This edition of Hot Cool is a special collection of interesting articles published in different Hot Cool magazines during the past months. Here you will find answers to your questions about how to get started with district heating and the best practices for converting from natural gas. But before focusing on that, we again must touch upon the European energy crisis – more specifically, the European gas crisis. Please read the article by Jørgen Nielsen, chairman of the DBDH board, and his letter to the International Energy Agency. You can look forward to some remarkable articles contributing to "How to get started." First, a team from Ramboll introduces the different roles different actors have to make these urban infrastructure projects successful. Maëlle Caussarieu pinpoints two essential conditions that need to be in place to make a DH fly. Read how the IRR (Internal Rate of Return) concept is to be understood in the DH industry and how it affects the development of city-wide DH projects. And finally, Denmark ranks at the top of the World Energy Councils' energy security, energy equity, and sustainability rating. Of course, district heating is key – read how and why in this special collection edition of Hot Cool.
SPECIAL COLLECTION EDITION
No. 1 / 2022
INTERNATIONAL MAGAZINE ON DISTRICT HEATING AND COOLING
CONVERSION FROM GAS
HOW TO GET STARTED?
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FOCUS: CONVERSION FROM GAS HOW TO GET STARTED?
GREEN VERSUS BLACK HEAT: ONE NIGHT CHANGED THE AGENDA By Lars Gullev
28 32 34 37 40 42
HEAT PLAN DENMARK 2021 – A CO2 NEUTRAL HEAT SUPPLY By Peter Sorknæs, Steffen Nielsen, Brian Vad Mathiesen, Diana Moreno, Jakob Zinck Thellufsen and Henrik Lund
FROM AMBITION TO ACTION - HOW GERMANY INTENDS TO USE HEAT PLANNING FOR ITS AMBITIOUS GREEN AGENDA By Christian Bjerrum Jørgensen and Willy Winkler WANT BETTER DISTRICT HEATING NETWORKS? LET WOMEN FLOOD IN By Rachael Mills
– INTERNAL RATE OF RETURN AND HOW IT AFFECTS THE DEVELOPMENT OF CITY-WIDE DH PROJECTS By Morten Jordt Duedahl and Lars Gullev
12 14 18 22 24
HOW TO GET STARTED? Scientist Corner By Maëlle Caussarieu
– INTERNAL RATE OF RETURN AND HOW IT AFFECTS THE DEVELOPMENT OF DH PROJECTS By Morten Jordt Duedahl and Lars Gullev
– DISTRICT HEATING CAN HELP UNLOCK THE HYDROGEN ECONOMY IN THE UK By Jacob Byskov Kristensen
DIGITALIZATION OF THE DEMAND-SIDE: By Michele Tunzi, and Svend Svendsen
THE WASTE HEAT KNOWLEDGE AND COMMUNICATIONS GAP By Charlotte Owen
PODCAST – GAS CONVERSIONS - WE ARE ALL IN THE SAME BOAT! By Jens Andersen and Jesper Møller-Larsen, with moderator Morten Jordt Duedahl
DH IS ALSO A PART OF THE SOLUTION TO THE EUROPEAN GAS CRISIS By Jørgen Nielse n
ENERGY EFFICIENCY SHOULD BE PRIORITIZED FIRST IN HEATING By Carsten Østergaard Pedersen, Asbjørn Bjerregaard Ebbesen, Rune Kaagaard Sørensen
DISTRICT HEATING AND COOLING IS A NATURAL PART OF THE URBAN INFRASTRUCTURE IN MODERN CITIES. By Anders Dyrelund, Frederik Palshøj Bigum and Emil Reinhold Kristensen
1 Photo of men at board meeting from social media: https://www.linkedin.com/posts/davidclancefield_ceos-diversity- inclusion-activity-6901111290907947008-ZbS-?utm_source=linkedin_share&utm_medium=member_desktop_web
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What if digitalisation could make heating more sustainable?
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Climate and reduction of CO2 emissions have reached the very top of the agenda in most countries. People have taken on the responsibility; there- fore, the topic has received the highest political interest and priority. If we are not careful, investments, political focus, and people’s understanding will work against our climate goals. GREEN VERSUS BLACK HEAT: ONE NIGHT CHANGED THE AGENDA
By Lars Gullev, CEO at VEKS
difficult for European consumers to invest sustainably.
