District heat: follow the leading light?

If the UK is to solve the challenge of meeting its heat needs in a decarbonised, affordable and secure manner it is going to need a multipronged approach. That was the strategy put forward by Imperial College London last year in its Managing Heat System Decarbonisation report. While the proposal is already largely accepted as good sense, last month the results of WWU’s Cornwall Energy project demonstrated with hard facts why a single technology strategy is a recipe for failure.

Its investigation into possible scenarios to meet the power, heat and light requirements of the Cornwall area through low-carbon sources alone revealed the “totally prohibitive and unacceptable cost” of some of the options. For example, abandoning the gas network and meeting all power needs wholly through electrification would saddle an individual dwelling in Cornwall with storage costs ranging from £32,533 to £141,477 a year.

Instead, the WWU project proposes the route put forward by Imperial College London as the only acceptable one: a multivector combination of electrification and repurposing the gas grid with new sources of decarbonised gas. Although decarbonisation will require the help of new technologies for both sectors, no vast shift from the current state of play is needed for either. The real challenge instead lies first of all with identifying, and then reaching, agreement on the right mix between the two.

But Imperial College proposes a three-pronged approach, and the third technology – district heat – represents a far more significant change. There are only about 2,000 district heating networks in the UK, supplying just 2% of the country’s heating needs. The Committee on Climate Change’s central scenario for the fifth carbon budget assumes that heat networks will be serving 18% of buildings’ heat demand in 2050.

The government has thrown its weight behind district heating by pledging £320 million at the end of 2014 to support the growth of the sector. Industry, however, says that growth is being held back by several factors, not least of which is the lack of regulation in the UK.

In contrast to the UK situation, district heating is the primary source of heat in Denmark, providing 70% of the country’s heat needs. In the capital Copenhagen the technology has a near-monopoly on heat, providing 92% of the city’s needs.

On the surface, the Danish system is constructed on many of the pillars the industry in the UK is calling for: regulation, a stringent planning system, and better protection for customers. Such a high penetration suggests a success story. It’s one the UK should look to emulate if the technology is to make any meaningful contribution. But how feasible would it be for the UK to follow Denmark’s example?

Network visited the Scandinavian city in the depth of winter to learn more about district heating, hearing from all sections of the supply chain, along with the regulator. What became clear is that the success of the Danish system owes a lot to fundamentally different societal values that conflict with those in the UK.

While much of the energy narrative on this side of the North Sea focuses on customers’ right to choose, in Denmark the green mission takes precedence, with customers subject to monopolies that charge wildly varying prices. This effectively makes the Danish system difficult to adopt on any real scale in the UK, but there are many valuable lessons our country could learn to boost growth, not least of which is how to integrate household waste into the energy system more effectively.

Regulation

Regulation is often put forward by the GB district heating sector as potentially being the silver bullet to many of the industry’s current problems, such as attracting institutional investment, lowering prices and protecting customers. All of these are achieved by the model of regulation operated by the GB electricity and gas networks; a model the DH sector would also like to adopt.

Gas and electricity networks in the UK are very attractive investments – last year National Grid sold a 61% stake in its gas distribution business for £13.8 billion. As the UK government is hoping to attract £2 billion of private investment to the GB district heating sector, regulation seems the obvious answer.

The Danish Energy Regulatory Authority (DERA) operates a not-for-profit model, where heat companies are allowed to cover only necessary costs. Achieving a return on capital is an option but this has to be approved by the regulator, and few heat companies choose to do so. This is because 60% of Danish heat companies are owned by municipalities, and another 36% by consumers. Regulation ensures heat companies cover their costs and customers pay reasonable prices.

But the system is not without its problems. The operating model does not allow for any cash buffer to be held by the company, so despite assured costs in 2012/13, 294 of the 400 total heat companies exceeded their costs two years in a row, by a combined total of £186 million. 133 companies’ income exceeded their costs by more than 10%, a combined total of £116 million. DERA’s Renee van Naerssen says the regulator would struggle to cope if there were more heat companies.

The GB sector is likely to far exceed 400 companies. Heat networks in Denmark have developed to be far bigger and more integrated than anything the UK is likely to achieve. For example Copenhagen is served by just four district heat networks. With local councils, universities, social housing schemes and private developers all likely to develop schemes, this could present a regulatory nightmare.

Planning

Denmark has a stringent planning system in place for the development for heat networks, which puts local authorities, called municipalities, in control. Importantly, municipalities are able to force the connection of end-users to a heat network. Being able to secure this future capacity would lower the investment risk for GB developers and help the formation of larger, more efficient schemes.

However, the planning system in Denmark does not prioritise the cost to the consumer, as would be expected in GB. Instead municipalities are obligated to approve heat supply projects that ensure the highest benefits to both society as a whole and to the utility and customers connected to the network.

This means social-economic factors can significantly affect consumer prices in different areas, and some consumers find it difficult to sell their properties because of high energy costs.

