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

EU'S WINTER PACKAGE SHOWS THE WAY TO MORE RENEWABLE ENERGY On 30 November 2016, the EU Commission presented its "Winter Package", which contains a number of initiatives that affect the entire European energy sector. The Winter Package is part of the implementation of the Energy Union, and it is expected that the Winter Package will mean a revision of the RE directive and that there will be specific recommendations on how the EU Commission will meet the Union's target of 27% renewable energy in 2030. DBDH publishes Hot Cool, but the main business is helping cities or regions in their green transition. We will help you find specific answers for a sustainable district heating solution or integrate green technology into an existing district heating system in your region – for free! Any city, or utility in the world, can call DBDH and find help for a green district heating solution suitable for their city. A similar system is often operating in Denmark, being the most advanced district heating country globally. DBDH then organizes visits to Danish reference utilities or expert delegations from Denmark to your city. For real or virtually in webinars or web meetings. DBDH is a non-profit organization - so guidance by DBDH is free of charge. Just call us. We'd love to help you district energize your city!

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By Lars Gullev, Managing Director VEKS and Editor of Hot Cool THE COLUMN


In Denmark, renewable energy accounts for more than half of the district heating production, and the increased adaptation of solar heat and biomass means that the share is increasing. One can hope that this success will be reflected in the EU Commission's initiatives, where a number of other countries are already today looking towards Denmark for inspiration on the best way to convert their renewables energy sector. In this version of Hot Cool, we learn how Udo Wichert (AGFW, Germany), Morten Helveg (Member of the European Parliament), Kim Mortensen (Danish District Heating Association), Birger Lauersen (Euroheat & Power) Susana Paardekooper, Brian Vad Mathiesen, and Lars Grundahl, (Aalborg University) each looks at the consequences of the Winter Package for the further development of district heating and cooling. All in all, the Winter Package is a huge opportunity to increase the share of district heating throughout EU. No other technology can integrate renewable energy as cost-effectively as district heating.

On 30 November 2016, the EU Commission presented its "Winter Package", which contains a number of initiatives that affect the entire European energy sector. The Winter Package is part of the implementation of the Energy Union, and it is expected that the Winter Package will mean a revision of the RE directive and that there will be specific recommendations on how the EU Commission will meet the Union's target of 27% renewable energy in 2030.

Among the main elements of the Winter Package, the following can be mentioned:

• EU's goal of using energy more efficiently is raised from 27% to 30% by 2030 in terms of consumption in 2007. • In order to reach the 27% renewable energy target by 2030, countries must draw up action plans. New requirements are also proposed for the share of renewable energy in district heating and transport. • TheWinter Package is estimated to be able to create 900,000 jobs by 2030 and trigger growth and investment of more than 190 billion Euro. EU's total GDP is expected to grow up to 1%. • Buildings account for 40% of EU's total energy consumption. A revised building directive will be an important part of cutting consumption and the CO2 emissions of houses. • A revised Renewable Energy Directive must reduce EU's dependence on imported fuels. This will also help make EU a global leader in climate-friendly energy.

We would like to wish all readers of Hot Cool a well-deserved summer holiday – enjoy reading!



By Morten Helveg, Member of the European Parliament in the ALDE group and Vice Chair of the Industry, Research and Energy (ITRE) committee


Ever since the launch of the European Commission's “Clean Energy for all Package”, the nature of the “1000+ pages beast” has been widely discussed. And naturally so, because the package goes farther than any energy legislation before and it touches upon all energy related sectors: research and innovation, building, industry, transport, skills, finance. The list goes on and on.

I speak from a Danish point of view, where green, innovative energy policy has been a priority since the beginning of 1970s. The decisions taken by brave and visionary politicians across the political spectrum back then are directly linked to today’s innovative industry, which has worked diligently towards the priorities of delivering a cost effective transition to an economy largely based on renewables, coupled with a highly energy efficient building stock. One example is the way energy intensive industries in Denmark ensure that their industrial production processes harness waste heat and turn it into cheap heating. In the Danish energy sector, synergies between different elements of the economy are always taken into consideration. In doing so, many Danish businesses are market leaders and innovators in a variety of areas - from offshore wind, to heat pumps and super-efficient district heating systems. The Danish approach, being cost-effective and inherently green at the same time, has benefited our society tremendously and I believe that the Energy Union can offer the same benefits to the whole of Europe. The Clean Energy package is the perfect driver. Beast or not, it really does not matter. The Clean Energy package is first and foremost a unique opportunity in terms of promoting renewables, improving energy efficiency and reducing greenhouse gas emissions. As long as it will deliver this, you can call it whatever you want.

