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DISTRICT HEATING SYSTEM OWNERSHIP GUIDE


The District Heating Ownership guide provides an overview of different ownershipstructures in CEE and Western European countries, and their recent development. Theownership and management of DH systems are divided into three main groups: solelypublic, solely private, and public-private partnership with mixed ownership andmanagement. In total, eight mixed models are presented. the Guide does not answerexplicitly a question if the district heating (DH) assets should be privatised, or remainin public ownership, since there is no single answer for this question. It provides a briefoverview of the history, current status, and trends in DH ownership in both theOECD/EU countries and in countries with economies in transition.

The Guide is intended primarily for policy and decision makers on a national,municipal and utility level who consider a change of ownership or operationalschemes, and potentially privatisation of the district heating assets.

This guide has been produced as part of the DHCAN project ‘District Heating & Coolingand CHP: Promotional Materials for Candidate Countries and Pilot Actions in Hungaryand Romania’. Other guides in the series are listed below. The project is supported by the European Commission under the SAVE (Special Actions for Vigorous Energy Efficiency) programme.

EXECUTIVE SUMMARY AND FOREWORD

DHCAN PROJECT TEAM BRE (UK)

Euroheat & Power

KAPE (Poland)

SEVEn (Czech Republic)

FVB (Sweden)

Ekodoma (Latvia)

Fotav Rt (Hungary)

Debrecen Heat Supply Company (Hungary)

Tata Municipality (Hungary)

ASA (Romania)

ARCE (Romania)

DHCAN GUIDES available from www.euroheat.org andwww.bre.co.uk

Generic guides

� The case for district heating: 1000 cities cannot

be wrong

For decision makers – setting out main benefits

� District heating system modernisation guide

For energy managers – key issues for

refurbishing networks

� District heating system management guide

For district heating company managers

� District heating system ownership guide

Options for public and/or private ownership

� District heating system institutional guide

Background policy and regulatory issues

� Guide for modernization of district heating

systems by implementation of small/medium CHP

Making the case for CHP – used for the pilot

action in Romania

� The heat that turns the light on!

District heating promotional flyer for the

general public.

Case Studies � The role of CHP in the development of district

heating in Budapest

� Towards a modern, customer-driven district

heating system in Debrecen.

CONTENTS


1 BACKGROUND 41.1 History of district heating ownership 41.2 Recent changes in the energy industry 41.3 Recent trends in the district heating industry 5

2 DISTRICT HEATING OWNERSHIP AND MANAGEMENT OPTIONS 7

3 FULL PUBLIC OWNERSHIP 8

4 FULL PRIVATE OWNERSHIP 10

5 PUBLIC PRIVATE PARTNERSHIPS 115.1 Operation and management contract 115.2 Leasing 125.3 Concession 135.4 Privatisation of heat generation only 135.5 Selected private minority equity partnership 155.6 Minority private equity invited through the stock market 165.7 Majority private equity ownership 165.8 Full private ownership with municipal support 18

6 CONCLUSIONS 196.1 Key aspects of public vs. private ownership 196.2 Assessment of district heating ownership schemes 20

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1 BACKGROUND


1.1 History of district heating ownershipOwnership structures of DH schemesboth in Western European countries andCentral and Eastern European (CEE)countries have experienced significantchanges during the last decade of the20th century. Formerly the DH industrywas typically in public ownership –either state owned (typical for CEEcountries), or owned by municipalitiesand/or regional governments (mostly inWest European countries). In countrieswith centrally planned command andcontrol economies the DH utilities – aswell as practically the whole economy –was typically owned by the state. Even incountries with market economies inWestern Europe, public ownership of DHprevailed. This was not the case only ofDH, but of energy and other utilities ingeneral as well as of main industrialcompanies in several countries.

In CEE countries, the centralised DHschemes were often incorporated intostate-owned national electricity utilities.DH utilities were departments or branchesof national state-owned companies, andtypically they were not incorporated asindependent economic entities. Some,mainly small decentralised schemes, wereunder municipal control and financeddirectly through the municipal budget,rather than incorporated as autonomousorganisations.

In Western Europe the DH utilities wereeither incorporated as utilities providingDH only, or more often they wereintegrated as multi-utilities into universalmunicipal service provision. A typicalexample is the German ‘Stadtwerke’ – iemunicipal multi-utility that providesdistribution and supply of electricity,

natural gas, DH, water as well astransportation, services in wastemanagement, street lighting etc. Thismulti-utility scheme is often the means bywhich specific national or municipalpolicies are implemented and, forexample, cross-subsidies transferred fromone municipal sector (typically publictransportation) to another (energy).

Energy utilities, including electricity,natural gas and DH were typicallyunderstood as public service providers.The term ‘public service obligation’(PSO) is used in several nationallegislations, as well as in EU directives,and it includes different specificobligations that reflect national policies.In most cases this obligation – ifspecified – contains certain standards forthe quality of supply, or specification ofan obligation to serve clients within thefranchised area.

