the marginal production price from heat source I.e. if the heat price is higher than the substitution price, the heat network will stop the negotiation and make a different contract. Figure 1 shows the principles for waste heat price negotiation. Sometimes, the marginal heat delivery price is high because the heat delivery is limited due to low heat network demand compared to the capacity for waste heat delivery or if another cheaper heat source is blocking heat delivery, e.g., during the summer. Expanding the heat network can increase demand and decrease marginal heat delivery prices. This can get the marginal heat delivery price below the substitution price. The difference between the heat substitution and marginal heat delivery prices is the space for negotiating the heat price. If the partners have investments on the same level, the negotiations can end so the partners share the space equally. There are no rules about how the heat price should be negotiated and how the space for negotiating the heat price should be split – but both partners are interested in reaching an agreement. Both partners’ risks, though, need to be evaluated, and the price may be adjusted in the contract period according to risks. If one of the partners needs to invest more than the other, it creates a higher risk for this partner. This risk can be aligned by up-front payment from the partner with low investment to the one with higher investment or through a large share of the “space for negotiation”. Often, the waste heat source owner requires a short payback of investments, which is impossible if the common surplus is split equally. This can be solved by letting the district heating network company pay a more significant part of investments from the beginning, but if the price is split equally, the payback time may still not be satisfying. The district heating company is often better suited for long-term investments. The solution then may be to split the price with a higher payment at the beginning of the contract period and a lower later in the contractual period. However, this solution needs a guarantee or insurance for the district heating company because the heat delivery may dry out before the end of the contract period, and the investments may not be paid back.
the existing heat source(s) that the new heat source heat will replace calculated for the agreed contract period. The heat consumers would pay investment costs for heat capacity twice if the district heating company already has sufficient heat production capacity. This is why investment costs are not included in the heat network price investigation. Suppose the heat network company does not yet have its own sufficient heat source capacity. In that case, the price investigation should include investment costs for the capacity not yet established. According to the above, the costs for its own heat sources during the expected contract period can then be calculated as an average heat production price for heat delivered to the network. Suppose the district heating network saves or adds costs like emission trading system (ETS), taxes, or other operational costs by purchasing waste heat. In that case, these should be reflected in the heat price calculated. The calculated heat production price is often called the “substitution price” or “contrafactual price”, meaning the heat price that can be substituted by cheaper waste heat sources delivered instead. Negotiating heat price For agreeing on a contract and getting to the point where the heat price can be established, the substitution price from heat network or contrafactual price needs to be higher than
Price too high for network
Substitution price from heat source
Space for negotiating heat price
Heat price
Marginal production price from heat source
Price too low for heat source
Figure 1: Principles for negotiating waste heat price.
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