District Heating Regulation: Parameters for the Benchmarking Model

AbstractIn this paper the authors have assessed the disadvantages of the current Latvian district heating (DH) regulation system and marked the next steps for a transition from hard regulation towards the approximation of benchmarking and market principles.The current regulatory system in Latvia which is based on the “cost+” method is not motivating DH companies to increase operational efficiency and optimize investments. As a result, overinvestment in assets and poorly utilized production facilities resulting in additional costs which are shifted to the customers are observed.In general terms, a cost-efficient DH tariff depends on the investment choices, conditions of capital utilization and operations performance. Using the operation data of Latvian DH companies, the authors analyze which cost drivers and exogenous factors (e.g. heat load density, scale, resource prices, DH technical parameters, etc.) are the most relevant for reflection of the mentioned three aspects and could be useful for the benchmarking model