nordic district heat

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Intermediate report

Nordic Energy Perspectives

The Future of Nordic District Heating

A First Look at District Heat Pricing and Regulation

March, 2009


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Preface

NordicEnergyPerspectives(NEP)isaninterdisciplinaryNordicenergyresearchprojectwiththe

overallgoalofdemonstratingmeansforstrongerandsustainablegrowthanddevelopmentinthe

Nordiccountries.

NEPanalyses

the

national

and

international

political

goals,

directives,

and

policy

instruments

within

theenergyarea,aswellastheirinfluenceontheNordicenergymarketsandenergysystemsandthe

infrastructuresandinstitutionalstructures.NEPaimsatclarifyingtodecisionmakersthe

consequencesofpoliticalandstrategicdecisionsforpoliticians,energyactorsandthepublic.The

projectistopromoteaconstructivedialogueamongresearchers,politicians,authoritiesandactors

ontheenergymarkets.

Forfurtherinformationabouttheproject,pleasevisit:www.nordicenergyperspectives.org.

Thisseriesofreportsarethesecondreportingfromthesecondphaseoftheproject.Thefollowing

intermediateandfinalreportsarenowpresented:

Synthesisreport,March2009:

SecondNEP2synthesisreport(Responsible:PeterFritz,HkanSkldberg,BoRydn)

Finalreports,March2009:

Widenedviewofenergyefficiencyandtheresourcemanagement(Responsible:BoRydn)

TechnologyoptionsforalowCO2energysystem(Responsible:TiinaKoljonen)

WoodmarketsandthesituationoftheforestindustryintheNordiccountries(Responsible:

PerErikSpringfeldt)

Intermediatereports,March2009:

Referenceandpolicyscenarios(Responsible:TheNEPmodelgroup)

Globalscenarios(Responsible:JanneNiemi)

Biomassmarketandpotentials(Responsible:TiinaKoljonen)

NordicperspectivesontheEUgoalsrelatingtoCO2,renewableenergyandenergyefficiency

(Responsible:ThomasUnger,BoRydn)

Prominentstrategiesforenvironmentalsustainabilityinthestationaryenergysector

(Responsible:AndersSandoff)

ThefutureoftheNordicdistrictheating(Responsible:MonicaHavskjold,HkanSkldberg)

TradewithintheRESdirectiveandrelatedpowerinterconnectionissues(Responsible:Berit

Tennbakk)

NaturalgasintheNordiccountries(Responsible:PeterFritz)

OurintentioninNEPistopresentallreportsinEnglish.Duetolackoftime,someofthetextsinsome

ofthereportsareatthisstagestillinScandinavianlanguages.Weapologizeforthis.Thesetextswill

assoonaspossiblebetranslatedintoEnglish.Thetranslatedtexts/reportswillbeavailableonthe

projectswebsite,www.nordicenergyperspectives.org,soonaftertheOsloconference.

Oslo,March2009

TheNEPResearchGroup


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Tableofcontents

1 DistrictheatingintheNordicCountries.......................................................................................... 7

1.1 Briefstatus............................................................................................................................... 7

1.2 PolicyupdateofdistrictheatingintheNordiccounties ......................................................... 8

1.3 Businesslifecycleandfuturedevelopmentofdistrictheating ............................................ 12

1.4 Energyefficiencyathreat?................................................................................................. 15

1.5 Modelresults......................................................................................................................... 16

2 DistrictheatingpricesinSwedenfixedorvariable? .................................................................. 17

2.1 Introduction........................................................................................................................... 17

2.2 Theenergyfee....................................................................................................................... 18

2.3 Variableenergyproductioncosts ......................................................................................... 20

2.4 Variableincomeandvariableaveragecosts......................................................................... 22

2.5 Variablecosts

for

district

heating

based

on

marginal

costs.................................................. 23

2.6 Marginalcostsduringdifferentseasons ............................................................................... 26

2.7 Discussionandconclusions ................................................................................................... 27

2.8 Furtherwork.......................................................................................................................... 30

3 PriceofdistrictheatinginFinland................................................................................................. 31

4 PriceofdistrictheatineightNorwegiancompanies .................................................................... 34

4.1 Surveyresults ........................................................................................................................ 34

4.2 Casestudy.............................................................................................................................. 37

5 Competitivenessof

district

heating

in

the

future

adiscussion

based

on

Swedish

conditions .. 39

5.1 Rivalingheatsolutions,andconsequencesforpricing ......................................................... 39

5.2 Existingdistrictheating,conversionofthetotalheatingdemand ....................................... 40

5.3 Existingdistrictheating,conversionofafractionoftheheatingdemand ........................... 41

5.4 Presentlyheatedbyanotherheatingalternative,conversiontodistrictheating ................ 44

5.5 Newbuilding,allalternativesstartingfromscratch,districtheatingisoneoftheoptions. 45

6 Regulation ..................................................................................................................................... 46

6.1 Introduction........................................................................................................................... 46

6.2 Status..................................................................................................................................... 46

7 References..................................................................................................................................... 52


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1 DistrictheatingintheNordicCountries

1.1 BriefstatusDistrictheatingisanimportantcarrierinallNordiccountriesexceptforNorway.AsshowninFigure

11,

Sweden

has

more

than

50

TWh

district

heating,

Denmark

and

Finland

approximately

35

TWh

whileinNorwayonly3TWhdistrictheatingissupplied.Whiletheincreaseinvolumeseemstolevel

offinSweden,FinlandandDenmark,theannualgrowthislargeandincreasinginNorway.Thisis

discussedmorecloselyinchapter5.

0

100002000030000400005000060000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

GWh/year

Sweden

Denmark

Finland

Norway

Figure11DistrictheatproductionintheNordiccountries

Thechoiceofenergyresourcesdependsonlocalavailabilityandenergyinfrastructure,thusthe

differencesshowninFigure12areasexpected.Inallcountries,biomass,peat1and/ormunicipal

wasteisamajorrenewableenergyresource.

1Peatisnotseenasrenewableinallcountries


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0%10%20%30%40%50%60%70%80%90%

100 %

Sweden(2006)

Denmark(2007)

Finland(2007)

Norway(2007)

Others

Oil

Coal

NaturalgasElectricity

Peat

Biomass

HeatpumpWasteheatWaste

Figure12Energy

carriers

in

district

heat

production2.

1.2 PolicyupdateofdistrictheatingintheNordiccounties

1.2.1 SwedenDistrictheatingisthedominatingenergycarrierontheSwedishheatingmarket.54TWhdistrict

heatingwasdeliveredin2007.Thedeliverieshaveincreasedrapidlyduringalongperiodofyears,

butduringthelastfiveyearsthegrowthhassloweddownconsiderably.Districtheatinghasbeen

oneofthemostsuccessfulareasinthetransformationoftheSwedishenergysystemtowardsamore

sustainabledevelopment.Fossilfuelshavebeenphasedout,biofuelshavebeenintroduced(andis

nowthe

dominating

fuel)

and

combined

heat

and

power

production

is

growing

rapidly.

30000

3500040

000

45000

50000

55000

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

GWh/year

DistrictheatinSweden

Figure13 DevelopmentofdistrictheatinSweden

2TheFinnishnumbersareforfuelconsumptioninproductionofDHandcombinedproductionofDHandelectricity


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On1July2008thenewdistrictheatinglawcameintoforce.Itaimsatstrengtheningthedistrict

heatingcustomerssituation,e.g.throughincreasingthetransparencyintothedistrictheating

business.Thelawspecifyanobligationforthedistrictheatingcompanytonegotiatewithadistrict

heatingcustomerregardingcertaincontractconditions,e.g.price.Iftheycannotreacghan

agreement,theycouldaskforexternalmediation.Thedistrictheatingcompanyshouldpresentits

prices

easily

available

for

customers

and

the

general

public.