In my view, as an MEP dedicated to energy policy, it is indeed a beast in terms of coordination and of looking at the proposals in their entirety. My colleagues and I try to keep head and tails right and navigate to find the right course in the many and divergent ideas on how to progress the proposals towards the best results for the EU. No one said it would be easy, it never is when you’re standing on the brink of entering a whole new era. That is why we have focus on getting the guiding principles right and then, after that, the actions and initiatives that will help us achieve the goals. The Paris Agreement and the 2030 EU Climate and Energy framework serve as core to the Energy Union strategy. However, in my view, the level of ambition in the Clean Energy package needs to be altered and advanced, if we want to live up our commitments. In other words, the package is a big step in the right direction, but the proposals could have gone even further. I have said it before; They should have gone much further. You have to practise what you preach, and therefore I see it as my job to make the case for a more optimistic, more radical and fundamentally more ambitious transition. This is history in the making. If we get it right, it will be the foundation for a brand new and much needed single energy market in Europe. All the arguments are there to support the transition to a better European Energy system that delivers clean energy for all European citizens. If we fail, it will lead to a halt of innovation, the loss of thousands of new jobs, a continuous EU- import of Russian gas and of oil from the Middle East. And we will continue to exacerbate climate change. The pressure is on and it should be.

Morten Helveg Phone: +32(0)2 28 45683 For further information please contact:

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By Udo Wichert, Managing Director of STEAG Fernwärme GmbH/Essen and President of AGFW/Frankfurt am Main, Germany

Combined heat and power (CHP) and district heating are technologies which have been acknowledged for years for their high efficiency and delivering renewables to urban areas. They are the real key to the real “decarbonisation” of European economy. The district heating sector in Europe is willing to increase the share of renewables in the generation – and we are aware of the importance of this step. However, this must go hand in hand with removal of obstacles and inequalities amongst technologies. The specific features of the heating and cooling sector must be observed, since heating and cooling differ considerably from electricity supply. In conclusion, we can say that EU’s recognition of the heating sector and strong support to DHC is a unique opportunity that needs to be welcomed. We all see that the support is not unconditional – the European Commission is asking for assurances about which version of DHC people will end up getting. Therefore, we must be open-minded, accept the offer in principle and start working with the EU institutions and national governments to get the details right in practice. So I think the next two years will be very busy and exciting in Brussels as well as in our home countries for the DHC sector!

In October last year, the European Commission’s Vice President for the Energy Union, Mr. Maroš Šefcovic said: “If we want a cost-effective transition to a low-carbon economy, we have to create an internal energy market where European rules apply”. Regarding to this, we had an intensive look into the papers published on November 30th last year, called “CLEAN ENERGY FOR ALL EUROPEANS”. We are talking about more than 4,500 pages, setting the scene for the EU policy on energy for the period 2020 – 2030. But what about heating? Even though heating accounts for half of European final energy consumption, the sector has long been overlooked by EU policy makers, who focused only on electricity, gas, oil and transport sectors. In 2015-2016, we finally witnessed a steadily increasing interest in DHC (district heating and cooling) and the heating sector itself, pushed by new discussions on energy security and the recognition of great ”decarbonisation” potential. So DHC is being recognized by local authorities and cities taking the lead in climate change efforts. In 2016, the first EU heating and cooling strategy proposed by the Commission, recognizing the important role of DHC has been issued. This year we hope to see the first proposals of EU legislation that will shape our sector. But back to the great ideas of the “Clean Energy Paper”: There are several legislative proposals important for the district heating sector, such as the revision of the Energy Efficiency Directive, the revision of the Energy Performance of Buildings Directive and last but not least the recast of the Renewable Energy Directive. Here we see some major effects that we need to discuss.

For further information please contact:

AGFW | The Energy Efficiency Association for Heating, Cooling and CHP Stresemannallee 30 D-60596 Frankfurt/Main Germany

Phone: +49 69 6304-278



By Kim Mortensen, Managing Director, The Danish District Heating Association (Dansk Fjernvarme)

The Danish companies, which today create jobs to about 20,000 employees and have a total annual export worth 1 billion Euro, have a golden opportunity to demonstrate their potential internationally even further. In the Danish utility sector, together with district heating companies, the export companies have a solid showcase that can strengthen their exports. In close collaboration, we have demonstrated how the development of new technologies, such as solar heating, can go hand in hand with green conversion, high security of supply and competitive prices.

