As Dutch lawmakers await the revised Heat Act – adopted by Parliament on 3 July 2018 – to enter into force on 1 January 2020, another bill to amend this act is already being prepared.
This bill, which the Ministry of Economic Affairs and Climate calls the Heat Act 2.0, anticipates the coming energy transition where heat networks are expected to play an increasingly important role as an alternative to gas. To facilitate decision-making and investment in the construction and operation of heat networks, the ministry is using the Heat Act 2.0 to elaborate on the roles and responsibilities of public and private parties, and outline the prerequisites for creating a reliable, affordable and sustainable collective heat supply.
The main themes of the Heat Act 2.0 will be market and price regulation, and sustainability.
The act envisages that market regulation will help realise a reliable, affordable and sustainable heat market. To safeguard these public interests, the ministry has identified three principles for market regulation: that market regulation be consistent with the market's technical and economic characteristics and that regulations contribute to market efficiency; that there be sufficient room for a local tailored approach due to the diversity of potential heat sources and systems; and that the government and municipalities have adequate means to safeguard the public interest in the future.
According to analysts, it might be useful to make distinctions for market regulation of large regional transmission grids, medium local distribution grids and small heating systems.
The ministry wants to reconsider tariff regulation under the Heat Act 2.0. At present, the Heat Act regulates tariffs for heat supplied to households and businesses. A maximum heat tariff, linked to the gas tariff, is set on an annual basis. The reference to gas prices is maintained in the revised Heat Act (coming into force in 2020), but since gas will certainly lose its value in the future, a suitable alternative must be found.
According to a study by the research agency SIRM, possible alternatives include a tariff determined by the regulator (e.g. based on the costs of the heat supplier or average costs for comparable companies, resembling the regulation of the gas and electricity markets) or transparent heat tariffs determined by heat suppliers in cooperation with the regulator. A third alternative could be national benchmarking by the regulator whereby heat suppliers are not permitted to set their tariffs above the benchmark – resembling the current gas reference in the Heat Act. According to SIRM, there is no clear preferred option, as the diversity of the heat market makes it difficult to find a suitable alternative for the gas reference. A hybrid form of regulation that takes this diversity into account may be more acceptable to the heat market.
The deployment of heat networks in the "built" environment will contribute to the objective of a 95% reduction in CO2 emissions by 2050, but for this to happen sufficient renewable heat sources must be available and connected to heat networks. The ministry is currently exploring the most efficient incentives to achieve this. Through a motion accepted by the House of Representatives, a request was made in February 2018 to explore whether it would be beneficial to separate the production and supply of heat from transport and grid management, as in the electricity and gas market. In those markets, this separation has enabled competition between producers and suppliers at a national level. However, according to a study conducted by the research agency SEO, the benefits to the electricity and gas market are not expected to occur in the heat market, due to the fact that a separation will not resolve the structural issues rising from the technical and economical characteristics of the heat market. These characteristics include the decentralised (local) profile of the heat networks due to relatively large grid losses, the fact heat networks are closed systems that make it difficult to maintain system quality and the fact that heat networks are often supplied by local sources with a local monopoly. In fact, the heat market itself contains characteristics of a natural monopoly due to its non-reproducible infrastructure.
Lastly, the heat market has not yet reached the maturity of the gas and electricity market. In view of this, the ministry has concluded that, as long as the economic and technical characteristics of the heat market remain unchanged, a mandatory separation on a national level between heat production and supply and heat transmission and grid management will not contribute to the affordability, sustainability and security of heat supply. The ministry, however, intends to explore whether this may be different for regional transmission grids.
The ministry plans to send the Heat Act 2.0 bill to the House of Representatives in early 2020. In accordance with the Climate Agreement, the Heat Act 2.0 is expected to enter into force by January 2022, and assist municipalities with improving the sustainability of the built environment. This schedule seems ambitious, knowing that both the current Heat Act and the revised Heat Act went through a lengthy parliamentary process.
CMS has been in the forefront of developments in the heat sector, advising on a large number of heat supply projects. If you have any questions on the Heat Act, do not hesitate to contact one of our local experts.