If

the

district

heating

company

gets

a

requestfromsomeonewhowantstosellheattothedistrictheatingcompanyortousethedistrict

heatingnetworktodistributeheat,thedistrictheatingcompanymustnegotiateaboutthepossibility

togetaccesstothedistrictheatingsystem.Thelawdoesnotincludeanypriceregulation.(Inthemid

1990iestheselfcostprincipledisappearedandpricingofdistrictheatingbecamefree.)

Therehavebeendiscussionsaboutgeneralthirdpartyaccesstothedistrictheatingsystem.Theidea

washoweverrejectedbyagovernmentalinvestigationin2005.

Thepriceofdistrictheatinghas,asanaverage,increasedslowerthanformostcompetingenergy

carriers.

Figure14CommercialenergypricesinSweden(Fjrrvrme=Districtheating)

1.2.2 DenmarkTheenergypolicyinDenmarkhasastrongfocusonenergyefficiencyandincreasedutilizationof

renewableenergyresources. Districtheatinghasbeenoneofthecentralmeasuresforthedramatic

reductionofCO2emissionduetoheatingofbuildingandtapwaterfrom25kg/m2in1980till10

kg/m2in

2008.

Throughenergyplanning,themunicipalitieshavedesignatedsomeareastodistrictheatingand

otherstonaturalgasdistribution.Electricheatingofhouseslocatedintheseareasisforbiddenby

law(elvarmeforbudet).Themunicipalitiesmaychoosetomakeaccessiontocollectiveenergy

distributionsystems(naturalgasordistrictheating)mandatory.Amajorchallengenowarisingfor

themunicipalitiesistodrawthelinebetweendistrictheatingareasandareasforlocalheat

productionlikeheatpumps.

DistrictheatingisconsideredanaturalmonopolyinDenmark,andisobligedtobeanonprofit

business.Thecompaniesarenotallowedtohaveeithernetprofitorloss(hvileisigselvprincippet).

Duringaperiodofseveralyearstheheatpriceshouldbeequaltotheheatcost.Severalmeasures

areconsidered

to

further

increase

the

efficiency

in

district

heating

operations,

thus

reducing

the

cost

ofheattothecustomers.


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ThenewnationalgoalofadramaticreductionofCO2emissionandinthelongtermfullpenetration

ofrenewableenergyhasbroughtdistrictheatinginfocusoncemore. Naturalgasareasmaynowbe

convertedtodistrictheating,thusfurtherincreasingitsmarketshare.Anewlypublicizedreport

VarmeplanDanmarksuggestpossibilitiesforthedistrictheatingtoincreaseitsmarketsharefrom

47%todayto6070%inthelongterm(20202050).Highfocusonenergyefficiency,extensive

utilization

of

renewable

sources

in

the

district

heating

systems

and

local

heat

pumps,

pellet

stoves

andsolarenergyenablesnoCO2emissionsfromtheheatingsector.

20000220002400026000280003000032000340003600038000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

GWh/year

DistrictheatinDenmark

Figure15DevelopmentofdistrictheatinDenmark

1.2.3 Finland

InFinland,29,4TWhdistrictheatingenergywassoldin2008,withagrossproductionof31,9TWh.

ThedevelopmentofdistrictheatproductionisshowninFigure16.Theaverageprice(incl.taxes)

was5,05c/kWh,resultinginheatsales(incl.taxes)of1,48bn..Marketshareofdistrictheatin

Finlandis49%.CHPdelivered74%oftheheatusedinFinland.

200002200024000260002800030000320003400036000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

GWh/year

DistrictheatinFinland

Figure16DevelopmentofdistrictheatinFinland


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DistrictheatinghasaverystablepricingpolicyinFinland.Mostfuelpriceshaverisensteeperthan

thepriceofdistrictheatingsince1999.OnereasonwhytheDHsectorhasmanagedthiswellisthe

diversifieduseoffuels,anotheristheincreaseintheuseofpeatandwastewoodandathirdisthe

widespreaduseofcoal.Thepriceofcoalhasonlyinrecently,sincesummerof2007experienceda

steeppricehike.

Pr i ces o f d i s t r i c t hea t an d fue l s i n hea t p rod uc t ion

as we l l as cos t -o f - l i v i ng i ndexi ndex , June 1999 = 100

80

120

160

200

240

280

320

360

June-99 June-00 June-01 June-02 June-03 June-04 June-05 June-06 June-07 June-08

District heat Natural gas Milled peat Hard coal

Heavy fuel oil Firewood Cost-of-living index

Sources:

Statistics Finland

Ministry of Employment and the Economy

Energy Market Authority

Figure17Indexseries(1999=100)ofpricesinFinlandofDHandseveralfuelsforheatproduction,andthe

costofliving.(FEI2009)

1.2.4 NorwayDistrictheatingisgrowingextensivelyinNorway,butfromasmallbase,withanetproductionof3

TWhin2007.

EnovaSFwasestablishedin2001withamainmissiontocontributetoenvironmentallysoundand

rationaluseandproductionofenergy,relyingonfinancialinstrumentsandincentivestostimulate

marketactorsandmechanismstoachievenationalenergypolicygoals.

Enova

is

obliged

through

a

contract

with

the

government

to

reach

a

sum

of

18

TWh

through

energy

efficiencyornewrenewableenergybeforetheendof2011,and40TWhbeforetheendof2020.No

specificgoalissetfordistrictheating,butaccordingtoEnovarenewableheatingisoneoftheleast

expensivewaystoincreasetherenewableshareofstationaryenergyuse.Recently3 thegovernment

grantedEnovaanadditionofapproximately150M.Oneofthefocusareasforthisextrafunding

wasdistrictheating. Alotofactorsarenowcompetingtoestablishnewdistrictheatingsystemsin

Norway.

Aconcessionfordistrictheatingismandatoryforplantwithmorethan10MWmaximumheatloads,

butalsosmallersystemsmayapplyforaconcession.Municipalitiesmaydecidemandatory

connectionsofnewbuildingstothedistrictheatingsystem,giventheyhaveaconcession.According

totheEnergyLaw,thepricefordistrictheatingmaynotbeabovethecostofelectricheating.

3January2009


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TheMinistryofPetroleumandEnergyisnowconsideringthefutureregulationofthedistrictheating

businessinNorway.

0

500

100015002000250030003500

198

3

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

GWh/year

DistrictheatinNorway

Figure18DevelopmentofdistrictheatinNorway

1.3 BusinesslifecycleandfuturedevelopmentofdistrictheatingBusinessdevelopmenttendstofollowanSshapedcurve(seeFigure19). Inadistrictheating

context,thevolumeofenergysoldisrelatedtothepenetrationrate.When(if)youreachalevel

whereallcustomershavedistrictheating,thevolumeisboundtobeatthesamelevelordeclinedue

tobothenergyefficiencyandsubstitutiontolocalsolutions(e.g.heatpumps).Ontheotherhand,as

longas

the

building

stock

increases

new

potential

customers

enter

the

market.

Figure19Scurve,businessdevelopment

Time

DH

Volume

Energy

efficiency

Substitution

GROWTH MATURITY DECLININGEMERGING


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InthisintermediatereportthefutureoftheDHmarketinthedifferentNordiccountriesmarketis

justbrieflydescribed.Thetopicwillbemoreextensivelytreatedinthefinalreport.

0

10

20

30

40

50

60

70

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

TWh/year

SE

SEestimatedDK

DKestimatedFI

FIestimatedNO

NOestimated

Figure110DevelopmentofDistrictHeatingintheNordicCountries

Swedenseemstobeinalategrowthperiodorperhapscrossingoverintothematurityperiod.In

Finlandthedistrictheatingbusinessseemstobeinthematurityface,whiletheDanishdistrict

heatingbusiness

seems

to

have

started

the

declining

face.

In

Norway

district

heating

is

still

in

the

emerging/growthphase.Thechallengesfacingtheactorsarethusalsodifferent.

SowhatisexpectedoffuturedevelopmentofdistrictheatingintheNordiccountries?