With the EU Commission's Winter Package, the direction has been set for next year's work in the EU Energy Union. The future is based on increased investments in security of supply, green conversion, energy efficiency, and research and development.

In total it is estimated that from 2021, the package will create private and public investment for approximately 117 billion Euro, while the package is expected to create 900,000 jobs. What the Commission calls for is technological solutions that, on one hand, can ensure a high level of security of supply while also securing that the energy and supply prices will not skyrocket. The Commission also calls for green solutions that can meet our overall 2030 environment and climate goals. From the point of view of district heating and cooling, there is reason to welcome the Commission's initiative. The Winter Package points to a systematic spread of district heating in the other EU countries, and with the strong district heating competencies we have in Denmark, this must cause optimism. In Denmark, district heating has steadily increased the share of renewable energy, and today, renewable energy accounts for more than half of the district heating production, as opposed to just over 30 percent 10 years ago. During the same period, we have kept the prices for district heating customers steady, and the last three years even reduced the price by 10 percent, which means that the average price is at its lowest level. The EU Commission's Winter Package does not indicate the direction for the development of the individual sectors, but sets, with a joint RE target and a number of concrete initiatives, the framework for the individual Member States to be able to be in control and lead the energy sector towards the 2030 targets.

What remains is that a joint EU finds support for the individual initiatives in the package and later that each member state finds out how to translate the initiatives into concrete goals. For some member states, it will probably be difficult due to national reasons, but for the most part, especially the Danish neighboring countries, the direction of the package and the individual initiatives will hopefully be seen as new opportunities for continuing the green change. Here the European Commission's winter package is a good helping hand, which we welcome and look forward to implementing.

For further information please contact:

Dansk Fjernvarme Att.: Kim Mortensen Fjernvarmens Hus Merkurvej 7 DK-6000 Kolding

Phone: +45 7630 8000

Photos: Nils Rosenvold

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By Birger Lauersen, Manager International Affairs, The Danish District Heating Association (Dansk Fjernvarme) and Vice-President, Euroheat & Power

This prominent role is also the positive outcome of efforts of the European DHC sector with the Heat Roadmap Europe analyses, which demonstrate the role the technologies will play in developing a sustainable energy supply for cities. The prominent role in the proposed RED can also be seen as an upgrade in status of DHC from mainly being seen as energy efficiency measure, to DHC also being recognized as a conduit for renewable energy (RE). Also challenges Generally there is an increased awareness of the importance of heating and cooling (not least due to aforementioned Heat Roadmap Europe and previous work), and it is positively reflected in the package, but it also means that the sectors are facing increasing demand for scrutiny. The fact that the development trend for RE in the heating/cooling sector at European level does not keep pace with the development of renewables in the electricity sector, has attracted attention and pressure to increase its rise.

In November 2016 the European Commission published its most recent energy initiative under the heading "Clean Energy for All Europeans". Of primary significance for the district heating and cooling sector are proposals for a major revision of the Renewable Energy Directive (RED), minor revisions of the Energy Efficiency Directive (EED) and Energy Performance of Buildings Directive (EPBD), and as well as proposals on the design of the electricity market, security of electricity supply and governance rules for the Energy Union. Good news The EU Commission has taken the habit of presenting its legislative initiatives in "packages" and presented a Winter Package in November with a series of proposals that affect the European energy supply. The package is welcomed by the Danish District Heating Association and the European district heating and cooling (DHC) sector in general - primarily because district heating and cooling play a major role in the package - especially in the proposal for revision of the RED.



It seems there was skepticism inside the Commission towards creating this parity, and this may also be expected among green movements and certain business organizations. Member States could be expected to be positive towards parity, as it would make the achievement of the RED goal easier and cheaper, and will enable the "cheap" surplus heat to finance the construction of district heating and cooling infrastructure in the cities. The RED also contains a proposal on sustainable biomass. This proposal is being assessed by the DHC sector in all countries. The assessment in Denmark is that it is reasonably close to the voluntary framework used in the Danish sector agreement for sustainable biomass. EED and EPBD The Commission proposes much more modest changes in the directives on energy efficiency and buildings, where the aim seems to be to extend (in time) current provisions, clarify certain issues, add focus to fuel poverty and moving Member States’ reporting obligations to the package proposals on governance. The package is now being reviewed by the EU Council of Ministers and the European Parliament. The Maltese Presidency has launched the work of the Council of Ministers with the Energy Efficiency and Building Directives already in early January, and expect to push for adoption before summer of a Council position. Discussions on the RED have been opened, but all stakeholders now primarily focus on assessing the impact of the many proposals. The remaining proposal in the package, not least the proposal on design of the electricity market, is expected to be taken up by the Estonian presidency in the second half of this year. Much more information on “Clean Energy for all Europeans” can be found here: commission-proposes-new-rules-consumer-centred-clean- energy-transition

