District Energy: review of international regulation and the future of district heating and cooling in Australia

Global demand for air conditioning is projected to triple over the next 30 years, with most of this demand emanating from developing countries.¹ Given the global commitment towards achieving net-zero emissions by 2050 and the impact of climate change, it is not surprising that district heating and cooling is predicted to be implemented at an increasingly rapid pace. Providing heating and cooling through a district energy model can significantly reduce both CO₂ emissions and energy consumption (by 30−50 percent),² including by using surplus renewable energy from local sources such as bio fuels, waste products and industry heat waste. As an industry, however, district energy is relatively new in some jurisdictions (including Australia) and has outpaced both public policy and government regulation in many parts of the world.

District heating has been used in some parts of Europe and Central Asia since the 1880s³ and the adoption of district cooling schemes in the Middle East and Asia, whilst a more recent development, now represent a significant percentage of the global district energy capacity (the world's largest district cooling plan was installed in Qatar in 2010). With the new federal Labor government's updates to Australia's obligations under the Paris Agreement (a commitment for Australia to reduce emissions by 43% below 2005 levels by 2030) and the impact of climate change, the uptake of district energy in Australia seems an imperative, although the limited appetite for district energy in Australia may be due to some critical challenges.

Whilst one of the reported roadblocks is low population density,⁴ Australia's district energy sector may also be hampered by lack of a regulatory framework, which could accelerate uptake and implementation, including by encouraging aggregated demand profiles and developer and consumer confidence. Given how nascent the district energy sector is in Australia, it is unclear what, if any, steps the Australian government may take in relation to district energy from an energy regulation and consumer protection perspective. And, if regulation was to be introduced, it is unclear which regulatory authority would assume responsibility (including for granting licences to service providers and monitoring compliance).

When the time comes, Australia may look to other exemplar jurisdictions where district energy regulation is currently in place, including Singapore and the Middle East.

Examples of district energy regulation in other jurisdictions

District Energy Regulation in Singapore

In 2001, Singapore introduced the District Cooling Act ("DCA") which tightly regulates the provision of district cooling services in Singapore. The DCA is prescriptive and allows for Singapore's Energy Market Authority ("EMA") to exercise three key functions and duties:

• exercising licensing and regulatory functions in respect of district cooling services;
• consumer protection in respect of pricing for the supply of district cooling services, the quality of district cooling services and the continuity and reliability of district cooling services; and
• issuing or approving and reviewing the codes of practice and other standards of performance in connection with the provision of district cooling services.

Under the DCA, a district cooling services provider must be granted a licence by the EMA in order to provide district cooling services. Such licence may include certain conditions as determined by the EMA, such as provisions:

• regulating pricing to be charged for district cooling services (including the fixing of prices, the fixing of maximum or average prices or the setting of price policies or principles);
• for the periodic disclosure of information by way of an information memorandum; and
• requiring the licensee to provide a sinking fund for asset management.

Where district cooling services are to be provided in an area, the DCA allows the Minister to designate such area as a 'service area' (so called 'gazetted service areas') with the effect that the occupier of every premises within such declared services area requiring air conditioning must use district cooling services if they are available. Penalties in the form of fines or imprisonment attach to a person's failure to comply with this requirement.

A licensee is under a duty to maintain a 'reliable, efficient, co-ordinated and economical district cooling system' in accordance with any codes and standards issued by the EMA.

The DCA also provides for open access rights allowing the licensee to enter any land within the service area in order to carry out the district cooling services.

District Energy Regulation in the Middle East

The district cooling market in the Middle East is one of the largest in the world and yet in many jurisdictions it has operated in an unregulated market, which has led to lack of consumer protection, industry monopolisation, and poor planning outcomes. In response to these concerns, in the last few years, some parts of the Middle East have introduced utility-style regulation, which has specifically targeted the district cooling sector.

Abu Dhabi, United Arab Emirates (UAE)

In 2021, Abu Dhabi was the first state in the Gulf to introduce a set of district cooling regulations ("Abu Dhabi Regulations"). The Abu Dhabi Regulations mandate the Department of Energy to protect consumer rights, provide a stable environment for investors and improve energy efficiency.

As with the Singaporean legislation described above, the Abu Dhabi Regulations require the Department of Energy to issue the district cooling service provider with a licence to provide district cooling services.

The Abu Dhabi Regulations prescribe a district cooling code and metering code which all persons or entities providing district cooling services must adhere to ensure that district cooling systems and energy meters meet or exceed prescribed levels of reliability, efficiency and sound water management. A technical panel review process for the district cooling technical code and district cooling metering code has also been established to ensure that district cooling service providers are meeting the prescribed minimum technical requirements.

A key feature of the Abu Dhabi Regulations is the introduction of district cooling competition regulations, which has been introduced in order to ‘enhance market competition in the District Cooling sector in Abu Dhabi through making compulsory (subject to certain pre-defined criteria)' a competitive tendering process in relation to the appointment of offtakers by district cooling procurers, within specified district cooling areas service area, served or to be served by district cooling.

Another key feature is the district cooling pricing regulations, which aim to enhance transparency and fairness of district cooling tariffs and charges applied by district cooling service providers. The pricing regulations require the Department of Energy to approve the tariff pricing and charges payable by all end-user customers making use of district cooling services.