1.3.1 SwedenEnergimyndigheten

4expectsthegrowthindistrictheatusetobebetween4and8TWhintheperiod

20042025.Dependingonwhereinthisgaptheexpectationslie,thedistrictheatbusinessinSweden

willmoreorlessstepintothematurityface.

However,manydistrictheatingsystemsexperienceasituation wheretheintroductionofnew

districtheatingcustomersisoffsetbymoreefficientuseofenergybyexistingcustomers,leadingto

stagnatingheatdeliveries.

1.3.2 DenmarkAccordingtoEnergistyrelsen

5,thetotalenergydemandinDenmarkisexpectedtodecrease,andin

addition,thefractionsuppliedbydistrictheatingisalsoreduced,thusthetotaldemandfordistrict

heatinginDenmarkisdecliningintheperiod20082025.Duetoenergyefficiencymeasuresexpected

tobeappliedtheheatdemandinthehouseholdsischanging.Theelectrificationoftheservicesector

duetothetechnologicaldevelopmentwillalsoaffecttheheatingdemand.

4Prognoserfrutslppochupptagavvxthusgaser Delrapport1iEnergimyndighetensoch

Naturvrdsverketsunderlag

till

Kontrollstation

2008

5FremskrivningafDanmarksenergiforbrugogudledningafdrivhusgasserfremtil2025,

ISBNwww:9788778447401


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Figure111

Business

as

usual

scenario,

Denmark

(Source:

Energistyrelsen

2008)

1.3.3 FinlandAsseenbefore,itseemsthatFinnishDHproductionhasachievedmaturity.However,ifwelookat

thetemperaturecorrectedDHconsumptionasshowninFigure112weseeanaltogetherdifferent

picture.DHconsumptionisincreasing;itistheweatherconditionswhichgiveadistortedviewof

maturity.ClimatechangeontheotherhandisexpectedtodecreasetheincreaseofDHinthefuture.

Temperature corrected district heat consumption

0

5

10

15

20

25

30

35

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

TWh

Figure112DevelopmentoftemperaturecorrecteddistrictheatconsumptioninFinland1970 2008(Source:

FEI2009)

Other

Biomass/HeatPump

NaturalGas

Oil

DistrictHeating

Electricity

PJ (Finalenergydemandextransport)


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TheMinistryforEmploymentandtheEconomyhasdevelopedaprognosis6wheredistrictheating

demanddevelopsfrom30,6TWhin2006,to33,0TWhin2020and33,1TWhin2030.Thegrowthis

thusslowingdownmarkedlyfrom2020,thusreachingmaturity.

1.3.4 NorwayAnanalysesoftheexpecteddistrictheatingvolumeinNorwayin2020

7concludedthatthereis

potentialfor

agrowth

of

approximately

7,5

TWh

district

heating

in

addition

to

the

3TWh

already

established.Thetechnicalpotentialissignificantlyhigher(18TWh),sonewmeasuresandincentives

mayfurtherincreasethisvolume.

MarketPotential Technical

Potential Energy

supply for

Heating

Elec

tricity

Oil

Nat.gas

Figure113Marketpotentialfordistrictheatingin2020(Xrgia2007)

1.4 Energyefficiencyathreat?EUhassethightargets,20%,forenergyefficiencyimprovementsby2020.Thisaffectstheheatingof

buildingsanddomestichotwateraswellasallothersectors.Asthebuildingcodesgetstricter,with

consumptionleveltargetsreachingthatoflowenergyhousesorevenpassiveenergyhouses,the

overallheatdemandinnewhousesandareaswillbemuchsmallerthanbefore.

Anotheraspecthavingagoatthedistrictheatingpotentialistheincreaseduseofelectricfloor

heatingand

for

supplementary

heating

of

incoming

air.

The

majority

of

new

detached

houses

in

Finlandhavefloorheatingatleastinthebathrooms.Evendistrictheatedhousesgetelectricfloor

heatinginstalled.

IfastandardsmallresidentialhouseinforexampleFinlandtodayhasafinalheatconsumptionof

21,6MWh/a,astandardlowenergyhasonly12,9MWh/a(Motiva2008).Willtherebeenoughheat

demandleftaftertheincreaseininternalheatsources(floorheating,ventilationairheating,

increasedamountsofappliancesetc)toletinvestmentsinDHbeprofitable?Thelessenergy,the

morethoseheatingformswithlargeinvestmentsbutlowrunningcostssufferincomparison.

6Thelongtermclimateandenergystrategy.GovernmentReporttoParliament,November2008

7Enova:Potensialstudien2020,Xrgia


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Especiallynewareastobebuiltwithonefamilyhousesandsemidetachedhouseswillfinditvery

difficulttomaketheinvestmentsinDHinfrastructureprofitablebothfortheconsumersandtheDH

company.

1.5 Modelresults

0

10

20

30

40

50

60

70

2002 2009 2016 2023 2030

TWh

Developmentof

District

Heating

in

the

Nordic

Countries

Scenario20_20_0

Finland

Sweden

Norway

Denmark

Figure114DevelopmentofDHintheNordiccountries,MARKAL

ThemodelgroupofNEPisdoingalotofscenariosandrunswithdifferentmodels.Unfortunately

onlyMARKALmodelsdistrictheatinginalltheNordiccountries.OneresultisgiveninFigure114.

Examplesoftopicstodiscussbasedontheresultis(1)whatcausesthereductioninFinlandand(2)

whysuchincreaseinDenmark?

Theseresultswillbefurtherinvestigatedinthefinaldistrictheatingreport.


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2 DistrictheatingpricesinSwedenfixedorvariable?

2.1 IntroductionWhenthisanalysisbegan,wehadtheperceptionthatthedistrictheatingratesinSwedencontaina

largepart

that

is

related

to

the

district

heating

customers

energy

usage.

At

the

same

time

our

impressionwasthatthevariablecostsfordistrictheatproductionconsisttoagreatextentof

differenttypesofwasteheat,andthatthecostsshouldthusbeverylow.

Anargumentthatisoftenemployedforallowingthevariablepartofthepricetobelargeisthatit

shouldbeprofitabletosaveenergy,sincethisissaidtobegoodfortheenvironment.Forexample,

thisargumentwasgivenquiterecentlyinEnvironmentalgoalsforthecountyofVstraGtaland,

April2007(Lnsstyrelsen2007).Asameasuretodecreasetheemissionofgreenhousegases,itis

recommendedamongotherthingsto:Reviewratesandfixedfeesinordertogiveincentivesfor

lowerenergyuse.Decreasethefixedfeesandincreasethevariableones.Weconsideredwhetherit

istruethatsavingisalwaysright,andwhetherinthatcaseitisareasonablemotiveforchoosinga

ratewhichperhapsisnotcostcorrect.

Atthesametimewecanobservethatthereareoftencustomerdesiresforalargepartofthedistrict

heatingpricetobevariableandguidedbyhowmuchenergyisused.Thereasonisthatthe

customerswanttobeabletoinfluencetheircoststhroughtheirbehaviour.Inthereport,wewill

returntothequestionofhowgreatthispossibilityofinfluenceisinreality.

Forsometime,throughcontactswithdistrictheatingcompanies,wehavereceivedinformationthat

varioustypesofheatpumps,primarilyexhaustairheatpumpsandinsomecasesairairheatpumps,

andsolarheatinghavebeeninstalledinhouseswhichareheatedinotherrespectswithdistrict

heating.Thishastheresultthatapartofthedistrictheatingcompanysenergydeliveryceases,but

thatthepowerneedfordistrictheating(whichoccursinthecoldestweatherwhentheheatpumps

incertaincasesnolongergiveanyheat)remainsmoreorlessunchanged.Thatthishasbecome

profitablecan

be

explained

to

some

extent

by

the

energy

part

of

the

district

heating

price

being

high.

