How is District Heating Price Formed?

As the weather gets colder, interest in energy prices grows. It is estimated that approximately 60% of Estonian residents use district heating, and every year the question tends to repeat – how will the district heating price develop and why is it so different from region to region. Adven manages networks across Estonia in quite different conditions in its 14 network regions. However, pricing works the same way for all district heating companies.

Price consists of variable and fixed costs

Broadly speaking, the district heating price consists of two main components: variable cost and fixed cost. Variable cost consists mainly of fuel and to a lesser extent electricity costs. As the name suggests, variable cost depends on market conditions, energy resource price fluctuations, and the quantities used. Fixed cost includes the maintenance, repair, renewal, and labor costs of the district heating network and boiler houses, as well as other fixed costs necessary to keep the systems operational and ensure supply reliability.

District heating prices are controlled by the Competition Authority

District heating companies cannot set prices arbitrarily; the price must comply with the rules established by the Competition Authority. The Competition Authority monitors the cost accounting of companies and allows them a certain level of profit. The pricing formula has been developed to keep prices as low as possible for consumers while ensuring the company's sustainability.

When the fixed components of the price change, the district heating provider goes through a thorough pricing procedure where the reasonableness of all costs and the company's activities to make the service more efficient are analyzed. This happens at least once every three years. When the variable components change, the pricing procedure is faster.

Why can prices differ so much from region to region?

How much the price changes in the same region during the heating season depends primarily on fuel prices. Estonian district heating companies, including Adven, use wood chips as the main fuel. Supply contracts are generally concluded for the entire season, but the fuel seller has the right to correct prices in unexpected situations (such as energy crises).

The amount of fuel used depends most on the outside air temperature, and generally the rule applies: the warmer the winter, the lower the costs. In colder weather conditions, many regions also use peak load fuel, which is usually natural gas. Therefore, the total fuel cost also depends partly on what is happening on the gas market.

It is often asked why district heating prices are very different in different regions. The fuels used and the boiler house and network equipment certainly affect the price – but differences also occur when these are all quite similar. One important price factor is network compactness, or how long the district heating network is per consumer. The more consumers and the shorter the network, the more favorable the service.

A second important factor creating differences is investments and the timing of their implementation – when updating the network and equipment, they do temporarily raise prices, but in the long term they make the network more efficient and ensure reliability.

How is a price change implemented and what to expect in the heating season that has begun?

In case of a price increase, the district heating company must notify customers of the new price at least one month in advance. In case of a price decrease, it can be applied as soon as possible.

Regarding the heating season that has begun, many district heating companies have reported that prices should remain similar to last year. Adven's customers will also see heating prices remain generally in a similar range as the previous season. The price of wood chips has decreased somewhat, while environmental fees, the price of natural gas used as backup fuel, and some other costs have increased – these changes offset each other.

However, as described, local differences affect each region's price. Thus, Adven also has regions where prices will increase slightly due to recent investments, as well as regions where they will decrease.

How can consumers influence the size of their heating bills?

From the consumer's side, building insulation and general maintenance of technical systems most effectively helps reduce heating service costs. A consistently maintained and, where possible, modernized heat exchange station and heating system ensure more efficient energy consumption.

Article author: Kadri Koppel, Head of Customer Management at Adven Estonia