NO. 1 /2019
INTERNATIONAL MAGAZINE ON DISTRICT HEATING AND COOLING
DISTRICT HEATING FINANCE AND ECONOMY
TCO - secure the best possible long-term investment
Internal rate of returN anD how it affects Development of DH projects
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THE COLUMN: THE BENEFITS OF DISTRICT HEATING By Knud Bonde, Senior Vice President, Meters – Heat & Cooling, Kamstrup, and member of the Board of DBDH
FOCUS FINANCIAL GAIN THROUGH HEAT AGREEMENT BETWEEN DISTRICT HEATING COMPANY AND SURPLUS HEAT SUPPLIER By Lars Gullev, Managing Director, VEKS
FOCUS IRR - INTERNAL RATE OF RETURN AND HOW IT AFFECTS DEVELOPMENT OF DH PROJECTS By Lars Gullev, Managing Director, VEKS & Morten Jordt Duedahl, Business Development Director, DBDH
FOCUS TOTAL COST OF OWNERSHIP ANALYSIS SHOULD ALWAYS FORM THE BASIS OF INVESTMENTS IN PRE-INSULATED DISTRICT HEATING NETWORKS - SECURE THE BEST POSSIBLE LONG-TERM INVESTMENT By Peter Jorsal, Product and Academy Manager, LOGSTOR A/S
FOCUS GEOTHERMAL ENERGY FOR DISTRICT HEATING By Lars Andersen, CEO, Geotermisk Operatørselskab A/S
FOCUS MOTIVATION TARIFF – THE KEY TO A LOW TEMPERATURE DISTRICT HEATING NETWORK By Tom Diget, Chief Operating Officer, Viborg District Heating Company
FINANCING THE 2030 AGENDA: PEOPLE-FIRST PUBLIC PRIVATE PARTNERSHIPS IN RENEWABLE ENERGY By Torkil Hvam Sørensen, Member of the World Association of PPP Units & Professionals (WAPPP)
AN INDISPENSABLE TOOL IN SUPPLY CHAIN MANAGEMENT By Michael Søndergaard, CEO of Pernexus
AWARD WINNER HEAT-DISPATCH-CENTER-SYMBIOSIS OF HEAT GENERATION UNITS TO REACH COST EFFICIENT, LOW EMISSION HEAT SUPPLY By Britta Kleinertz, Dr. Götz Brüh and Dr. Serafin von Roon, "Forschungsgesellschaft für Energiewirtschaft mbH"
MEMBER COMPANY PROFILE: VERDO
Front page: Heat exchanger where surplus heat from the CP Kelco process is transferred to the district heating system (see article page 4).
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E N E R G Y A N D E N V I R O N M E N T
By Knud Bonde, Senior Vice President, Meters – Heat & Cooling, Kamstrup, and member of the Board of DBDH
THE BENEFITS OF DISTRICT HEATING
converting this into hot water. With the increasing adoption of electricity production from wind and solar, ‘wrong timing’ of excess production of electricity is happening more and more frequently. This is where DH is helpful in creating a better balance in the total energy picture by absorbing excess produced electricity. There are numerous other examples of where energy, otherwise wasted or sold at very low prices, is converted into heat comfort and hot showers. The exploration of this issue will surely continue. In other cases, DH is often produced by different types of biomass, like wood chips and non-recyclable waste type of materials, which are often not useable in other contexts. To summarise, in many cities these sources will cover the entire need for DH, with the positive consequence that the usage of primary energy sources, such as oil, coal and gas for heating purposes, are constantly reduced or eliminated. Everybody can imagine the positive significance of this when it comes to using our basic energy sources on Earth and when it comes to benefitting CO2 and other environmental balances as well as reducing pollutions. Furthermore, the use of local DH sources will for many countries, be beneficial to their international balance of payments, which any government would gladly welcome. All in all, DH proves that it has a lot of advantages for the environment, the energy balance, the economy and last, but not least, with the built-in “no-trouble-concept” it fits very well with the modern human being, who wants to spend their time on other things in life than caring about operating a technical system for bringing up heat comfort and hot water. Finally, we might add that most of the advantages of DH can be adopted by producing and distributing cooling/air-condition, in fact these similar concepts already exist on a big scale in areas such as e.g. Dubai.
