Denmark’s district heating journey, which began with its first heat supply law in 1979, has since become a global benchmark for energy solutions. The International Energy Agency (IEA) has recognised Denmark as an early leader in decarbonisation, noting that the district heating sector has practically phased out coal, helping lower the country’s reliance on fossil fuels in total energy supply from 75 percent in 2011 to 53 percent in 2022, well below the IEA average of 79 percent. The renewable energy share of district heating production has risen to 70 percent by 2021.
The phase-out of fossil fuels in heating, anchored in the Heat Supply Act and reinforced by the 2022 Climate Agreement on Green Electricity and Heat, which established an ambition that no Danish households should be heated by gas boilers by 2035, together with regulatory changes lifting existing consumer bindings to natural gas, are gradually opening the sector to private investors. That said, the Danish heating sector carries distinct legal characteristics that differ markedly from other European markets.
This edition of Bird & Bird Heat Transition Insights focuses on the regulatory framework, the transaction-specific challenges, and the latest legislative initiatives for private investors in the Danish heating sector.
Why is the Danish heating sector particularly attractive to private investors right now?
Denmark’s obligations and targets
The Danish Climate Act (2020) sets a legally binding target of 70 percent Greenhouse gas reduction by 2030 and climate neutrality by 2050. More ambitious targets have been proposed – climate neutrality by 2045 and a 110 percent reduction by 2050 – though these have not yet been written into the Climate Act itself.
A central element is the political ambition that gas should no longer be used for space heating from 2035, driving households towards district heating or individual green solutions. The phase-out of fossil space heating presupposes massive investments in new green heating infrastructure within a relatively short timeframe, creating a substantial and time-sensitive investment opportunity for private investors.
A sector in electrified transition
Heat production from large heat pumps and electric boilers rose by 17 percent from 2023 to 2024, now accounting for just under 10 percent of total district heating production. Small heat pumps accounts for just under 14 percent of energy used for space heating in households and the commercial sector.
Approximately 400,000 Danish homes remain heated by natural gas, and approximately 50,000 by oil boilers. These households must transition to district heating or individual green solutions, both of which require investments that public bodies and consumer-owned utilities cannot shoulder alone, creating an opening for private capital.
The district heating fund
The state supports the roll-out of district heating with direct grant funding. The District Heating Fund is reopening on 1 September 2026 with DKK 350 million and an increased grant of DKK 40,000 per connection. Public co-financing of this kind reduces technological risk and improves the commercial business case for private investors.
Municipal heat supply planning
Municipal councils are under a statutory duty to carry out heat supply planning and to approve projects for new collective heat supply installations or major changes to existing ones. This creates structured decision-making processes and a visible pipeline of investable projects to which private investors can connect, either in cooperation with the municipal utility or as an independent operator following regulatory approval.
Practical examples
In Denmark, a growing number of investments and projects in the heating sector are being realised by private investors, both independently and in partnership with municipalities and consumer-owned utilities.
- Geothermal heating systems: A significant example of private investment in Danish district heating is the geothermal project in Aarhus developed by Innargi A/S, a company backed by A.P. Møller Holding, with ATP Pension holding a 37 percent stake, NRGi holding 20 percent and A.P. Møller Holding the rest. The geothermal district heating plant at the Skejby site in Aarhus has officially started operations, supplying heat to approximately 330,000 homes from a reservoir at 2,500 metres depth. The plant is the first of several planned geothermal projects by Kredsløb and Innargi, with an expected total capacity of at least 102 MW. By 2030, the system is expected to cover approximately 20 percent of Aarhus’ total heat demand.
- Large-scale heat pumps: Copenhagen’s district heating system, operated by HOFOR and Ørsted, has integrated large-scale heat pumps utilising seawater and wastewater. Approximately 10 new heat pumps are poised for installation in various locations across Copenhagen. The two largest facilities will have a combined production capacity of 170–200 MW, equating to around 18 percent of Copenhagen’s district heating consumption. Collectively, the heat pumps will deliver 300 MW of heat.
- Waste heat utilisation: A project in Kalundborg with an investment of DKK 1.4 billion (approximately EUR 190 million) developed for Novo Nordisk and Novozymes by Kalundborg Forsyning, will deliver up to 166 MW of district cooling capacity. The project also explores utilising waste heat from the district cooling plant for district heating purposes, with estimates suggesting it could generate district heating for up to 40,000 households.
- District heating expansion: TVIS, the overarching district heating supplier for the Trekantområdet region, has approved an investment plan of DKK 534 million covering 12 district heating projects, endorsed by the municipal councils of TVIS’s four owner municipalities. The projects will collectively reduce CO₂ emissions from heat by 460,000 tonnes and connect approximately 8,700 new consumers. The plan includes investments in waste heat recovery from Lindegas and an expansion of the existing agreement with Everfuel’s hydrogen facility, which already covers a heat demand equivalent to 1,300 consumers.
Regulatory framework for investors
Favourable factors
Certain renewable energy based installations, including those using geothermal energy, solar heat, biogas, biomass, and electricity-driven heat pumps supplying heat to collective district heating systems, may incorporate a surplus in their prices, with the Minister empowered to extend this to comparable installations. This is a commercial opportunity and a material departure from the pricing restrictions applicable to fossil fuel-based heat production.