It is therefore proposed that EU Member States “endeavor”, as the Commission formulates it, to increase RE in heating and cooling with one percentage point annually by 2020, but with full flexibility, as there is no specific requirement for countries in how to achieve it. It is furthermore proposed in the RED for Member States to provide DHC consumers with the right to challenge district heating and cooling systems that are not efficient, and – with some limitations - seek other options by disconnecting. The definition of an efficient district heating or cooling system is, according to the Energy Efficiency Directive, that it "uses at least 50% renewable energy, 50% waste heat, 75% cogeneration, or 50% of a combination of such energy and heat". It is also proposed that such non-efficient DHC systems (again with certain limitations) must provide heat producers with RE heat or surplus heat with direct access to - through the grid – final customers.

This proposal is not warmly received throughout the European district heating sector, and it certainly is a challenge to confront. Keeping customers on board and honoring existing planning, where implemented, is important to an integrated approach to an efficient heating and cooling supply which avoids sub-optimized solutions on a project-by-project basis. Current legislation (EED) also aims at promoting efficient district heating and cooling when, based on a cost-benefit analysis, a cost-benefit surplus over efficient individual heating and cooling supply options is shown. A main deficiency in the RED proposal is that full equality between RE and surplus (waste) heat is not created. The Commission has chosen not to create parity, so that use of surplus heat - which does not express use of fuels – could count as RE, but paradoxically promotes net heat production for heat pumps as such. This even though a share of electricity used in heat pumps will originate at thermal power plants emitting surplus heat. This beggars the question: how far from a thermal power plant must a heat pump be placed before the heat it upgrades, with electricity from the power plant, becomes renewable? Is inside the fence acceptable, just outside or far away? And then why isn’t surplus heat directly extracted from the power plant considered RE?

For further information please contact:

Dansk Fjernvarme Att.: Birger Lauersen Fjernvarmens Hus Merkurvej 7 DK-6000 Kolding

Phone: +45 7630 8000

Photos: Nils Rosenvold

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By Susana Paardekooper, MSc., Brian Vad Mathiesen, Professor MSO, and Lars Grundahl, MSc., Aalborg University Aalborg University

low hanging fruits available; and it is their implementation that remains challenging. Through research at Aalborg University, Denmark, and in particular the Heat Roadmap Europe projects, we have identified three areas where there are still significant opportunities to improve the heating and cooling sector, which must be taken better advantage of than currently set out. Renovation strategies mean a better energy transition Heat savings, and particularly heat savings in the existing building stock, are essential to decarbonise the heating and cooling system and can still be very economical if they are implemented when people are doing regular renovations to their house. This is especially the case for individual homes, built before 1980. While the Winter Package addresses the building stock extensively in the proposals for the EPBD (Energy Performance of Buildings Directive), the focus remains exclusively on the individual building rather than integrating renovation strategies with NEEAPs (National Energy Efficiency Action Plans), SEAPs (Sustainable Energy Action Plan), and the wider energy system. This automatically limits buildings’ potential to contribute to the decarbonisation of the energy system. An investigation in the Danish building stock and energy system has shown that if the building stock is to be part of a wider energy transition towards decarbonisation and renewability, thermal performance is not enough (Figure 1). Buildings must also enable technologies that maximise synergies within energy systems such as low temperature district heating, consider user behaviour and find a balance between investing in savings and renewable supply technologies. Approaching renovation strategies with a more integrated perspective will not only allow for more and deeper renovations, but also enable a better energy transition in other sectors of the energy system.