The benefits of district heating (DH) are certainly many, and the beauty is that there are also benefits to many of the different “stakeholders”. Just to mention a few: the users or customers of the “product”, the society – locally and nationally, the energy preservation and the environment. Let us take a closer look at these different stakeholders… The customer of DH is of course the most important stakeholder in this, since if they do not choose DH, DH has no market justification. The basic benefits for the customer are that they will always have an adequate supply of heat and hot water, without having any worries about operational issues, etc. Once installations are set up, the supply will simply always be available and unrestricted. Compared to other sources of heat/hot water, this means no worries, no service calls, no risk of break downs and so on. The overall economy is at a competitive level while the investment is on a similar or lower level compared to other ways of achieving heat comfort and hot water. At the same time, the current payment of usage is on a competitively low level and based on the concept “you pay as you go / for what you use”. Over the years, DH has brought benefits to the local community, having removed a lot of chimneys, which were connected to individual heating sources, thus contributing substantially to cleaner air in the surrounding areas. DH is often set up locally in conjunction with e.g. water or electricity supply, thus enabling the use of the most modern(convenient) technology. An example of this would be in the collection of consumption data from the different usages of energy and water, enabling the utilities to provide efficient and seamless services to the customers. Generally, both locally and on a national basis, DH acts as an absorber or user of energy that would in other cases be wasted, for instance, cooling water from power production or from a variety of other productions where cooling is needed, such as production of cement or of oil. Over the latest years, DH is also absorbing excess production of electricity and
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FOCUS FINANCE & ECONOMY
By Lars Gullev, Managing Director, VEKS
Well thought out heat agreement between a producer of surplus heat and a district heating company ensured both parties an economic gain at the project's realization. This article describes the background and content of a heat agreement between the company CP Kelco and the district heating company VEKS - both located near Copenhagen, Denmark. BACKGROUND CP Kelco is a US-owned company that produces pectin, a natural starch. The company is located in Lille Skensved approx. 40 kilometres from Copenhagen. Pectin can be found in apples and in the shells of citrus fruits - and it is exactly the peels of citrus fruits that are used by CP Kelco at the factory in Denmark. The factory in Denmark is the largest of its kind in the world, and 98 % of the production is exported. We often encounter pectin (E-440) when we eat processed foods such as marmalade, desserts, ice-cream, ketchup, or dairy products such as yogurt and smoothies. The process used to extract the pectin from the citrus peels involves large amounts of energy, and at the factory in Lille Skensved, the excess heat from the process has so far been emitted to the surroundings via large cooling towers. VEKS operates a large district heating transmission network in the western part of Copenhagen and the local district heating distribution network in the town of Køge, situated right next to the CP Kelco factory. It was therefore natural to look more closely at whether the large amounts of unused surplus heat from the production of pectin could be utilized in the local district heating network in Køge. CP Kelco and VEKS already know each other well. Already in 2008 the parties had been working together with Solrød municipality in order to examine the possibilities for Solrød municipality to establish a biogas plant, where part of the organic "waste" for the plant was to be composed of citrus peels from CP Kelco. In addition, seaweed from beach cleaning, slurry from cattle and pigs, and residual products from a pharmaceutical company were to be supplied to the biogas plant. The biogas from the plant was to be purchased by VEKS,
which would utilize it in a gas engine for the production of green electricity, and the surplus heat from the engine was to be used for heating of district heating systems.
Existing cooling towers, which will, in the future, only be used as back-up if the district heating system cannot receive the surplus heat from the process at CP Kelco
The biogas plant was officially inaugurated in November 2015, and VEKS bought the first biogas from the plant at the end of 2016, when the biogas was sufficiently clean to be used in a gas engine. The experience from the collaboration between CP Kelco and VEKS regarding the biogas plant was so positive that the parties without reservation again in 2015 took up the collaboration with the goal of utilizing the surplus heat from CP Kelco to district heating targets, while at the same time both CP Kelco and VEKS should be able to see a financial gain from the possible realization of the surplus heat project.
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The challenge, therefore, was to set up a contract model that catered for both considerations. A realization of the surplus heat project could be attractive for both parties with the right agreement. What benefits did CP Kelco gain from an agreement with VEKS? • Constant and financially attractive sales of surplus heat produced in connection with the company's primary activity - to produce pectin. • An alternative to cooling the surplus heat in cooling towers and thereby minimizing future investments in noise reduction of existing cooling towers. What benefits did VEKS gain from an agreement with CP Kelco? • Future-proof and constant delivery of surplus heat at a competitive price, which in the first years would be on a par with the heat price from VEKS' alternative heat suppliers. • In the long term, the heat price from CP Kelco would be lower than VEKS' alternative heat purchase price from other suppliers. What are the benefits for both CP Kelco and VEKS with the agreement? • The heat agreement would contribute to both companies' environmental and climate-related objectives - a green CO2 footprint.
After about two years of negotiations, the heat agreement was signed in December 2016, and the planning of the technical installations began. One year later, in December 2017, the surplus heat project was formally put into operation. Schedule as well as budgets had been met. HOW IS THE SURPLUS HEAT UTILIZED? The production of pectin generates large amounts of surplus heat, which until now has been directed to cooling towers. The idea of the project was to utilize the surplus heat in the local district heating network as follows:
The surplus heat from the process, which has a temperature of 75°C, is led to a heat exchanger. Here, the surplus heat meets return water in the district heating network at a temperature of 47°C, which is heated to 72°C through the heat exchanger. For a large part of the year, this temperature is sufficient as flow temperature in the district heating network. If there is a need for a higher district heating flow temperature than 72°C, the temperature can be "boosted" via a heat pump, which is also provided with surplus heat from the process, at a temperature of 75°C. Thereby, the supply temperature in the district heating water can be increased from 72°C to 85°C, should the need arise. Since the transfer of surplus heat to the district heating network for a large part of the year only takes place through the heat exchanger, the COP for the overall system is calculated to be 18.5. The first year's operating experience has shown that the COP for the system is even higher than 18.5.
