The Competition Council (CC) has identified competitive shortcomings in district heating procurement on the right bank of the River Daugava in Riga during its market surveillance activities. The CC proposes to revise the existing district heating procurement model on the right bank of the River Daugava, gradually opening up the overall market and thereby eliminating preferential treatment for one market participant.
The CC initiated market surveillance in response to multiple submissions from small independent district heating producers, alleging competitive restrictions by AS Rīgas Siltums in organising weekly district heating purchases in the district heating market on the right bank of the River Daugava in Riga.
Shortcomings of the existing district heating procurement model
Currently, weekly district heating procurement on the right bank of the River Daugava in Riga is divided into two segments – competitive and monopoly areas – with two parallel market segments. In the competitive area, a tender is announced for the volume of district heating offered by small independent producers and AS Latvenergo for the next trading week. In contrast, there is no competition in the monopoly zone (the second procurement segment), as the remaining volume of district heating is only supplied by AS Latvenergo to ensure the required volume for AS Rīgas Siltums.
Given the fact that the economic gradualism principle is only applied to the competitive weekly segment in the existing procurement model, AS Latvenergo has no incentive to offer a lower price than the tariff set by the Public Utilities Commission (the Regulator) in the monopoly area, since AS Rīgas Siltums, given the monopoly area of the procurement model, purchases the district heating from AS Latvenergo at the set tariff even though there is a cheaper offer on the market.
The CC concludes that the existing procurement system does not ensure the full and equal development of competition, as the district heating procurement model created by AS Rīgas Siltums gives AS Latvenergo an advantage, which manifests itself as the possibility to sell the produced district heating in both procurement segments – the competitive and monopoly segments, allowing different prices to be applied depending on the procurement segment. The CC believes that the price of AS Latvenergo district heating in the monopoly segment should be equal to the price of AS Latvenergo district heating in the competitive segment, thus ensuring comparable market conditions with small independent district heating producers and a district heating price in the monopoly segment that corresponds to real competitive market conditions.
Proposals for improving the competitive situation
The district heating market on the right bank of the River Daugava is saturated with production capacity, which continues to grow; therefore, an effective market mechanism must ensure that consumers receive district heating at the lowest possible prices and in accordance with environmental sustainability requirements. In the opinion of the CC, AS Rīgas Siltums should improve the existing district heating procurement model for the right bank of the River Daugava, focusing procurement on production efficiency and the use of more efficient technologies, including the integration of waste heat generated through various technologies into the system.
The CC points out that the common market should also be gradually opened up, and this issue should be addressed in a comprehensive manner, taking into account the proportion of lot divisions, the issue of waste heat, and changes to the district heating procurement period. In the opinion of the CC, a transition to a unified volume or the possibility of increasing the proportion of district heating procurement in the competitive segment would allow the market to self-regulate. This would gradually provide small independent district heating producers with an incentive to develop and increase district heating production capacity in the competitive area.
To improve the existing district heating procurement model, the CC encourages AS Rīgas Siltums to engage in consultations with industry stakeholders to find a mutually beneficial solution and engage an independent expert to improve the procurement model. This approach would ensure not only efficiency, sustainability, and development opportunities as well as uninterrupted service provision for district heat producers, but also the lowest possible final price for consumers.
The CC also encourages AS Rīgas Siltums to foster collaboration with the Regulator and consider the need to update methodologies in light of AS Rīgas Siltums’ planned changes to the district heating procurement model. This should include improvement of the definition of capacity charges, consideration of district heat producers’ technical capabilities, elimination of potential discrimination between market participants with comparable technical capabilities, and the assessment of potential future changes related to the balancing service and the planned offering of waste heat to the market.
The Ministry of Climate and Energy, as the authority responsible for climate and energy policy, has a duty to evaluate which energy source can be considered waste heat and which model for the acquisition and realisation of waste heat would be most appropriate to avoid negatively impacting competition, and generating benefits for end consumers through lower district heating prices.
The CC conducted an in-depth analysis of the competitive situation for district heating procurement in the area of the right bank of the River Daugava in Riga from 2020 to 2023, including the relevance of waste heat procurement.
You can get more information on market surveillance HERE.