In April 2021, the EU member states, and the European Parlia- ment agreed to reduce CO2 emissions by 55% by 2030 com- pared to 1990 levels. Although it was a long, complicated pro- cess to agree on a common goal - a green EU - it was probably the most straightforward part. Now it’s getting tricky, and the subsequent discussions have already begun - can green be graded? Are there more shades of green? At first glance, one would not think it possible - but on Febru- ary 2, 2022, the EU created serious, legitimate doubts about what is green and what is black. As part of the EU Action Plan for a Greener and Cleaner Econ- omy, in line with the Paris Agreement and the UN’s Global Goals, the EU has phased in a new classification system (tax- onomy) to ensure uniform identification of green and environ- mentally sustainable investments in the European market... The taxonomy classifies an economic activity as environmen- tally sustainable based on several criteria. The problem with the taxonomy is that most people now will feel great uncer- tainty and ambiguity about defining black or green fuels - and green technologies. The European Commission has now recognized both natural gas and nuclear power as greenish - and we have initiated a process in which the colors “green“ and “black“ are no longer unambiguous. Once the European Commission has classified nuclear power and natural gas as green technologies/fuels, the rationale is that it is necessary to accept imperfect solutions for a transi- tional period to achieve the goal of climate neutrality in the EU by 2050. This taxonomy opens the door for money that would have gone to renewable energy, such as wind turbines and solar cells, to go to natural gas and nuclear power, making it very
The Commission sends an entirely wrong signal to investors, and the taxonomy will promote investment in technologies that are problematic for both the climate and the environ- ment. But on February 24, 2022, the world changed - with the Rus- sian invasion of Ukraine, it became clear to everyone that en- ergy policy is synonymous with security policy. At the top of the agenda is now a reduction in dependence on natural gas here and now - and on the slightly longer path of phasing out natural gas for space heating. Others express that this is a case of greenwashing. In one night, the world changed. There has been massive criticism from several countries that the Commission has not listened, as neither nuclear power nor natural gas should be called green in line with renewable energy. It is, therefore, only natural that some members of the Euro- pean Parliament have started a group with the aim of having the Commission’s decision to classify natural gas as a “green technology” voted down. The district heating of the future will primarily be based on the utilization of surplus heat from data centers, CO2 capture, Power-to-X (PtX) factories and waste energy plants, heat from the sea- and sewage water heat pumps, geothermal plants, from electric boilers, and combined heat and power plants based on sustainable biomass. So, district heating will be the greenest you can imagine. All in all, only green, sustainable technologies that either uti- lize the energy resources in society – or technologies based on sustainable fuels (wind, solar, and sustainable biomass) – should be defined as “green“ – and be part of the “taxonomy”.
In our district heating world, there is no doubt about what is green and what is black.
HEAT PLAN DENMARK 2021 – A CO2 NEUTRAL HEAT SUPPLY CO2 neutral energy systems also mean CO2 neutral heating sectors. However, this raises questions about what technologies should be utilized and to what extent energy savings should be implemented. In Heat Plan Denmark 2021, we investigate these questions and more.
By Peter Sorknæs, Associate professor, AAU. Steffen Nielsen, Associate professor, AAU. Brian Vad Mathiesen, Professor, AAU. Diana Moreno, PhD-fellow, AAU. Jakob Zinck Thellufsen, Associate professor, AAU and Henrik Lund, Professor, AAU.
Like many other countries, Denmark has long-term political goals for going towards a low-carbon society with an energy system based on renewables. The Danish goals are a 70% re- duction of CO 2 emissions in 2030 compared to 1990-levels and a net zero-carbon society in 2050. Such a transition raises many questions about what should be done in each CO 2 emitting sector. Investigating this is especially important for the sectors expected to lead the CO 2 reductions in the coming years. Here, the heating sector is especially interesting as the goal is to get this sector to near-zero CO 2 emissions in 2030. However, a tran- sition of the heating sector raises a slew of different questions, such as: Where is the balance between investments in heat savings and CO 2 neutral heat supply? Where should district heating (DH) be, and where should individual solutions be? What should the individual heat supply be based on? Which heat sources should the DH be based on? What are the in- novative challenges, e.g., low-temperature DH, smart meters, digitization, Power-to-X, data centers, geothermal heat, etc.? In the context of the overall energy system, it is also a question of how the heating sector best can help to integrate renewable energy sources. These questions encouraged us to investigate the future heat- ing system in Denmark and make a new heat plan for Den- mark, Heat Plan Denmark 2021. Besides investigating these questions, the heat plan should also assist authorities and utility companies in planning the heating sector’s transition.
Energy savings in the building stock are impor- tant. A good balance between energy savings and renewable energy must be achieved with low costs and low fuel consumption. This means that a continued focus on building energy renovation is important to implement 32-40% savings. District heating should be expanded to cover 63-70% of the heat market as individual natural gas, and oil-fired boilers are phased out in exist- ing urban areas and as new urban areas emerge. Outside the DH areas, the heat should come from individual heat pumps supplemented by solar thermal. This combination provides the most en- ergy-efficient and flexible solution. In DH, a targeted focus should be placed on a transition to 4th generation district heating with lower temperatures. It provides the lowest cost and most efficient use of geothermal heat, waste heat, and large heat pumps. In future low-carbon energy systems, there is great potential for utilizing geothermal and waste heat from industry, data centers, and Power-to-X. These opportunities should be exploited.
