Big question marks around the intention of the Minister of Climate and Energy toward more public ownership in organizing collective heat systems

In the letter to Parliament dated 21 October 2022 (the Letter), the Minister of Climate and Energy (the Minister) announced his intention to include in the legislative proposal on the Collective Heat Supply Act (Wet Collectieve Warmtevoorziening or Wcw), which has not yet been submitted to the House of Representatives, that heat companies operating collective heat infrastructure must be in public hands for at least 51% (the Intention). In this respect ‘in public hands’ means that the shares are directly or indirectly held by a government authority (een overheid), such as the provincial authority or municipal authority, and ‘collective heat infrastructure’ means networks with more than 1500 connections. The Minister justifies his Intention with the argument that such would strengthen public control of the heat transition and that the public interests could be better safeguarded, also in the long run. The question is whether this reasoning is convincing, whether the Intention is necessary to achieve the outlined goals and, above all, whether the Intention does not delay rather than advance the energy transition.

The 51% requirement applies (contrary to what the Letter seems to suggest on some points) to heat companies as a whole and not only to heat networks. The Minister indicates in the Letter that ‘he does not advocate an unbundled (gesplitst) model of supply and production on the one hand and network management on the other hand’. The Minister thus takes a controversial market organization decision by (in my opinion unnecessarily) ‘regulating’ the market operation of heat companies at the frond end, while the methodology of the Wcw (without the Intention) already provides for public control through the authority of government authorities to designate a heat company. I will discuss the Intention in more detail below and I will provide a number of critical comments on the Intention.

Original proposal and methodology Wcw

Government authorities will soon have to establish heat plots pursuant to article 2.1 of the Wcw. The Wcw (in paragraph 2.2) furthermore stipulates that for each plot a government authority must designate a heat company (applying the selection procedure as prescribed in the Wcw) that will have the exclusive right and obligation to construct and operate a collective heat supply in that heat plot.

Proposed amendment of the Wcw

The Intention sets requirements for the heat company that can be designated under the Wcw to construct and operate the collective heat supply in the heat plot. This is because the Wcw stipulates that for a new heat plot municipalities can only designate a heat company of which at least a majority of the shares is in public hands and in which public parties have decisive control (Publiek Warmtebedrijf or Public Heat Company).

This Intention will not apply in full when the Wcw enters into force (envisaged as per 1 July 2024). The plan is to include a so-called ‘transitional period’ (ingroeiperiode) of, in principle, seven years. Given the current intended date of coming into force of the Wcw, this transitional period runs until 1 July 2031. The transitional period serves to build up so-called ‘public realization power’. Public realization power means that municipalities should be given the financial and organizational resources to be able to acquire a majority stake in a heat company. During the transitional period, by way of exception heat companies which are not (at least 51%) in public hands can still be designated, namely in the situation that ‘no heat company is available that meets this qualification.’

Furthermore, the Minister has indicated that the transitional period of seven years may possibly be extended in the event the public realization power is not yet fully in order by then.

Underlying research reports

In the Letter the Minister discusses the studies conducted into the aforementioned public realization power. This has a financial and an organizational component. PwC has conducted a study into the effects of the Intention on the realization power for collective heat systems.[1] In this study PwC concludes that a substantial part of the required capacity for the investment challenge (being EUR 5.6 billion for 500,000 new heat connections including auxiliary boilers and delivery sets in 2030) will have to be contributed by the State. PwC assumes that the Intention will result in significantly less reliance on private heat companies. PwC furthermore notes that public parties will also have to expand significantly on an organization level. Now that this public realization force is not yet up to par, the Intention will significantly delay the rollout rate of heat networks in the coming years. According to the Letter, the Minister feels he can prevent such delay by introducing the previously discussed transitional period.