It has been a while since the first Heat Roadmap Europe research report was launched in 2012, in which we first emphasised the importance of an integrated smart energy system for Europe’s heating and cooling sector. Europe has faced a number of challenges, including a Brexit and a refugee crisis. However, there is also a strategic crisis with regards to the integration of the energy sectors in the European Union. The EU’s “Clean Energy for All Europeans” set of proposals, more commonly known as the Winter Package, was published in November 2016. The emphasis on 1) energy efficiency and 2) an expansion of renewable energy for heating and cooling can enable a real development of renewable energy in heating. The Winter Package also recognises the need for an integrated approach towards the sectors – something which underpins the ability of the energy systems to achieve decarbonisation in an affordable way through synergies and smart energy systems. This is indeed good news, as in Heat Roadmap Europe we have repeatedly found that Europe is able to provide heat in a more efficient, sustainable and affordable way by combining energy savings, efficient individual heating and district heating in an integrated approach. As part of the Energy Union, it marks the largest launch of changes in EU legislation on the energy markets to date. While critics say that it is simply old wine on new bottles, the package provides a much-needed change concerning the heating and cooling sector, which has been neglected so much in the past. When the EU Energy Roadmap was published in 2011, heating and cooling did not get much attention. This prompted the start of our Heat Roadmap Europe series (, which is now in its 4th edition. Since then, the Commission hosted its first heating and cooling conference in 2015, and published its first heating and cooling strategy last year. In the past 7 years, we have seen the EU and energy community recognise the importance of heating and cooling more and more, and the Winter Package is an extension of this. The Winter Package has been brought out with the framing that ‘we have already harnessed the low-hanging fruits’, and the next steps towards more renewable and efficient heating and cooling will be more challenging. While this may be true on the policy side, our research also shows that there are many more technical

Figure 1: Three perspectives that are key to the role of buildings in future cost- effective sustainable energy systems. Taken from Future Green Buildings: A Key to Cost-Effective Sustainable Energy Systems. Department of Development and Planning, published in 2015 by Aalborg University



Figure 2: District heating and cooling potential in the EU28, based on heat demand density. This figure shows the cumulative heat demand densities based on Peta3. While it does not have an energy system perspective (so cannot show what the efficient level of district heating could be in the context of the energy system) it shows that there are many areas in Europe where district heating is already (highly) feasible, and should be implemented.

Implementing district heating The further implementation of district heating is still an area where large gains can be made. In many areas, district heating potential remains largely unfulfilled. The work in Heat Roadmap Europe 3 (WP2 of the Stratego project) included the thermal mapping of the EU28 and the development of integrated heating and cooling strategies for five member states. Figure 2 shows the cumulative heat demand densities in the EU28. In some of the countries with the highest potential for both conventional and 4th generation district heating, such as the Netherlands, Spain, and Germany, district heating is currently minimal or practically non-existent, even though the potential is larger than in some more traditional district heating countries. The implementation of district heating systems in these areas is hard because of current planning and institutional frameworks, but there is technical and socio-economic potential to providemore renewable and affordable heating and cooling. Heat synergy regions Most impressively, the latest results from the Heat Roadmap Europe project, which is now expanding to 14 countries, show that there is still a huge amount of energy being wasted. One of the latest results currently available online in the Pan-European Thermal Atlas is the location of excess heat activities. The excess heat available from individual plants is calculated as the theoretically available excess heat based on data from the European Pollutant Release and Transfer Register (E-PRTR). The combined knowledge of the location of heat demands and excess heat activities allows the Heat Roadmap Europe project to highlight heat synergy regions in which both high levels of heat demand and high levels of excess heat exists. Middlesborough and Hartlepool in the United Kingdom represent a case where several excess heat activities are located in the centre of the town and within a short distance of the heat demand, as seen in Figure 3. The two towns have a heat demand of approximately 9.5 PJ, and the excess heat facilities within the area

have a theoretical excess heat available of 34 PJ. This comes from the potential for industrial excess heat, which comes mainly from iron and steel manufacturing and chemical industries. Under the Renewable Energy Directive proposal in the Winter Package, this excess energy from the industry would be counted as renewable and contribute towards the targets.

Figure 3: An image from Peta 4 ( showing the Middlesbrough and Hartlepool area. It currently displays the heat demand density and sources for excess heat. In the interactive version, one of the possibilities is to select the potential excess heat facilities to gain more information.