1 Access to maps of Denmark and reports: www.energyplan.eu/varmeplandk
HEAT PLAN DENMARK 2021 – A CO2 NEUTRAL HEAT SUPPLY
District heating should be expanded In Heat Plan Denmark 2021, we also analyze where DH should be utilized. We do this by using the estimates for heat demands for all buildings in Denmark and finding the heat density for each area without DH. We then make five scenarios for DH ex- pansion. Specifically, in Heat Plan Denmark 2021, we analyze the following expansion scenarios:
In Heat Plan Denmark 2021, we both map the geography of the heating demand and supply, as well as relate these to the integration potential in the Danish energy system. The map- ping involves seven different detailed geographical informa- tion system analyses covering all of Denmark. These include estimates for annual heat demands and energy saving poten- tials of all Danish buildings and costs and heat loss of DH grids in about 3,000 areas, which currently are without DH. These mapping data provided input for making over 1,000 hour-by- hour energy system simulations for a future Danish decarbon- ized energy system. Heat savings in the building stock In Heat Plan Denmark 2021, heat-saving options are estimated for each building in Denmark. This is done based on the Danish heat atlas, a detailed GIS mapping of estimated annual heat demands in nearly 2 million Danish buildings 1 . The estimates for each building’s demand are based on a heat consumption model that uses average heating needs based on the build- ings’ use, age, and size. The heat consumption model is linked to the building-specific data from the national Building and Housing Register. The main principle behind heat savings in buildings is that they should only be implemented until the cost of decarbonizing the heat supply is cheaper than the cost of increased heat savings. In Heat Plan Denmark 2021, we find that heat savings should be done regardless of whether DH is expanded or not. The reason is that heat savings are important for reducing costs in the energy system and keeping biomass consumption at a sustainable level. The results show that the costs in the energy system are lowest, with heat savings between 32% and 36% in the building stock. These are flat optimums, and a sensitivity analysis shows that increasing heat savings to 40% can result in further reductions in biomass consumption with only a mar- ginal increase in the energy system’s cost. The heat savings can include improvements of the buildings’ climate screen (exterior walls, roofs, etc.) and a more optimized operation of the heating systems through, e.g., intelligent me- ters and control equipment.
Buildings currently registered with DH (~ 50%)
All buildings in areas designated for DH (~ 59%)
Extensions to urban areas with heat density above 15 kWh/m2 (~ 63%)
Extensions to urban areas with heat density above 10 kWh/m2 (~ 70%)
Extensions to urban areas with heat density above 5 kWh/m2 (~ 74%)
More than 3,000 areas without DH are evaluated, and for each area, a DH grid layout is modelled, including pipe sizes, costs, and grid losses. The five expansion scenarios have been simulated in a national energy system analysis tool, simulating the entire energy sys- tem hour-by-hour. This is done to identify how the different expansion levels affect a future Danish energy system based on 100% renewable energy sources. We find that expanding DH from the current approx. 50% of the total heat demand in buildings to 63-70% will most bene- fit the energy system. The expansion is primarily at the expense of individual heating with natural gas, but also oil, biomass, and direct electric heating. In Heating Plan Denmark 2021, we propose an expansion to 70% as the main suggested expan- sion. 70% provides the lowest costs in the energy system while reducing the pressure on the need for biomass and wind pow- er in the overall energy system.
The spread between 63-70% is due to uncertainties in the na- tional model. Local conditions, such as the placement of new buildings, can affect the most appropriate level of district heat- ing in each area. Transition to 4 th generation district heating Though it is relevant to expand the DH system in Denmark, it is also essential that existing DH systems transition from the cur- rent temperature levels of around 80°C in the supply and 40°C in the return, corresponding to 3 rd generation DH temperature levels, to 55-60°C in the supply and 25-30°C in the return, cor- responding to the 4 th generation DH temperature levels. Such a transition must take place in conjunction with an ongoing energy renovation of the building stock. The analyzes show that reduced temperature levels in the DH system provide increased synergies for the end-user and throughout the supply chain for DH. The transition to lower temperatures reduces the grid loss in the DH pipes, making a more efficient supply. However, the crucial advantage is that it ensures a much more efficient utilization of current and future DH sources. These are mainly waste heat, geothermal, heat pumps, and solar thermal. Utilizing geothermal and waste heat Utilizing waste heat and geothermal heat allows for low fuel consumption in DH. Waste heat has previously been from electricity production and industrial processes. However, new waste heat potentials are likely to be relevant in the future, such as waste heat from Power-to-X facilities. In Heat Plan Denmark 2021, we estimate the possibilities for waste heat, partly using GIS analyses, for industrial waste heat and geothermal heat, and partly via own and others’ estimates for the development of Power-to-X and data centers. We find that in 2045 the total potential for waste heat and geothermal heat is between 12 and 42 TWh/year. This is on top of the amount of industrial waste heat currently utilized in Denmark, less than 1 TWh/year. The high potential can theoret- ically cover the entire current need for DH. In a future system, the DH demand depends partly on the DH coverage and the
energy consumption of the building mass. In the main Heat Plan Denmark 2021 scenario, DH has been expanded, and the building stock has been made more energy-efficient, resulting in the DH demand being at the same level as today. To accelerate the green transition, DH should be significant- ly expanded already before 2030. In 2045, it is estimated that waste heat from industries, data centers, and Power-to-X and geothermal energy will cover half of the DH production, corre- sponding to 19 TWh/year. While the Heat Plan Denmark 2021 focuses on Denmark and Danish conditions, it can be seen as a good indicator for the role of energy efficiency in the building sector and the role of DH in achieving the goal of decarbonization of the energy supply in Europe. Previously we have constructed analyses for Europe in the Heat Roadmap Europe projects 2 .
