The City of Tallinn and Utilitas have agreed to enter into a joint venture

The City of Tallinn and OÜ Utilitas enter into a cooperation agreement to create a joint venture in the field of district heating, AS Utilitas Tallinna Soojus, which will be 33.34% owned by the City of Tallinn and 66.66% by the private limited company Utilitas. The joint venture will be a holding company that manages investments in the Tallinn area, but AS Utilitas Tallinn will continue the provision of heating service.

According to the Mayor of Tallinn Mihhail Kõlvart, there will be an opportunity to build innovative energy solutions through the joint venture, which will ensure energy independence and stability of the price of heating. “The reconstruction of networks and investments in new renewable energy sources, such as wastewater and seawater heat pumps, and the exploitation of biogas potential, will provide Tallinn residents with district heating based on renewable energy and will allow Tallinn to move realistically towards climate neutrality,” said Mihhail Kõlvart.

The city’s strategic goal is to ensure the availability of environmentally friendly district heating solutions and the functioning of vital services on the territory of the City of Tallinn, and for this, the district heating network must be constantly modernized, and the necessary large investments made.

In recent decades, Utilitas has made large-scale investments into Tallinn’s district heating, significantly increasing the security of supply and the share of local renewable fuels. “Today, Tallinn has a modern district heating system, in which the share of local and renewable fuels exceeds 2/3. Unfortunately, we can see that imported fossil fuels continue to be used as a geopolitical weapon, and therefore the next steps must be taken to minimize their share as soon as possible. By adding renewable energy based production units, in addition to environmental sustainability, we can end our dependence on imported fuels with highly volatile prices,” said Priit Koit, CEO of the Utilitas Group.

As a result of the transaction, the City of Tallinn, and the private limited company Utilitas will establish a new company, AS Utilitas Tallinna Soojus. The City of Tallinn will make a non-monetary contribution to the new association with the shares of Tallinna Soojus and Utilitas, for its part, with the shares of Utilitas Tallinn. Utilitas Tallinn and Tallinna Soojus will henceforth be subsidiaries of the new joint venture. The transaction does not affect the fulfillment of the enterprise lease and operating agreement. Also, nothing will change for district heating customers, and the maximum price of heat will continue to be regulated by the Competition Authority.

On 31 October 2001, an enterprise lease and operation agreement was signed between AS Tallinna Soojus and AS Tallinna Küte (today’s AS Utilitas Tallinn), based on which Utilitas has been managing and developing the district heating network for the past 22 years. Utilitas has invested more than 450 million euros, and today more than two-thirds of the heat consumed by the capital’s district heating customers is produced from biomass and municipal waste, while the remaining third is still produced from natural gas. The current form of cooperation does not allow for the construction of new renewable generation capacity, as the remaining eight-year contract period does not give banks the necessary confidence for financing investments with a payback period of 25-30 years.

In addition, according to the current contract, the lessee, i.e. Utilitas Tallinn, must return the leased property to the city at the end of the contract, and the city must compensate for the investments made by the lessee in the assets. The amount of compensation depends on the investments made and based on the investments carried out to date alone, the compensation obligation is estimated at 250 million euros by the end of 2031. With the creation of the joint venture, the City of Tallinn will lose its compensation obligation.

Utilitas plays a leading role in the development, preparation, and updating of the business plan for the new company. The business plan aims to complete the renewal of the district heating network in accordance with the Tallinn Unified District Heating Network Development Plan and to achieve carbon-neutral district heating and cooling supply by 2030 at the latest. At the same time, the objective of the accelerated investment plan is to reduce the share of natural gas in district heating to less than 10 percent by 2027 at the latest, which will reduce fossil fuels consumption by more than 500,000 MWh. The aim is also to expand the district heating and cooling network, enable convenient connection for new customers, and to bring the network to districts that today mainly use fossil sources for heating.

The investments of the joint venture will be financed by internal cash flows, loans taken from shareholders and third parties, and contributions to the share capital of the joint venture. Utilitas undertakes to finance the investments into carbon-neutral production assets of up to EUR 225 million without affecting the share of the city’s and Utilitas’ shareholdings in the joint venture. Tallinn does not assume any financial obligations in connection with the financing of the joint venture or the provision of any other financial assistance.

Creating a joint venture between the City of Tallinn and OÜ Utilitas must be approved by the Tallinn City Council and the Competition Authority.