Eneco: cabinet delays heat transition

The cabinet is scheduled to take a decision on mandatory public ownership of new heat networks next Friday. In time, private owners of existing heat networks will also be expropriated. These unprecedented choices will lead to investment uncertainty for current projects, years of delay in the heat transition and greater dependence on natural gas. In times of high energy prices, in particular, all parties are desperately needed to get out of the energy crisis as quickly as possible. Private heat companies currently account for approximately 90% of all investment in collective heat facilities. The exclusion of the private sector is therefore incomprehensible. In the current energy crisis, the public and private realisation strength must be combined, not divided and delayed. This proposal will also not make heat cheaper.

Just like municipalities, Eneco sees the importance of more public control in the heat transition and the company supports a cabinet decision in that direction. But the chosen solution, under which private companies will only be allowed to be minority shareholders in a heat network, is wrong. With limited control, Eneco cannot take responsibility for the major business risks of a heat company. It would make it impossible for us to take investment decisions and it would become irresponsible from a business economic perspective to invest tens of millions of euros per heat network. It would not be feasible to contribute capital, knowledge and experience while control rests with a public partner, often with little experience in the construction, maintenance, distribution and operation of a heat network. The risk would be too great to expose projects with an investment horizon of 20 to 40 years to the unpredictable dynamics of local politics.[1]

No national straitjacket, but a custom, local approach

The cabinet decision is all the more remarkable because a recent study by PwC[2] commissioned by Minister Jetten has confirmed that mandatory public ownership will slow down the heat transition. Not only because of the enormous financial risks for municipalities, but also because the public realisation capacity will be insufficient until at least 2030. In addition, other public parties, such as network companies, are already having great difficulty increasing the capacity of their electricity networks in a timely manner.

On the other hand, a national legal straitjacket of compulsory public ownership does not fit the need of many municipalities for flexibility and a custom local approach. Eneco therefore advocates a model in which municipalities have more freedom of choice between public, private and PPP (public-private partnership, for example with a 50/50 ownership ratio). The challenge of the heat transition is too great and important to put all your money on one horse.

Risk for current projects despite the transition phase until 2030

Together with municipalities, Eneco would like to help as many households in the Netherlands as possible to switch from expensive and scarce natural gas. However, the intended cabinet decision will lead directly to investment uncertainty for current heat projects because the transitional law is unclear. Can a project go ahead or not and will it still be possible to recoup investments after the law comes into effect in 2024? Eneco will therefore examine per area, together with municipalities and housing associations, how investments can still continue, while investment security can be maintained.

The Hague

An example of the immediate uncertainty is Eneco's contribution to the switch from natural gas to heat networks in the municipality of The Hague. This transition is a precondition for the development of local geothermal resources and our role as launching customer of the WarmteLinq transport pipeline (Heat pipeline from the port of Rotterdam to The Hague).

Mandatory public ownership does not lead to lower heat tariffs

The Netherlands is currently suffering from high energy prices. It is therefore important that a recent study by Berenschot shows that in practice public heat companies do not apply lower heat tariffs on average than private companies.[3] The cabinet's choice for compulsory public ownership will therefore not contribute to lower heat tariffs. Due to the increasing complexity, there is even a good chance that the risks and costs will actually increase.

Eneco supports the wish to no longer base the tariffs on a natural gas reference, but on the actual costs plus a reasonable return. It is already the case that heat companies are not allowed to make more than about 6% return on their investments. ACM monitors this and since 2021 has the right to intervene if the returns achieved are too high. Mandatory public ownership does not lead to better affordability, but would require a lot of extra capital from municipalities, which can lead to extra financial risks for the (local) taxpayer.

[1] See page 6 of the PwC report commissioned by the Ministry of Economic and Climate Affairs (see note 2). See also the reports of the Audit Offices in Amsterdam and Rotterdam that illustrate the extent of the effects of local politics on the operational management of AEB and Warmtebedrijf Rotterdam (WBR), respectively. Both companies have been in serious financial trouble in recent years.

[2] PwC, August 5, 2022, 'Effects of public ownership obligation on the realisation strength for collective heat systems'.

[3] See p. 11 of: https://www.berenschot.nl/media/b2qkhjpr/berenschot-vergelijking-van-zes-warmtenetten-met-verschillende-ketenstructuur.pdf