Recently, the Energy Regulatory Authority listed the circumstances that may and must be included when estimating a reasonable return on capital invested in a heating company in connection with the Authority's approval of return on invested capital.

The list is based on and supplemented by a separate list on the new WACC model. The Authority has also decided on a question concerning return on  capital invested in EnergiGruppen Jylland Varme A/S in 2011-2017.

At the moment, the Authority is considering almost 60 cases concerning return on capital invested in heating companies. It was therefore considered appropriate to lay down general principles in relation to the criteria for estimation in these cases. The criteria were laid down based on a calculation of a range by applying the WACC model adapted to the objective.


With the companies' risk profiles as landmark, the Authority has listed a number of criteria, which should be clarified during the case handling and included in the actual estimation. Some of these criteria will be more general and some more specific, for instance as regards heat production, distribution and transmission.

The Authority's criteria are general and not exhaustive. If it turns out that there are other relevant criteria, these will be included.

The list does not contain a specific decision on the mutual weighting of the criteria.


The Authority attached importance to a number of circumstances. These circumstances are assessed based on the importance they may have for the potential risk of the heat supply activity.

In this connection, there are also a number of assumptions as regards the legal position of a number of areas, which are:

  • The size of the interest must be estimated as to whether the prices will be unreasonable.
  • The following criteria may clarify the risk profile:
  • Whether the gearing is higher than 70 % of the loan capital.
  • Whether delivery is to the end-user.
  • Whether there is competition on the heat supply and the competitive situation.
  • The ranking on the Authority's price statistics (i.e. is the price high).
  • Whether several types of fuel may be used in the production.
  • Whether the production is subject to a price cap (e.g. waste incineration system).
  • How many customers are connected to a heat distribution and how concentrated the take is compared to the number of customers. How many businesses are connected, and whether is there a connection duty/a duty to remain connected to a supply plant.
  • As regards heat transmission, the number of connected households, partly takers, partly suppliers, and the concentration of the take on customers


In a separate notification, the Authority has laid down a WACC (Weighted Average Cost of Capital) applying to heating companies from 2003 to 2017. The WACC is a tool used by the Authority supporting the estimation of a reasonable return on capital invested in heating companies that have applied for return.

To a significant extent, the WACC is based on what applies to the power supply market, but with a number of adjustments to fit the heating market.

An interval may be calculated based on two parameters - beta active and debt risk premium. The upper/lower limit is applied together with the invested capital to calculate an interval for a reasonable return. An estimate is then made thereof based on the notification of the estimation criteria, see above.

As a consequence of the fact that the Danish tax authorities, as a consequence of the fact that the inclusion of an approved return on invested capital may be included in the heating prices if the tax payment could not have been avoided by a different set-up of the tax accounts.

The actual capital structure must also be included in the calculation of the interval of the reasonable return.

The lower limit of beta is estimated at 0.15 and the upper limit at 0.35.

There is also a table of the upper/lower limit of debt risk premium.

Further, there is a survey of the high and low interest rate on the heating market for 2003-2017.

For 2017, the lower limit is fixed at 2.39 % and the upper limit at 6.39% as regards equity costs. The low limit for loan capital is fixed at 0.6 % as the lower limit and 0.86 % as the upper limit.

There is also a comparison of the results according to the previous WACC model from the EGJ case.


In continuation of the two lists, the Authority has made a decision in a case concerning the return on invested capital concerning EnergiGruppen Jylland Varme A/S (EGJ Varme) for 2011-17.

The Authority has decided that the original invested capital amounts to DKK 612 million.

After the Authority's adjustment of the WACC model and the implementation of the other criteria, the Authority concludes that a reasonable return on EGJ Varme's invested capital for 2011-2017 may in total amount to DKK 119 million as a maximum.

However, the Authority found that, for administrative reasons, the new WACC model may not be applied in the estimation when assessing applications for  return in the years prior to 2017 - notwithstanding the fact that the new WACC model is perhaps in fact more correct.

This is based on a general assessment that practice may have been changed to the impairment of the recipient of the decision with retroactive effect.

When applying the previous WACC model, the return instead amounted to DKK 172 million.


Line Markert

Partner (L)

Eigil Worm

Senior Attorney (H)

René Frisdahl Jensen

Partner (L)