For further information please contact: Peter Sorknæs, email@example.com Steffen Nielsen,
firstname.lastname@example.org Brian Vad Mathiesen, email@example.com Diana Moreno, firstname.lastname@example.org Jakob Zinck Thellufsen, email@example.com Henrik Lund, firstname.lastname@example.org
2 Access to European maps and reports: www.heatroadmap.eu
For further information please contact: Jacob Byskov Kristensen, email@example.com
– Internal Rate of Return and how
it affects the development of city-wide DH pro jects
IRR is a theme discussed everywhere when looking at establishing DH systems – the IRR concept is still to be understood in detail in the industry. Still, it is an essential part of understandings the effect on the rollout of city-wide networks. All cities planning to enjoy the benefits of DH must understand what the IRR means and how a low or a high level of IRR will affect the rollout of DH. Not least how high IRR requirements will limit, if not jeopardize, city-wide expansions of DH.
Morten Jordt Duedahl, Business Development Director, DBDH and Lars Gullev, Managing Director, VEKS
The critical part is how the DH company is structured – the technical design is assumed to be the same. A well-chosen business model will lead to success. The conclusion is to pick the low-hanging fruits first but be sure to do it in the right way. Otherwise, a city may never be able to reap all the fruits availa- ble (the ultimate goal). The entire city – not only small selected areas This article assumes that it is insufficient to make green heat transitions in smaller city areas. The ambition must be to en- sure that the entire city can enjoy the benefits of green afforda- ble heating solutions in the future. And here, district heating is an obvious (if not the only solution) in small, large, and mega cities.
Internal Rate of Return - IRR Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential in- vestments. 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. In the DH industry IRR is used as a simple (maybe not always 100% correct) tool to compare the economic viability of a project. We recognise that it is not abso- lutely theoretical correct, but also recognise that IRR creates the best common understanding of a project’s economic viability.
This is a re-write of an article published in 2019 in Hot Cool. The articles have created a lot of attention and a lot of discus- sion. The authors have decided to divide the original article into two separate ones – both are published in this magazine. The articles both circle around IRR and the understanding of the effects on DH. One article discusses the effect of different expectations to IRR (this one) and another discussing how a municipal lead DH company can benefit from picking the low hanging fruits in the right way and how making the decision on choice of business model must be made from early on. This article is called IRR – Internal Rate of Return and how it affects the development of DH projects. You will find it on page 12 in this magazine.
Example of an entire city laid out for DH at a 0% IRR level. The black figure to the right is a significant, no-carbon-free surplus heat source. Readers familiar with the east of Scotland will recognize the map of Dundee. The examples given are not based on the actual situation. Dundee has merely been used, as
IRR for the entire city: 0%
discussion with knowledgeable
people from Dundee led to the initial idea for this article.
A simplified example of several projects to be developed over time with different levels of calculated IRR that, in total, will become a city-wide system. Please note that the IRR numbers are fictional and for illustration only. The IRR for the city-wide system is 0%
IRR in the entire city: 0%
An example of projects that can be developed with high IRR expectations (14% or more) – the complete lines. More may be developed but would then rely on subsidies or grants from, e.g., the local authority – the dotted lines. The large low- carbon heat sources to the left will not be included in the project and will be lost.