Transitional law

Transitional law applies for heat companies that (at the time the Wcw enters into force) do not meet the new criteria (being that at least a majority of the shares must be in public hands and that this shareholder also has predominant control, the Criteria). Such transitional law with ‘deferred effect’ (as the Minister calls it) means that the private heat companies will only have to meet the Criteria after 20 or 30 years. The idea is that existing heat networks (or at least heat companies, the Letter is inconsistent on this point) will be owned by a Public Heat Company after 20 or 30 years and will thus meet the Criteria at that time. The Minister assumes that existing heat companies (which do not meet the Criteria) can recoup their investment within this period. In the event the existing heat companies would be required to meet the Criteria after this period, the Minister feels this would (apparently) not constitute expropriation and the associated obligation to pay compensation. The Letter does not mention when this period (of 20 or 30 years) commences. This period is apparently also based on the economic lifespan of heat networks, whereas the question is whether ‘expropriation’ (which is what the Intention actually boils down to) should not be based on the technical lifespan, which is often much longer.

It is also remarkable that the Minister writes that ‘existing heat companies will otherwise be subject to the Wcw with immediate effect, so that the supply obligations, sustainability requirements and cost-based tariff regulations will also apply to them’. This comment ignores that these interests are already largely safeguarded by the scope of application of the Wcw (and, for that matter, also already largely safeguarded by the current Heat Act) and that these requirements also apply to existing heat companies when they do not meet the Criteria. In addition, this comment ignores the role of the Netherlands Authority for Consumers & Markets (the ACM) as a regulator of (compliance with) the rules laid down in the Heat Act (or in other words: as a ‘watchdog’ for safeguarding the public interests). The Letter virtually does not mention the ACM.

Public ownership of bundled heating companies

As mentioned, the Intention seems to go beyond the mere transfer of ownership of the heat networks. After all, the Minister writes that the Criteria will apply to heat companies as a whole and not just to heat networks and that ‘he does not advocate an unbundled (gesplitst) model of supply and production on the one hand and network management on the other hand’. It is therefore questionable to what extent the reasoning around expropriation is conclusive. The Minister writes that his ‘choice’ is inspired by the fact that collective heat systems can be considered as so-called vital infrastructure (just like gas, electricity and drinking water networks) and that public interests could be better safeguarded if heat networks meet the Criteria. However, this ignores that the Gas Act and Electricity Act only regulate network management and that the regulation applies to network companies which, unlike what the Minister apparently envisages for the heat market, are not allowed to develop production or supply activities.

As indicated above, ‘in public hands’ means that the shares are directly or indirectly held by a government authority. ‘Indirect’ could then mean a network company whose shares are fully publicly owned. According to the provisions on permitted ancillary activities of network companies (article 17c of the Electricity Act and article 10d of the Gas Act), these companies would be allowed to play a role as network manager of heat networks. However, the question is whether they are also allowed to engage in these activities at integrated Public Heat Companies, which also engage in production and supply activities. The Minister offers the following ‘solution’ in the Letter: ‘However, a network company can produce and supply heat outside the group, for example in the form of a joint venture in which the network company has no control over supply and production.’ In my opinion, the Minister should reconsider this point.

Possible consequences

The three largest heat companies in the Netherlands (Eneco, Vattenfall and Ennatuurlijk) have indicated that the Intention will delay the energy transition. In the context of the Intention it is (in short) not attractive to invest in new heat networks. The Minister notes that the combination of the transitional period and transitional law is sufficient incentive for private heat companies to remain active in the heat domain, which would not delay the energy transition. Whether that assumption is correct seems very questionable to me.

In itself, it is understandable that the Minister considers it undesirable that heat networks get into the ‘wrong hands’, however there are other less far-reaching options for meeting that desire. Moreover, in the Wcw, as originally submitted for consultation in June 2020, the directive role of municipalities in establishing heat plots and designating heat companies was already thoroughly and appropriately laid down. The usefulness and necessity of a greater role of government authorities in the heat market than was envisaged in the 2020 version of the Wcw is still not clear to me (also after reading the Letter). Furthermore, the Intention could lead to a Public Heat Company that (during the transitional period) ‘tenders’ with higher heat rates in the selection procedure, being preferred in the selection procedure over a ‘regular’ private heat company that has tendered with lower heat rates.

In the current climate, in which energy costs are increasing, the Netherlands face an enormous challenge in the field of energy transition, various important legislative procedures are considerably delayed (with all the uncertainty that this entails) and in which we are possibly on the brink of a huge recession, it is in my view not wise to nationalize heat companies (with all that this entails). All the more so since the arguments for doing this do not convince (me at least) at all.