In the Netherlands gas is currently still the dominant source for heating. This is however expected to change in favour of collective heating. To allow for this transition, a bill (the “Bill”) was presented to Parliament on 22 May 2017 to amend the Dutch heat act (the “Heat Act” or "Act").

By improving the functioning of the heat market, the Bill aims to build confidence in collective heat supply as the alternative for natural gas. It furthermore aims to align the regulatory framework for collective heat supply with future developments in the context of the energy transition and to deal with issues that have come up in a recent review of the current Heat Act.

Below we will briefly touch upon the current Heat Act and then address some of the most important changes made by the Bill to the Heat Act.

Background

The Heat Act was adopted by Parliament on 10 February 2009 on the basis of 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 a potential abuse by the heat suppliers' monopoly position 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 main focus of the Act is on district heating.

Pursuant to the Act heat suppliers are required to arrange for reliable and affordable heat supply against reasonable conditions and good quality service. For this purpose the Act introduced a license obligation for the supply of heat, as well as price regulation.

During the lengthy discussions on the Act in Parliament, it was frequently requested to broaden the objective of the Act to also promote sustainable heat supply and the useful application of waste heat. This was however always refused and was considered by many as a missed opportunity.

Key changes introduced by the Bill

Amendments to the scope

During the review of the Heat Act that took place in 2015/2016 it was found that in practice the initial assumptions for the introduction of the Heat Act (i.e. the need to protect captive customers) do not always apply or have adverse effects. As a consequence, two groups of heat suppliers will under the new Bill be excluded from the scope of the Act. Firstly, where heat users are represented in an owner association and entitled to participate in the decision-making of such association, the owner association (or similar entity) is excluded from the scope 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 heat supply and therefore do not need any further protection of their interests under the Heat Act. Secondly, lessors that supply heat to their lessees are excluded from 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 lessees find similar protection in tenancy law.

Where these groups have connections larger than 100 kW, they do not fall under the scope of the Heat Act. As a consequence, such groups may 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.

As indicated above, the current Heat Act has a strong focus on regular district heating, which means the supply of heat at a temperatures of 90o Celsius. The Act does not take into account recent developments in heat supply that make use of lower temperatures. Moreover, the Act does not regulate the supply of cooling energy since in the Netherlands cooling is, unlike heating, not deemed a necessity of life. Although the latter 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 case 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 mandatory maximum tariff for supply of heat to small scale users. This mandatory tariff is based on the so called '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.

During the recent review of the Heat Act the current system of tariff regulation was strongly criticized for being too complex, ambiguous and not taking into account the actual costs for heat supply (which are very different from the costs that are incurred when gas is used for heating), thereby putting heat projects at risk of not being able to earn a sufficient return.

Although it is acknowledged that the use of gas as reference for heat will in the long run become unsustainable, the Bill nevertheless maintains the reference to gas, since at present more than 90% of Dutch heat users are connected to the gas grid. The Bill however aims to improve the formula for calculating the maximum price and introduces new elements to the tariff regulation that are not based on gas but on (average) actual costs: a one-off connection fee (applicable both for connecting to an existing heat network and to a new heat network), costs for disconnection and the tariffs for provision of heat exchangers.

The Bill furthermore aims to promote new incentives for 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 (e.g. instead of the regulated maximum tariff that is set on an annual basis, agree on a fixed tariff that will apply for several years or on reduced fixed costs but a higher variable tariff, or vice versa).

In addition, the Bill allows users of heat to terminate their heat supply agreement, provided that such supply agreement was entered into after the amendment of the Heat Act. This will also apply in case of agreements for definite duration that do not include the possibility of termination and will only be different 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 on the supplier.

Third party access

It is acknowledged that production, supply and transportation of heat currently constitute a closed system, whereby the network owner has a monopoly on the infrastructure and the heat supply and often the heat is generated by one large producer. To ensure security of heat supply, parties will enter into long term supply contracts with take-or-pay obligations for supply and offtake. Heat producers – for which heat generation is not their core business - are often reluctant to be bound by such strict terms. This therefore constitutes an obstacle for the development of sustainable heat networks. In addition, users of heat experience a lack of choice since the heat market does not offer them the same flexibility to choose a supplier as the electricity and gas market.

This could in principle be resolved by the introduction of third party access. According to the explanatory memorandum to the bill, third party access for heat producers is deemed 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 the Minister of Economic Affairs to deviate 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. In the case of heat, there are however important differences. Due to the fact that revenues generated by gas and electricity grid operators are regulated through the transmission tariffs, these grid operators lack financial incentives to resolve supply disruptions. This is however different for heat. In case of a disruption the heat supplier, usually also being the owner and operator of the heat system, will not receive any revenues, other than fixed charges. Unlike gas and electricity grid operators, the heat supplier will therefore have an important incentive to maintain the quality of the transport service. The Bill aims to reflect this in the new compensation mechanism, by granting heat suppliers dispensation from the compensation requirement for one interruption per year, provided that such interruption is resolved within 24 hours. In addition, the supplier will now be excluded from the obligation to pay compensation where the interruption is not caused by the heat network of the supplier or 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 in case of block heating (heat supply to a block 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. The heat supplier is under the Heat Act however responsible for the heat supply and the payment of compensation in case of an interruption 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 under the Bill be required to cooperate with the supplier to arrange for disconnection of 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 amendment in the context of the development of the heat market includes, inter alia, the Gas Act and the Electricity Act 1998 (through the Bill Progress Energy Transition that is currently pending in Parliament), as well as building and spatial planning regulations. Important issues that will be dealt with in such other legislation include the scope of ancillary services of electricity and gas grid operators under the Bill Progress Energy Transition (at present it seems that electricity and gas grid operators will not be allowed to be involved in production or supply of heat), as well as the extent to which new building projects will under the Buildings Decree 2012 be required to be connected to heat systems. In addition, such new legislation may introduce a ‘broader right for heat’ as mentioned in the Energieagenda 2016, which would grant heat users the right – depending on their location - to be connected to a heat network, gasnetwork or electricity network.

We welcome the new focus on the energy transition. There is however considerable tension between the two objectives of the Bill, i.e. to facilitate the energy transition and to protect heat users (captive customers). Measures that aim to (further) protect the position of heat users (such as the maintaining of the reference to gas, the introduction of a mandatory contract termination right for heat users and the introduction of negotiated third party access for producers) may have a negative impact on the business case for heat projects and therefore hinder the development of the desired large scale support for collective heat supply.

It is expected that the revised Heat Act will enter into force on 1 January 2018 at the earliest.