1.2 Recent changes in the energyindustryThe formerly relatively stable conditions inthe energy industry dramatically changedduring the 1990s. It was not only thecollapse of the command-and-controleconomies, but also changes in traditionalmarket economies especially theliberalisation of energy trading, andintroduction of competition into traditionalmonopolistic electricity and natural gasmarkets. These changes implemented inboth Western European and CEE countries,have had significant impacts on theownership structure of the industry.

Liberalisation of the electricity and naturalgas markets means specifically thatcommodity trading has become the subjectof competition. The original franchised

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BACKGROUND


monopolies have been abolished and canno longer limit the entrance of newcompetitors into the market. Competitionmeans that eligible electricity and naturalgas customers have the freedom to chooseand change electricity and natural gassuppliers. However, regulatory conditionsmay lead to difficulties in the combinedheat and power (CHP) market generally (egGermany, Netherlands) or favour largergenerators (eg UK) despite the fact thatenergy policy/aspirations for carbonabatement would be better delivered bysmall (CHP/renewable) embeddedgenerators.

To counter these difficulties, and followingEnergy Efficiency and EnvironmentalPolicy objectives, legislation has beendrafted (Germany) to assist the CHPmarket, while in the UK Good QualityCHP attracts a number of benefits,including exemption from the ClimateChange Levy.

Large electricity and natural gas customersin most European Union (EU) countriesalready have access to the competitivemarket; in several countries 100% of themarket is already open to competition. ByJuly 2007 all customers in the EU-15member states including households willhave be free to choose any electricity andnatural gas supplier1.

In response to energy marketliberalisation and globalisation a newtrend has emerged. In numerous casesformer public utilities have been fully orpartially sold to private investors. The

goal was to develop a better position andbecome more flexible and effective incompeting in a new global Europeanelectricity and natural gas market.

1.3 Recent trends in the district heatingindustryAlthough changes in ownership andespecially privatisation are driveninternationally, they do also influence theDH market in each country. The DHutilities are sometimes also electricityproducers, for example through CHPproduction. Electricity and especiallynatural gas are direct competitors to DH.The introduction of competition inelectricity and natural gas markets hasdecreased prices significantly – at least inthe short-term. DH thus has had to reactto this price development and adjust itsheat prices and marketing policies as well.

The changes in utility ownershipstructure are still ongoing and will reactpartly to the new European directives2003/54 and 2003/55. It is thus too earlyto summarise the final experience andlessons learned based on an analysis oflong-term impacts. However, the newtrends in a changing industry canalready be identified.

A national illustration of the new trendsin DH ownership is presented in thefollowing chart. It shows an increasingshare of private ownership in thetraditionally publicly owned Swedish DHmarket. The diagram reflects ownershipshares of heat sold, since many systemsare co-owned by a municipality and a

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1 According to the new directives 2003/54/EC and 2003/55/EC of the European Parliament concerning common

rules for the internal market in electricity and natural gas respectively, which replace directives 96/92/EC and

98/30/EC

BACKGROUND


private company. Whether this trendtowards more private ownership willcontinue in Sweden is an open question,but this development does reflect typicalEuropean experience since about 1990.An industry which was traditionallypublicly owned now exhibits a widevariety of ownership structures includingfull public, full private, and joint publicprivate partnerships.

The private sector has started to expandinto DH even in countries with publicownership traditionally prevailing in thisindustry. The participation of the privatesector in formerly traditional publicutilities and services (Public PrivatePartnership-PPP) has a number ofdifferent forms: in addition to ownershipchanges and privatisation it includesparticipation of the private sector in

procuring public services andinfrastructure on a contractual basiswithout necessarily changing ownershipof the district heating assets.

Although the major privatisation in DHand change from state to municipal andprivate ownership took place in the earlyto mid 1990s in the CEE countries, nodefinitive ownership structure has yetemerged. For example, severalmunicipalities have recently decided tosell their assets in DH utilities to privateinvestors. Exceptionally themunicipalities have decided or intend topurchase the assets from privateinvestors to obtain majority controlinterests in the DH utility.

Secondary purchases of DH utilitiesamong private local and multinationalinvestors are also quite common.

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Fraction of heat sold

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Ownership for Swedish district heating systems

1990-2002

Other private companies

Vattenfall, Sweden

Sydkraft, subsidiary of EON, Germany

Fortum, Finland

Municipalities

Source: Sven Werner, FVB, personal communication, 2003

2 DISTRICT HEATING OWNERSHIP AND MANAGEMENT OPTIONS


With the recent changes in the DHindustry, four major alternatives ofownership models for DH utilities havebeen identified:� Full public control by the state or

municipality� Full private control� Mixed ownership and management –

public and private� Not-for-profit community-owned co-

operatives.

The first two alternatives contain 100%ownership, public or private, withabsolutely no commitment from theother side. Within the mixed andcommunity ownership categories,various models have been developed:1 Operation or management contract2 Leasing3 Concession4 Only privatisation of heat generation5 Selected private minority equity

partnership6 Minority private equity invited

through the stock market7 Majority private equity ownership8 Full private ownership with

municipal support

These eight variants contain exampleswith full public ownership with privateinvolvement in management, mixedownership, and full private ownershipwith some public commitment. So thisclassification does not only reflect theownership, but also management of DHsystems. Other public privatepartnerships can be found for financing,modernisation, and customer support,but are not dealt with in this guide.

