District heating prices in a liberalised energy market - benchmarking the production of combined heat and power
Facing a market structure of independent heating systems and cost-of-service regulation the regulator considers ways to create incentives for increasing efficiency in heat production. One way is to implement benchmark regulation.
Households are often obliged to connect to and solely use district heating. The district heating plants, both municipal and corporate, are protected natural monopolies exploiting economies of scale. This should be beneficial to customer, but it turns out, that heat changes varies by factor 5 from the cheapest to the most expensive area. Hence consumer charges are subject to cost-based regulation. The Danish energy legislation has recently been updated to stimulate enhanced competition between energy suppliers. In fact, the competition in the power generation sector is now so fierce, that market concentration has been encouraged to reduce the risk of bankruptcies. The monopoly regulation of heating seems to be inconsistent with the market orientation of the other energy sectors. In order to perform cost introspection to identify possible causes of price differences the project applies Data Envelopment Analysis (DEA) to the district heating sector. Since DEA can be enhanced to be a yard-stick competition tool, the study also provides the initial step with respect to applying best-practice regulation to a natural local monopoly sector
The aim of the project has been twofold: (1) To investigate the potential for increasing productivity in Danish district heating production and (2) to examine whether benchmarking has a role to play. Using DEA (Data Envelopment Analysis) our analyses show that by assuming variable returns to scale there exist a potential to reduce production costs by 5-27 % depending on the portfolio of inputs and outputs included in the model. Further, our analyses show that the ranking of producers are much dependent on the choice of model. Hence great care has to be taken when implementing benchmarking as a regulatory mean
Key figures
Category
Participants
| Partner | Subsidy | Auto financing |
|---|---|---|
| Den Kgl. Veterinær- og Landbohøjskole | ||
| KORA, Det Nationale Institut for Kommuners og Regioners Analyse og Forskning |
Contact
P.O. Box 49
DK-4000 Roskilde, Denmark
Fristrup, Peter (seniorforsker), 46774677, risoe@risoe.dk
Øvr. Partnere: Den Kgl. Veterinær- og Landbohøjskole; Amternes og Kommunernes Forskningsinstitut (AKF)