The regulatory framework is designed to allow long depreciation periods, and heat supply agreements may be concluded for very long periods, as illustrated by Innargi’s 30-year agreement with Kredsløb. Denmark’s high district heating connection rate, combined with the possibility of mandatory municipal connection requirements, provides suppliers with a stable and contractually secured revenue base.
A stamp duty reimbursement scheme applies to mortgages registered as security for loans replacing oil or gas boilers with an alternative heat source, covering the period 1 May 2023 to 31 December 2028, subject to conditions including year-round residential use, at least 90 percent of loan proceeds being used for the replacement, and completion within 12 months of mortgage registration. This reduces financing costs associated with heat transition and strengthens demand for new connections.
Considerations for investors
Collective heat supply installations may only include in their prices the costs necessary for heat production and distribution. The “cost-recovery principle” creates a predictable and stable pricing structure: prices are insulated from short-term market fluctuations. Any over-recovery, where consumers have paid more than necessary costs require, constitutes a debt to consumers and must be set off against future prices, providing a transparent and well-defined framework for long-term financial planning.
Agreements with group-affiliated and associated companies must be concluded on arm’s length terms. The Danish Utility Regulator may determine the market price to be used as the basis for what may be included in the prices charged. Tariffs and conditions that have not been notified to the Regulator are invalid, and the Regulator may order changes to tariffs and conditions that are not reasonable and objectively justified. For vertically integrated investors, these requirements are well-established and can be addressed effectively through proactive compliance structuring and early engagement with the Regulator.
Operation of transmission infrastructure not owned by municipalities or consumers must be conducted through a separate company, and a majority of board members must be elected by consumers or municipal councils. These requirements are a well-understood feature of the sector and can be accommodated through appropriate transaction structuring.
What specific transaction features need to be taken into account?
Ownership and investment structures
The Danish district heating sector has been dominated by consumer-owned cooperatives and municipal utilities. Transactions involving private investors require careful mapping of the target company’s corporate structure, as substantially different rules apply regarding permissible ownership, lawful return on capital, profit distributions and regulatory supervision. A thorough legal analysis of the target’s regulatory profile is a prerequisite for any valuation and structuring exercise.
Pre-emption rights and transfer restrictions
Before a non-consumer-owned transmission installation can be transferred to a party other than a municipality, the connected consumers must be offered the right to acquire it at market price. Conversely, where the installation is consumer-owned, the municipality must be offered a right of first refusal. The pre-emption right applies equally to transfers of ownership stakes and lapses after three months. These requirements are a standard feature of the Danish district heating sector and, when addressed proactively with specialist legal advice, can be integrated seamlessly into transaction planning.
Critically, the consideration upon transfer must not, directly or indirectly, result in higher heat prices than would have applied absent the transfer, including through increased financing costs, depreciation or return on capital. This is a fundamental pricing parameter that should be incorporated into the financial model from the outset of any investment process, ensuring that the transaction structure is designed for full regulatory compliance.
Surplus heat projects
Following the abolition of the surplus heat price cap, which entered into force 1 July 2025, prices paid by district heating companies to surplus heat suppliers may be freely negotiated. However, costs remain subject to the general “necessary costs” principle under the Heat Supply Act and the consumer price cap that has been in force since 1 January 2025. The overall district heating price, including surplus heat costs, must not exceed the price of the cheapest alternative.
FDI screening
Foreign investors acquiring a qualifying holding of 10 percent or more in companies active within Danish critical infrastructure, including the energy sector, are subject to mandatory authorisation under the Danish FDI Act, with closing suspended until approval is granted by the Danish Business Authority. A pre-screening request may be filed to obtain advance certainty. Where a transaction also falls within the scope of the EU Foreign Subsidies Regulation, parallel notification to the European Commission may be required. Investors should factor both processes into their transaction timetables from the outset.
Outlook on legislative initiatives
The regulatory framework governing permissible returns on capital for private investors continues to attract strong political support. The ongoing dialogue between consumer protection interests and the need to ensure sufficient investment incentives for the green transition is progressing towards a clearer framework, with further legislative amendments anticipated that are expected to strengthen the conditions for private investment.
A legislative bill on strengthening connection to the electricity grid is currently before the Danish Parliament. The bill introduces a four-tier categorisation system for grid access, with individual electricity-based solutions, including private heat pumps, placed in Category 1 (highest priority), whilst collective district heating is currently placed in Category 2. Dansk Fjernvarme has argued in its consultation response that all heat supply – whether delivered through individual or collective solutions – should be treated equally and that collective district heating should be elevated to Category 1. Dansk Fjernvarme has further noted that authorities must ensure coherence between grid prioritisation and municipal heat plans, as district heating companies risk being unable to supply electricity-based heat to new areas without guaranteed grid access – which could both increase the cost of heat production and slow the electrification of district heating. The consultation period closed on 28 July 2026, and the bill is now awaiting parliamentary treatment before entering into force. For private investors in electrically-based heat production, the final categorisation will have direct implications for project feasibility and timing.
Our expertise
Given the regulatory complexity and the multitude of transaction-specific features in the heating (and cooling) market, early legal support is recommended.
Bird & Bird has extensive expertise in providing legal advice for complex innovation, infrastructure and transformation projects in the heating sector and would be pleased to advise you.
For further information, please contact:
Mikkel Taanum, Partner, Bird & Bird
mikkel.taanum@twobirds.com
