and customer sides. The question of transparency and sharing benefits can be a game changer with the right incentives.