Heat pump where the flow temperature in the district heating system can be boosted from 72°C to 85°C if necessary.
CONSTITUENT PARTS OF THE AGREEMENT - RESPONSIBILITY FOR INVESTMENTS AND DESIGN CP Kelco is responsible for the investments and the design of the technical installations for utilizing the surplus heat right up to the "connection point" with VEKS - that is, for example, heat exchangers and heat pumps. The design concept must be presented to and approved of by VEKS. VEKS is responsible for the investments and the design of the technical installations from the "connection point" with CP Kelco and to the existing district heating network - that is, for example, district heating pumps, meters, and about 150 meters of district heating pipes in the ground.
But how, then, is the heat agreement - based on this plant concept - designed?
MAIN FRAMEWORK FOR THE AGREEMENT The two parties - CP Kelco and VEKS - are very different. CP Kelco is a 100 % commercial company, which must, necessarily, focus on the fact that free capital must be yielded interest in the best way possible. This means, as a starting point, a large focus on investments with a short payback period. In contrast, VEKS - as operator of infrastructure in the form of a district heating system - has a longer time horizon for its investments. In other words: VEKS works with more patient capital.
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In period 1, it is ensured that CP Kelco's investments will be repaid. During this period, the surplus heat is settled at VEKS' substitution price, which means that for the depreciation of CP Kelco's investments, there will be the difference between VEKS' payments for the heat supply and the direct operating costs for heat exchanger and heat pump etc. This period is expected to last 3-4 years. In period 2, it is ensured that VEKS' investments are repaid. During this period, the surplus heat is settled with VEKS, corresponding to the direct operating costs for heat exchanger and heat pump, etc., so that for the depreciation of VEKS' investments, there will be VEKS' substitution price and the difference between VEKS' payments for the heat supply. This period is expected to last about 3 years. In period 3, which starts when both parties' investments have been repaid, the profit is divided between the parties when the surplus heat project has been realized. The profit is determined as the difference between VEKS' substitution price for heat supplied by alternative heat suppliers and the current operating costs for the supply of surplus heat. As previously mentioned, the profit between CP Kelco and VEKS is divided according to their "Budget Net Investments". SUMMARY The surplus heat project has now been in operation for a year and the experience from this has met expectations. Heat production has been slightly lower than expected, which has also characterized the operating costs - thus, it means a better operating result than budgeted. The learning from the project here and now is that for such a project to succeed between such different parties like CP Kelco and VEKS, the secret is: • A good chemistry between the parties involved at all positions of the collaboration. • Open calculations in which each party has the full insight into the counterparty's financial calculations. • Respect for each other's interests. • Trust. If the above framework conditions are present, a good, but also necessary, foundation has been created for a good project and, thus, for a good business for both parties.
Each party prepared a budget for their own investments, freezing each party's share of the investments that would subsequently be included in "Budget Net Investments". This "Budget Net Investment" is subsequently used as a distribution number between the parties for determining the heat price, when both parties' investments have been repaid. After completion of the construction work, each party had to prepare a building account including documentation for costs incurred. The building accounts were to be presented to and approved of by the counterparty. The realized investments should subsequently be included in each party's “Actual Net Investments”, which forms the basis for the length of the repayment periods for the parties' respective investments.
CONSTITUENT PARTS OF THE AGREEMENT - DELIVERY PERIOD
The basis for pricing of the surplus heat depends on which period of the year the supply of surplus heat occurs. A distinction is made between two periods: • "Off-Peak Consumption Periods" are those months of the year when the heat deliveries from CP Kelco alone could be replaced by heat deliveries from the KKV CHP plant - typically 4-5 months. • "Peak Consumption Periods" are those months of the year where the heat deliveries from CP Kelco would have been replaced by heat supplies from AVV1 CHP plant and AVV2 CHP Plants - typically 7-8 months.
CONSTITUENT PARTS OF THE AGREEMENT - SUBSTITUTION PRICE
The substitution price is defined as the price VEKS should have paid for heat deliveries from either KKV CHP, AVV1 CHP or AVV2 CHP Plant, if no surplus heat was supplied from CP Kelco: • In the "Off-Peak Consumption Periods", this means that the substitution price corresponds to the price for heat supplies from the KKV CHP Plant. • In the "Peak Consumption Periods", this means that the substitution price corresponds to the price for heat supplies from AVV1 CHP plant and AVV2 CHP plant.