Anadjacentissueisthedistrictheatingcompaniesargumentationinrelationtotheircustomers.The

companiesoftenmaintainthatalargepartofthedistrictheatingconsistsofdiversetypesofwaste

heat(industrialwasteheat,heatfromcombinedheatandpowerproduction,etc.).Itthenbecomes

peculiartotakelargepaymentfortheenergydeliveryitself.Shouldwasteheatnotgivelowenergy

costs?

SincealargepartofthedistrictheatinginSwedenconsistsofwasteheatofdiversetypes,onemay

askwhetheritisreallyalwaysjustifiedtopreventlargepartsoftheheatusage.Thisquestionis

connectedwiththeongoingdiscussionofenergyandenvironmentperformanceforvariousenergy

carriers,e.g.forheatingofbuildings.Theprimaryenergyconsumptionisaconceptfrequently

discussedin

this

context.

Should

the

energy

saving

ambitions

not

stand

in

proportion

to

how

valuablethesuppliedenergyis,andtowhatenvironmentalconsequencesaredirectlyorindirectly

associatedwiththeenergyusage?

Inourstudywehaveassumedthatthetotallevelofthedistrictheatingpriceiscorrect,withregard

tothecompaniesrealcostsandyieldrequirementsetc.Weareinterestedonlyinthedistribution

betweenfixedandvariablepartsoftherate.

Thepresentationisdividedintoseveralparts.Insection2.2wediscusshowSwedishdistrictheating

pricesaretypicallybuiltupbyfixedandvariableparts.Thediscussionisbasedonastudyof15

SwedishdistrictheatingcompaniesthattogetherrepresentsnearlyhalfofthetotalSwedishdistrict

heatingdeliveries.

Insection2.3wecalculatehowmuchofthe15studieddistrictheatingcompaniescoststhatareconnectedwithaveragevariableenergyproductioncosts.Thecalculationsarebasedonproduction


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18

statisticsandassumedfuelprices.Insection4wecomparetheseaveragevariablecostswiththe

variableincomefromthedistrictheatingprice.

Theanalysispresentedinsections2.3and2.4dealswiththeaveragevariablecosts.Insection2.5we

insteadstudythemarginaldistrictheatingproductioncosts,themarginalvariablecost.This

analysisisbasedonproductionstatisticsforallSwedishdistrictheatingsystems(fromtheSwedish

DistrictHeating

Association),

which

have

been

processed

further

by

Profu

in

order

to

identify

the

marginalproduction.Thismarginalvariablecostisalsocomparedtothetypicalvariableincomefrom

thedistrictheatingprice.

Themarginalvariablecostshavebeenidentifiedmonthbymonth.Insection2.6wediscussthe

seasonaldifferencesandhowtheycouldinfluencethepricingofdistrictheating.

Insection2.7wediscusstheresultsandconsequencesifthedistrictheatingrateswouldnotbecost

correct.Insection2.8finally,wementionsomeareasforcontinuedstudiesinthefuture.

2.2 TheenergyfeeHowmuchofthedistrictheatingpricecomprisestheenergyfee?Wehaveturnedtodiversesources

forinformation

about

this.

Here

we

have

chosen

to

concentrate

on

one

of

these

sources,

which

containsdetailedinformationaboutthepricecomposition.ByassignmentoftheSwedishDistrict

HeatingAssociation,theEKANGrouphasstudiedstatisticsondistrictheatingprices.Theworkis

describedinthereportStatisticsproject,astudyofdistrictheatingpricesdated20060130(EKAN

2006).ThisreportpresentsdistrictheatingpricesandtheircompositioninSwedenstenlarge

municipalitiesandinfiveadditionalmunicipalities.Inthese15,thedistrictheatingmakesup49%of

thetotaldistrictheatingdeliveryintheSwedishDistrictHeatingAssociationsstatistics;seeFigure

21.

Forthegivenmunicipalities,thelevelandcompositionofdistrictheatingpriceshavebeenstudied

forahousetypethatisusedinthesocalledNilsHolgerssonstudy,whichismadeannuallybythe

FeeGroup.Thehousetypeisamultiresidentialbuildingwithanannualheatconsumptionof193

MWhper

year.

Figure21DH

deliveries

in

the

15

studied

municipalities

(EKAN

2006)


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Thedistrictheatingpricesandthedivisionintodifferentpriceparts,forthehousetypeinthe15

municipalitiesareshowninFigure22.

Figure22Districtheatingpricesin2006forthestudiedmunicipalities[kr/MWh](EKAN2006)(Energi=Energy;Flde=Flow;Effekt=Capacity;Fast=Fixed)Thus,thedistrictheatingpricesin2006laybetween621SEK/MWh(Stockholm)and351SEK/MWh

(Vsters).Thepartofthepricesthatisbasedonenergyusetheenergyfeevariedbetween580

SEK/MWh(Lysekil)and204SEK/MWh(Linkping).Theenergyfeesshareinpercentofthedistrict

heatingpriceisshowninFigure23.

Figure23Districtheatingpricein2006forthestudiedmunicipalitiesdistributionintodifferentprice

components[%](EKAN2006) (Energi=Energy;Flde=Flow;Effekt=Capacity;Fast=Fixed)Theenergyfeespartofthetotaldistrictheatingpricevariesbetween100%(UppsalaandLysekil)

and43%(Linkping).Asacalculationexample,ifoneassumesthatthe15studiedmunicipalitiesare

representativeforalldistrictheatinginSwedenandthatthepricedataareweightedagainstthe

districtheating

deliveries

in

the

15

municipalities,

the

average

total

district

heating

price

and

energy

feecanbecalculatedforthehousetype.Thedistrictheatingpricethenbecomes523SEK/MWh,in


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20

whichtheenergyfeeis345SEK/MWh,bothexcludingVAT.Thus,theenergyfeesshareofthe

districtheatingpriceis66%.

Thecapacityshareofthedistrictheatingprice,Effektinthefigureabove,isgenerallynotagenuine

capacityprice.Inmostcasesitisapricewhichisdirectlycoupledtotheyearlyenergyconsumption

throughasimpleconversionfactor(oftenreferredtoascategoryfactor).Thereforethecapacity

pricecould

also

be

seen

as

avariable

income.

If

the

capacity

price

is

added

to

the

energy

fee

the

total

variableincomewouldbe490SEK/MWh.

Doesthislargesharefortheenergypartofthetotaldistrictheatingpricecorrespondtoequallylarge

costsconnectedwithvariableenergyproductioncosts?Weshalltrytofindthatoutinthenext

section.

2.3 Variableenergy-productioncostsTogetanideaofthe15districtheatingcompaniesvariableheatproductioncosts,wehavemadean

attemptwithgenerallyaccessiblestatisticstocalculatetheheatproductioncostsbasedonassumed

fuelpricesandtaxcosts.

Toestimate

the

variable

heat

production

costs

in

the

chosen

municipalities,

we

have

used

the

SwedishDistrictHeatingAssociationspreliminarystatisticsfortheyear2005(SvenskFjrrvrme

2007).Thesegivestatisticsonwhichfuelswereutilisedforheatandelectricityproduction.They

werethelatestavailablestatisticsatthetimewhentheanalysiswasmade.Thismeansthattherates

(for2006)andtheheatproductionstatistics(for2005)donotactuallyrefertothesameyear.

However,wejudgethattheresultanterrorissmallanddoesnottoanygreatextentinfluenceour

analysisandtheconclusionswedraw.