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3 FULL PUBLIC OWNERSHIP


The current public ownership in DH ismostly the result of a historic publicinitiative to start a local DH system(both in CEE and Western Europeancountries). Nowadays publicadministrators are often not familiarwith current and future issues relating toDH, so that many of the large strategicissues are delegated to the companymanagement group. This kind of passiveownership is unfortunate, since thepotential environmental and customerbenefits of DH often are achieved morereadily when there is a stronginvolvement by local public bodies.

An active discussion about privatisationof the DH utility has appeared in manymunicipalities in both Western Europeanand CEE countries. Sometimes there hasbeen an active decision to keep the DHsystem in public ownership. Thisdecision has sometimes also given arevival of the motives for publicownership and has strengthened therelations between the public owner andthe DH company.

A variant of public ownership is when apublicly owned DH company starts tobuy and operate DH systems in othermunicipalities. The management skills inthe major DH company are then used inother municipalities.

Examples of public ownership are:In the Czech Republic, the fullypublicly owned DH utilities are ratherrare, especially with larger schemes.They exist with some smallermunicipalities (less then 30,000inhabitants) and typically purchaseheat from another heat producer,

and/or operate small boilers. Mestskétepelné hospodárství Kolín, s.r.o. is aDH utility 100% owned by the Kolínmunicipality. It serves the city of Kolínand Cesky Brod, and purchases the bulkof the heat from a local power plant.Tepelné hospodárství Prachatice, s.r.o.is 100% owned by the Prachaticemunicipality, and operates several smallboiler houses.

In Hungary, DH distribution networksare mostly owned by the public sector egFötav (see DHCAN case study) is fullyowned by the municipality of Budapest,as they believe in the concept of publicsector services being best served by non-profit making organisations. The DHsystem in Debrecen is also kept inmunicipal ownership. Theirtransformation from an old DH systemwith a bad image to a modern customer-oriented DH system is extensivelydescribed in another DHCAN case study.The Debrecen DH Company also runsthe DH system in Balmazujvaros.

In Germany, Stadtwerke München, thethird largest German DH system, is fullyowned by the city of München.

In Sweden, the DH systems in Göteborg,Västerås, Linköping, Eskilstuna, andVäxjö are all fully owned by the localmunicipalities. Several of thesecompanies have also acquired DHsystems in smaller municipalities. Somesmall municipalities (Pajala, Tierp, andÄlvkarleby) have fully repurchased sharesin their former partnership withVattenfall, the state-owned powercompany, in order to strengthen thelocal public ownership.

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FULL PUBLIC OWNERSHIP


In Denmark, public ownership is strongin both large and small systems, butlarge systems often buy bulk heat fromregional CHP plants. The DH companiesare owned either by the municipalities(particularly in the major cities), or bylocal consumer co-operatives. More than430 DH companies supply around 60%of all Danish dwellings. Of these 15% areowned by municipalities – responsiblefor approx. 66% of the heat sale, and85% are consumer owned companieswith approximately 37% of the totalheat sale

In Austria, Fernwarme Wien whichoperates the city DH scheme, is 100%owned by the municipality.

In Finland, Helsinki Energia, whichoperates the successful city-wide DHscheme in Helsinki, is fully owned by theMunicipality of Helsinki.

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4 FULL PRIVATE OWNERSHIP


The advantage of the private sectortaking on district heating assets is thatrisk is transferred; the private sector is inthe best situation to handle risk. Ingeneral the private sector is better placedto deliver capital-intensive projects.However, the consequence of a full,100% private ownership is that thepublic administration (localmunicipality, regional or centralgovernment) loses its influence onbusiness decisions of the utility unlessthe role (for example price regulation,environmental regulations, impactassessment) of the public administrationhas a mandate for these issues, orspecific legislation, in national orregional law.

Examples of private ownership are:In the Czech Republic, numerous localas well as foreign companies bought andoperate DH schemes in differentmunicipalities. The example of 100%private ownership and control in DH isLounské tepelné hospodárství spol. s r.o.,

a DH utility supplying heat to the city ofLouny. Most of the private investors didnot or were not able to acquire full 100%ownership control, and thus have eitherminority or majority shares in the utility.For example International Power owns99,9% of Elektrárna Opatovice powerplant and DH. Other examples of privateinterests in DH are German based MVVEnergie, French Dalkia, or Czechcompanies Komterm and Tedom.

In Sweden, Vattenfall has acquired theDH system in Uppsala and severalsmaller cities, while Sydkraft (owned byE.ON, Germany and Statkraft, Norway)owns the DH systems in Malmö,Norrköping, Örebro and several othersmaller municipalities. Fortum, Finlandhas acquired 90% of the Stockholm DH utility.