CONSTITUENT PARTS OF THE AGREEMENT - PRICING OF SURPLUS HEAT
Lars Gullev, email@example.com For further information please contact:
The agreed price for the surplus heat is in the interval between VEKS' substitution price for heat deliveries from alternative heat suppliers and the operating costs for the surplus heat from CP Kelco, including surplus heat taxes.
E N E R G Y A N D E N V I R O N M E N T
FOCUS FINANCE & ECONOMY
By Lars Gullev, Managing Director, VEKS & Morten Jordt Duedahl, Business Development Director, DBDH
INTERNAL RATE OF RETURN - IRR Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project, equal to zero. IRR calculations rely on the same formula as NPV does.
IRR is the theme discussed everywhere when looking at how to establish district heating (DH) systems – these words are still to be understood in detail and are at the same time a very important part of understanding how to roll out city-wide networks. All organisations hoping to enjoy the benefits of DH must understand what the IRR means and how a low or a high level of IRR affects the roll-out of DH. Not least, how high IRR will limit city-wide expansions of DH.
uncertainties, normal but good management etc. – nothing fancy or extraordinary, just a good ordinary system.
Cities discuss how to buy back their DH companies from private companies, how they can get private funding involved and how to become more competitive and efficient all over the world. This discussion often leads back to one of private ownership or council led ownership and then again to the IRR. In this article the authors do not discuss local framework conditions that allow or do not allow specific business models nor how local traditions influence the choice of ownership of public goods. The authors have simply noted that ownership of DH companies is (one of) the most important discussions these days – at least in Europe. The discussion of how control, cost, expansions etc. differs depending on the ownership, is becoming more and more important and often ends up being the crucial factor for a project to go forward. THE TWO BASIC MODELS FOR OWNERSHIP In this article we discuss two basic models of ownership: A strictly commercial and a strictly municipal/cooperative with the only difference being the expectation to IRR. Many scholars have identified several models in between the two, but for simplicity, this article claims that in essence, there are only the two. In the end, the actual ownership of pipes and production facilities is the key. For both models, we assume that they are active market players accessing the competitive and commercial market for the best offers for pipes, welding, digging, planning, finance, operation, maintenance etc. In this sense they are both equally cost and quality conscientious. We have found no general evidence of the opposite. LEVEL OF IRR IN THE TWO MODELS FOR OWNERSHIP The assumption of this article is to compare similar systems – pears to pears, apples to apples! The projects are in both cases well managed, well planned, well built, well financed – in short, a “well-made” project. DH systems with their small flaws, some
In many places with a municipal or co-operative ownership, the IRR threshold for a DH project can be around 4%, based on the cost of capital plus a security element, leaving room for small changes in the economy of the system. This is not a set standard, as the DH company may accept a lower IRR, if the project is straightforward and something that has been done many times before. Or, it may be a bit higher, if the DH company finds that there are extra uncertainties or risk factors that should be included. The 4% threshold is used often in Denmark to evaluate projects and could be used in many other countries where the main interest is to provide comfort and city development. For a strictly commercial operation, the level of IRR will vary from project to project. Numbers as high as 18% have been mentioned – but a more realistic level may be around 14%. It must be stressed that these numbers are speculations only, as the actual level is a commercial secret, and therefore most often unknown. On the other hand, numbers around 14% are not unrealistic. It seems to be accepted in some DH communities, that 14% is acceptable and sometimes even discussed as a fact. When looking at it from a different perspective, 14% does not seem way off. The commercial companies can invest in other projects (in any industry or country – chicken farming in Uganda, wind turbines in Vietnam or solar projects in Australia – just to mention a few) that will provide an IRR at the same level to their owners. And they should! The commercial companies are here to give their owners the highest possible return on investments with the lowest possible risk, including the perceived risk of long pay back times. If that leads to developing DH or something else, it is entirely up to the owners of the company.
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THE LOWER THE IRR - THE MORE DH It is as simple as that…. The lower expectations to the IRR, the more or larger DH projects a company can invest in, within their economic framework. The picture below illustrates this fact. People familiar to the east of Scotland will recognise the map of Dundee. The examples given are not in any way based on the actual situation in Dundee – any city map could have been used. Dundee has merely been used, as discussion with knowledgeable people from Dundee created the initial idea for this article some years back. The drawing illustrates that a DH system in a city (at least in the beginning) consists of several individual projects – the blue line areas. For each of them the IRR can be calculated ranging from very high to very low. At the same time, an IRR calculation has been made to establish how large a DH system the city could create within the IRR threshold at 4% - the red line.
Picture 2. An example of projects that can be developed with high IRR expectation (14% or more). More may be developed but would then rely on subsidies or grants from e.g. the local authority. The large low carbon heat sources to the left will not be included in the project and thereby lost.
