HOT|COOL NO. 1/2020 - "How to District Energize your City"

Main principles for a compensation scheme A compensation scheme was decided in 2012. It was based on three main principles: Firstly, the compensation scheme secures lower heat prices for the new district heating consumers. A standardized feasibility study based on levelized cost of energy must document that the new district heating supply will result in lower consumer prices and better socio-economic costs. Secondly, the compensation model secures repayment of debt in all natural gas distribution companies, whether they have a relative high debt or a low debt. Thus, the size of the compensation can vary from one area to the next, according to the economy of the gas distribution company. Thirdly, the compensation scheme must be as simple as possible. It was pointed out by all key stakeholders during the preparatory process that unclear rules and interpretation options could delay the conversion significantly. The reason is that one part could bring the case for a complaint body or court, which could result in higher costs and delayed investments. Thus, a fair and simple compensation scheme was deliberately asked for by all stakeholders. Relatively high indebted natural gas companies were secured, and the new district heating customers would only be asked to convert, if their district heating bill was lower than the previous heating bill with natural gas, incl. compensation.

By Ole Odgaard, Former Senior Policy Advisor on district heating at the Danish Energy Agency

In many places, lower consumer prices could be obtained by replacing natural gas by district heating. But such conversions are often countered by a remaining debt at the natural gas companies. This article suggests a solution based on several years of experiences in Denmark, which is applicable in other countries. Denmark supports a heat conversion from natural gas to district heating, which brings about lower consumer prices and lower CO2-emissions. However, a key issue is that the natural gas companies may still have a debt from the natural gas network's establishment. This debt must necessarily be settled by the remaining natural gas customers. When a significant conversion from natural gas to district heating is made, the remaining gas consumers will be charged with even greater repayments on the debt. In short, there are fewer to pay. Therefore, a fair compensation scheme could be considered for larger heat markets or heat zones. As many cities in other countries face the same challenge, this article will highlight the Danish solution, which could serve as inspiration for a similar solution adapted to the specific conditions elsewhere.

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