In Germany, the DH systems in Berlinand Hamburg, the two largest inGermany, are fully consolidated intoVattenfall Europe.

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5 PUBLIC PRIVATE PARTNERSHIPS


There are many types of public privatepartnership arrangements with varyingdegrees of private sector involvement.Generally speaking these partnershipmodels allow both private and publicparties to exert influence within thescheme. DH schemes can benefit from suchpartnerships: the private sector being bestplaced to raise capital and deal with risk,while the public sector is best placed todeal with local issues involving a numberof different municipal departments. It isimportant to note that the actualownership within these partnerships maybe solely public, solely private, or mixed.

The partnership is a mode of co-operation between the former full publicowner and a new private partner inprocurement and provision of traditionalpublic services and infrastructure.

5.1 Operation and managementcontractsPublic private partnerships with no capitalinvolvement from the private sector andno ownership change are operation andmanagement contracts. In these casesutility management and/or operation areoutsourced based on a contract withspecified terms, to a private company forsome years. The public partner keeps theownership of the assets, and is responsiblefor the investments, while the operatorgets paid for the services performed.

The critical issue in this public privatearrangement is the quality of thecontract between the owner of the assets(the municipality) and the privateoperator. An important part of suchcontracts is the specification of duties ofboth parties and an exit strategy in caseof default by the operator.

In the Czech Republic, a mayor of onevery small municipality in NorthernBohemia complained that there was nolaw that would regulate what to do whentheir DH operator faced financial default.The small boiler house and local DHscheme supplying several municipal andresidential apartment buildings was inmunicipal ownership, and themunicipality had contracted operation ofthe DH to a small private local operator.

After a period of successful operation theprivate operator faced serious problemswith cash flow and was not in a positionto continue the operation, purchase offuel and supply of heat. Unfortunately,the contract between the municipalityand the private operator was notprofessional and did not have any exitprovisions for this eventuality.

Contracts between the owners of the DHassets and the service providers shouldinclude provisions on:� financing and ownership of new

assets (reconstruction, newdevelopment, extension of the grid,connection of new customers)

� performance specifications foroperation and maintenance

� pricing policy� policy on connection, disconnection

and upgrade� co-operation with the

municipality� environmental, sustainability and

planning strategies� exit strategy – especially in case of

under- or non-performance of theoperator, with a specification towhom, by when and under whatconditions the operational andownership rights would betransferred.

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PUBLIC PRIVATE PARTNERSHIPS


For options 5.1 and 5.2 care is neededwhen setting up a contract whereownership and responsibility foroperation and maintenance areseparated. Issues to be resolved include:� During the first years of the contract,

the external contractor will bemotivated to make investments innew DH technology, which willincrease the energy efficiency. Theinvestments will reduce the runningoperation costs and the investmentswill be paid back before the end ofthe contract. But what will motivatethe external contractor to makeinvestments when the remaining partof the contract period is shorter thanthe pay back time of the investments?

� Similarly, care will be needed toensure proper maintenance schedulesare adhered to during the last part ofthe contract period, when theownership of the installations belongsto the local distribution company

� The contract will need to set out howthe quality level of the technicalinstallations is to be measured whenthe contract is signed and when thecontract runs out

� The contract will need to set outhow the quality levels for theoperational reliability of the boilerstation be set up.

Examples of public private partnership withoperation outsourcing are:In Sweden, Borås Energy, the municipaldistrict heating and CHP company inBorås, is responsible for managementand is still the owner of the DH system,while Fortum Service operate andmaintain the system as a serviceaccording to a contract.

5.2 LeasingIn a leasing agreement, an operator rentsthe DH assets from the owner for aspecified, usually long-term period.Operation, maintenance, investments, andthe company cash flow will be in the handsof the private lessee/operator who pays aspecified amount of rent to the public(municipal) owner/lessor or invests aspecified amount of capital to theinfrastructure (or a combination of both). Ina standard leasing contract the ownership ofthe infrastructure does not change andremains in the hands of the original owner.It is worth checking whether such a leasingarrangement attracts any taxation benefit.After the leasing period, the assets willreturn to the municipality.

A leasing contract between the owner ofthe DH assets and the leasing operatorshould include the same provisions asmentioned for the operation andmanagement contract. Since a leasingcontract will often last longer than anoperation contract, it is vital that thecontract contains an agreement of howto maintain the assets. Otherwise, a riskoccurs that the assets will be worn outand the residual value will be low afterthe leasing period.

Examples of public private partnership withtime limited leasing are:In Estonia, the capital Tallinn has thelargest Estonian DH utility, where themunicipality retains ownership of theDH infrastructure which is incorporatedinto the municipally owned TallinaSoojus AS company. The assets andoperation of the DH utility were leasedin January 2002 for 30 years to a privatecompany Tallinna Küte, 100% owned byDalkia International from France.

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In Lithuania, the Vilnius DH system hasbeen operated since April 2002 byVilnius Energija, owned by DalkiaInternational, in a leasing agreementduring 15 years. The agreement includesextensive investments in the networkand an initial reduction of the heat tarifffor households by 5%. As from 2004, theheating price depends upon gas andelectricity prices as well as averageearnings and inflation rate.