A municipal led DH company with a 4% threshold will over many years develop DH throughout the entire area - see picture 3. Of course, starting with the most economic viable projects and then working their way through the different expansions and new projects. Please note that a municipal led company planning to build out into the entire area will consider building a project with a very low IRR in order to improve the economy of the entire system. In this example, it could be creating the 3% project (to the right in the picture) with the main purpose to gain access to low-cost surplus heat (as illustrated with the small black production site) and connecting several individual projects to that heat source through the project with only 1% IRR. Other factors than strictly economical could similarly influence the order of which projects are rolled out. For example, areas with severe fuel poverty, areas in need of renovation and other local and political reasons may lead to decision makers prioritising specific projects before projects with a higher IRR – again illustrated as the 1% area.
Picture 1. A simplified example of several projects which are to be developed over time with different levels of calculated IRR. For simplicity, only a limited number of projects have been illustrated. The remaining parts of the city will also have DH in the future. These areas would have an even smaller IRR and would therefore be the last to be developed If a project can only muster up 10% IRR, a commercial company would not accept it unless support is given that would bring the calculated IRR up to their threshold. A municipal DH company, with a threshold of 4% IRR, would see this as a very relevant and investable project and would go ahead immediately. In the case of a strictly commercial ESCO approach, only three projects would be built in this city, see figure 2 – the ones with an IRR of 14% or above. A few more could be added if the local authority or another benefactor would support the developments with subsidies or cash allowances. Sooner or later, the ongoing support from any benefactor will run out and then no more projects will be developed. The complexity of having up to three individual and competing companies operating in the same area and the effects on possibilities for expansions and alterations to the systems is not discussed here.
Picture 3. Development of projects based on a council approach - on the way to rolling out DH in the whole city. In this picture the expansion of projects has been included. IRR has been assumed constant due to access to the large low carbon heat source, lower cost as the DH company has been established, experience has been gained etc.
E N E R G Y A N D E N V I R O N M E N T
DEPRECIATION TIME MAY ALSO DIFFER The depreciation period (or pay-back period) used in different business models may also differ – that again makes the comparison of IRR difficult as projects should be similar in order to make a correct comparison of IRR. For a classic end user owner / municipal owned DH company, the depreciation time in theory would be the technical life time minus a few years. For a pipe network, this may be 30 years or up to 50 years, for a biomass plant maybe 20 years, etc. For a commercial operator it may be shorter. How much shorter is not known! Many commercial companies do simply not allow investment that has a very long payback time, as it is considered higher risk. In this article this perspective is not discussed further but it is, however, worth considering when looking into an investment. A simple (but not entirely correct) analogy would be to consider how one would prefer to pay back a property investment – e.g. you own home. All things equal, one would prefer the longest possible payback time (up to the technical lifetime) as that would keep annual costs down. EFFECT OF DIFFERENT EXPECTATIONS TO IRR Imagine a project that is commercially viable for a commercial ESCO, i.e. the IRR is calculated to 14%. This project would be an easy sell and would be rolled out soon. The below will discuss the effects if a municipal ESCO with a threshold at 4% was asked to do the same project. In other words, what could the difference in IRR be “used” for. Remember that the price offered to the end user on the 14% project must be acceptable – otherwise it would not have been built. Some of the effects are relevant in different stages of the roll out of DH in a city. Price reductions are always welcome, expansion also. But the complex process of establishing a DH company with all the lawyers, accountants etc. is a one-off situation. Climbing the learning curve is an ongoing process, but the need to climb it will decrease over time. The first projects undertaken will be projects with the very highest IRR – they are the most obvious projects and should of course be looked at in the beginning. Projects that will provide a lower IRR should be looked at later. At that point, some of the learning and starting costs have been covered by the projects that could afford it and will therefore not influence later projects.
Figure 1 illustrates how this difference in IRR could be used for different purposes. The percentage mentioned to the left in the figure will differ from project to project, from city to city and be different depending on for example, the number of projects already completed/started.
IRR for a commercial ESCO (assumed)
Climbing the learning curve step by step
Create council lead ESCO
Build equity to support future developments
Build a surplus to balance income from year to year Build in extra network capacity to support future expansions Improve quality to minimise operation and maintenance
Expand the network - adding areas with lower IRR
Lower prices / Alleviate fuel poverty (assumed fair prices)
IRR for council lead company (common threshold in Denmark)
Approximate interest rate for borrowing capital
Figure 1. Illustration of how the difference in levels of IRR can be used by a council led DH company for different purposes. The obvious could be simply to lower the price for the end user, but it is assumed that the price in both cases is fair and correct.
