The Dutch Heating Supply Act (Warmtewet) currently in force will be amended. The principal purpose of the improvements envisaged by the amendment is to strengthen the position of existing and future heating consumers who face a monopolist as a heating supplier (‘captive consumers’). In addition, the government expects that the clarification of the statutory parameters (despite the fact that various other steps must also be taken to achieve this) will eliminate major obstacles standing in the way of sustainability, since the phasing out of natural gas leading up to 2050 and a cost-effective and low-carbon heating supply require proper functioning legal conditions to be in place. The proposed legislative amendment is the government’s first step in creating those conditions. The memorandum of amendment to the proposed amendment to the Heating Supply Act led to questions and comments in the House of Representatives. On 19 September 2017, the Dutch Minister of Economic Affairs, Henk Kamp, addressed those questions and comments in a memorandum of reply. Below we address some of the most relevant statements made by the minister in the latter memorandum. He talked about, for example, an anticipated strengthening and expansion of electricity networks, a stimulus for returns and investment conditions on the heating market and potentially more attractive business cases for heating companies.
Anticipated increase in electricity use
Expanding on the existing possibility for municipalities to block gas connections in certain areas, under the proposed legislative amendment, municipalities will have the authority to designate areas (districts or streets) where gas transmission networks will not be installed or expanded. This option is particularly relevant in connection with the construction of new housing developments. In those areas, the network manager will no longer be obliged to connect low-volume users to the gas network. The minister predicts that the conversion from the right to a gas connection to a general and technologically neutral ‘heating right’ combined with the active phasing out of natural gas will not only have a stimulating effect on the development of heat networks, but also on the expansion of electricity networks. Existing gas-fired boilers that supply heating will to a great extent be replaced by all-electric solutions such as heat pumps. The increased use of heat pumps is expected to cause an increase in electricity use. As such, an expansion and/or strengthening of the electricity network is foreseeable. Extensive insulation of buildings that need to be heated and demand-side management by means of smart devices are potential solutions that could aid in ensuring that the expansion of the electricity network is kept to a minimum, especially in cases of a peak in the demand for electricity. This presents a major challenge for the market, which must offer an attractive range of products and services.
Indirect improvements of returns and investment conditions
Bearing in mind the principal purpose of the Heating Supply Act currently in force and the envisaged amendment to that Act, i.e. to protect captive consumers, the Heating Supply Act does not, in principle, seek to improve the financial returns of the suppliers in the heating market or the investment conditions for companies in the heating market. However, that does not diminish the fact that the legislative proposal in question wishes to contribute to consumers’ faith in collective heat supply, from which heating suppliers will obviously reap benefits. Furthermore, the minister explicitly states in the memorandum that the amendment to the Heating Supply Act, particularly the introduction of a maximum price for heating, should not lead to such pressure on suppliers’ returns that it affects security of supply. In addition, pursuant to section 7(1) of the Heating Supply Act, the Netherlands Authority for Consumers & Markets (ACM) must monitor the movements in the returns achieved in the heating supply market and present its report to the Minister of Economic Affairs once every two years. Thus, if heating suppliers report insufficient returns, which makes investing in heating projects less attractive, ACM will have to make note of and address this matter.
Potentially more attractive business cases for heating companies
Many sections of the Heating Supply Act prescribe maximum prices for heating which are based on a natural gas reference price. In this connection, 'natural gas reference price' refers to the relationship between the gas price and the maximum heating price, in which respect the price that low-volume users pay for heating is derived from the average costs that the same low-volume users would have paid had they used a gas supply for their heating needs. Thus, while an increase in the natural gas price could lead to a price increase – by way of the link between the maximum heating prices and the natural has price – and consequently better business cases for heating companies, virtually no correlation exists between the heating suppliers’ actual costs and the natural gas price. Therefore, leaving aside the question of how the gas price will develop, this could result in doubts as to whether heating suppliers will achieve sufficient returns to cover their costs. However, as energy transition progresses, heating by means of natural gas will become less standard. Consequently, it will become increasingly illogical to use the natural gas price is as a reference. However, the minister deems a gas reference price necessary at this point in time. He considers the current dominant position of natural gas in the heating supply in the Netherlands to be a justification to also have the gas reference price be a supporting element for the rate regulation for heating in the present legislative amendment. The price for energy supplied by renewable sources such as the sun, wind and geothermal heat is set by the market rather than by monopolists and the Heating Supply Act aims to protect consumers from monopolists. For this reason, the minister believes regulated prices are not necessary and the question of whether maximum rates for heating suppliers cover costs is less pertinent here. In this connection, it is furthermore relevant to note that the minister explicitly mentioned hydrogen as a renewable gas that could play a permanent role in the supply of energy in the future. In short, the anticipated elimination of the link with the natural gas reference price and the increasing importance of renewable heat sources could lead to attractive business cases for heating companies. This is reinforced by the fact that the amendment to the Heating Supply Act provides that future producers of renewable heating will be entitled to relevant information from the network manager about the situation on the networks in question, which means that they will have clear and transparent information when working out the details of their business cases as to whether their business cases are profitable.
Follow-up to the envisaged amendments
As stated previously, many more measures are needed in addition to the amendment to the Heating Supply Act to achieve the sustainability targets. As such, the rules regarding electricity, gas and heating are likely to be adjusted once again. The memorandum of amendment must be seen in this light. In addition, proposals to amend the Heating Supply Decree (Warmtebesluit) and the Heating Supply Regulation (Warmteregeling) are currently being prepared. The amendment to the Heating Supply Act will be given actual and specific shape in that subordinate legislation. In July and August 2017, an online consultation was held to consult on this decree and this regulation. The responses to this consultation are being processed now and could result in changes to the draft proposed amendments. The proposal to amend the decree will subsequently undergo a legislative quality test, as well as an implementation and enforcement test. These tests could also result in changes to the draft proposed amendments. After the test results have been processed and consent has been obtained from the Council of Ministers, the amending decree will be presented to both Chambers of the Dutch States General. Click here to read Minister Kamp’s memorandum of reply.
Course of the procedure regarding the envisaged amendments
22 May 2017: Presentation of the legislative proposal to amend the Heating Supply Act (amendments following an evaluation of the Heating Supply Act) (Dutch)
28 June 2017: Memorandum of amendment for the legislative proposal to amend the Heating Supply Act (Dutch)
31 August 2017: Consultation closed