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By Troels Michael Lilja and Bent Ole Gram Mortensen, Professors at the Department of Law, University of Southern Denmark

In recent years, it's not uncommon for local district heating utilities to shut down due to poor financial conditions. This is particularly seen in small villages where houses are spaced far apart and there are few customers, such as the Øland Combined Heat and Power Plant, Menstrup-Hyllinge Combined Heat and Power Plant, and Præstbro Combined Heat and Power Plant. Other small plants have survived due to mergers. Reconstruction (previously called "payment suspension") has been used in the past.

A reconstruction is carried out in bankruptcy court and aims to save a company by re-ducing its debt (a forced debt settlement) or by selling the company. In December 2020, Refa Maribo-Sakskøbing Combined Heat and Power Plant A/S (Refa MSK), which supplies heat to district heating companies in Maribo and Sakskø-bing, filed for reconstruction. A year later, the reconstruction proposal was finally ap-proved in an appeal case by the high court, avoiding bankruptcy.

In early 2024, several smaller district heating companies were denied by the Danish Utility Regulator the right to include so-called "losses from electricity price specula-tion" in their heat prices. In 2021, several district heating companies lost millions due to electricity price speculation (the DKVK case). One of the companies – Hirtshals District Heating – had to undergo reconstruction. Other district heating utilities are now struggling to find funds to refund the speculative losses, which were unlawfully passed on to customers. However, other district heating companies face challenges even without speculating in the electricity market. Many district heating projects are struggling with generally rising construction costs.

The Green Transition

The autumn of 2024 brought a special focus on the municipal utility sector. This is not without reason. After all, we are in the midst of a green transition, where, for ex-ample, the expansion of district heating in residential areas is growing at the expense of natural gas.

Unfortunately, it wasn’t discussions about necessary investments that dominated the media. Instead, it was the threat of bankruptcies in these now crucial utility sectors.

In Odsherred Varme A/S, there were plans to expand the existing district heating net-work, increasing the current 2,100 supplied households by another 2,500 – more than doubling the customer base. Odsherred Varme is one of several subsidiaries in the municipally owned holding company Odsherred Forsyning A/S. Odsherred Varme had to undergo reconstruction and halt the planned expansion, even though several con-struction projects were partially completed. The residents who signed up for the up-coming district heating supply are now in limbo, unsure if they will ever receive dis-trict heating. The rest of the consumers don’t know if Odsherred Varme will go bank-rupt and if there will be future district heating supply.

The municipality is liable through a guarantee for a loan taken from KommuneKredit. However, a larger amount is guaranteed by a surety bond provided by the holding company to the lender Nordea for loans to Odsherred Varme.

At the project's start, construction costs were estimated at 950 million DKK. By the end of 2023, the estimate had been revised upwards by 300-400 million DKK, and by 2024 the price reached 1.6 billion DKK.

Odsherred has a widespread organizational model for its municipally owned utility companies. The municipality owns 100% of a holding company, which in turn owns 100% of several subsidiaries, each representing its utility sector (water, wastewater, waste, district heating). Additionally, the holding company owns a service company that, for a fee, services the individual subsidiaries.

Reconstruction and Bankruptcy

Are utility companies too important to go bankrupt? It’s a valid question, as utility se-curity is critical to a local area's attractiveness for residency. Given its importance and considering the struggling utility companies, it may be worth examining whether the current organizational structure and legislation are optimal. When a company enters reconstruction, the main goal is typically to save jobs and future tax revenues.

When a utility company undergoes reconstruction, the societal goal is equally to se-cure future supply for consumers without prices rising to the point where homes be-come unsellable. However, this goal cannot legally be prioritized under current legis-lation. In a reconstruction, the standard is for creditors to receive a percentage of what they are owed, with the remainder being lost to allow the company to survive. Credi-tors accept this because they typically have ongoing business with the company, which over time can recover their losses.

In the mentioned utility companies, creditors are largely contractors and others who have assisted the utility with one-off work in connection with the expansion of an ex-isting district heating network. They do not have the same opportunity to recover losses through future trade. Moreover, when the largest creditors are secured through guarantees and sureties, it becomes nearly impossible to gain support for a reconstruction.

A failing utility company doesn’t attract many buyers, and this could mean that it would be economically more attractive for creditors to dig up the pipes laid in the ground and sell them, as the resale value of the company's operations may be lower than the scrap value of the pipes in the ground.

In Danish insolvency law, there is a fundamental principle that the bankruptcy court must reject a reconstruction proposal if one or more creditors are worse off than they would be in a bankruptcy. This principle could lead to the absurd situation in Od-sherred, for example, where an almost finished district heating system is dug up and sold for scrap, resulting in significant value loss, while the residents who were expect-ing future district heating will have to find alternative heating sources. If the alterna-tive heating sources are less environmentally friendly than the intended heating sys-tem, we as a society stand to lose significantly – both economically and environmen-tally.

Municipal Ownership of the Utility Sector

While various utility laws require that municipalities’ involvement in the utility sector be through limited liability companies, there is no requirement for the existence of a holding company between the individual utility companies and the municipality.

Had there been direct municipal ownership of the shares in the individual utility sub-sidiaries, the problem with the surety bond would not have arisen. Instead, a lender would have approached the municipality and requested a more traditional guarantee. The municipal utility sector could not have accumulated a large guarantee obligation without the municipal council’s knowledge, and the municipality would not risk los-ing ownership of all its utility companies due to problems in one utility company.

A Call to Action

We urge municipalities to move away from the holding company model. Likewise, we encourage legislators to rethink the position of consumers in the event of bankruptcy. A new heating supply for a house cannot be provided overnight, and if district heating delivery ceases during a cold period, it can result in significant losses.