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Build a surplus to balance income from year to year Many DH companies prefer to offer stable prices over the years and avoid price fluctuations. Many DH companies have a standard price for the whole season to allow the end users to budget correctly. Others change their price from month to month depending on their actual cost ensuring that all costs will be covered. It is common to create an income-buffer that allows a DH company to run a small surplus one year (if the winter is colder or warmer than expected) so as to cover for a small deficit the next year; this in turn balances the price over time. Build equity to support future developments This is the same as creating a surplus to balance income from year to year. Here the surplus is earmarked to building equity to support future projects with a much lower IRR – this may be projects that will connect existing areas to low-cost surplus heat. Create the local DH company – the Council ESCO If this project is the first project undertaken by a city run DH company, the city will need to establish and develop a DH company – this may be at a substantial cost. This would be a one time cost and only influence the IRR for the first project. Here, the first project “pays” for the total cost of establishing the DH company, to the benefit of future projects, who then have access to an experienced DH company that is already well established. Climb the learning curve If the project is the first project, it would be expected that small and big mistakes will be made. As more projects are being completed/undertaken, it must be assumed that the company will climb the learning curve quicker and make fewer mistakes. Again, the first few projects pay (and can afford) to climb the learning curve to the benefit of other future projects. CONCLUSION This article does not give guidance to which business model is the best or most relevant in different countries or under different framework conditions. It simply demonstrates the effect on the roll out of DH in a city dependent on the accepted level of IRR. It is clear that a high level of IRR jeopardizes a city-wide development of DH and could also make access to large low carbon heat sources difficult or impossible. Besides the theme of this article, a local authority should also consider the benefits of having just one company in charge of developing DH city- wide, as opposed to having several companies and being responsible for supporting the cooperation and coordination between several independent entities.
A DETAILED DISCUSSION OF HOW LOWER IRR COULD BE “USED”
Price reductions The simplest way to reduce the IRR is to reduce the cashflow i.e. simply lower the price for the end-users. The definition of IRR mentions “all cash flows”. This means that if the cash flows are reduced, the IRR will go down. Here, the local DH company can simply calculate backwards and find the price (cash flow) that would result in an IRR that is acceptable. In this article, this option is less relevant as we assumed the price to be fair from the beginning. Expansions of the network Another opportunity is to expand the project further into areas that are less economically viable – i.e. provide a smaller IRR. In this example, the DH company would increase the scope of the projects into areas with a lower IRR. The larger project would therefore be more expensive, requiring a larger investment. The cash flow would increase as more end users are connected at the specified price, but the IRR would go down as the investment grows faster than the cash flow.
Improve quality to minimise operation and maintenance cost
Project developers will always seek to find the right balance between investing into high quality to avoid operation and maintenance costs or vice versa. The effect to IRR could be neutral as an increase in investment would be offset by an increase in net cash flow, as costs would decrease. To the extent that the first projects will be developed as part of the backbone in future projects, it may be relevant to “overdo” quality over operation and maintenance. If the project is again among the first undertaken by the municipal lead ESCO, overdoing focusing on quality to avoid trouble and uncertainties on maintenance and operation costs may be relevant until the organisation has climbed/completed the learning curve.
Build in extra network capacity to support future expansions - Future proofing
Another option is for the city DH company to build in future proofing of the network. If the plan is to create citywide projects, the first projects (of course the ones with the highest IRR) should be dimensioned to be the backbone of the future system. Here cash flow would remain unchanged (if we assume that operation cost is not affected), but the investment would increase and thereby lower the IRR. This will help future projects to reach an acceptable IRR, as the first project has already acquired investments that will benefit the next projects.
For further information please contact:
Lars Gullev, firstname.lastname@example.org
Morten Duedahl, email@example.com
E N E R G Y A N D E N V I R O N M E N T
FOCUS FINANCE & ECONOMY
By Peter Jorsal, Product and Academy Manager, LOGSTOR A/S
It ought to be a matter of course to include a Total Cost of Ownership (TCO) analysis when investing in a pre-insulated district heating network, whether it is to expand in new areas or replace old systems, and then choose the system with the lowest costs during the service life. However, this is not always the case. We still see many examples of people investing in the cheapest possible system or continuing to build their district heating network on the same principles as always, regardless of whether it actually results in higher Total Cost of Ownership.
COSTS TO INCLUDE IN A TOTAL COST OF OWNERSHIP ANALYSIS
The following elements are natural to assess in a Total Cost of Ownership analysis of establishing a pre-insulated district heating network: • Investment in the pre-insulated materials • Investment in the welding work, installation of casing joints, and handling of pipes and components • Investment in excavation/backfilling, asphalt, and other pavements • Control and inspection • Heat loss costs during the period, which is analyzed • Maintenance and repair costs during the period, which is assessed • Pipe dimensions and derived pumping costs The duration of the period the analysis is based on must be determined. Normally, the period of a Total Cost of Ownership analysis is 30 years, but more and more energy companies calculate with a 50 years’ period. On the other hand, there are also many examples of investments, which are assessed over a much shorter period. The analysis will give an overview of the Total Cost of Ownership as shown in below diagram, based on an analysis of 4 different pipe systems in a case-project. The costs of the single elements of an actual project are stated in 1,000 Euro.