 

DERA ensures transparent prices by publishing price lists up to three times a year, but customers are subjected to monopolies and prices are reflective of costs in that area, so the lists serve little practical purpose. While much of the press in GB focuses on driving up switching rates and ensuring customers get the cheapest deal, prices are not a topic of discussion for the average Dane, and switching is not a priority.

Investment

Although the UK government has pledged £320 million of funds to kick-start private investment in the DH sector, heat companies in Denmark have no such worries. There, heat companies can start gathering capital through customer bills up to five years in advance of an extension to a heat network to cover 75% of the cost.

They are also able to get municipal security for loans, allowing them easy access to finance. The loans have a long payback period of about 25 years and an almost zero interest rate.

Fuel sources

The Danish government has steered the production of heat away from fossil fuels such as coal through the use of taxes, rather than the subsidised system used in GB. Since 1990 the use of coal has fallen while biomass has increased rapidly because it is exempt from energy taxes. Many large-scale combined heat and power plants around major cities are being converted to biomass to meet zero carbon targets.

There are now 310 biomass-based boilers in Denmark producing 21% of the 63% total DH capacity.

But this is just the short-term plan. Long-term the country’s renewable energy ambitions are expected to feed through into heat as well. Already the country is beginning to see the conversion of excess renewable electricity into heat through heat pumps and electric boilers. This is only set to continue. Using the excess energy will help stabilise the system and provides a form of short-term energy storage by using the DH pipe capacity. In the future solar heating is also expected to take off.

Such technologies in the UK are still in their infancy in terms of penetration – solar thermal technology was recently saved from removal from the Renewable Heat Incentive. Doing so would have destroyed the supply chain necessary to form a solar thermal DH industry in the UK in the future.

In Denmark, taxes – which represent more than a quarter of the customer’s final bill – help control fuel source, but it is also influenced by DERA through regulation. Heat companies can claim only the cost of the cheapest fuel source available to them. This prevents the development of too many competing fuel sources DERA says, and ensures the cleanest is fully utilised first.

Incinerated waste is currently prioritised over other fuel sources. Waste companies that sell heat are exempt from the not-for-profit regulation but will be subject to a price cap in two years’ time. Incineration is an effective solution to the country’s waste problem, and Denmark is so efficient at dealing with its waste that alongside Sweden it actually imports waste from other countries – such as the UK – to meet its needs. Comparatively the UK’s waste resource is largely untapped, and is a particular area where the Danish model could provide valuable learning for the development of both a larger DH sector and more integration between different sectors.

Customer protection

The lack of DH consumer protection in GB – compared with the regulated gas and electricity industries – has been somewhat alleviated by the creation of the Heat Trust in 2015. In Denmark, customers such as social housing schemes, which make up 20% of the housing stock in Copenhagen, are protected through its system of regulated necessary costs.

But there is a further layer of protection for tenants living in those schemes. Tenants are billed on their specific consumption -achieved through submetering using heat cost allocators that are largely unfamiliar to GB customers, or through energy meters. The total annual bill is divided into equal payments taken through the year. If customers disagree with the social housing scheme they can complain to a Complaints Commission. This commission consists of three locally selected members who analyse written complaints and reach a decision.

Boligkontoret Danmark, a social housing company with 32,000 rental units, said it received 127 complaints last year of which just six were taken to the commission.

 

In the transition from fixed quotas to individual billing, research has shown that consumption drops by 20% as consumers are able to follow their daily energy use online. But unlike in GB, the focus is less on reducing energy consumption and more on better use of heat. The country has a major problem with mould because of its climate, and many consumers do not understand how to correctly heat their homes to prevent mould growth. A major focus for social housing companies is in communicating with their tenants, something Boligkontoret says is best done face-to-face.

It is difficult to look at such an established system as district heating in Denmark and imagine the UK could emulate it any significant way. But despite this there are valuable lessons to be learnt.

Firstly and most critical is the whole system approach to energy in Denmark that ensures different sectors such as waste are fully utilised, and cooling is already being considered. This has achieved an overall system efficiency and put Denmark on track for reaching CO2 and fossil fuel reduction goals that the UK could currently not even dream of.

But this culture of prioritising the needs of a country as a whole in becoming greener over the needs, and choice, of the individual consumer is at odds with the culture in the UK. Here, energy is a trilemma with price given equal footing alongside carbon reduction. The natural monopoly of a district heating network also does not tally with the changing attitude to traditional monopoly utilities in the UK. The non-domestic water sector in the UK is readying itself for competition, and gas and electricity networks have been warned to expect competition in the not-to-distant future.

The Danish example does point to the necessity of regulation for the development of district heating, but the Danish system would likely become unwieldy at the scale necessary here, and even in Denmark questions are starting to be asked about whether heat companies would be better run competitively. It may be leaps ahead, but Denmark is unable to provide all the answers.

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