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Moving forward The Winter Package is a welcome development but can only be seen as the first step. Amuchmore integrated approach is needed in the future. One explicitly positive development from theWinter Package for the district heating sector has been the proposal in the Renewable Energy Directive to work towards binding renewable heat share targets, with a proposed yearly increase of 1%. If passed, this action will be the first step allowing for the concrete replacement of oil and gas boilers, and a direct incentive to capture and use excess heat from industry. In addition, as Figure 5 shows, district heating and cooling can be a key technology

Another example, with a much higher potential for district heating, is the Cologne area of Germany, depicted in Figure 4, in which both a high heat demand density as well as numerous excess heat activities are located. More than 50 excess heat facilities are located in the area, and the 10 largest ones have a theoretical excess heat available of more than 600 PJ, while the heat demand in the area is slightly more than 200 PJ. These excess heat facilities are a combination of large (fossil fuel) power plants, waste-to-energy facilities, ferrous and non-ferrous metal production, food processing facilities, chemical industries and petroleum refineries, etc.

to decarbonise the heating and cooling supply in cities, and be able to integrate further renewables.

Through various mechanisms, district heating and cooling allow for a better integration of renewables. This is especially the case if the building stock is energy efficient, and able to integrate low temperature energy sources. Firstly, the connection with the electricity sector through combined heat and power (CHP) – especially in combination with thermal storage – allows for more flexibility in the electricity system, and a higher integration of intermittent renewables, such as wind. Secondly, large heat pumps can be used to integrate more wind into the energy system, and avoid the need for fuels in the heating and cooling sector. Lastly, some sources of renewable energy, such as excess heat, geothermal and solar district heating, can only become available if there is a district heating system already installed. This is also the case for (cheaper) large-scale thermal storage. Since

Figure 4: An image from Peta 4 ( showing Cologne and the Ruhrgebiet.

renewables can be integrated into district heating systems so efficiently, a potential renewable heat obligation could be a catalyst for implementation of district heating on the ground.

Both examples, although very different in scale, show areas where the excess heat activities have a theoretical output of more than three times the heat demand. This means that even if only a part

of the heat can be harvested for district heating, a very substantial share of the heat demand can be covered using resources that are efficient or renewable. In addition, this currently does not even include potentials such as geothermal or solar district heating. The potential for harnessing excess heat in Europe is huge, but has largely not been realised. Through the proposed renewables obligation and the classification of excess heat, it may be possible to start seeing real developments in utilizing these resources.

Figure 5: Share of renewable energy in the heating and cooling sector for the EU28 shown with the level of district heating penetration for 2015.



While progress has been achieved, Heat Roadmap Europe also shows that there are many more technical ‘low hanging fruits’ available. Savings must and can still be implemented to a higher level, but the current focus on the individual buildings risks that oil and natural gas boilers will be mainly replaced by biomass boilers or heat pumps. While these solutions certainly have an important role in the future, there are still vast amounts of untapped potential for cost-effective district heating. Additionally, this may hinder the use of low value heat sources for low value heat demands. An integrated approach is needed to take advantage of the remaining potentials and develop a smart energy system approach, where we intelligently connect the electricity sector with the heating

For further information please contact:

Sustainable Energy Planning Research Group, Department of Development and Planning Att.: Susana Paardekooper Aalborg University

AC Meyers Vænge 15 DK-2450 Copenhagen Phone: +45 22892392

sector using (large) heat pumps, co- generation and cheap thermal storage.

While there are positive indications in theWinter Package, future policies must be much more explicit about integrating energy systems to ensure affordable and sustainable decarbonisation. The next level in Europe could be to strengthen the national comprehensive assessments of heating and cooling as well as to require more concrete policies that enable comprehensive energy planning. The challenge is in heat planning and capitalising on these opportunities. Mechanisms have been introduced to drive change in the Winter Package proposals, but we must also start seeing real change on the ground. The problem is not that the low hanging fruits have been picked: it is that we must become better at picking the available low hanging fruits.

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By Frede Hvelplund, Dr. Techn. Professor in energy planning, Aalborg University