wrong. Commercial companies can invest in other projects (in any industry or country) that could provide owners with an IRR at the same level. Commercial companies exist to give their owners the highest possible return on investments with the lowest potential risk. If that leads to developing DH or some- thing else, it is entirely up to the company’s owners. The lower the IRR, the more DH It is as simple as that. The lower expectations for IRR, the more or larger DH projects a DH company can invest in. The first drawing illustrates how large DH can cover an area of a city with a 0% IRR threshold. A well-qualified consulting engineer has made heat maps to establish demand, calculat- ed pipe network, and continued to expand the area covered by DH until the magic 0% was reached. Here DH can provide affordable green heat to the entire city! A city-wide system will always consist of several individual projects built over time – the blue “circles” in figure 2. The IRR can be calculated for each of them, ranging from very high to very low. The sum of these developments is an IRR of 0%, as shown above. Over time each of these systems will be built one by one, connected, and be able to benefit from shared heat sources, reach out to “free” heat sources, etc. In a planned and controlled way – all the apples will end up in the basket. With a company structure around the DH company that is happy with 0% IRR, the entire city can have district heating! Usually, the small 18% project will be built first, but other goals may lead to other projects being built earlier (e.g., fuel poverty or the presence of heat sources). Higher IRR approach If a project can only muster less than the required 14% IRR, a commercial company would not accept it unless financial support is given that would bring the calculated IRR up to the threshold. A municipal DH company – with a threshold of 0% IRR would see 14% (and less) as a very relevant and investable project. It would go ahead, adding positively to the rollout in the entire city. In the case of a strictly commercial ESCO approach, only one project would be built in this city (see figure 3) – the one with an IRR of 18%. It may be possible to identify smaller areas in some of the projects described where an IRR of 14% can be calculated. The smaller areas in picture 4 with IRR of 14% and 15%. Please note that these are smaller projects than in the drawing in figure 2. Please also consider what happens to the potential IRR for the remaining part of the city after an 18% project has been built. It will become lower, making the rollout to the rest of the city
In this article, the authors do not discuss local framework con- ditions that allow or do not allow specific business models nor how local traditions influence the choice of ownership of pub- lic goods. The authors note that ownership of DH companies is (one of) the most critical discussions to determine how to roll out DH networks. The discussion of how control, cost, expan- sions, etc., differs depending on the fact that the ownership is becoming increasingly important. It often becomes the crucial factor for a project to go forward. The technical parts and de- tails are easier to agree on. This discussion often leads back to one of private ownership or council-led ownership and then again to the level of IRR. The two basic models for ownership There exist two basic models of ownership in the DH world. A strictly commercial and a strictly municipal/cooperative, one difference being the expectation to IRR. Many scholars have identified several other models between the two, but for clari- ty, this article claims that there are only these two. Level of IRR in the two models for ownership For both models, we assume they are active market players accessing the competitive and commercial market to opti- mize their business, e.g., find the best offers for pipes, welding, digging, planning, finance, operation, maintenance, etc. In this sense, they are both equally cost and quality conscientious and similarly well-managed. We have found no general evidence of the opposite. The assumption also is to compare similar sys- tems – pears to pears, apples to apples, pipes to pipes! The pro- jects are similar. In many places with municipal or cooperative ownership, the calculated IRR threshold for a DH project can be around 4%, based on a security element, leaving room for small changes in the system’s economy when established. This is not a set stan- dard, 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 extra uncertainties or risk factors should be included. The 4% threshold is used in Denmark to evaluate project propos- als. The IRR for established projects should be 0% in total for a classic non-for-profit company and can be lower for specif- ic projects. Municipal companies operating like this are often tasked with rolling out DH to the entire city. 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 strict commercial secret and therefore un- known. On the other hand, numbers around 14% are not unre- alistic. It seems to be accepted in some DH communities that 14% is correct, and sometimes 14% is even discussed as a fact. Looking at it from a different perspective, 14% does not seem
more complicated. If you have picked the best apple (without planning), the average value of the rest will become lower.
If the local authority can financially support the development of more projects, these could be added as the support will lift the IRR to the required 14%. Sooner or later, the ongoing sup- port from any benefactor will run out, and then no more pro- jects will be developed. The complexity of having up to three individual and competing companies operating in the same city and the effects on possibilities for expansions and altera- tions to the systems is also a relevant discussion – but another time. In this case, the solution may look like this – 3 areas developed directly by commercial ESCOs and three developed by com- mercial ESCOs financially supported by the local authority. Please also note that the free heat provider is not included in this case; maybe, more importantly, the rest of the city now has to find a different solution (The red circle has been removed). DH led by a municipal-led DH company A municipal-led DH company with a 0% threshold will, over the years, develop DH throughout the entire city. Of course, they start with the most economically viable projects and then work 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 before other projects. In this example, it could create the 3% project (to the right in the picture) with the pri- mary purpose of gaining access to low-cost surplus heat (as il- lustrated with the small black production site) and connecting several individual projects to that heat source through the 1% Other factors than strictly economic could similarly influence the order in which projects are rolled out. For example, areas with severe fuel poverty, areas in need of renovation, and for lo- cal and political reasons may lead to decision-makers prioritis- ing specific projects before projects with a higher IRR – again illustrated as the very low IRR areas. Conclusion This article demonstrates the effect of DH rollout in a city de- pending on the accepted level of IRR. It also shows that if the low-hanging fruits are not picked in the right way, the ultimate goal may be jeopardized. It is clear that high levels of IRR jeopardize a city-wide devel- opment of DH and could also make access to large low-carbon heat sources impossible. This way, the low-hanging fruits will be picked in a structured and planned way, and the low-hanging fruits will be picked first, but in a way that ensures that all fruits on the tree will be picked. We will have a full basket.
The case of Denmark This article is not directly related to how DH is rolled out in Denmark – besides that fact that Denmark has chosen to use this approach for the cities DH develop- ments. This approach has also been used in many other places all over the world, in a recognition that critical in- frastructure can be a municipal task and responsibility to be able to deliver to all citizens. It also does not mean that jobs are not created – Den- mark has a lot of jobs both directly in the DH com- panies and in the supporting industry. Each Danish DH company will always operate in the commercial marked for all services and in that way operate like a classic commercial company. In a way the Danish DH companies are commercial companies operating in a natural monopoly.