In the following, the essential elements in the Total Cost of Ownership analysis are outlined.
PIPE DIMENSIONS AND DERIVED PUMPING COSTS The hydraulic dimensioning of the district heating network shall ensure that there is capacity for future expansions and connections to the district heating network. At the same time, it must be ensured that the pipes are not overdimensioned, as this will only result in too large investment costs, subsequently higher heat loss costs, and too large temperature drops in the network. In relation to the Total Cost of Ownership, the investment in pumps and the resulting annual operation costs for pumps (power consumption) are naturally important. The hydraulic dimensioning of a district heating network and the consequent pumping costs is a complicated matter, which should be carried out by consulting engineers, specialized in this field. In the following considerations on the Total Cost of Ownership in connection with different choices of pre-insulated district heating systems, it is a pre-condition that the hydraulic dimensioning is optimized and has been determined. That is, the service pipe dimension will be the same in all comparable systems.
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INVESTMENT IN PRE-INSULATED MATERIALS There are more aspects to take into consideration when choosing pre-insulated pipe systems. Which pre-insulated pipe system you choose has a large influence on other elements in the Total Cost of Ownership analysis, such as the contractor costs of establishing a district heating system (welding, handling pipes, casing joint work, excavation/backfilling, asphalt etc.), as well as the heat loss costs. • Is it a TwinPipe or a single pipe system you want to establish? • Are flexible pipes used for minor dimensions? • Are mastic-sealed shrink joints or weld joints used? • Which surveillance system is chosen to ensure that damages, if any, are detected in due time? • Which insulation series is chosen? • How is the static design of the system made and how are the movements absorbed in the system? When choosing products for a district heating network, you must demand that the materials and product properties ensure that you get the system service life you expect. The European standards EN13941, EN253, EN448, EN488, EN489, EN14419, EN15632, EN15698 define the minimum requirements to components, system and design to be complied with, in order to obtain a minimum service life for the district heating system of 30 years, provided the continuous operating temperature is 120°C, and the peak load temperature for individual periods are up to 140°C. On average, the sum of these peak load temperatures must not exceed 300 h per year. Most energy companies have a considerably lower load on the district heating system as regards temperature, load cycles, pressure etc. than prescribed in the European standards, and the service life is therefore expected to be higher than 30 years – up to 50 years.. TWINPIPE VERSUS SINGLE PIPE This is an essential choice, as it influences the contractor costs (investment) and the heat loss costs. Today TwinPipe systems up to DN250 are available.
In addition, the costs of casing joint work will typically be lower, because the number of casing joints is halved, but the dimension of the casing joints is bigger. When using TwinPipe systems, the heat loss will be considerably lower than that of a single pipe in similar dimension, what appears from below figure, in which the heat loss in kW is stated for 1,000 trench meters DN50 in different systems.
RIGID STEEL PIPE SYSTEM OR FLEXIBLE SYSTEMS It must be assessed whether it is advantageous to establish the minor dimensions with flexible systems in coils or not. There are flexible systems with different service pipes like Alupex, steel, copper, and PEX, which can be used dependent on temperature, pressure, and dimension.
The contractor costs of excavation/backfilling, and handling, and joining pipes are typically lower for flexible pipe systems.
The exercise is to compare this to the difference in investment in the pre-insulated pipe materials and the difference in heat loss costs.
CASING JOINT SYSTEM TO CHOOSE
Historically, statistics show that damages in a system typically occur at casing joints, and that the majority is due to faulty installation.
By using TwinPipes the contractor costs for excavation/ backfilling can be reduced, compared to single pipes due to a smaller trench profile.'
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SURVEILLANCE SYSTEM TO CHOOSE To establish a well-functioning, active surveillance system is crucial for receiving information in due time and localize any damage where moisture enters the PUR insulation. This enables you to repair the damage before it spreads, and ensures that the damage does not influence the expected service life of the pre-insulated pipe system. So, the surveillance system is a very important tool for asset management. The surveillance system must ensure that the following faults are reported quickly: • Weld faults • Installation faults, casing joint installation • Product faults • Excavation/backfilling damages
The casing joint system you choose is important to ensure that you get the system service life you expect and not unforeseen expenses for repairing damages. So it is important to choose a casing joint system with the same service life as the rest of the pipe system. The casing joints must also be easy to install to minimize the risk of faults and it must also be possible via inspection of the installed casing joints to ensure they have been installed correctly. Typically, you can choose between the following casing joint systems • Shrinkable PE casing joints, which are mastic sealed • Shrinkable cross-linked PEX casing joints, which are mastic sealed • Weld casing joints, which are fusion-welded with the outer casing of the pipe Weld casing joints are considered by the market to be the ultimate, but also the most expensive casing joint solution. Weld casing joints require more installation equipment, but also enable the energy company to require independence of persons as regards weld data input by scanning data by means of a QR code on the casing joint as well as requirements to documentation of the welding process.