In this article, we will compare the costs of energy conservation in multifamily apartment buildings with the incentive system in the district heating supply system. We have calculated the energy conservation consequences of a 2-track reform where we have changed to 100% variable tariffs in combination with the introduction of public guaranty that makes 30 years, 2% loans possible. The conclusion is that if this 2-track reform is implemented, the economic incentives for a reduction of heat consumption of around 50% seems to be in place. Without these rather simple reforms it is unlikely that the needed energy conservation goal will be implemented. Danish energy scenarios mostly aim at reducing heat demand from residential houses by around 40% per m2 before 2050. At the same time, the m2 area is supposed to increase, so that the total demand for heat in 2050 is supposed to be just slightly lower in 2050 compared with 2015. This assumed reduction in heat demand per m2 is carried out concurrently with a radical change in the energy supply system towards 100% renewable energy supply. And there are good reasons to believe that a major part of the heat supply system in coming Danish smart energy systems will be wind power in combination with district heating, heat pumps and heat storage. This will be supplemented by geothermal, solar and some biomass heat. In this process of fundamental change of the energy and the district heating supply system, the amount, timing and character of conservation measures at the heat markets become both technically and economically essential, both for the development of smart energy systems and for the 4th generation district heating systems. The main requirements for heat conservation in a smart energy- and a 4th generation district heating system are summarized in table 1. NOT ONLY IN DENMARK The suggested reform has been evaluated in a Danish context with a focus onmultifamily apartment buildings. A similar reform could well have a similar effect in other European countries, and especially the connection between heat conversation, low temperature district heating and the efficiency of renewable energy in connection with heat pump is of general interest.

1. Heat conservation requirements

2. Why these requirements?

a. Right/optimal amount of heat conservation.

a. Optimization between investments in supply and demand systems. Especially relevant in the present strategical change to 100% RE supply systems. b. To avoid investments in oversized supply systems in a situation with not optimized heat consumption. Especially needed in the present situation with a strategical change of the energy supply system. c. To make it possible with existing district heating pipes to supply the needed heat in low temperature systems - and thus avoid new investments in district heating pipes. d. To support a high efficiency/COP of heat pumps in a system with mainly wind power based heat pumps.

b.In right time of heat conservation investment.

c.Heat conservation that supports low temperature systems

Table 1. Energy conservation requirements in a smart energy system

In a future 100% renewable energy based smart energy system, it is mainly an economic optimization between energy supply and energy conservation that determines the optimal level of energy conservation in houses. A bit too simple expressed: If, in a 100% renewable energy based system, it is more cost efficient to heat 100 m2 house area by adding some centimeters to the length of the wind turbine blades than to the thickness of insulation, then this should be done until the marginal costs of prolonging the wind turbine blades (or building one more wind turbine) are equal to the marginal costs of increasing the thickness of insulation. This is a new situation, and calculations in Denmark show that with a 100% CO2 free energy supply system, the optimal heat consumption level is around 80 kWh/m2 heated area for older houses, and 55 kWh/m2 for new houses. In a smart energy system, heat conservation is not only conservation in the heat sector, but heat conservation in a smart energy system. Similar, electricity conservation is not electricity conservation in an electricity sector, but electricity conservation in a smart energy system. So the value of heat conservation is dependent upon the type of supply system, and the level of electricity conservation. The value of electricity conservation is a function of the energy system and the level of heat conservation.



Does heat conservation pay with the present incentive system? The question in this section is whether the present heat conservation incentive system is capable of “delivering” the right amount of heat conservation in right time and in that way, also support a low temperature heating system.

Costs of heat conservation in multifamily apartment buildings

Figure 1 shows the costs per kWh of energy conservation in multifamily apartment buildings based on calculations from the Danish Building Research Institute (SBI) and the Danish

Figure 1. Costs per kWh of energy conservation in Danish multifamily apartment buildings. (1 Euro is the equivalent of approximately 7.5 Dkr).

heat atlas. The calculations are linked to the implementation of what SBI calls scenario A with a 60% reduction of energy consumption in multifamily apartment buildings. The first 1 TWh conservation costs are 0.6 Dkr per kWh and the last almost 2 TWh conservation cost 0.95 Dkr/kWh. In the calculations of figure 1, we have used a discount rate of 4% p.a., and a technical lifetime of the investments of 20 years. We assume that this is a rough average of the financial conditions of investors in heat conservation. If we had used a lower discount rate and a longer technical lifetime, the costs per saved kWh would be lower. The tariff system in Danish district heating companies In this section, we will analyze whether consumer payment for heat supply, as manifested in tariffs, are higher or lower than the figure 1 consumer costs of energy conservation. If the payment for heat supply per kWh is higher than the costs of energy conservation, it pays to invest in energy conservation, and if the heat bill per kWh is lower than the “energy conservation bill” per kWh, heat conservation does not pay.

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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.



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.

[1] Lund, H. et al., 2014. 4th Generation District Heating (4GDH). Energy, 68, pp.1–11. Available at: [2] 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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