Ourcalculationhasmadethesimplificationthatthevariableheatproductioncostsconsistsolelyof

fuelcostsforheatandelectricityproduction,includingrelevanttaxesforenergy,carbondioxideand

sulphur.Thecombinedpowerandheatingplantselectricityproductionhasbeencountedinthe

calculationasanincomewhichtherebyreducesthevariableheatproductioncosts.Forrenewable

electricityproduction

in

combined

power

and

heating

operation,

the

electricity

certificate

income

alsocontributestoreducingthevariableheatproductioncosts.8

Thefuelpricescomefromdiversesources.Pricesforoil,naturalgasandcoalhavebeentakenfrom

theSwedishEnergyAgencysEnergyinSwedenfactsandfigures(Energimyndigheten2006)which

referstofuelpricesfortheyear2005.ThepricesforwoodchipsandpeatcomefromtheSwedish

EnergyAgencysPriceSheet(Energimyndigheten2007)andreferto2006.Wehavesettheelectricity

priceto300SEK/MWh.(Inrealitythepricewasveryhighduring2006,at445SEK/MWh,whichwe

havejudgedtobenonrepresentativeifcomparedwiththepricesbothbeforeanduntilnowduring

2007.)ThepricesforotherenergycarriershavebeentakenfromthereportDistrictheatingin

Sweden2003(FVB2005),wherethepricesreferto2003.Thetaxesrefertothesituationon200601

01

and

have

been

taken

from

the

Swedish

Tax

Agency

(Skatteverket

2007).

The

emission

rights

price

consistsoftheyearaveragespotpricefor2006ontheEuropeanEnergyExchange(EEX2007).A

certificatepriceof200SEK/MWhhasbeenassumed.Totheenergypricesrelevanttaxesareaddedin

thecalculations,dependingonforwhatpurposestheenergyisused.

Inreality,partsoftheoperationandmaintenancecostsarealsovariable,butthisisneglectedinthe

presentintroductorystudy.Examplesoflargefixedcostsarethecapitalcostsforproductionfacilities

anddistributionsystemsaswellaspersonnelcosts.

Inatrulylongperspective,suchas50years,almostallcostscanbeconsideredvariable.Duringsuch

alongperiod,probablytheentireproductionanddistributionsystemmustbereplaced,andthe

costsforthiscanthenbeseenasvariable.Butinthepresentstudywefocusonshorterperspectives

8Ini.e.Finland,mixingofincomesfromelectricitysaleswithdistrictheatingcostsisnotseenasappropriate.


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21

suchas10years,wherecostsconnectedwithexistingproductionfacilitiesanddistributionsystems

canberegardedasfixed.

Figure24showstheresultfromthecalculationofthevariablefuelandtaxcosts(variablegross

cost)forheatandelectricityproduction,andofthevariablefuelandtaxcostsminustheincomefor

electricityproducedincombinedpowerandheatingoperation(variablenetcost).Inbothcases

thecosts

per

delivered

heat

unit

are

reported.

In

the

subsequent

analysis,

it

is

the

variable

net

cost

thatweutilise.

Fromthefigureitcanbeseenthatthevariablegrosscostliesbetween127and342SEK/MWh.The

variablenetcost(wherethefuelandtaxcostshavebeenreducedwiththeincomefromthe

combinedpowerandheatproductionselectricitydeliveries)becomeseitherthesameasthegross

cost(ifthesystemlackselectricityproduction)orlowerasaresultoftheelectricityincome.Larger

electricityproductionentailsagreatergapbetweenthegrossandnetcosts.Thevariablenetcost

variesbetween33and342SEK/MWh.Thisspreadisverybig,primarilyduetodifferentfuelcosts

anddifferentsizesofincomefromelectricitydeliveries. Theweightedaveragevalueforthevariable

netcostis157SEK/MWh.Notethatthecostswereportarebasedonelaborationofgenerally

availablestatistics.Thus,wedonothaveaccesstorealcostsinthegivencompanies.

0 100 200 300 400

Stockholm

Gteborg

Malm

Uppsala

Linkping

Vsters

rebro

Norrkping

Helsingborg

Jnkping

Huddinge

Borlnge

stersund

Ume

Lysekil

SEK/MWh

Variable cost, net

Variable cost, gross

Figure24Estimatedvariablecostsofdistrictheatproductionin15studiedmunicipalities(notethatthe

costsbuildonestimatesmadewithintheproject).

Onecanassumethatthemunicipalitiesthatshowthelowestvariabledistrictheatingproduction

costshavemaderelativelygreatinvestmentsinordertoenableexploitationofcheapenergycarriers,

andtoenablelargeelectricityproductionincombinedpowerandheatingplants.Thisprobablyleads

tocomparativelyhighfixedcosts.However,wedonotanalyzeitfurthersincethevariablecostsand

theenergypartoftheratearewhatwefocusuponinthiswork.

Our

conviction

is

that

the

district

heat

production

will

be

based

to

an

ever

greater

extent

on

combinedpowerandheating,wasteincineration,industrialwasteheatetc.Therebythedistrict


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22

heatingconsistsincreasinglyofwhatmoreorlesscanberegardedaswasteheat,witheverlower

variablecosts.Wethussuspectthattherealvariablenetcostfordistrictheatproductionwill

decreaseinthefuture.

Inthissectionwedescribetheresultofanestimationoftheaveragevariableheatproductioncosts,

i.e.thetotalvariablecostsdividedbytheheatdelivery.Anothermeasurewhichisusedsometimesis

theshort

term

marginal

cost,

i.e.

the

variable

production

cost

for

the

last

produced

heat

unit.

This

variesovertheyearandishigherthantheaverageprice.Marginalcostsareoftenusedasabasisfor

pricesetting,astheygiveinformationonwhatitcoststoproducetheutilitythatcustomersare

abouttouseornotuse.Marginalcostsasabasisforvariablecostsfordistrictheatingispresentedin

section2.5below.

2.4 VariableincomeandvariableaveragecostsIntheabovesectionwehavepartlystudiedtheenergyfeessizeandshareofthetotaldistrict

heatingprice,andpartlycalculatedthevariablecostsfordistrictheatproduction.Inthissectionwe

willcomparethesetwoperspectivesandanalyzetowhatextentthedistrictheatingratesenergyfee

correspondstorealvariablecosts.

Figure25shows

for

each

of

the

15

municipalities

the

total

district

heating

price

(blue),

the

part

of

thatpricewhichisdirectlycoupledtotheenergyusage,namelytheenergyfee(red),andthe

variablenetcostsfordistrictheatproduction(yellow).

0 200 400 600 800Stockholm

Gteborg

Malm

Uppsala

Linkping

Vsters

rebro

Norrkping

Helsingborg

Jnkping

Huddinge

Borlnge

stersund

Ume

Lysekil

SEK/MWh

Variable cost, net

Energy fee

District heating price

Figure25Comparisonofdistrictheatingprice,energyfee,andvariablenetcostfor15studiedmunicipalities

(notethatthecostsbuildonestimatesmadewithintheproject

Fromthefigureitcanbeseenthatthevariablecostscompriseasmallpartofthedistrictheating

prices.Onaverage,thevariablenetcostsmakeup28%ofthedistrictheatingprice.Alsoinrelation

tothepricesenergyfee,thevariablenetcostissmall;seeFigure26.Onaverage,thevariablenet

costsfordistrictheatproductionmakeuplessthanhalf,43%,ofthedistrictheatingpricesenergy

fee.However,

the

spread

is

very

great,

and

the

share

varies

between

14%

and

98%.

In

all

cases,

though,thevariablecostsarelessthantheenergyfee.


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23

Inconnectionwiththedesignofrates,itisgenerallyrecommendedthattherateshouldbecost

correct,i.e.thattheratescompositionshouldcorrespondtothatofthecostside.Thiscouldbe

takentomeanthatthefeesvariablepartshouldcompriseaboutthesameshareofthetotalpriceas

thevariablecostsshareofthetotalcosts.Ourintroductorystudyshowsthatsuchisnotthecase.If

costcorrectnessaccordingtothisdefinitionwerestrivenfor,theenergyfeewouldonaveragebe

half

the

level

they

are

today,

and

fixed

rate

parts

or

parts

related

to

power

consumption

would

be

correspondinglyhigher.Thisconclusionisunderlinedevenmoreifyoutakeintoaccountthatthe

capacityrelatedpartoftheprice,whichonecouldassumeshouldreflectthecapacitydimensionin

realityisdirectlycoupledtotheyearlyenergyuseinmostcompaniesdistrictheatingprice.

