When you hear the word “utility bill”, you are most likely to associate to electricity and gas. But there is a third utility here – mysterious and non-transparent, like the local forest on a foggy morning: district heating. Decision-makers are using magic tricks to convert this industry into a market-based system. Instead of the well-known “abracadabra”, regulators are using words like “cogeneration fee”, and “specially treated institution”, with limited success: district heating is expensive, but not replaceable. This short writing will argue that instead of magic, we need the imagination to find the proper place of district heating in our revolving energy mix.
District heating had been a source of permanent headaches for decision-makers ever since the fall of socialism. It cannot be shut down (there are around one million district heating domestic users in Romania, roughly 650,000 in Hungary), but on a per-customer basis, this is THE most expensive utility. The Romanian system is more centralized: there are only fifty settlements connected to district heating, while in Hungary this number is close to one hundred. Roughly 80% of all district heating customers is domestic in Romania, and 90% in Hungary: i.e. district heating is truly about domestic customers that tend to live in un-modernized blocks. For politicians, district heating customers are potential voters – hence the price of district heating is a political compromise both in Romania and Hungary. The final price of district heating had not been updated in Hungary since 2014. If an average customer is billed HUF 100 in Hungary, the central budget is matching this payment with extra HUF 89: otherwise, the district heating system would go bankrupt. Not much economic knowledge is necessary to realize that this district heat financing is not correct: cross-financing is socially expensive.
But who is covering the extra costs that are NOT charged to district heating customers? In Hungary, the last reform of the district heating sector happened in 2011. Two new magic terms were introduced then: District Heating Fund and Cogeneration Industry Reform Fee. These fancy terms cover up a very simple idea: industrial electricity (I repeat: electricity) users are paying a hidden tax (Cogeneration Industry Reform Fee) to MAVIR, the Hungarian electricity grid company. This is the so-called District Heating Fund that is making subsidy payments to district heating companies. This arrangement had been working well until 2018: as soon as energy prices started to spike, big industrial users cut back their consumption, and the Hungarian district heating cross-subsidy system failed. The income side turned out to be limited (the less electricity industry used, the less money was flowing to the District Heating Fund), while the expense side seems to be unlimited: as we have seen last August, in theory, gas prices may jump to any level. As of 2018, every year the District Heating Fund in Hungary closed the heating season with a negative balance. Then the government is sending billions from the national budget to the District Heating Fund: originally, this cross-payment was around 40 bn HUF per annum (around 100 million euros), but last year the total cost of subsidizing district heating jumped to unreasonable levels. The Hungarian government passed special decrees to pump extra money to the District Heating Fund (last time on 20 February 2023, HUF 115 billion was paid), plus MAVIR was making pre-payments to the district heating companies in late December 2022. In short, the Hungarian system of financing district heating via a hidden tax charged to electricity industrial users is likely to fail.
How about the Romanian system? Here the main idea is that gas producers sell gas to district heat-generating companies at an artificially low price. District heat producers are selling two goods: electricity, via Opcom and heat. On the electricity sales, district heat producers are making extra profit and this money is used to cross-finance potential losses on heat sales to final customers. In addition to this, local municipalities are using the so-called “affordability factors” to adjust the ANRE-approved national heat tariff to their local circumstances. In short, the Romanian district heating system seems to be double-subsidized – first at the input fuel level (below market gas) and then also final customers get a discount (affordability test).
But why is district heating so expensive? In Hungary, the reason is very simple: 70% of all heat is generated from natural gas. Unlike in Romania, there is no major Hungarian gas production – gas to be imported at TTF-linked prices and paid for in euro, while the Hungarian forint is weak. In Romania, the most important factor pushing up the cost of district heating is network losses. As per the 2022 ANRE report, around 34% of all district heating purchased/produced “disappears” as system losses. This number is exorbitant and the number one focus for Romanian decision-makers should be to find out what is really going on with network losses.
In addition to cost of fuel and losses, an extra financing factor should be mentioned in the case of Hungary. As a main rule, Hungarian district distribution companies are municipality owned, but this is NOT so in the district heat generation sector: there are international and domestic private investors here, plus also the Hungarian state via MVM (minority). As of 2017, district heat distribution companies are making fixed and variable payments to district heat producers. Interestingly enough, in Hungary, around 70% of all fixed payments go to one single international investor (the same investor is a minority player in Romania). The Hungarian District Heating Fund is actually about financing this single district heat producer. For those readers who are after a scandal, apparently, one family member of one Hungarian MP is a minority investor in this very same district heat company. Municipality-owned heat distributors are receiving fixed payments from the District Heating Fund, but 70% of such payments are passed on to that single international investor in Hungary. This seems to be a well-hidden state subsidy that the EU has not discovered, as yet.
Final words should be about how to reduce district heating consumption. As was mentioned above, 80% (Romania) and 90% (Hungary) of all district heating is sold to domestic customers. Until after domestic customers are metered and their blocks properly isolated, there is no chance that district heating consumption will be reduced. Much education is necessary here: radiators without metering are usually associated with open windows. This must stop. District heating invoicing should be based on metered consumption and not the m3 size of flats. As was mentioned in a previous article, Hungarian electricity and gas consumption changed, once the government introduced “Rezsicsokkentes v 2.1” (utility bill reduction program) last Summer. The same would happen in the district heating sector if domestic customers were invoiced based on actual consumption.
To summarize, district heating is a classic heritage from mismanaged socialism, yet it is difficult (if not impossible) to replace it with something else. Hence we have to find a way to adopt district heating to our modern age. In Hungary, the number one challenge is to replace natural gas with biomass or geothermal energy; in Romania, to bring back losses to a reasonable level. District heating invoices shall be actual (measured) consumption-based, as and when technical conditions are ready (i.e. blocks isolated, meters installed). The heating season is soon over; yet the above work is just about to start.
Photo: Sigmund on Unsplash
* The article originally appeared in the online publication www.vg.hu
About the author Jozsef Balogh is a senior business developer for Axpo Solutions, Switzerland, with a special focus on Central European and Ukrainian electricity, gas and CO2 opportunities. He had been active in the Central European energy industry in various roles since 1992. He has been especially active in Ukraine and Hungary.