For further information please contact: Morten Jordt Duedahl, e-mail: firstname.lastname@example.org
– Internal Rate of Return and how it affects the development of DH projects
A well-planned approach from day one to how a city would like its district heating systems to develop is essential. Taking the benefits from the first most beneficial systems and making sure these benefits will support the entire city over time is key. A city needs to establish the DH company, climb the learning curve, etc., to reach the goal of delivering sustainable heat to the entire city. An understanding of IRR is a part of the road leading to success. Effect of different expectations on IRR Please imagine a project with a calculated IRR of 14%. This project would be an easy sell and would be rolled out soon no matter the chosen business model – a commercial ESCO or co-operative/municipal-led DH company. Such a 14% project would be one of the first projects to be done in a city. And if done right, it will benefit all the future developments. The assumption is that this project will be owned by an ESCO aiming at a 0% overall IRR threshold. The DH company will benefit from the difference in IRR – they will, in a way, “earn” the 14%. What could the difference in IRR be “used” for? Operating a project that can provide a 14% IRR but a lower cost will create a surplus (not a profit!). This surplus should be used wisely, creating positive effects for the entire city! And not just be used to lower the price for a few selected end-users. Here a threshold of 0% IRR is used. This is the correct number for not-for-profit company when looking at the entire city. The many projects should have an av- erage of 0%. Some may know that in Denmark a calculated IRR of 4% is used as the threshold (required by law). The 4% is based on project proposals (calculations) and is used as a security so that new projects will not influence ex- isting customers. If a project when established have a positive IRR, the “surplus” generated will be used to lower prices or create further expansions. For a not-for-profit company the price (= the revenue stream) can be decreased until the IRR is 0%. In this article we assume the price is fixed, fair and acceptable.
Some of the positive effects are only relevant in different stag- es of the rollout of DH in a city. The complex process of estab- lishing a DH company with all the lawyers, accountants, etc., is a one-off situation that must be done together with the first systems. Climbing the learning curve is an ongoing process, but (hopefully) the need to climb steep learning mountains will decrease over time. Making sure that main pipes are di- mensioned for future expansion is also important – and is a benefit (and investment) that could be included throughout the entire city development, even as a part of the lower IRR projects. The first projects undertaken will be projects with the very highest IRR – they are the most apparent projects and should, of course, be looked at in the beginning. Projects that will provide a lower IRR should be looked at later – unless other reasons push them forward. After the high IRR projects have been built, the learning and starting costs have been covered by the projects that could afford it and will therefore not in- fluence later projects. Very low IRR projects will always need support from the higher IRR projects. The price offered to the end-user must be acceptable and at a reasonable level. In fact, the municipal ESCO will provide the same price to all citizens in the entire city. This is very similar to roads and other natural monopolies – we all pay the same. This is a re-write of an article published in 2019 in Hot Cool. The article has created a lot of attention and a lot of discussion. The authors have decided to divide the original article into two separate ones – both are pub- lished in this magazine. The articles both circle around IRR and the understanding of the effects on DH. This article is about how a municipal lead DH company can benefit from picking the low hanging fruits in the right way and how making the decision on business model must be made from early on. The other article discusses the effect of different expec- tations to IRR (please read IRR – Internal Rate of Return and how it affects the development of city-wide DH projects on page 8) on how IRR influences the roll out of DH to the entire city.
Morten Jordt Duedahl, Business Development Director, DBDH and Lars Gullev, Managing Director, VEKS
company will climb the learning curve quicker and make few- er mistakes. The first few projects will pay (and can afford) for the team to climb the learning curve to benefit other future projects. One way of overcoming this, or rather making the curve less steep, could be establishing a national competence centre as in Germany these days. Such a center can support all DH developments with expertise and at the same time act as a training center. Create the local DH company – the Council ESCO If this is the first project undertaken by a city-run DH company, the city will need to establish and develop the 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” the total cost of establishing the DH company to the benefit of future projects, who then have access to an ex- perienced DH company that is already well established. Great care must be taken here, as this is the vehicle that will ensure future success. Build in extra network capacity to support future expansions - Future-proofing Another vital option is to build in future-proofing of the net- work. As the plan is to create citywide projects, the first pro- jects (the ones with the highest IRR) could be dimensioned to be the backbone of the future system. Here cash flow would remain unchanged (if we assume that operation cost is not af- fected by this short-term over-dimensioning). Still, the invest- ment would increase and thereby lowering the IRR. The extra capacity will help future projects reach an acceptable IRR, as the first project has already made small additional investments to benefit the following projects. The same argument can be used for building extra production capacity or preparing sites to be ready to install more heat production capacity. Build equity to support future developments The whole idea of a citywide municipal owned ESCO is to en- sure that the company can expand the DH system to the entire city. As the first initial one-off cost has been covered, some of the surpluses in the following projects could be earmarked to simply building equity to support future projects with a much lower IRR. Then the DH company has the capital it can inject into projects with a very low or maybe even negative IRR as a part of the goal to deliver sustainable, affordable heat to the entire city.