0% 20% 40% 60% 80% 100%

Stockholm

Gteborg

Malm

Uppsala

Linkping

Vsters

rebro

Norrkping

HelsingborgJnkping

Huddinge

Borlnge

stersund

Ume

Lysekil

Figure26Thevariablenetcostsasashareofthedistrictheatingpricesenergyfeefor15studied

municipalities(notethatthecostsbuildonestimatesmadewithintheproject)

Therearehoweverdifferentwaysofpresentingthevariablecost.Intheanalysispresentedabove,

theaveragevariablecostshavebeencalculatedandcomparedtotheenergyfee.Ifinsteadthe

marginalcostsareusedasvariablecoststheconclusionmightbedifferent.Thisispresentedin

chapter2.5.

2.5 Variablecosts

for

district

heating

based

on

marginal

costs

Intheabovereasoningwehavestartedfromthevariableaveragecostofdistrictheatproduction.If

oneinsteadpresupposesthatitistheshorttermmarginalcostwhichshouldreflectthecostsand

providethebasisforpricesetting,thesituationisdifferent.Marginalcostsareoftenusedasabasis

forpricesetting,astheygiveinformationonwhatitcoststoproducetheutilitythatcustomersare

abouttouseornotuse.

Thereisasignificantdifferencebetweentheaveragedistrictheatingproductionandtheenergy

weightedmarginalproduction.(Byenergyweightedwerefertoamarginalproductionresultingofan

addeddemandwiththesameseasonalprofileasthetotaldistrictheatingproduction.)The

differencebetweenaverageandmarginaldistrictheatingproductionisillustratedbyFigure27.


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24

Average

Oil fired heating plant: 5 %

Heat pump: 40 %

Bio fueled CHP: 55 %

Energy weighted marginal

Oil fired heating plant: 30 %

Heat pump: 40 %

Bio fueled CHP: 30 %

Oil fired heating plant

Heat pump

Bio fueled CHP

Figure27AtypicalSwedishdistrictheatingsystemheatproductionmix

Inarelatedstudywehave,asmentionedabove,alsoanalysedthemarginalcostsfordistrictheating

production.Thisworkisbasedonpreliminaryyearlystatisticsfortheyears2006and2007fromthe

districtheatingtradeorganisationSwedishDistrictHeatingAssociation.Thisstatisticspresentsthe

useoffuelsfordistrictheatingandforelectricityproductionincombinedheatandpowerproduction

(CHP)foralldistrictheatingsystemsinSweden.Fromthisandadditionalinformation,e.g.typical

variablecostsforallheatproductionalternatives(primarilybasedonpricestatisticsfromthe

SwedishEnergyAgency),wehavedevelopedadatabasemodelwhichmakesitpossibleto,among

otherthings,identifythemarginaldistrictheatingproductionsourcesystembysystem,andmonth

bymonth.

Theresultsfortheseapproximately200districtheatingsystemscouldthenbeaddedtogether,

therebypresentingtheenergyweightedmixofSwedishmarginaldistrictheatingproduction.Since

theSwedishmarginaldistrictheatingproductionismadeupfrommonthlymarginalproduction

systembysystem,itconsistofamixofalargenumberofproductionalternatives.

Thedistrictheatingmarginalproductionmixhasbeencalculatedfortheyears2006and2007,Figure

28.


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25

0,00

0,05

0,10

0,15

0,20

0,25

Was

teinc

ineratio

n

Ind.w

astehe

at

Exter

nalhea

t

Biof

uelCH

P

PeatCH

P

CoalCH

P

Biofuel

Peat

Heat

pump

Pelle

tsCHP

Natur

alga

sCHP

Pellets

OilCH

P

Natur

algas

Coal

Oil

Elec

tricity

Share

2006

2007

Figure28DistrictheatinginSwedenthemarginalproductionmixfortheyears2006and2007

Thefigureaboveclearlyshows,asmentionedabove,thatthemarginaldistrictheatingproductionis

madeupfromaverylargenumberofproductionalternatives.Thisispartlyaresultofthefactthat

differentproductionalternativesmakeupthemarginalproductionduringdifferentseasons,and

partlythatthedifferentdistrictheatingsystemsareverydifferentlybuiltupwhenitcomestotheir

productionmix.

The

figure

also

shows

that

there

are

differences

in

the

composition

of

the

marginal

productionbetweendifferentyears.Thereasonforthisismainlythatthepricesofdifferentenergy

carriersvarybetweentheyears,therebychangingthemeritorderbetweentheproduction

alternatives.Newproductionunitsarealsointroduced,whichinfluencestheresultingproduction

mix.

Therearethreeproductionalternativeswhichplayadominatingroleinthetotalmarginal

productionmixofdistrictheatingduringthetwoanalysedyears.Theyareheatingplantsfiredbyfuel

oilandbiomass,bothrefinedbiomass(pelletsinthefigureabove)andunrefinedbiomass(bio

fuelinthefigureabove).Togethertheyaccountforapproximately50%ofthemarginaldistrict

heatingproduction.

Thecalculation

method

also

facilitates

the

identification

of

aweighted

average

marginal

district

heatingproductioncost,basedontheresultsforalldistrictheatingsystems.Assumingageneral

leveloftotaldistributionlossof9%thisproductioncosthasthenbeenconvertedtoamarginalheat

costforthefinalconsumer.Thiscostiscomparabletothenetvariablecostpresentedinsection3

above.Therearehowevertwosignificantdifferences.Thefirstdifferenceisthatthemarginalheat

costconsistsof,asthenameindicates,amarginalcost,whereasthecostpresentedinsection3isan

averagecost.TheseconddifferenceisthatthemarginalcostisbasedonallSwedishdistrictheating

systems,whereasthecostpresentedinsection3isbasedondatafor15districtheatingsystem.

ThetypicalenergyweightedmarginalcostforSwedishdistrictheatingis400SEK/MWhfortheyear

2006and340SEK/MWhfor2007.Anaveragevalueforthosetwoyearswouldthenbe370

SEK/MWh.Ifweassumethattheaverageenergyfeeidentifiedinsection2,345SEK/MWh,is

representativefor

all

Swedish

district

heating

systems

this

energy

fee

would

correspond

rather

well


26/52

26

tothemarginalcost.Thiscouldbeseenasanindicationthatthedistrictheatingpriceiscostcorrect

andthereforewelldesignedinthisrespect.

However,ifyoulabelthecapacitypriceasapartofthevariableincome(asdiscussedinchapter2)

theenergypartofthepricewouldbesignificantlyhigherthanthemarginalcostincome490

SEK/MWhcomparedtocost370SEK/MWh.

Itisimportanttobearinmindthatthenumbersarecalculatedusingdifferentselectionsofdistrict

heatingsystemsandyears.ThemarginalcostscorrespondtoallSwedishsystemsandtheyears2006

and2007.Theenergyfeehowever,correspondsto15districtheatingsystems,predominantlylarge

systems,andtheyear2006.Theenergyfeewasprobablyslightlyhigherin2007(theaveragedistrict

heatingpriceincreasedby1%from2006to2007).Sincetheidentifiedenergyfeetoagreatextentis

basedonlargedistrictheatingsystemsatypicalenergyfeeforallSwedishsystemsmaybehigher(if

weassumethatdistrictheatingpricesarehigherinsmallsystemsandthattheenergyfeeshareof

thedistrictheatingpriceisconstant).Boththesefactorswouldresultinahigherenergyfee.

Basedonthisdiscussionandconsideringtheprecisionoftheanalysisitisprobablyfairtorepeatthe

conclusionpresentedabove;theenergyfeecorrespondsratherwelltothemarginalcostandthat

thiscould

be

seen

as

an

indication

that

the

typical

district

heating

price

is

reasonable

cost

correct

and

thereforewelldesignedinthisrespect.However,sincethecapacitypartofthepriceisoftendirectly

coupledtotheyearlyenergyconsumption,andthereforecouldbeseenasavariableincome,the

variableincomeisgenerallyhighinrelationtothevariablemarginalcosts.Itwouldthereforebe

positiveifthecapacitypricewouldbemoredirectlycoupledtotheactualcapacitydemand.