5.3 Concession2

A concession agreement normally startswith an exploitation of a new system,where a private investor is the owner ofDH company. The municipality gives theconcession for a certain period and anannual fee for the concession can be acondition of the agreement. Thedifference to the leasing alternative isthat the concessionaire owns the DHassets. Whether the assets will be handedover to the municipality at the end ofthe concession period is a question to bedecided and included in the agreement.

Since the municipality does not haveany ownership power, unless it is a co-owner of the DH company, all municipaldemands must be included in theconcession agreement. A demand can bechecked by regular reviews of theoperation and management against thespecifications in the agreement.

Examples of public private partnership withlong term concession are:In France, the Paris DH system isoperated by CPCU under a concession,originally obtained in 1927. The currentconcession period started in 1987 and

will end in 2017. As remuneration forthe concession, CPCU pays 1,85% of theannual turnover to the city of Paris.However, the city of Paris also owns onethird of CPCU.

5.4 Privatisation of heat generationonlyIn most cases, the heat generation plantsand distribution networks are verticallyintegrated into one single company.However, in numerous cases the centralheat generation plants and thedistribution networks are historicallyoperated and owned by separatecompanies. Central heat generationplants are often CHP plants belonging toa power company.

The historical reasons for the division ofDH systems into two separate entities aresimilar in Western European and CEEcountries. In Western European countries,a power company typically tookresponsibility for heat generation at a CHPplant in a DH joint venture while the localmunicipality took responsibility for theheat distribution and heat sales to thefinal customers. In CEE countries, the CHPplant was normally organised under thenational ministry for power generationand electricity distribution while heatdistribution was the responsibility of theregional or municipal administration.When the power industry was privatised,the CHP plants joined the new privateowner. In the privatisation process theCHP plants were more often seen as powerstations than as heat generation plants.

In some CEE countries the distributionnetworks are divided by ownership. The

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2 The Concession described here should not be confused with licences (also known as concessions) required by law

in some countries for DH and network operations.



primary heat distribution grid (down tocentral heat exchange stations) isincorporated into the CHP company,while a separate company owns andoperates the secondary distribution(from the central heat exchange stationsto the final customers) and perhapssmall decentralised boilers. In such casesthe ‘secondary’ distribution assets areoften in public hands owned by themunicipality, or by a company in whichthe municipality has a majority control.The large heat distribution networkswere associated to the CHP plants, whichare now more often privately owned. Thestructure of the ownership dependssignificantly on the site specificconditions and the former historicalorganisation of the DH in each specificmunicipality.

This ownership model often suffers fromthe cost allocation problem for CHPplants. In a CHP plant owned by a powercompany, the power company oftenprefers to allocate the whole benefit fromCHP to the electricity side. The heatdistribution company then has to pay thealternative cost for generating heat inlarge boilers. In this situation, DH doesnot have any competitive advantagecompared to small natural gas boilers inthe buildings served. It is particularlyimportant to have effective negotiationand good co-operation between the heatproducer and heat distributor and ifpossible become a single production andsupply entity. Read more about thisproblem in the Institutional andManagement DHCAN guides.

In addition, this ownership model willlead to a different perspective for choicechoosing of cost allocation method

between old and new EU Member Statesas the type of market will have animpact on the choice of cost allocationmethodology used.

In the new EU Member States gas pricesare often distorted by cross subsidies withthe same price for small and bigconsumers such as CHP plants. Thereforethe key driver for choosing the costallocation methodology should be theneed to ensure the competitiveness of DHin comparison to other heating sources(especially gas-fired).

Examples of public private partnership withprivatisation of heat generation only are:In Poland, the capital Warsaw, whereVattenfall from Sweden has bought theCHP generation company in theprivatisation process, while thedistribution company, SPEC, is owned bythe municipality.

In the Czech Republic, 85% of shares inTeplárny Brno power and heat plantsupplying the TEZA Brno distributioncompany with heat are owned by MVVEnergie and 10% by the Brno municipality.TEZA Brno distribution scheme is 100%municipal. MVV Energie policy was tointegrate individual companies that areunder their control into one integratedcompany, MVV Energie. The Brno citycouncil on the other hand wanted toincrease their control and to integratepower and heat producing Teplárny Brnoand municipal heat distribution companyTEZA into a single company in which theyhoped to maintain a significant control.The agreement on the integration betweenprivately controled Teplárny Brno hadmunicipal TEZA Brno had not beenreached (at the time of writing).

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In Latvia, Rigas Siltums owns andoperates the heat distribution networksand the large peak and back-up heat-only-boilers, while Latvenergo, the un-privatised national power company,owns the central CHP plants, whichsupply 70% of the heat. In localnetworks, not connected to the CHPplants, Rigas Siltums plans to buildsmaller CHP plants.

In Sweden, in the municipality ofAlingsås, Alingsås Energy is responsiblefor heat distribution, while Sydkraftsupply heat from a large biomass boiler.

