At first glance, the financing of public heating companies appears complex. This is mainly due to a lack of familiarity with how financing works at the municipal level. Accuracy is important, but the reluctance to act this might cause among administrators is unnecessary. Municipalities actually have a great deal of experience with long-term investments in infrastructure. To provide clarity to municipalities and other stakeholders, the white paper “Public heating networks: municipalities have the knowledge and capacity to invest” has been published.
The new Heat Act (Wet collectieve warmte – Wcw) assumes a public majority interest in the heat infrastructure. There has been much discussion about ownership and implementation capacity of heating networks. It is noteworthy that the discussion about public implementation capacity does not apply to other public facilities such as sewerage, drinking water, bridges and cycle paths. The discussion about ownership is often conducted in the context of existing heating networks in a dozen large cities. However, the task ahead of us (2,600,000 heating network connections) is many times greater. There is a large group of municipalities that do not have a heat network, but where there are neighbourhoods where a collective heat network is the most affordable solution. Many municipalities are preparing to set up a municipal heating company (whether or not in collaboration with other public or private parties) and to finance it. This ongoing discussion threatens to overshadow other crucial issues. In this article, we identify four themes that deserve more attention right now and could play a key role in the sustainable and feasible financing of district heating networks.
Another recurring topic in discussions about ownership is the distribution of risks. Of course, common technical and organisational risks play a role, such as tenders, permits and fluctuating market prices. However, the focus is often on affordability and full occupancy (the number of households participating). Affordability for residents is a prerequisite for sufficient uptake. This requires a national set of instruments in the form of a guarantee fund for financing, subsidies for funding, incentives via energy tax (on gas and electricity) and making the standing charge variable (for electricity and heat). The standing charge must be linked to, for example, the size of the home or energy consumption.
The standing charge for someone who lives in an apartment and has a heat and electricity connection and consumes little energy is currently twice as high as the standing charge for a large ground-level home with solar panels, a charging station and its own heat pump (with only an electricity connection). If there are sufficient subsidies and agreements with housing associations about the standing charge for flats, the risks are in principle manageable.
Heat networks in existing residential areas are part of an integrated neighbourhood approach, in which social, housing, safety and spatial issues also play a role. The municipality naturally has a coordinating role in this. By taking proactive measures, risks can remain manageable. A good example of this is public support: this does not require financial compensation, but rather targeted investments in the neighbourhood, particularly in collaboration with local housing associations. In this way, risks can be better assessed and reduced, improving the feasibility and affordability of heat networks.
Another term that often gives rise to different interpretations is return. Return is the profit or loss achieved on an investment. Simply put, it consists of revenues minus costs and interest paid, risks, and a return for shareholders. The latter is not an issue for a local authority. Of course, local authorities do pay interest to banks, currently around 2.5 and 3.5%. As far as risk is concerned, if there is sufficient support among partners and residents, the chances of a successful and affordable roll-out of the heat network are high.
This can reduce the “risk pot” – also known as “resilience” in municipalities. For municipal heating companies, this is usually around 2%. This brings the desired return to between 4.5 and 5.5%. In commercial markets, returns of 6 to 8% are common. At the same time, the return has a direct impact on feasibility and affordability for residents. To illustrate: a difference of 1% in return can amount to an additional cost of 3,000 euros per home or 100 euros per year in the energy bill. This underlines the importance of a balanced return structure for determining whether a project is feasible and, above all, affordable for residents.
Outside municipalities, little is known about the municipal budget process. This process is crucial in the careful preparation of municipal investments in heat networks. Discussions (and also the legal text) often start with the heating company (the private limited company), but prior to this, the municipal council has already taken four decisions: the decision to become the owner, the establishment of the financial frameworks (similar to a land company), the establishment of the private limited company and the provision of credit to enable the necessary investments to be made. The white paper explains in more detail the steps municipalities take to allocate funds for a heating company.
For local decision-making, it does not matter whether the heating company is 100% municipally owned or whether there are other shareholders. For the municipal part, the municipal council must always comply with the usual administrative criteria and financial decision-making, in accordance with the budgetary regulations (Bbv). Municipal participation means that a number of conditions as described in the Wcw and the Bcw (Collective Heating Decree) have already been met.
Sound reasoning and vision are needed to deploy municipal assets for the heating company. Municipal accounting rules (Budget and Accountability Decree; Bbv) guarantee this. Before the company is established, the municipal council, when approving the investment proposal, has made a preparatory or construction loan available and released funds for a reserve capital (see the explanation under “Return and reserve capital” in the white paper). The municipality can use these contributions to inject capital into the private limited company (the heating company). No additional capital is required. However, capital is transferred from the municipal budget to a private limited company.
For a long time, the discussion about heat networks has focused on a route involving private parties. Since the government's decision in 2022 to pursue a public route, it makes sense to also look at the processes involved in large investments within municipalities. The white paper explains that although financing public heat networks is complex, it is no more so than other major infrastructure projects in sewerage, bridges or area development with which a municipality is familiar. Raising capital is not usually an obstacle. Public management and a public return benefit the feasibility of the project and thus have a direct positive effect on affordability for residents in the neighbourhood.
By building on existing knowledge and experience within municipalities, many uncertainties can be removed, unnecessary delays prevented and matters properly arranged financially and organisationally. A business case for a heat network has many similarities with the way in which local authorities have been organising land development for years; laying a heat pipe in the ground is essentially not so different from replacing sewers in an existing residential area. In both cases, much of the work is outsourced to specialist companies, but carried out under the direction of the local authority.
Of course, this does not happen automatically. The smooth roll-out of a heat network requires attention and a targeted approach. It is crucial that, in addition to policy departments, the finance department and experienced project managers are closely involved in setting up a heating company from the outset and throughout all phases. The same applies to the municipal council. Because several decisions have to be taken during the development period, the municipal council must be kept well informed at all times. Continuous communication and announcement of follow-up steps to and with the council lays an important foundation for stable business operations.
A more in-depth analysis can be found in the white paper. This document is intended to support professionals in the public domain. In addition, there are other aspects that play a role in the development of heat networks. Information and collaboration via VNG, G4/G40, NPLW and other platforms are indispensable in this regard.