Withthemarginalcostasapointofdepartureforthepricesetting,thedistrictheatingprices

compositionmaynotgowrongatallandthecustomermightgetcorrectinformationaboutthecost

structure.Inthiscasethesuboptimizationsdiscussedabovedonotarise.However,itisimportantto

beawareofthefactthatthedifferencesbetweenthedistrictheatingsystemsarelarge,both

regardingthemarginalproductioncostandtheenergyfee.Therefore,althoughtheconclusionatthe

nationallevelisthattheenergyfeecorrespondswelltothemarginalcost,theremaybemany

districtheating

systems

where

this

is

not

true.

It

could

go

both

ways

either

that

the

energy

fee

is

to

largecomparedtothemarginalcost,ortheotherwayaround.

Intheanalysispresentedabovewehaveusedtheyearlyaverageofthemarginalcostfordistrict

heatingproduction.Therearehowever,significantdifferencesinmarginalcostfordistrictheat

productionovertheyear.Thisisdiscussedinchapter6below.

2.6 MarginalcostsduringdifferentseasonsSincedistrictheatingproductionistypicallymadeupfromamixofbaseload,mediumloadandpeak

loadproductiontherearesignificantdifferencesinmarginalcostfordistrictheatingproductionover

theyear.

The

base

load

is

characterised

by

large

investment

costs

and

low

variable

costs

(e.g.

waste

incineration),whereaspeakloadproductionischaracterisedbylowinvestmentcostsandhigh

variablecosts(e.g.oilfiredheatingplants).

Bymeansofthemethodwhichisusedforcalculatingthemarginalcostfordistrictheating

production(chapter2.5)itisalsopossibletoidentifythemarginalproductionmonthbymonth.This

alsomakesitpossibletoidentifythemarginalcostmonthbymonthforthetotalSwedishdistrict

heatingproduction.TheresultsareshowninFigure29.

Inthecalculationswehaveassumedzerocostforheatfromwasteincinerationandindustrialwaste

heat.Ifcostsrelatedtoactualcontractswouldbeappliedthesummermarginalcostwouldbe

higher.


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27

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Jan Feb Mar Apr Maj Jun Jul Aug Sep Okt Nov Dec

Average marginal production cost: 360 SEK/MWh

Winter

Autumn/spring

Summer

Figure29CostoftheSwedishmarginaldistrictheatingproductionmonthbymonthfortheyear2006

Thefigureconfirmsthegreatseasonaldifferencesindistrictheatingmarginalproductioncost.Ifwe

assumethatthemarginalcostisthebestillustrationofthevariablecostsandinordertohaveacost

correctdistrictheatingprice,thisgreatdifferenceshouldbeexpressedthroughthedistrictheating

price.Ifnot,thereisforexampleariskthattoolittleheatisconservedduringwintertimeandtoo

muchheatisconservedduringthesummer.

Seasonadjustedenergyfeesareappliedin60%ofthe15studiedmunicipalities(chapter2).Ifwe

assumethatthese15companiesarerepresentativeforallSwedishdistrictheatingcompaniesand

thatthesituationisthesametodayasin2006almosthalfthecompaniesuseadistrictheatingprice

withoutanyseasonaldifferentiation.

Inthefigureabovethreeseasonsareindicated.Ofthecompaniesthatuseseasonaldistrictheating

pricesnocompanyapplymorethantwoseasons.Thepricedifferencesbetweendifferentseasons

are,withfewexceptions,small.

Inordertocreatemorecostcorrectdistrictheatingpricesmorecompaniesoughttointroduce

seasonal

prices,

maybe

with

more

than

two

seasons

and

with

seasonal

price

levels

related

to

actual

marginalcosts.Towhatextentthiswouldinpracticeinfluencetheheatcustomersbehaviourisno

easytoforesee.Atthisstagewedonoteventrytospeculateaboutthis.

2.7 DiscussionandconclusionsSwedishdistrictheatingpricestypicallyincludealargevariableshare,theenergyfee.Astudyofthe

districtheatingpricefor15Swedishdistrictheatingcompaniesshowsanaverageenergyfeeof345

SEK/MWh,or66%ofthetotalprice.Theaveragevariableproductioncostsareconsiderablylower

thanthat,lessthanhalftheleveloftheenergyfee.

However,forthepurposeofdesigningcostcorrecttariffstheshorttermmarginalcostisamore

relevantvaluationofvariablecoststhantheaveragevariablecost.Marginalcostsareoftenusedasa

basisfor

price

setting,

as

they

give

information

on

what

it

costs

to

produce

the

utility

that

customers

areabouttouseornotuse.Themarginalcostsareconsiderablyhigherthantheaveragecosts,since


28/52

28

theyreflectthecostforthemostexpensiveproductionalternativethatismadeuseoftosatisfythe

demand.

Therearelargevariationsinmarginalcostsforthedistrictheatingproductionindifferentdistrict

heatingsystems,duetothedifferencesinproductionmix.However,asanationalaveragethisstudy

showsthatthemarginalcostsareofthesamemagnitudeastheenergyfeeinthedistrictheating

price.This

means

that

the

price

is

generally

cost

correct

in

this

respect.

However,sincethecapacitypartofthepriceisoftendirectlycoupledtotheenergyconsumption,

andthereforecouldbeseenasavariableincome,thevariableincomeisgenerallyhighinrelationto

thevariablemarginalcosts.Itwouldthereforebepositiveifthecapacitypricewouldbemore

directlycoupledtotheactualcapacitydemand.

Inouranalysiswehavenotincludedanyvariablecostsrelatedtothedistributionofdistrictheating.

Theassumptionhasbeenthatthedistributionscostsdonotchangewhentheenergydemand

changesmarginally.Thisisasimplification,butwedonotthinkthatitaffectstheresultsinany

significantway.

Thelargevariationsinbothvariableprice(energyfee)andvariablecost(marginalcostofproduction)

betweendifferent

district

heating

systems

indicate

that,

although

the

price

appears

to

be

cost

correctonatotalnationallevel,therearemanysystemswithpricesthatarenotcostcorrect.This

goesbothways,i.e.bothsystemswithtoolargevariableshareofthetotalpriceandsystemswith

toosmallvariableprice.

Asmentionedabovethedistrictheatingpriceisdesignedwithmoregoalsthantobecostcorrect.

Thepriceshoulde.g.besimpletounderstand.Thecustomersalsooftendesiresforalargepartof

thedistrictheatingpricetobevariableandguidedbyhowmuchenergyisused.Thereasonisthat

thecustomerswanttobeabletoinfluencetheircoststhroughtheirbehaviour.Thereforewe

understandthattheremaybequiterationalreasonsforchoosingadistrictheatingpricethatmay

lackincostcorrectness.However,westilldiscussthisissue,sincewefeelthatitisimportantto

reflecton

this

and

make

aconscious

choice

on

how

to

design

the

price

structure.

Althoughthemarginalcostsasanationalaveragecorrespondswelltotheleveloftheenergyfeeof

thedistrictheatingprice,thestudyindicatesthatmarginalcoststypicallyvariesalotbetween

differentseasons.Themarginalcostfordistrictheatingproductioncouldoftenbefivetimeshigher

duringwinterthanduringthesummer.Thestudyatthesametimeindicatesthatmanydistrict

heatingcompaniesdonotdifferentiatethevariablepricebetweenseasonsatall,andthecompanies

thatdoso,oftenonlyapplyrelativelysmallpricedifferencesbetweenseasons.Iftheambitionisto

haveacostcorrectpriceinthisrespect,largerpricedifferencesbetweenseasonswouldgenerallybe

encouraged.

Whatcouldthenbetheconsequencesifadistrictheatingpricewhichdoesnotcorrectlyreflectthe

true

variable

costs?

