OWNERSHIP MATTERS FOR DISTRICT HEATING

 Let’s now take a closer look at these two claims, examining the evidence behind each and considering what they could mean for the future of district heating.

Democratic ownership lowers your heating bill.

District heating companies that are democratically owned by either consumers or municipalities are generally more affordable for consumers than those that are commercially owned. Several studies conducted in various countries support this finding.

In Denmark, the evidence is particularly striking. While almost all district heating utilities in Denmark are owned by consumers and municipalities, a few utilities have historically been owned by commercial entities. A 2012 analysis by the Danish Energy Regulator Authority examined the price disparities between these ownership structures.

Even after adjusting for differences in energy sources, urban density, and the scale of the utility, the study found a clear cost advantage for democratically owned utilities. Specifically, households paid, on average, €941 more per year in current prices for commercially owned utilities compared to consumer-owned ones, and €750 more compared to municipality-owned utilities.

Figure 1: The price difference between the yearly heating bill for a typical household of either a commercially or municipality-owned district heating utility when compared with the yearly heating bill in a consumer-owned district heating utility. The data is from Denmark in 2011/2012, and the prices have been adjusted to current-day prices.
Source: Danish Energy Regulatory Authority [2]

Moreover, following consumer complaints, several commercial utilities were sold off to consumers and municipalities in 2013. This led to immediate price drops in the yearly heating bill from around €3075 to €756 in current prices by the end of the year.

The pattern holds true beyond Denmark. In Sweden, privately owned district heating utilities charge significantly higher fixed fees compared to those owned by municipalities. After adjusting for background variables, the fixed price differences between private and municipally owned district heating utilities amount to 17% for multi-dwelling buildings and 25% for single-family houses.

A recent German study also confirms this trend, with publicly owned district heating companies offering prices 10-20% lower than those of their privately owned competitors, once confounding factors are controlled for. [6]

Why prices are lower in democratically owned utilities

Why do we consistently find price differences between democratically owned and commercially owned utilities?

District heating utilities are local natural monopolies, meaning it is inefficient to have multiple providers in the same area. Commercially owned utilities are driven by the need to generate returns for shareholders, which often results in them using their monopoly power to charge higher prices.

In contrast, democratically owned utilities are accountable to local citizens, either directly by electing board members or indirectly through elected officials. This accountability incentivizes the utilities to keep prices low, as they are more responsive to consumer needs and concerns.

While some argue that the need to generate a surplus in commercial companies encourages innovation, democratically owned utilities also have strong incentives to innovate. Innovations that lower costs can lead to reduced prices, which benefit the consumers who control the democratically governed utilities.

Studies from Sweden indicate that consumer comparisons of prices across different utilities, as well as complaints, play a significant role in maintaining low prices. This demonstrates that consumers’ ability to compare prices across regional providers and voice their complaints are important governance mechanisms that pressure utilities to be more efficient.

In summary, the observed price differences may arise because commercially owned utilities focus on generating a surplus for their shareholders, while democratically owned utilities prioritize providing affordable and stable heat to consumers. This aspect of ownership is especially important to keep in mind when taking steps to ensure a just and politically sustainable transition away from fossil fuels in the heating sector.

Democratic ownership makes long-term planning possible.

Ownership doesn’t just matter when it comes to keeping prices low. It is also central to investment. Expanding district heating requires making investments with a very long economic life. That, in turn, requires owners with a long-term horizon.

This is where commercial ownership runs into problems. The median holding period of a private infrastructure investor is around six years. In practice, this means they typically own an asset for only six years before selling it on.

There are, of course, significant deviations, with some investors holding assets for significantly longer periods. Still, the mismatch between the time horizon of a typical private investor and the lifespan of the assets they own is hard to ignore.

This short time horizon of private infrastructure investors is a result of how the infrastructure investment funds are set up. They are often “closed-end”, meaning that they are typically designed to operate for a period of 10-12 years before selling their assets again and repaying the money to investors.

This creates a serious mismatch, because district heating assets often operate on a timescale of around 25 years in the heat production area, and new transmission pipes are estimated to last more than 80 years.

Figure 2: The lifespan of district heating assets compared with the median holding period of a private infrastructure.
Source: SWECO , Danish Utility Regulator , and MSCI [10]

Why is this mismatch in time horizons a problem? One of the clearest examples of the conflict between the long-term public purpose of a utility and the short-termism of private ownership comes from another related utility sector, namely the experience of British water privatization.

Here, the biggest water company in the UK, Thames Water, has suffered from decades of underinvestment under private control. Rather than investing in the maintenance of its water treatment infrastructure, it has prioritized paying out dividends to its private owners. This chronic neglect is now posing a threat to the public in the form of an increased risk of flooding and a higher frequency of waterborne parasites.

Different models of democratic ownership offer a distinct advantage here. They are not subject to the same short-term pressures to deliver quarterly returns to investors. This gives them the space to plan ahead. There is, of course, no guarantee that they will always use this freedom wisely. But the ability to think long-term will be essential as countries move to expand district heating.

Ownership matters

District heating has the potential to deliver cheaper heat, greater energy security, and a faster green transition. But whether it fulfills that promise will depend on how it is owned and governed.

The evidence is clear. Democratically owned district heating utilities, whether by consumers or municipalities, consistently deliver lower prices. They are also better positioned to make the kinds of long-term investments that expanding district heating requires. Private investors, by contrast, often operate with shorter time horizons that do not align with the economic life of the infrastructure.

The stakes are high. District heating networks are built to last for generations, not just a few investment cycles. Choosing ownership models that align with this reality is not just a question of fairness. It is a question of effectiveness. If we want district heating to scale in a way that is affordable, resilient, and compatible with climate goals, ownership structures must reflect the long-term public purpose they serve.

For further information, please contact: Magnus Skovrind Pedersen at msp@brundtlandorg.dk