The joint venture will be a holding enterprise in charge of investments in the Tallinn area, while district heating services will continue to be handled by Utilitas Tallinn, the city government said.

The city will be making a nonpecuniary down payment using the shares of the municipal heating utility Tallinna Soojus, while Utilitas will do the same with shares of Utilitas Tallinn. Utilitas Tallinn and Tallinna Soojus will both be the new company's subsidiaries in the future.

With the contract, Utilitas will take on the obligation of investing €225 million in new carbon neutral production assets without it affecting its share or that of Tallinn in the joint company. Tallinn will not be taking on any additional financial obligations.

Mayor Mihhail Kõlvart said that the company will start generating heat using waste water and seawater pumps already this year.

"Utilitas has the necessary know-how for utilizing these technologies, how to construct seawater and waste water pumps that will serve as alternative sources of energy to reduce our dependence on natural gas and other fossil fuels," Kõlvart said.

The city government said that the changes have no bearing on rental or operating contracts, as well as that nothing will change for district heating customers, with the price of district heating still coordinated by the Competition Authority.

Termination of current contract would cost the city €250 million

Tallinna Soojus and Utilitas' predecessor Tallinna Küte in 2001 signed a rental and operating contract that has seen Utilitas manage and develop the capital's district heating network for the last 22 years. The company has invested over €450 million in that time, with more than two-thirds of Tallinn's district heating now produced using biomass and household waste. The remaining third is generated using natural gas.

The existing agreement does not allow for new renewable production capacity as the remaining contract period of eight years does not provide banks with enough certainty to finance projects the payback period of which is 25-30 years, Tallinn said.

The contract's termination would obligate Utilitas Tallinn to return all rental properties, while the city would have to compensate the tenant for investments made. Based on recent investments alone, this would put Tallinn's compensation obligation at €250 million by 2031. The creation of the joint venture does away with this investment obligation.

Kõlvart said that having to pay the sum would hurl the city into a financial crisis seven or eight years from now, which is among the chief reasons the city has been negotiating with Utilitas for an alternative solution for the last two years.

The mayor added as another reason the fact that Tallinn has few levers for giving up the use of fossil fuels itself. "Tallinn's potential for coming up with solutions is limited, which is why we need a partner."

Utilitas will be in charge of developing and updating the new company's business plan. The business plan prescribes finishing updating the city's district heating network and having a carbon neutral district heating and cooling system by 2030 at the latest.

The plan also prescribes reducing the relative importance of natural gas to below 10 percent by 2027 at the latest.

Competition watchdog unaware of details

The joint venture by the City of Tallinn and Utilitas needs to be approved by the Estonian Competition Authority.

The authority was not aware of the details of the transaction when contacted by ERR and could, therefore, offer no comment.

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