5. HEAT AND DISTRICT HEATING

Figure 5.7 District cooling supply, 1996-2016

District cooling has increased significantly in the past two decades, but in recent years growth has stalled.

Note: GWh = gigawatt hours.

Source: SEA (2018), Energy in Sweden, Facts and Figures 2018, www.energimyndigheten.se/statistik/energilaget/?currentTab=1#mainheading.

DH markets and regulation

The liberalised DH market

DH was introduced in Sweden in 1948, and it expanded widely in the following decades. Initially, all the DH systems were owned and operated by municipalities, and the heat was sold at a price based on the cost of production. In 1996, the DH market was liberalised together with deregulation of the power market. Since then, DH systems have been operated as a business by public or private companies. Municipalities still own 65% of Sweden’s around 200 DH companies, while the rest are private or state-owned. The large DH network in Stockholm is owned 50% by the city and 50% by the company Fortum.

A DH network is a natural monopoly, similar to electricity or gas distribution grids. To avoid the misuse of a monopoly position, many countries regulate DH prices. Sweden has chosen a different approach, in which DH is considered to compete against other heating technologies on an integrated heat market. Since the liberalisation in 1996, DH companies are free to set any DH price and customers are free to switch to alternative heat sources. A similar free-market approach is used in Finland, whereas the other Nordic countries and most others use price regulation of some sort. Heat pumps, which benefit from low electricity prices, are the main alternative to DH in the Swedish heat market.

DH prices

There are no official national statistics of DH prices. However, in 1996, the major Swedish housing associations formed the Nils Holgersson Group, which publishes yearly price statistics from each municipality. The data show that DH prices increased significantly in the early 2000s, but stabilised somewhat in recent years. Furthermore, the statistics show that DH prices vary significantly across networks. A customer connected to the most expensive system pays more than twice as much for DH as does a similar customer in the cheapest system. The price difference is mainly based on the cost of production. A DH system supplied by waste heat from local industries can often offer lower prices, which is the case in, e.g. the cheapest system in Luleå. Small DH systems

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5. HEAT AND DISTRICT HEATING

using expensive fuels, such as wood pellets and oil, tend to have higher prices, e.g. in the DH system in Munkedal (Figure 5.8).

Figure 5.8 Average DH prices (nominal) in selected municipalities, 1996-2017

DH prices vary significantly across networks, depending mainly on the production costs, where, e.g. industrial surplus heat leads to lower prices.

* The average is calculated as an average of all available DH prices, not weighted by delivered heat per system. Note: Average prices for the heating of one square metre during one year in nominal values (SEK/m2/yr).

Source: Nils Holgersson Group (2018), Fjärrvärme – Historik [District Heating – Historic Data], http://nilsholgersson.nu/rapporter/rapporthistorik/fjarrvarme-historik/.

Large price differences between different DH systems indicate that DH companies are not operating on a fully integrated heat market, and that they have considerable market power (Åberg et al., 2016). If DH companies were competing with other heating technologies on a fully integrated heat market, DH prices would be set more in relation to other prices, e.g. the electricity price, which reflects the competitiveness for heat pumps. Price variations between Sweden’s electricity price regions are insignificant compared to the price differences between different DH markets, which indeed indicates some market power of the DH companies.

The “Price Dialogue”

Some years after the liberalisation of the DH market in 1996, the DH prices increased at a fast rate (Figure 5.8), which led to political pressure to strengthen consumer protection. One way to increase competition on the market and thereby improve the situation for the consumers would be to introduce mandatory third-party access (TPA). However, the technical conditions for accessing a DH system can vary locally from one network to another, which complicates TPA regulation. After several studies on the issue, the government concluded that mandatory TPA would not be a feasible solution for strengthening consumers’ protection while maintaining flexibility for the producer.

In 2008, the government adopted the District Heating Act (2008:263), which confirms the liberalised nature of the heat market. The act requires producers to increase the transparency of their pricing. Following this, in 2011 the main producers (energy companies) and consumers (housing organisations) jointly established the non-profit organisation Prisdialogen (the Price Dialogue) to assess changes in DH prices and improve transparency and consumer confidence. Prisdialogen is organised by Riksbyggen (an association of building unions and local housing associations), SABO

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