HOT|COOL NO.2/2016 - "District cooling in the Middle East"


Consumer concerns The past few months have seen increased activity centred on the need for consumer protection on heat networks. This follows a Citizens Advice study in January of this year summarising a survey of local authorities on heat networks and district heating user complaints gathered through its advisory services and builds on a 2015 report from the consumer affairs organisation Which?. The Citizen Advice report focuses on: the availability of data on heat networks; billing and information provided to consumers; maintenance and controls; and customer protection. One recommendation from the Citizens Advice report was the need for an independent ombudsman to be in place, hence it is heartening to learn that this exactly what the Heat Trust will be offering along with other actions such as developing a common approach to tariff structures. However, whilst both reports helpfully dig into the issues, neither goes far enough. The Which? study provides a range of prices paid by those on heat networks ranging from 5.51p to 14.95p per kWh, and compares this with the lifetime costs (i.e. including the costs of replacement of a gas combi boiler and annual maintenance charge) associated with gas heating of between 9.55p to 11.60p per kWh and electricity heating price of between 22.91 – 22.99p per kWh (where an electric combi- boiler was considered). Clearly someone is getting a good deal. But which heat network operators are charging more than gas and what sits behind it? These reports do not say. I suspect it is because some operators are seeking returns on capital of 15% plus. These will tend to be networks delivered by the commercial sector that have recently been constructed as older networks will have paid off their initial capital cost or because they were wrapped into local authority housing budgets. Neither report recognises that higher tariffs are charged by commercial operators whilst generally public operators do not. These high returns are in part because investors perceive heat networks as high risk because they are unregulated and price debt capital accordingly. Therefore, could more formal regulation help address both the customer service issues and the financial risk issue at the same time? The other common theme in the Which? and Citizens Advice reports is the belief that the ability to switch supplier is a solution in itself. However, the UK Competition & Markets Authority published its findings on its investigation of the energy markets on 10th March which make clear that the gas and electricity markets are not working in the interests of the customer. Switching away from heat networks may not provide the solution that disgruntled customers seek. The reality is that individual customers have very little power in the market. They can exercise more market muscle if they join together. Witness the drive towards setting up municipal gas and electricity

retail companies and the large number of community energy projects trying to exercise precisely this collective approach to the market. Being on a heat network gives customers such collective market power that a single residential customer lacks. The two consumer reports suggest that the numbers of complainants are a minority, albeit significant ones. This suggests that the majority of customers are happy, but clearly more work must be done to ensure that this is the case. And at 5.5p per kWh district energy can deliver a competitive offer. But if we want customers to feel proud to be on a heat network and want to stay on it then the district energy sector needs to ensure it’s better than the alternatives if it is to prove itself a real alternative. Restructuring ownership along functional lines An alternative approach was suggested in an article referenced in the District Energy Vanguards newsletter last month (April 2016) by Ian Manders of the Royal Danish Embassy and Dr. Tanja Groth of the Carbon Trust, which argued for heat distribution infrastructure to be moved into a not-for-profit pipe co. This may only be possible once projects have been built out and costs and revenues stabilised – in other words, the project has been de-risked. Indeed, it was also reported that last month the Green Investment Bank and Equitex had bought out 100% the Wick District Heating Scheme from its previous owners, Ignis Energy. This illustrates that the potential of a secondary investment market for de-risked projects is real. If the entity buying them was constructed as a not-for-profit then it could accept lower returns on capital more in line with regulated utilities. And consequently high standing or fixed charges would drop. Where next? In conclusion, the UK Government is working together with industry and the municipalities to build a platform that supports the development of the heat networks in the uniquely open British energy market. This means under the scrutiny of independent consumer groups more familiar with a competitive approach. In doing so, it has to balance the interests of investors, the industry and consumers. Undoubtedly, more regulation would give investors and consumers greater confidence. But that will risk burdening the industry and stifling innovation as it explores different commercial structures that will potentially give these stakeholders what they want whilst building a financially sustainable future for itself. The key challenge for Government is maintaining this delicate balance as the market grows and evolves. For further information please contact:

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