In the Netherlands, gas remains the dominant source for heating. However, on 22 May 2017, a bill was presented to Parliament (the “Bill”) to increase awareness of the collective heat supply as an alternative to natural gas. In addition, the Bill aims, to align the regulatory framework for collective heat supply with future developments and to address issues identified in a recent review of the current Heat Act.
Below, we explain the background of the current Heat Act and explain some of the most important changes brought by the Bill.
Background
The Heat Act was adopted by Parliament on 10 February 2009, based on a Bill that was submitted back in 2003. Due to extensive discussions and criticism of the Bill, in particular its price regulation, it took until 1 January 2014 before the Act entered into force.
The Act aims to protect heat users from potential abuse by regulating the supply of heat to users with a connection off less than 100 kW. Pursuant to the Heat Act any party that supplies heat to this group of heat users falls under the scope of the Act. From its explanatory notes, it appears however that the Act focuses on district heating.
Heat suppliers are required, under the Act, to secure a reliable and affordable heat supply against reasonable conditions and good quality service. To facilitate this, the Act introduced a license obligation for the supply of heat, as well as price regulation.
During the lengthy Parliamentary discussions on the Act, broadening the objective of the Act to also promote sustainable heat supply and the useful application of waste heat was discussed. This was refused and is considered by many to be a missed opportunity.
Key changes introduced by the Bill
Amendments to the scope
A 2015/2016 review of the Heat Act found that the initial reasons behind the introduction of the Act - to protect captive customers - do not always apply or may result in adverse effects. As a result, the Bill excludes two groups of heat suppliers from being a 'supplier' within the meaning of the Act. Firstly, owners associations (or similar entities) that represent heat users and include them in the decision-making process do not qualify as 'suppliers' within the meaning of the Heat Act. The reason for this exclusion is that heat users will, in their capacity as members of owner associations, have a say in the terms and conditions of their heat supply and therefore do not need any further protection. Secondly, lessors that supply heat to their lessees will no longer qualify as a 'supplier' under the Act, provided that the heat supply is an integral part of the lease since in practice the applicability of both tenancy law, consumer protection under the Civil Code, as well as the Heat Act has led to confusion. Moreover, it is felt that in these circumstances tenancy law grants similar protection.
Where these groups have connections larger than 100 kW, they do not qualify as protected users under the Heat Act. As a consequence, such groups may as heat off-takers be confronted with costs that they cannot pass on to their heat users, being protected users under the Heat Act. To avoid such situations, the Bill now extends the definition of ‘heat user’ to include these two groups. By doing so, these parties will be able to enjoy the protection of the Bill, including the applicability of a maximum heat price. This however remains the only extension of the scope of the Act to users with a connection larger than 100 kW, since large-scale users are generally believed to have sufficient alternatives to arrange for heating.
The current version of the Heat Act focuses on regular district heating, which means the supply of heat at temperatures of 90o Celsius. The Act does not consider recent developments in heat supply that use lower temperatures. Nor does the Act regulate the supply of cooling energy since, in the Netherlands, cooling is not deemed a necessity of life. Although this does not change under the Bill, the Bill introduces the possibility to set maximum tariffs for supply of cooling energy where such cooling energy is inseparably linked to the supply of heat (e.g. in cases of thermal storage (in Dutch: warmte koude opslag)) and for the supply of heat at lower temperatures (lukewarm water). This will be elaborated on in subordinate legislation.
Tariff regulation
The Heat Act includes a maximum tariff for the supply of heat to small-scale users. This mandatory tariff is based on the 'not-more-than-otherwise' principle (referred to as the “NMDA-principle”), which means that the price is derived from the average costs incurred by a party when using gas for heating.
The current system of tariff regulation was strongly criticized for being too complex, ambiguous and not reflecting the actual costs of the heat supply (which are very different from the costs incurred when gas is used for heating), thereby putting heat projects at risk of not being able to earn a sufficient return.
Although the use of gas as a reference to determine the price of heat will be unsustainable, the Bill continues to reference gas, since at present more than 90% of Dutch heat users are connected to the gas grid. The Bill aims to improve the formula for calculating the maximum price and introduces new elements to the tariff regulation that are based on average actual costs, such as: a one-off connection fee, costs for disconnection and tariffs for the provision of heat exchangers.
Furthermore, the Bill aims to promote new incentives for the collective heat supply by allowing parties – subject to a broad interpretation of the non-discrimination requirement set out in the Heat Act – to deviate from the regulated tariffs under the Bill and agree on alternative tariffs; instead of the regulated maximum tariff that is set on an annual basis, e.g. parties can agree on a fixed tariff that will apply for several years or on reduced fixed costs with a higher variable tariff.
