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
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