Figure 1 illustrates how this difference in IRR could be used for different purposes. The percentage indicated 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, hence the question marks. The top ones tend to be benefits that are most relevant at the beginning of a city’s engagement with DH. The button ones are benefits that are generally relevant. Figure 1 Illustration of how a council lead DH company can use the difference in IRR levels for different purposes. Lowering the price is not an option as the calculation is fair and will cover costs for heat for all citizens. The order in which the different benefits are mentioned reflects the authors’ perception and may differ from city to city and overlap somewhat.
A detailed discussion of how a lower IRR could be “used.”
Let’s start from the top – with the benefits that are important to harvest in the first phases of a DH rollout to a city. The benefits will help secure a rollout to the entire city and prepare the city for the following projects and expansions. Climb the learning curve If the project is among the first projects undertaken, it would be expected that small and big mistakes will be made, and that the organisation is still not top-professional – the positive spin on this is that the organisation will climb the learning curve. As more projects are completed/undertaken, the DH
Improve quality to minimise operation and maintenance cost
Project developers will always seek the right balance between investing in high quality to avoid operation and maintenance costs or vice versa. The effect on 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 de- veloped as part of the backbone of 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 fo- cus on quality to avoid troubles and uncertainties on maintenance and operation costs may be relevant until the organisation has climbed/completed the learning curve.
The UK governments’ ambitions for new hydrogen infra- structure n could create new sources of waste heat suffi- cient to supply the entire UK demand for domestic space heating. But this heat does not have to go to waste. If hydro- gen production can be located close to towns and cities, where there is high heat demand, district heating networks could provide significant economic, environmental, and social benefits to everyone - the hydrogen producer, the district heating network, and consumers. This was the con- clusion of a study conducted by Ramboll UK on behalf of the Danish Government’s Energy Governance Partnership at the Danish Embassy in the UK. Here, we explore wheth- er district heating is in tension with the electrification ver- sus hydrogen debate, the opportunities for district heating from waste heat from hydrogen production, and how to actually make this work through policy and planning. New study shows significant economic, environmental and social benefits from co-development of hydrogen and dis- trict heating (DH) in the UK
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 com- panies have a standard price for the whole season to allow the end-users to budget correctly. 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) to cover a small deficit the following year to balance the price over time. Price reductions Not relevant! The price is assumed to be fair for the en- tire city! But still lowering prices should be the aim of the DH company – of course! Conclusion A city must ensure the district heating business struc- ture created can support the development of the cit- ywide DH system. The business model chosen should be able to harvest the benefits from the highest IRR projects and make the city capable of making the low- er IRR projects come through over time.
Hydrogen has been identified by all UK governments as having an important role in the decarbonisation of heating.
Hydrogen is on everyone’s mind these days – at least in the energy sector. That is also the case in the UK, were
For further information please contact: Morten Jordt Duedahl, e-mail: email@example.com
DISTRICT HEATING CAN HELP UNLOCK THE HYDROGEN ECONOMY IN THE UK – FOR THE BENEFIT OF EVERYONE INVOLVED
By Jacob Byskov Kristensen, Energy Counsellor, Embassy of Denmark, UK
the UK government’s Hydrogen Strategy suggests that 250 – 460 TWh of hydrogen could be needed by 2050, making up 20 – 35% of the UK’s final energy demand. A key reason for these high estimates is that the UK, unlike many other coun- tries, considers hydrogen as a possible pathway to decarbon- isation of the heating sector, including domestic buildings. In the UK, domestic heating is often considered a “hard-to-de- carbonise” sector alongside heavy transport and industry. Whether heating of households with hydrogen – blended or not – is a good idea, is still a highly contentious policy topic. In any case, current government policy is such that hydrogen looks set to occupy a cornerstone position in the Net Zero pathway for UK industrial and transport decarbonisation. This in turn means it’s likely that huge volumes of hydrogen will be produced on land, and potentially near areas of high heat demand. What seems to be less well-known, is that like other energy conversion processes the production of hydrogen itself gener- ates heat - potentially a lot of it in the case of the UK. By default, this heat is considered a by-product with no immediate use, which will therefore be vented off into the surrounding envi- ronment, leaking substantial cost and potential carbon savings from the hydrogen production process. For some of the most well-known and established green hydrogen production tech- nologies, using electrolysers, as much as 30% of the input ener- gy can end up as waste heat. Even blue hydrogen production
