District cooling system as a utility infrastructure business – Contractual obligations of the district cooling operator

Featured Image: District Cooling as a Utility Infrastructure Business - Contractual Obligations


The district cooling system, according to IDEA’s  “District Cooling Best Practice Guide”, is a long-term utility service business. By their very nature, district cooling systems are often structured as utility infrastructure. In this article, we shall explore the key characteristics of district cooling that distinguish it as a utility infrastructure business, as well as the contractual obligations of the district cooling system operator or owner.

Definition of a utility infrastructure business

A utility infrastructure business invests in physical infrastructure assets that provide utility services to consumers. The infrastructure usually consists of generation assets (such as power plants, which generate electricity) and transmission assets (such as power transmission lines, which transmit and distribute power to the consumers). The utility company commits to heavy upfront investment in these physical infrastructure assets in return for long-term supply contracts with the consumers. Examples of businesses in the infrastructure sector range from water, gas, and electricity to transportation and even heating and cooling energy. Due to the extended life span of the infrastructure, there are significant recurring costs for the repair and maintenance of these assets.

Key features of long-term utility infrastructure businesses include:

  • High barriers to entry: The requirement for a significant initial capital investment serves as a potent barrier to entry for new competitors. Established utility companies usually enjoy a significant first-mover advantage over newer players seeking to enter the business.
  • Monopolistic or oligopolistic market structure: Many long-term utility infrastructure businesses operate in markets that are monopolistic or oligopolistic in nature, meaning that there are only a few dominant players in the market.
  • Long-term contracts: Utility companies enter into long-term contracts, usually lasting decades, with their consumers. The long time horizon provides a stable stream of cash flow, allowing the servicing of debt payments and the distribution of profits to shareholders, representing a return on their investment and the return of investors’ capital.
  • Regulatory oversight: Utility infrastructures often provide essential services to the community and have significant impacts on the local economy. For these reasons, many utility infrastructure companies are subject to regulatory oversight.

Read more