HOT|COOL NO. 2/2019 - "Smart Heating System Integration"


INVESTMENT Integration and flexible operation are dependent on investment in flexible technologies. Investment subsidies for inflexible assets: If investment in heat-only boilers is subsidised, flexible alternatives can be less competitive. Solution: Remove subsidy or level playing-field by including flexible technologies. Limitations in capital for flexible assets: DE systems carry large upfront investment costs. Capital can be scarce. Solution: Government loans or similar support by decreasing risk for external investors. Third-party ownership (ESCOs). High risk premium for financing flexible assets : Capital providers may, in addition to limiting the access to funding, also require high rates for providing capital. Solution: Improve investors’ understanding of DE projects. Implement long-term targets to decrease risk. Public guarantees. Limitations from pay-back time and internal rate of return/ discount rate requirements: High discount rates (e.g. >5-10%) or short payback periods may reduce investment incentive for long-term flexible technologies. Solution: Decreasing strict investment requirements by increased certainty of return on investment, e.g. by public guarantees. Limitations from regulated rate of return: E.g. if a utility’s investment in flexibility falls outside the framework of regulated investments. Solution: Implement incentives-based regulation for flexibility.

Electricity market: Lack of flexibility-need (involatile prices): Weak price signals may not incentivise flexible operation. Solution: Volatility in market prices can be increased, if they reflect costs more closely – e.g. by shorter bidding periods or by location. Electricity market - Fixed electricity prices: Consumers or generators can face contracts or rules that removes flexible operation signals. Solution: Increasingly introducing (market) signals to DE, perhaps with a security mechanism (e.g. bottom/ceiling price caps). Physical vs. financial dispatch -Must-run operation: Operating purely according to heat demand is a typical example. Solution: Heat storages are the main enabler for flexible operation. Operational taxes and levies on flexible assets: Taxes on electricity for power-to-heat can decrease the incentive to use this technology. Solution: Lowering or introducing dynamic levies that follows e.g. current market prices. Favourable operational taxes and levies on inflexible assets: If heat-only boilers (such as a gas boiler) are cheaper to run, flexible technologies may be uncompetitive. Solution: Taxing fuels used for heat-only to a degree, where there is a level playing-field. Inflexible operational subsidies for flexible resources: Subsidies such as feed-in-tariffs can remove or dampen signals. Solution: Revise subsidies to accommodate signals (e.g. feed- in-premiums or capacity payments). Operational subsidies for inflexible resources: Subsidies for heat-only boiler operation. Solution: Remove subsidy or expand to flexible technologies. Electricity grid tariffs: Just like taxes, grid tariffs can remove incentive for power-to-heat. Solution: Well-designed tariff schemes could reward flexible use of electricity – e.g. capacity tariffs. Barriers for entry into signal-providing schemes: Discriminatory requirements for entering into a market, e.g. by strict regulation of third-party access. Solution: Revise regulation to make access easier and cheaper. Barriers for operation in signal-providing schemes: Discriminatory requirements for operating in market, e.g. if services are not valued sufficiently. Solution: Revise regulation to make operation easier and more profitable.

PERMITTING Permitting-phase of a project can facilitate or delay the process.

Technology bans and mandates: E.g. in Denmark, where large heat pumps have been banned in larger cities. Solution: Re-evaluate consequences of restrictions and remove these if obsolete. Inadequate legal framework for evaluation of projects related to DE: E.g. in Denmark, where socio-economic assessment standards until 2018 did not include variation in electricity prices and thereby value of flexibility. Solution: Revise regulation to better reflect flexibility-needs and benefits Friction in the permitting process: E.g. crossing a public road in US with DE infrastructure can cause high time- and economic costs. Solution: Streamline permitting process, e.g. by clear guidelines.

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