In Denmark, Copenhagen Energymanages heat distribution in themunicipality of Copenhagen; the heatdistribution to the rest of theCopenhagen area is done by 24 otherdistribution companies. CTR (owned bythe municipality of Copenhagen and 4other municipalities) and VEKS (ownedby 11 municipalities) manage thetransmission networks in the central andwestern parts of Copenhagen. The powercompany Energy E2 supplies heat to thetransmission network from several CHPplants.

In Romania, the large CHP plants aretypically owned by the state-ownedcompany Termoelectrica, and the localDH schemes and distribution is undermunicipal control.

5.5 Selected private minority equitypartnershipOffering a private company a minorityshare of the DH company will bring inspecific ownership and managementskills, but retains a municipal majorityownership and control.

In this ownership model, the publicpartner selects the private partner. This isthe crucial difference between thisownership model and the next modelwhere private partners select the publicpartner.

Examples of public private partnership withminority private ownership are:In the Czech republic, Plzenskáteplárenská CHP plant and distributiongrid is owned (83%) by the city of Plzen,(16%) by E.ON, and has 34% interest inPlzenská distribuce tepla heatdistribution company together withanother private investor and anothermunicipality.

In Germany, the city of Düsseldorf soldshares in their municipal multiutilityStadtwerke Düsseldorf to EnBW – EnergieBaden-Württemberg. Bielefeldmunicipality sold 49.9% of shares toSWB – Stadtwerke Bremen and retains amajority control of 50.1%. The newinvestors are typically owned by a mix ofprivate and public owners.

In Austria, the traditional public multi-utilities also have undergone significantownership changes. For example EVNAG, originally serving the province ofLower Austria, is owned (51.5%) by theprovince, with the rest owned by privateinvestors, including 19% free float.

5.6 Minority private equity invitedthrough the stock marketAn alternative to actively inviting andselecting a specific investor into thepublic DH utility is to attract privatecapital (and partners) by selling shares orcreating new shares through the stockmarket. An Initial Public Offering (IPO)

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might start the privatisation transactionwhen new shares of the utility are issuedand offered on the market to investors,or more typically utilising private equityinvestment either to existing or newshares. The latter case means that theinvestor raises company’s equity capitaland thus increases its market value andallows for easier and less expensivefinancing of its development andmodernisation projects.

An issue to be wary of is the legal andbrokerage costs associated with this wayof raising capital and level of uncertaintyinherent in such a process.

In this ownership model, one or manyprivate partners select the public partner.This is the crucial difference betweenthis ownership model and the precedingmodel.

Examples of public private partnership withstock market privatisation are:In Germany, MVV Energie AG, was thefirst municipal distribution utility inGermany to go private. The Mannheimmunicipality sold 25% of the shares toprivate investors and was introducedonto the stock market on March 2, 1999,and the formerly ‘Stadtwerke’ municipalmultiutility became activeinternationally. The city of Mannheimlater reduced their ownership share to72.8%. MVV Energie has bought sharesin utilities in other countries as well; forexample it is now among the largestdistrict heating utilities in the CzechRepublic.

In Italy, the multi-utility company ASMBrescia (with one of the largest DHschemes in Italy) is 70% owned by the

municipality of Brescia and 30% of theshares are traded on the stock market.

In Poland, the Wroclaw DH system hasbeen partly introduced to the stockmarket.

In Bulgaria, there is intended to be a capon private ownership: municipalitiesshould keep 50% of the shares.

5.7 Majority private equity ownershipSome municipalities have decided to sella majority of the shares to a privateinvestor which means they do not haveeveryday management responsibility, butit also of course means they surrendercontrol. A minority of the shares areusually held by the municipality in orderto keep some influence in the companyby agreement with the new privatemajority owner.

Examples of public private partnership with amajority private ownership are:In the Czech republic, the DH utility inthe three largest Czech cities – Prague,Brno, Ostrava – has been sold to privateinvestors who control the majority ofshares.

The British utility International Power plcowns 99.9% interests in the EletrárnaOpatovice CHP plant, Eletrárna Opatovicein turn owns 49% share in Prazskáteplárenská, the district heating utilitysupplying heat in the capital city Prague.

United Energy owns 70% of shares inLiberec DH utility; the Liberecmunicipality owns the remaining 30%.

In the Czech republic, an interestingexample of ownership structure is with

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heat, power and gas utilities in Prague.Originally the City of Prague directlyowned shares in all three utilitiestogether with other private shareholders.The ownership structure has beenrestructured in such a way that Praguecreated three holding companies as ajoint venture partnership with privateinvestors, which have ownershipinterests in individual utilities.Nowadays, the City of Prague does notown any direct shares in the utilitiesthemselves, but instead in the holdingcompanies that own the individualutilities. This ownership restructuringwas done when the state still directlyowned shares in these utilities. Theholding structure allowed Prague tocreate a coalition with private investorsand to increase their effective control.This is especially the case of Prazskáplynárenská (PP) gas utility, wherePrague actually controls the utilitythrough the PP Holding, although theprivate investor has de facto a majorityinterest – after the state shares in gasutilities have been privatised.