technologies (often significant net consumers of heat) yield significant waste heat through their its auxiliary processes. This is especially the case where blue hydrogen production – e.g., steam methane reformation – is combined with carbon cap- ture technologies. All these observations beg the fundamental question; why not use this (wasted) heat for heating purposes – increasing the efficiency of hydrogen production, creating new revenue for hydrogen producers, and freeing up valuable hydrogen for other hard to decarbonise sectors? Decarbonisation of space heating in the UK - has the electrification vs. hydrogen debate slowed down the development of district heating networks? Decarbonisation of heating systems is, by most, considered to be the biggest immediate policy challenge that the UK faces to achieve its Net Zero targets. In 2019, heating of buildings accounted for 23% of the UK’s total carbon emissions. Same year, the UK Climate Change Commission estimated that less than 5% of the UK’s homes are heated from low-carbon sources – with more than 85% of households heated with natural gas. Awareness of this challenge is nothing new. In 2008, the UK be- came the first major economy to legislate on climate change – legislation that today includes a binding national Net Zero target by 2050. But while these ambitions have helped yield a transition to low carbon energy sources, such as wind, in the
The South Humber area was eventually selected from a short- list for further economic modelling and assessment. This case was particularly interesting as it included three ambitious new hydrogen production projects; two very substantial (2 x 100MW) green hydrogen projects, and another large (700 MW) blue hydrogen project. In addition, the area has several DH net- works currently under consideration. Significant economic, environmental and social benefits The study concluded that it is technically feasible to recover heat from new green and blue hydrogen infrastructure without negatively impacting production. It also concluded that heat recovery would actually provide great potential gains in system efficiency, especially for some green hydrogen technologies (14-32% efficiency improvements for the various electrolysers considered). The temperature of the captured heat also proved to be generally compatible with supplying heat networks, par- ticularly newer schemes operating at lower temperatures. The results of the financial assessment were even more en- couraging. Even without an existing DH network in place (as with the South Humber area), the case still proved financially attractive for the hydrogen producer, the heat network oper- ator, and the heat consumers. The heat network option was compared to the best available low carbon heating counter- factual of individual building air source heat pumps. Table 1 - Key results from financial assessment (*compared to counter factual of air source heat pumps)
power sector, relatively little progress has so far been made to decarbonise heat.
Part of the explanation for this is that there has so far been little strategic consensus on the most appropriate transition pathway for the sector. There is, for example, still active and heated debate around the relative merits of electrification vs. hydrogen as the best solution to decarbonise heat. In the UK Government’s Heat and Buildings Strategy from 2021, a strate- gic decision on the “role of hydrogen” in heating was effectively postponed until 2026. For better or worse, this uncertainty is making it difficult for stakeholders and investors to make long- term decisions for their business and industry. The impact of continued strategic uncertainty around decar- bonisation of heat is perhaps illustrated by the DH sector. The technology has been around for more than a Century and is widely recognised as a low-regret policy option to decarbonise heating in densely populated areas. A central reason for it be- ing “low-regret” is that not only is it well-established technology, providing the lowest cost Net Zero option to many households, but it also yields opportunities to exploit synergies with both electrification and the hydrogen pathways for space heating. Unfortunately, this fact seems to have been drowned out amidst the noise of the discussion on electrification vs. hydro- gen. This could at least in part explain why DH in the UK today still serves less than 3% of households - compared to for exam- ple over 65% in Denmark. So although great policy strides in the UK are being made, it remains to be seen if the DH sector will end up with the favourable, stable and long-term frame- work conditions that it has been craving for so many years. The study to investigate possible synergies between hydrogen and district heating in the UK context In an attempt to highlight the “low-regret” nature of DH, the Danish Energy Governance Partnership at the Danish Embas- sy in the UK, together with Ramboll UK, decided to launch a study in early 2021. The study was set to investigate possible synergies between evolution of “the hydrogen pathway” and the DH sector and draw inspiration from some promising case studies in Denmark and the Netherlands. To capture the particular circumstances of the UK, the study fo- cused its inquiry on case studies and stakeholder engagement with several geographical “clusters” in the UK where hydrogen production and DH are understood to be rapidly evolving in tandem*. Across each cluster, existing, planned, and potential hydrogen production and DH networks were identified and mapped, and a technical assessment was undertaken to short- list opportunities to capture and utilise hydrogen waste heat.
14% IRR, positive NPV
District neat network operator
>4% IRR, positive NPV
20% reduction in heating cost*
Based on these results, the study firmly concluded that signif- icant economic, environmental, and social benefits are asso- ciated with heat recovery from hydrogen production, and its auxiliary processes. How to reap the benefits? To seize the opportunities that this analysis points to, hydrogen production and centres of high heat demand need to be in proximity to one another. As heat demand is already fixed, the key will thus be to influence the location of new hydrogen pro- duction facilities. This is not a novel undertaking. Most stake- holders across the world are currently contemplating how to best achieve the same end, trying to ensure that this emerging technology, and the ensuing investments, falls in their geogra- phy – be that region, nation, or local authority.
* Cases included: Aberdeen City; Leeds City; the Humber Region (split into Beverley, Hull and South Humber)Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44
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