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
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