• Fatigue damage of steel • Corrosion of service pipe
The most widely used surveillance system is the so-called Nordic system with 2 uninsulated 1.5 mm2 copper wires in the pre-insulated components. The fundamental function of the surveillance system is to give a signal, if moisture enters the insulation.
See below example where a GPS localization of the installed casing joint is possible:
Surveillance systems can be designed after very different principles: • Passive system. Measurements of the system are made manually by a measuring technician at preset intervals e.g. once or twice a year. No active surveillance of the system between these measurements. Fault detection is carried out by the measuring technician. • Active system that is based on the resistance measurement principle with information as to whether there is moisture in the insulation or not. It is possible to carry out further analyses of resistance values and galvanic resistance to assess whether the insulation is wet or dry, and whether moisture, if any, comes from inside the service pipe or outside. Any fault finding is carried out by a measuring technician.
No matter which type of casing joint is chosen, it is pivotal for the quality of the installation and the expected service life of the system that the casing joints fitters are trained and certified to install the casing joints in question. Therefore, the project owner should always require that fitters have completed a certifying course at the supplier’s and make requirements to the contents of the course.
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TOOLS FOR ANALYZING TOTAL COST OF OWNERSHIP There are different tools to assess the Total Cost of Ownership of different pipe systems. Below is an example of a tool to analyze a pre-defined pipe system. The tool gives an indication of which type of pipe system gives the lowest Total Cost of Ownership, and whether you, as the pipeline responsible, make the right choices for the pipe system.
The pre-defined pipe system is as follows:
• Active system, based on the impedance principle. In addition to the above possibilities, the system can locate any faults in the system. • Web-based management system where a single click on your PC gives you an immediate overview of the different detectors in the surveillance system – resistance measurement, galvanic resistance, localization of any faults. HEAT LOSS COSTS Heat loss costs are a critical element in the Total Cost of Ownership analysis of the district heating system.
It is crucial for Total Cost of Ownership analyses that the conditions that apply to the individual energy company are used in the calculations.
Various factors influence the heat loss costs: • Whether TwinPipes or single pipes are chosen. TwinPipes have a lower heat loss than single pipes in the same service pipe dimension. • The insulation series. The standard insulation series are series 1, 2, and 3.
A decisive condition is to settle the price of the energy cost of producing district heating to cover the heat loss.
• The production method is of huge importance for the insulation properties of the foam. Continuously produced pipes have better insulation properties than traditionally produced pipes. • Whether the pipes are produced with diffusion barriers or not, to ensure that
the insulation properties are not deteriorating during their service life. Pipes without diffusion barriers will age and the insulation properties deteriorate over time.
Total Cost of Ownership is calculated instantly for 12 different pipe scenarios for the same project, when above conditions have been entered. (Single pipe, TwinPipe, traditionally produced pipes, continuously produced pipes).
It is also simple to make sensitivity analyses on other conditions e.g. the price of the energy.
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The investment costs for materials, installation work, and excavation/backfilling can be adjusted, so they comply with the energy company in question. See below as an example of the calculation result:
The energy company also has the possibility of comparing two different pipe scenarios and calculate the return on investment, ROI, by investing in a system with a lower heat loss.
If the analyses of the pre-defined system show that it is interesting to the energy company to choose another insulation series, TwinPipe instead of single pipe, or a pipe produced after a specific method, detailed calculations of the Total Cost of Ownership of specific projects can be carried out by means of available tools.
Peter Jorsal, firstname.lastname@example.org For further information please contact:
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FOCUS FINANCE & ECONOMY
By Lars Andersen, CEO, Geotermisk Operatørselskab A/S
Geothermal energy is sustainable green energy source from the subsurface. Management of the exploration risk is key to successful geothermal projects. Once the geothermal resource has been confirmed in the exploration phase, the price of financing the geothermal project is crucial to producing the most cost-effective heat for the consumers. Geothermal energy is capital intensive in the exploration and development phases. The optimal financing scheme in the development phase turns out to be a combination of financing provided by the district heating companies and financing provided by industry partners. THE OPTIMAL FINANCING AND OWNERSHIP MODEL Geothermal energy production is a technical product that requires a robust financing and ownership model in order to be successful.
It all comes down to developing geothermal resources as inexpensively as possible, so that geothermal energy is competitive with alternative heat sources. This requires experienced professionals with the appropriate technical skills, inexpensive financing and a robust organization. The purpose of this article is to illustrate the considerations and parameters involved to meet the goal of supplying the consumers with the lowest heat price. BUILD OWN OPERATE VS. TURNKEY WITH A VIEW TO CONSTRUCTION CONTRACTS The different contract models support the goal of inexpensive heat to the consumers less or more. The most commonly used types of contracts, their characteristics and the pros and cons of each contract type are presented on the next page.
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