HOT|COOL NO. 2/2017 - "The Winter Package"


We are, of course, aware that there might be other reasons than the pure positive present value economy, for energy conservation. For instance, any major building restauration has to live up to specific energy efficiency specifications in order to be approved by the authorities. So even if it does not pay economically in a present value calculation, the buildings will improve their energy efficiency in parallel with needed renovation activities. But this will take several decades, and might be too late compared with coming investments in a new renewable energy based heat supply system, and thus may generate uneconomic overinvestments in the supply side.

The present district heating tariff school says that tariffs should reflect the cost structure in the district heating company (Energistyrelsen, Finansministeriet, Energitilsynet 2009). According to this tariff school, the perceived fixed supply system costs should be reflected in a fixed tariff, and running costs should be reflected in the variable tariff share. The division between fixed and variable costs is (relatively arbitrary) determined by the district heating company at a certain point of time. The result of this tariff philosophy is manifested in the actual tariffs as shown in figure 2.

Therefore, we will conclude that there is a massive lack of incentives for heat conservation with the present economic conditions. So, it is a valid conclusion that the present incentive structure and energy conservation policy does not fulfill any of the energy conservation requirements from table 1 with regard to reaching the optimal energy conservation level in the right amount and time, and thus supporting low temperature district heating systems.

New heat conservation policies thus must be developed and implemented.

Figure 2. Heat bill in some district heating areas divided on fixed and variable tariff shares in DKr/ MWh.

In a situation of fundamental change of the heat supply, it is important that tariffs reflect the future system costs, and not the short-term marginal costs of present supply systems. When making fundamental change of the energy supply system, the tariffs thus should reflect that for long-term decision all costs are variable! Policies for smart energy system conservation activities In the following, we will analyze whether a policy with 100% variable tariffs and a 30-year loan at 2% discount rate will be a sufficient incentive for energy conservation in the right amounts and time, and supporting a consumption level that makes low temperature district heating economical. But first we will discuss the reasons behind a change to 100% variable tariffs. Is a change to 100% variable tariffs justified in economic theory? The arguments in the present 3rd generation district heating 1 tariff school is that it reflects the cost structure of the district heating supply sector, and that it consequently will imply economic distortion costs to change to 100% variable tariffs. This argument is based on a situation where (a) the supply system is not going to be totally changed. So, the short run marginal costs of today’s district heating sector can be seen as a valid representative for the long-term marginal costs of the heat supply system 10-20 years from now. (b) All costs and benefits of energy conservation can be found within the heat supply sector.

Figure 2 shows the heat costs per MWh (1000 kWh) and therefore also the heat prices in a variety of Danish district heating companies. As it can be seen, the tariffs are divided in a fixed and variable part, where only the variable part gives the incentive for heat conservation. How big a share of the energy conservation potential in figure 1 does it pay to implement with the present tariffs? Just by comparing figure 1 and 2, it can be seen that for the vast majority of district heating companies, the variable tariff per kWh is below the cheapest fig.1. conservation measure of 0.6 Dkr. per kWh (or 600 Dkr/MWh). It also can be seen from figure 2 that if the fixed tariffs are changed to a variable tariff, a large number of the district heating companies will have tariffs that are higher than the lowest cost of energy conservation. We have made detailed calculations of the costs linked to the different age groups of flats in each district heating area, and calculated how large a share of each building age group will give a positive present value with an investment lifetime of 20 years and at a discount rate of 4% p.a. The result of this calculation is that only between 2% and 4% of an energy conservation scenario with 60% energy conservation have a positive present value in these calculations. This leads to the conclusion that with the present tariff structure (fig.2) and the present costs of heat conservation measures (fig. 1), only a very tiny amount of the needed heat conservation measures will be implemented.


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