In addition, the Bill allows heat users to terminate their heat supply agreements, provided that such supply agreement was entered after the amendment of the Heat Act. This will also apply to agreements of definite duration that do not include the possibility of termination and will only be inapplicable where termination of heat supply is not possible for technical reasons or where termination will have significant adverse effects for another heat user. It should however be noted that the Bill does not prevent heat suppliers from demanding a termination fee as compensation for the supplier's investment risk, provided that such is included in the heat supply agreement. For both exceptions, the burden of proof lies with the supplier.
Third party access
Production, supply and transportation of heat currently constitute a closed system; the network owner holds a monopoly and heat is often generated by one large producer. To ensure security of the heat supply, parties must enter into long-term supply contracts with take-or-pay obligations for supply and offtake but heat producers are often reluctant to be bound by such strict terms, resulting in an obstacle for the development of sustainable heat networks. In addition, heat users have a lack of choice since the heat market does not offer them the same flexibility to choose a supplier as the electricity and gas markets.
In principle, this could be resolved by the introduction of third party access. According to the explanatory memorandum to the Bill, third party access for heat producers is desirable. However, due to the complexity and diversity of the current heat networks, the different forms of heat generation and the large variety in the development phase of the current heat networks, it has been decided not to introduce regulated third party access for producers. Instead, the Bill introduces negotiated access, requiring the operator of a network to inform a heat producer, at its request, on certain key data in relation to the heat network (such as available transport capacity, transport tariffs and technical characteristics) and to enter into discussions with the heat producer on third party access.
The Bill does not address (regulated or negotiated) third party access for heat suppliers, since the benefits that this would generate (such as increased competition and thus more efficient pricing) are deemed not to outweigh the additional costs resulting from more intensive supervision and grid management. Moreover, effective competition between suppliers and producers is hindered by the local character of heat demand and supply and the complexities of operating and balancing a heat network. Pursuant to the explanatory notes to the Bill also countries with large(r) scale heat networks and a large(r) number of heat producers do not offer third party access to heat suppliers.
Experiments
In view of the rapid developments in heat supply, the Bill offers the possibility to request an exemption from certain provisions of the Act in order to conduct experiments in relation to reduction of CO2 emissions, renewable energy, energy saving, efficient network use or gaining experience with new market models. This aims to prevent legislation hindering the development of new initiatives in the context of the energy transition.
Terms and conditions for such experiments will be elaborated on in subordinate legislation. The outcome of the experiments will be evaluated and may result in future amendments of the Act.
Compensation for interruptions
In addition, the Bill aims to improve the compensation scheme for interruptions in heat supply. The compensation mechanism currently set out in the Heat Act is based on the mechanism applicable to gas and electricity, but this presents problems as there are important differences in these systems. Under the Bill, suppliers will now be excluded from the obligation to pay compensation for one interruption per year, provided that such interruption is resolved within 24 hours. In addition, the suppliers will not have to pay compensation where the interruption is not caused by the heat network of the supplier/network operator or by an extreme situation that is not attributable to the supplier.
In practice, issues have been reported in relation to interruptions of heat supply to blocks of flats. Since the internal heat network in the flats is not owned by the heat supplier, the supplier is not entitled to perform maintenance in relation to the internal heat network. However, under the Heat Act, suppliers are responsible to pay compensation for interruptions in supply. To resolve this situation, the Bill stipulates that the owner of the building is responsible for maintenance of the internal network and that – unless parties have agreed otherwise – the supplier remains obligated to pay compensation in case of an interruption of supply caused by the internal network, which it can subsequently recover from the building owner. In addition, the owner of the building will be required to cooperate with the supplier to arrange for disconnection of service to a heat user that is connected to its internal network.
What next?
The Bill is part of a series of measures to shape the energy transition. Other legislation that requires amending includes, the Gas Act, the 1998 Electricity Act (through the Progress Energy Transition Bill that is currently pending in Parliament), and building and spatial planning regulations. These amendments will address important issues, including the scope of ancillary services of electricity and gas grid operators under the Progress Energy Transition Bill, as well as requirements for new building projects to be connected to heat systems under the 2012 Buildings Decree. This new legislation may introduce a ‘broader right to heat’ as mentioned in the ‘Energieagenda 2016’, which would grant some heat users the right – depending on their location – to be connected to a heat network, gas network or electricity network.
We welcome the new focus on the energy transition. There is however considerable tension between the Bill’s objectives of energy transition and protection of heat users. Measures that aim to protect heat users may hinder the development of the desired large-scale support for collective heat supply.
The revised Heat Act is expected to enter into force on 1 January 2018 at the earliest.