The ownership for the Prague heatdistribution utility, Prazská teplárenská(PT), is effectively controlled by a privateinvestor (International Power Plc), andthe city of Prague is a minor stakeholder;however, the stakeholders decided thatfor key decisions an agreement of aqualified majority, ie. both partners, willbe necessary. The picture oppositeillustrates the ownership:

Prague has a majority control in the PTholding and thus it can directly control47% of interests in the district heatingutility Prazská teplárenská, a.s. (PT),although directly, without the holding

structure it would be able to control only24% of interests. German companyGESO is fully controlled by EnBW –Energie Baden-Württemberg.

This example from the Czech republicshows that it is possible to maintainpublic control with a majority privateequity ownership.

In Slovakia, six major so-far state ownedDH utilities are scheduled to beprivatised in 2004. Private investors willbe offered majority interests in the DHschemes and heat and power plants inBratislava, Trnava, Zvolen, Martin, Zilina,and Kosice.

In Macedonia, the DH utilityToplifikacija AD in the capital of Skopjeis owned (70%) by the companyemployees, (20%) by the state and 10%owned by the governmental PrivatisationAgency.

17

Prague GESO

InternationalPower

ElektrárnyOpatovice

PT

GESO

PT Holding

PT

51% 49%99.9%

49%

1,75%

1,12%

47%



In Germany, Stadtwerke Bremen iscontrolled by a Dutch public utilityEssent, while other shareholders areGerman energy utilities E.ON andRuhrgas. The city of Bremen keeps 13.6%interest in the utility.

5.8 Full private ownership withmunicipal supportAnother form of public privatepartnership is when the DH system isfully privatised, but the localmunicipality fully supports the companythrough a separate mutual agreement.This support can be based on a localpolitical intention to introduce andexpand a heating option based on localresources with low environmentalimpact. This support can be essential for

minimizing the financial risk for theprivate company responsible for the localDH system.

An example with full private ownershipwith a strong municipal support is:

In the UK, Utilicom owns and operatesthe Southampton District Energy Schemeunder it’s subsidiary SouthamptonGeothermal Heating Company.Southampton City Council works closelywith Utilicom to actively promote districtheating for its environmental benefitsand also as an economically viableoption. French company IDEX, operatingmany of the small geothermal districtheating systems located in the Parisregion, owns Utilicom.

18

6 CONCLUSIONS


Privatisation of DH systems is currently agrowing trend in Western Europeancountries as well as in CEE countries.Municipalities tend to sell or lease theirDH assets and/or operation to privateinvestors. Thus privately controlled DHutilities continue to increase their shareon the market. However, that is notnecessarily the case of each municipality.Some municipalities have decided not toabandon their ownership control indistrict heating.

Are private controlled DH companies moreefficient than public controlled? No generalanswer appears to this question. There areexamples of very well managed andeffective DH utilities both in private andpublic ownership that have competitiveprices, energy efficient operation, andprovide good quality services. In general,utility performance, quality of servicesprovided and price of heat depend mostlyon site-specific conditions, effectiveness ofcompetition on the local heat market(especially availability of natural gas forspace heating) and quality of the utilitymanagers, rather than on the ownershipstructure itself. No single recommendationcan then be presented on what ownershipstructure and organisational arrangement isthe best.

When a privatisation or a public privatepartnership is put forward, no singlestandard solution is available. The examplesfrom Central, Eastern and Western Europecountries show a variety of differentownership and organisational models. Theprivatisation process must include severalkey aspects for discussion and analysis.Some of the key issues to consider arepresented here in this concluding part ofthe guide. However, Europe has no long-term (20-30 years) experience of

privatisation of DH systems to comparewith the traditional public ownershipmodel.

As a key benchmark, any new corporateentity should provide the scope to take acommensurate share in the risks andbenefits. As a local entity it is importantthat it is local consumers that create thewealth for the utility and the municipalitythat provides the new entity with accessto a capital revenue stream.

6.1 Key aspects of public vs. privateownershipThe following overview summarises keyaspects of public versus private ownershipin DH schemes. The individual factors caneither be positive or negative, dependingon the case-specific situation.

Public ownership:� potentially easier access to some grant

funding (domestic and international,including EU structural funds)

� possibility that business decisions willbe politically driven; this might makethe performance of DH less effective,but it also helps the implementation ofa rational public policy more easily(e.g. utilisation of renewable energy)

� key business decisions require activityand time-consuming decision processeswithin the city council

� in general there is less pressure (andknowledge) to generate profit anddividends, reduce costs, staff, etc.

