These arguments do not automatically lead to a recommendation of 100 % variable tariffs. In the following, we nevertheless assume that it is a reasonable estimation that the total costs 2 of future renewable heat supply systems will be higher when compared with the level of present short- term variable costs that is the base of the present fig. 2 tariff system. Therefore, it is reasonable to suggest 100% variable heat tariffs. In the conclusion in fig. 3, we will see that 100% variable tariffs are a part of an incentive structure that leads to an optimal level of heat conservation, which is also indicating that 100% variable tariffs reflect the societal costs of coming heat supply systems. Conclusion regarding policies for district heating in smart energy systems We have calculated the energy conservation consequences of a reform, where we have changed to 100% variable tariffs in combination with public guaranty that makes 30 years 2% loans possible and showed it can contribute significantly to reduction of heat consumption with around 50%. We have added the financial reform with public guaranty for loans, as 100% variable tariffs alone would not result in sufficient incentives for heat conservation. The results of the reforms are shown in the purple column in figure 3.
Meanwhile in a 4th generation district heating system, these two assumptions (a) and (b) are not fulfilled.
Firstly, because the supply system is in a process of fundamental change. The short run marginal cost structure of the existing supply system therefore does not encompass the needed price signals for the optimization between the coming heat supply system and energy conservation activities. In the ongoing fundamental transition of the supply system, energy conservation tariff incentives should include long-term heat relevant investments in wind power, heat pumps, thermal storage and the needed capacity in a low temperature district heating pipe system. These long-term needed investments in future supply systems should be reflected in the tariffs. This would make the value of heat saving increase. Secondly, the costs and benefits from investments in energy conservation do not only appear within the present heat sector. Efficient energy conservation makes low temperature heat supply possible without new investments in district heating pipes, which again increases the efficiency of wind power driven heat pumps, and thus also increases the competitiveness of wind power for heat (a technology outside the heat sector). This heat sector-external effect thus increases the societal value of heat conservation in parts of the smart energy system outside the heat sector. Therefore, it is relevant to conclude that with a fundamental change from a sector based 3rd generation district heating system to a 4th generation district heating system within a smart energy system, the tariff principles should change. The marginal costs of energy supply therefore are not the present short-run marginal costs, but the coming long term energy supply costs. And heat tariffs should reflect this change in cost structure.
The needed change in tariff policy are summarized in table 2.
4rd generation district heating
3rd generation district heating
Range of investment horizon
Figure 3. Energy consumption before and after reform with 100% variable tariffs and 2% 30 years loans (fixed interest).
Strategic change to renewable energy based supply system
Fossil fuel sector base
Time range: Time horizon and supply system change
The blue column shows present energy consumption for heat in the studied multifamily apartment buildings. The brown column is named scenario A, and shows a 60% heat conservation scenario as calculated in a report from the Danish Building Research Institute. The green column shows the consumption with the present incentive structure, which is simulated with a 20 year 4% loan and the present tariff structure as shown in figure 2. The conclusion is that with the present tariff structure and 20 years 4% loans, almost no energy conservation measures yield a positive present value.
Integrated smart energy system
Sector based heat supply
Space range of investment
4rd generation tariff system based on long run marginal costs in a smart energy system structure
3rd generation tariff system based on the short run marginal
Resulting tariff system
cost structure in existing supply systems
Table 2. From tariffs based on heat sector cost structure to tariffs based on system cost structure and long run marginal costs.
 Lund, H. et al., 2014. 4th Generation District Heating (4GDH). Energy, 68, pp.1–11. Available at: http://www.sciencedirect.com/science/article/pii/S0360544214002369.  The total costs in a future heat supply system are the variable costs in a situation of fundamental change of the energy supply system.
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