In the autumn of 2020, the Competition Authority supplemented the methodological guide ‘Principles of approval of the maximum price of heat’. The additions were based on the need to meet Estonia’s ambitious climate goals. As more environmentally friendly district heating based on carbon-neutral fuels and efficient co-generation is preferred in densely populated areas, the need for sustainable district heating is increasing, which is today the main possible type of heating to ensure a carbon-neutral heat supply. One of the main aims of the Energy Efficiency Directive is also that: ‘Energy must be used more efficiently at all stages of the energy chain, from energy production and transmission to use. It is also important to note that in the future, the production of electricity from renewable energy sources required for statistical transmission will also contribute to the production of heat energy. This change in the practice concerning the energy sector also entails the additional need to take into account more heat production and transmission efficiency indicators – efficiency and pipeline loss – when coordinating the maximum price of heat under the District Heating Act, as fuel consumption directly depends on these indicators. Pursuant to subsection 5 (1) of the District Heating Act, district heating must also be efficient and sustainable.
The technical requirement for heat production efficiency and pipeline losses is also intended to motivate heat companies to make optimal investments in boiler equipment for more efficient use of fuels and district heating pipelines to develop the technical and economic functioning of the network to reduce pipeline losses and ultimately protect consumers from inefficient heat production and to ensure the continuation of distribution services.
Due to the above, the methodological guide set out the following technical requirements for heat production efficiencies and pipeline losses:
a) for efficiency of heat production:
- no less than 92% of gas fuel,
- no less than 90% of liquid fuel,
- no less than 85% of solid fuel;
b) for pipeline losses:
- 14% from 2021,
- 13.5% from 2023,
- 13% from 2025,
- 12.5% from 2027,
- 12% from 2029,
- 11.5% from 2031.
The efficiency of heat production depends on the type of fuel used and the load on the boiler equipment. As a result of the use of different technologies, it is possible to achieve different efficiency of heat production when burning fuels in boiler equipment. In determining the efficiency of heat production provided in the methodological guide, expert assessments and actual statistical data of heat companies in the database of the Competition Authority have been taken into account. In the process of coordinating the maximum price of heat, the Authority analyses the change in the efficiency of a specific production unit over time. The analysis assesses the characteristics of heat production, such as heat production with a base load and/or peak load boiler and the needed heat production volume. Based on these circumstances, the Competition Authority assesses the possibility of actually meeting the technical requirements for efficiency set out in the methodological guide. If compliance with the technical requirements for efficiency proves to be economically impractical, the Competition Authority may deviate from the requirements.
In the process of approving the maximum price of heat, the Competition Authority analyses the change in the pipeline loss of a specific network area over time on the basis of both absolute value (MWh) and relative (%) pipeline loss indicators. The analysis assesses the characteristics of the district heating network, such as heat consumption density (low or high), heat sales volume (decreasing or increasing), summer heat production for domestic hot water (yes or no), technical condition of the district heating network (poor or good) and impact of necessary investments on heat price (increasing or decreasing). Based on these circumstances, the Competition Authority assesses the possibility of actually meeting the technical requirements for pipeline losses set out in the methodological guide. If compliance with the technical requirements for pipeline losses proves to be economically impractical, the Authority may deviate from the requirements.
In addition to the above, the principle of applying a reasonable rate of return, i.e. the weighted average cost of capital (WACC), has been supplemented in the methodological guide. Namely, from 2021, separate WACC will be applied to heat producers and network operators. For heat undertakings engaged in the production, distribution and sale of heat, separate WACC is applied to regulated fixed assets for heat production and regulated fixed assets for the distribution and sale of heat.