Dubai, United Arab Emirates (UAE)

Similar to the Abu Dhabi and Singaporean legislation, the Executive Council Resolution No. (6) of 2021 regulating the provision of District Cooling Services in the Emirate of Dubai ("Dubai Regulations"), requires:

• that any person wanted to provide district cooling services must apply for a licence from the relevant authority; and
• the Supreme Council of Energy to approve all charges and tariffs relating to the provisions of district cooling services.

The Dubai Regulations, whilst not as comprehensive as the AD Regulations, are equally focused on making district cooling more customer focused and efficient. The Dubai Regulations have also introduced penalties for poor energy performance, and obligations to monitor and report health and safety. Interestingly, the Dubai Regulations provide that the relevant government agencies and real estate developers must provide the necessary corridors in the areas under their supervision to install a district cooling distribution network and that such corridors shall be common to all district cooling providers and, save in certain circumstances, providers cannot object to the request to install a distribution network of another provider in the road reserve.

The future of district cooling and heating in Australia

The district energy sector in Australia is currently focused on self-contained university and hospital campuses, and large greenfield commercial and residential developments. Some commentators have suggested that low population density in Australia is a deterrent to widespread endorsement of district energy schemes,⁵ however technology improvements (e.g. heat pumps eliminating natural gas use) will eventually reduce costs and energy losses associated with lengthy and diversified transmission systems. Integration of central thermal plants with other utilities (such as embedded electricity networks and wastewater treatment plants) is also predicted to contribute to resource efficiency, demand side management and lower life cycle costs.

There are also a number of other issues, which, once addressed, are also likely to accelerate the uptake of district energy in Australia, including:

• Lack of regulation – there is currently no recognised regulatory authority in Australia responsible for the district energy sector and no regulatory framework. Lack of regulation will likely have an impact on the appetite of domestic developers in implementing district energy solutions and on international district energy developers from fully engaging in the Australian market (despite many leading district energy developers, including Veolia and Engie, having established businesses in Australia). Utilities-style regulation would also assist with coordinating district energy schemes with other regulated utilities and provide a framework of consumer protection and technical and performance standardisation. Furthermore, a regulatory framework is likely to drive urban planning and zoning decisions, which encourage (or even mandate) the use of district energy schemes rather than traditional air conditioning solutions. These decisions will ensure that developers make choices based on environmentally-friendly outcomes, rather than short-term financial considerations. Singapore and the Middle East are examples of jurisdictions where specific district cooling legislation has assisted with both public opinion of the district energy sector and developer appetite for district energy solutions.
• Upfront costs and perceived negative financial impact – district energy requires a significant upfront investment and, whilst the long term benefits are apparent, real estate developers may require government incentives in order to overcome any (actual or perceived) financing viability gap issues. Moreover, notwithstanding such costs, district energy is often perceived to have a longer-term negative financial impact. Low electricity tariffs in the Middle East can 'obscure the economic advantages of district cooling'⁶, however in jurisdictions (like Australia) where the electricity price is not subsidised, the economic advantages should be more apparent, and from a consumer perspective, the cost savings are significant – analysts anticipate that district energy schemes can generate US$1 trillion in energy savings worldwide⁷. Whilst district energy is more energy efficient, tariff setting and benchmarking are also important levers to ensure that district energy developers are adequately incentivised to invest in low-carbon energy sources.
• Lack of knowledge – integrating district energy infrastructure at early stages of urban planning is a fundamental prerequisite to the successful development of district energy solutions. Given the limited number of district energy projects in Australia, there is however an unsurprising lack of knowledge amongst urban planners, contractors, real estate developers and advisers about the sector. Any move by the Australian government towards regulatory reform is likely to be accompanied by a robust public education program (and possibly standardised documentation), and in the meantime, experience and know-how are confined to those who have either worked on one of the few district energy projects in Australia or have overseas experience.

Conclusion

International experience suggests that district energy will eventually cool and heat buildings and precincts in Australia. A combination of lower costs, technology improvements and a regulatory framework will be essential to ensuring that the pathway to district energy uptake in Australia runs smoothly. Due to the numerous benefits of centralised energy distribution, including in the context of climate change, many jurisdictions are both encouraging and regulating the district energy sector.

Given the nascent stage of the district energy sector in Australia and a highly urbanised population, Australia has a unique opportunity to:

• ensure that district energy forms part of the energy mix within a regulated system in a way that encourages both district energy and real estate developers to install and invest in the sector, and also protects and supports consumers; and
• adopt innovative ways to combine district energy systems with renewable energy sources, including geothermal energy and waste heat sources, for the purposes of decarbonising Australian cities.

The author acknowledges the valuable input of Ashleigh Petzer (Senior Associate at White & Case (Sydney)) and Muhammed Ali (Precinct Utility Infrastructure Lead at Arcadis) in the preparation of this publication.

_{1 'Cooling our world: how to increase district cooling adoption through proven regulation', Strategy&, July 2019
2 'District Energy in Cities: Unlocking the Potential of Energy Efficiency and Renewable Energy', UNEP, 2015
3 Ibid
4 'Are district energy systems finally ready for prime time in Australia?', The Fifth Estate, 15 December 2022
5 See footnote 4
6 'Unlocking the potential of district cooling: The need for GCC governments to take action', Strategy&, 2012
7'Increased Adoption of District Cooling Could Save US$1 trillion in Energy Costs Worldwide', Strategy&, July 2019}

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