On 1 January 2022, a new price regulation of surplus heat came into force. District heating companies may as a maximum include expenses for purchase of surplus heat equivalent to the lowest price of the substitution price or the price cap fixed by the Energy Agency.

Scope

The new price regulation applies to supply of surplus heat to buildings with district heating and hot domestic water (room heating purposes).

Surplus heat means: Unavoidable heat produced as a by-product from industrial or electricity production plants or within the tertiary sector which will be channelled out unused in the air or in the water without access to a district heating system. For example surplus heat from data centers, industrial processes, transformer stations, supermarkets, etc. If it concerns co-production, for example at a thermal power plant or a cooling/heat pump, it is not considered surplus heat.

Only surplus heat plants with a capacity of minimum 0.25 MW are covered by the price regulation. The price regulation will not apply to small surplus heat suppliers supplying heat on market terms. However, a district heating company purchasing such surplus heat will be covered by the general price regulation of the heat supply legislation. So, when purchasing heat from small surplus heat suppliers, the consumers will also be protected against high prices via the principle concerning substitution price.

Surplus heat is subject to a price cap

Under the new rules, the Energy Agency will fix a price cap of surplus heat each year which will be a simple average of the total production costs for heated water. 50 % will be based on a production of 6 MW in a wood chip boiler and 50 % on a production of 10 MW in an air-to-water heat pump. The production costs will be fixed based on data from the technology catalogue and the socio-economic assumptions.

It is the intention that the authority to subsequently fix the price cap will be that of the Utility Regulator which will fix the price cap based on the district heating companies’ actual documentation of the prices. The executive order is therefore preliminary and will be replaced by a final and more detailed executive order on the price cap which is subsequently to be fixed by the Utility Regulatory.

Surplus heat price cap for 2022

The surplus heat price cap for 2022 is DKK 77 per GJ.

The price cap is the limit as to how much the surplus heat purchaser may include in its heat price. The price of surplus heat which is included in the heat prices may vary during the year as long as the annual average price per GJ does not exceed the price cap.

Not clear which costs must be kept under the price cap

It does not appear from the executive order which costs must be kept under the price cap. According to the legislative history, it is “the total costs of exploitation of surplus heat”.

A guess is that the costs for a production plant in connection with the exploitation of surplus heat must be kept under the price cap, see the legislative history, and cannot be included above this. It will presumably also apply to heat pumps. Transmission costs may presumably be included in the heat price above the price cap. Charges on surplus heat may perhaps also be included above the price cap but presumably not charges on electric heating.

The costs covered by the price cap are expected fixed in the final executive order.

Principle concerning substitution price still applies

Furthermore, the general principle concerning substitution price still applies to the district heating companies purchasing surplus heat. This means that the price of heat, including surplus heat, may not exceed the price of the cheapest alternative, e.g. own production or purchase from another supplier.

Who is to observe the price cap?

The surplus heat supplier is not subject to the Utility Regulatory’s supervision and is not to report prices etc.

But the buyer of the heat (the district heating company) must observe the price regulation. This means that the district heating company may as a maximum include the lowest price of either the price cap or the substitution price in the final heat price to the customers for its purchase of surplus heat.

It does not appear explicitly from the price cap regulation that the price cap formally serves as a cap for the inclusion of costs for the purchase of surplus heat in connection with redistribution and thereby de facto only as a cap as to what the district heating company may pay for the surplus heat.

Part of the agreement is not reflected in the executive order

In the legislative history and the agreement concerning surplus heat, the price cap regulation is described as follows:

  • The possibility of maintaining the price cap applicable at the time of the agreement during the entire term.
  • The possibility of the authority approving an increased price cap the first years against a similar decrease of the price cap in the subsequent years.
  • The possibility of the authority fixing an individual price cap.

These elements are not reflected in the executive order concerning fixing of a price cap in relation to supply of surplus heat. It is therefore not certain that an agreed price will not be affected by a subsequent lower price cap. Based on the Energy Agency’s statements in the consultation memo, the above possibilities will be regulated in the final executive order on the Utility Regulatory’s fixing of the price cap.

Agreements concerning purchase of surplus heat

We recommend that when agreeing to purchase surplus heat, the district heating companies ensure in the agreement that the agreed price of surplus heat cannot exceed the price cap and other maximum prices under the Heat Supply Act. Also to avoid that the district heating plan realises a loss due to a lower substitution price or a subsequently fixed price cap.

In this way, you also ensure that any case law as to what is to be kept under the price cap will apply to the agreement and thereby be to the benefit of the purchaser of the heat instead of resulting in a loss.

Exemption

In the consultation memo, the Energy Agency has stated that it is not possible to obtain an increased or individual price cap under the executive order, but that this will be adjusted later when the Utility Regulatory fixes the price cap.

Even if it is not regulated explicitly, it will be possible to apply for an exemption from the rules with the Energy Agency being the regulatory authority. In accordance with the legislative history, the Energy Agency may for example allow when granting an exemption that the price cap in the first year is increased provided that it is reduced correspondingly, or it may fix an individual price cap.

Contacts

Line Markert

Partner

Eigil Worm

Senior Attorney

Renée van Naerssen

Assistant Attorney