� less interest in integrating with utilitiesin other municipalities in order toobtain better economies of scale

� lower quality of some services,especially interruption of heat supplyduring the night and service breaksduring summer period, is still morecommon with publicly-owned

19

CONCLUSIONS


utilities in CEE countries.� local population more likely to have a

voice and derive benefits � stronger focus on local conditions

Private ownership:� in general higher pressure on return

on investment, and on effectivenessand competitiveness of DH

� easier to raise capital, for example viabank loans (although municipalitiescan raise capital at a lower rate)

� better at managing risk� more flexible decision-making process

and more independent from directpolicy influences

� better able to take advantage ofeconomies of scale when integratingDH utilities in several municipalities,or integrating with other serviceproviders/utilities

� more acquainted with sector issues atnational and international levels.

These key aspects form the foundationfor the assessment of various options forownership models.

6.2 Assessment of district heatingownership schemesIn the CEE countries, there are commonexamples where the privatised DH utilityis well managed and provides betterservice quality for a competitive pricethan the original publicly owned utility.There have also been some cases wherethe private investor had only short terminterests and the quality of service andutility performance was lower than inother publicly-owned utilities.

The quality and the persistence of theinvestor, the managerial experience, degree

of financial strength, and overall credibilityas well as the terms of privatisation, and/orcontracting arrangements play a criticalrole for the potential success whenprivatising a DH system.

Several vital questions can and should beput forward when both public andprivate ownerships are assessed. Some ofthese questions are considered below:

The decision processIs the decision process in the DH utilityfocused on the business? In cases whenmunicipalities own interests in DHutilities, they should be aware ofpotential conflict of interest during thepolicy and business decision makingprocess. The separation of businessresponsibility related to municipalownership of DH utilities fromresponsibility for policy making processat a municipal level helps to avoidconflicts of interests and thus allows foreasier policy decision making process.The more the DH market is exposed toeffective and strong competition, themore important is the ability to operatethe utility in a flexible way, and to adoptquickly business-driven decisions.

The policy aspectWill the potential environmentalbenefits be achieved if the networks arefully in the hands of the private sector?The specific industry or even utilityinterests are not necessarily always inline with general public interests. In caseof separation of the public policyresponsibility and business responsibilitybetween the municipality and a privateinvestor such potential conflicts ofinterest are more transparent.

20

CONCLUSIONS


The time focusIs the private company only focused onshort-term issues or will they look to thelong-term perspective? DH always has along-term perspective with the largeamounts of capital employed. Very largecompanies can also change focus quicklydue to new strategies from the topmanagement. Sydkraft in the EON grouphas acquired shares in six Polish DHsystems during the last few years. InJanuary 2004, they announced a sell-outof these companies when they adopted anarrower geographical focus for thefuture. However, the same can happen inmunicipality councils after electionswhen a new political majority hascompletely different opinions.

The local focusWhat will be the local focus when aprivate investor enters the local DHutility? Normally, a private company canoperate on a national or a internationallevel, as with electricity and gas markets.The foreign investor is not necessarilywell acquainted with local issues, butmay bring in superior management skills.The municipal concern and interest tocontrol DH frequently prevails due to thefact that the DH is a local infrastructureserving a local heat market.

The credibility aspectHas the private partner financial andtechnical credibility? Is he familiar withDH and is he operating systems in othercities and other countries? Is apronounced exit strategy necessary?

The framework perspectiveIs the national institutional frameworkappropriate for DH? More importantthan a specific ownership scheme, and

especially in countries with economies intransition, are well-establishedframework conditions for effective DH,such as pricing, effective competitionbetween different energy suppliers, andquality of heat regulation ifimplemented. If there is effectivecompetition between different energysuppliers, especially between heat andgas utilities, and the consumers have areal and effective choice of supply,regulation and price control becomes lessimportant.

The decision whether DH should remainin public hands or be privatised is alwayspolitically driven and depends heavily onpolitical preferences of the respectivedecision makers and policyrepresentatives, but it is heavily influencedby developments on the energy markets aswell. On one hand, some municipalrepresentatives prefer to keep control overthe DH utilities. On the other hand, othermunicipal representatives prefer themunicipality to step back from doingbusiness, especially in a competitiveenvironment, and to allow privateinvestors to enter the market.

Public ownership can be very effective ifthe business decision process is delegatedto the DH utility, the local focus isdeveloped, and customer demands arethe basis for the business.

Private ownership can be very effective ifthe private owner has a long termperspective, a specific DH knowledge,and a customer oriented management.

Public private partnerships, involvingthe municipality and a chosen privatepartner, can be very effective if

21

CONCLUSIONS


conditions regarding guaranteed level ofservice provision to consumers, sharingbenefits with the community andinvestment in the system are writteninto a common agreement. In this casethe concrete terms of the contract are ofkey importance, including theconditions for an exit strategy from thecontract.

22

This guide was written by Jiri Zeman, SEVEn and Sven Werner, FVB,with review carried out by the DHCAN project team (see page 2).

Disclaimer: Neither the authors, the DHCAN project team nor theEuropean Commission give any warranty that the guidance containedin this guide or others in the DHCAN series is or will be suitable andappropriate for particular applications and can therefore take noliability whatsoever should it be followed in whole or part. This guidedoes not necessarily fully reflect the views of the individual membersof the DHCAN project team

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