Here

we

discuss

a

case

where

the

district

heating

prices

energy

related

part

constitutesaclearlylargershareofthepricethanthevariablecosts(marginalcost)sharejustifies.

Asmentionedabovetherecouldjustaswellbetheoppositesituation,thatthevariableprice

elementistoosmall.Forthatsituationthediscussionbelowcouldgenerallybeseentheotherway

around.

Asituationwherethevariablepartsinthepricearepresentedasalargershareofthedistrictheating

costthantheyactuallyconstituteleadsto,orrisksleadingto,anumberofphenomena. Belowwe

listsomeofthese:

- Greaterenergysavingthanwhatwouldbeeconomicallyoptimal

- Heatpumpscouldbeintroducedindistrictheatedbuildingstodecreasetheuseofdistrict

heat

energy


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29

- Thedistrictheatingsenergydeliveriesdecrease,whichamongotherthingsreducestheheat

basisforresourceconservingcombinedpowerandheating

- Thedistrictheatingproducersriskdecreasingtheirownmarket

- Thespecificenergyfeemustberaisedtocoverthecosts

- Ifthedistrictheatingispresentedasifconsistinglargelyofvariouskindsofwasteenergy,it

canbe

difficult

to

explain

high

energy

fees

ThedistrictheatinginSwedenistoanincreasingdegreebaseduponrenewableenergyandwaste

heatofdiversekinds.Ifthedistrictheatingpriceconveystheinformationthattheenergybeing

deliveredisveryvaluable,theuserswillstrivetodecreasetheuseofdistrictheatingenergy.This

mayleadtointroductionofsavingsmeasuresthatreducetheheatingdemandmorethanwhat

wouldbeeconomicallyoptimal.Somethinkthatthisisalwaysadesirableeffectforreasonsofthe

environmentandclimate,andthatahighenergyfeeshouldthereforebestrivenfor.Buttheproblem

isthatmostenergyusershavealimitedbudgetandalimitedinterestinenergysavingandenergy

efficiency.Woulditperhapsbebetterthattheinterestandtheeconomicresourcesforsaving/

efficiencyare

focused

on

other

areas

where

the

utility

in

terms

of

environment

and

climate

may

be

greater,suchastransportand/orhouseholdelectricity?

Exaggeratedheatsavingandpartialconversiontoheatpumpsdecreasestheheatmarketforthe

districtheatingcompanies.Ifadistrictheatingcompanytakesoutalargepartoftheheatingpriceas

anenergyfee,itthusriskseventuallygettingadistrictheatingmarketthatdeclinesnotbecause

thetotaldistrictheatingpricelackscompetitiveness,butasaresultofthefeehavinganillogical

composition.

Alargelyvariabledistrictheatingpricegivesthecustomersgreatpossibilitiesofinfluencingtheir

costsbysavingorpartiallyconvertingawaytheuseofdistrictheating.Ifthedistrictheating

companyscostsinrealityarenotvariabletothesameextent,theresultisthatonemustgradually

raise

the

specific

district

heating

price

to

cover

the

costs

and

be

able

to

retain

ones

profit.

This

can

rebounduponthecustomersandonecanexpectdisappointmentamongthosecustomerswhohave

carriedoutsavingsmeasurestodecreasetheirenergycosts,andwherethecostreductiondoesnot

proveasbigasexpectedsincethespecificheatingpricerises.

Inawiderperspective,adistrictheatingpricewithadisproportionatelylargeenergyfeebasiscan

alsoleadtonegativeeffectsonthetotalresourceusage,aswellasontheenvironmentandclimate.

Ifahighenergyfeeleadstodecreaseddistrictheatingdeliveries,theheatbasisisreducedfor

resourceconservingcombinedpowerandheatproduction.Ifthedecreaseddistrictheating

deliveriesarearesultofpartialconversiontoheatpumps,theNorthEuropeanelectricitybalanceis

weakeneddoublytheelectricityproductionincombinedpowerandheatplantsdecreases,andthe

electricityuseincreasesduetomoreheatpumps.Theconsequentadditionalneedforelectricity

productionwill

be

covered

partly

by

condensing

power

plants,

which

in

environmental

terms

are

clearlyworsethancombinedpowerandheatingplants.

Naturally,wearenotarguinghereforwastageofenergy.Weonlywishtodrawattentiontothefact

thattheurgencyofdecreasingheatusagedependsonhowtheheatisproduced.Different

investigations(e.g.Byggforskningsrdet1996)haveshownthattheoptimalenergysavinglevelis

clearlylowerforbuildingsthatareheatedwithdistrictheating,incomparisontobuildingswithoil

firingorelectricalheating.

Asalreadymentionedintheintroductorysection,certaindistrictheatingcompaniesmaintainthat

thedominantpartoftheirdistrictheatproductionconsistsofvariouskindsofwasteheat.Asa

customer,onecanthenthinkitstrangethatthiswasteheatshouldhaveahighvariableprice.The

conceptof

waste

heat

rather

suggests

low

variable

costs.

In

this

perspective

it

seems

more

reasonabletohavealowshareofvariablepriceandarelativelyhighshareoffixedprice.The


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30

argumentcanthenbethatthewasteheatischeap,butthatcostlyinvestmentshavebeenmadeto

enabletheresourceconservingutilisationofthiswasteheat(whichisprobablytrue).

2.8 FurtherworkAfterthisintroductorystudyweexpecttocontinuetheanalysisofthedistrictheatingprices

composition

and

the

consequences

that

different

alternatives

may

have.

Until

now,

the

work

has

beendirectedmainlytowardSwedishconditions.Inthefurtherwork,otherNordiccountrieswillalso

bestudied.Itisthennaturallyimportanttotakeaccountofthedifferingconditionsand

requirementsinthosecountries.

Duringthefurtherworkwemayseektocollaboratewiththedistrictheatingcompaniestrade

organizationsintheNordiccountries.Itmaythenalsoberelevanttocontactindividualdistrict

heatingcompanies.Obtainingthedistrictheatingindustrysviewofthecurrentissuesisvery

valuable.Howareforexamplethetypicaldistrictheatingtariffsdesignedandwhy?Inaddition,we

arehopefulthatthetradeorganizationswillbeabletocontributeinformationandbasic

documentation.InitialcontactshavebeenmadewiththeSwedishDistrictHeatingAssociation.

Itwouldalsobeofinteresttocomparethepricesettingofdistrictheatingwiththatofotherenergy

carriers.Primarily

other

grid

distributed

kinds

of

energy

are

relevant,

such

as

electricity

and

natural

gas.Inconnectionwiththis,itissuitabletodevelopthediscussionofaveragecostandmarginalcost

further,andhowtheseshouldbeutilisedasabasisforratedesign.


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31

3 PriceofdistrictheatinginFinlandTheinformationisbasedonFinnishdistrictheatingstatisticsfrom2007(Kaukolmptilasto2007).In

2007districtheatingsoldtocustomerswas 30100GWh. Thearithmeticaveragepriceofdistrict

heatingwas50,7/MWhandtheaveragepriceweightedbyannualsalesofthedistrictheating

companieswas

45,6

/MWh.

The

average

energy

fee

of

all

district

heating

companies

was

46,8

/MWhandtheweightedaveragewas39,9/MWh.Theenergyfeevaried27102/MWh.

Thetariffstructuresvarybetweenthecompaniesandbetweendifferentusergroups.Generally

therearetwopartsintheFinnishtariffs;afixedfeethatdependsonthecontractedcapacityofthe

costumerandavariablefeethatdependsontheactualenergyuse.Thelargersharethevariablefee

formsofthetotalcosts,thelargerthecustomersincentivesaretoreducetheenergyuse.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

I II III IV V

/MWh

fixed fee variable fee

Figure31CompositionoftariffesinFinland.Weightedaveragefeesaccordingtocustomersize(IV)

InFigure31customersaredividedintofiveclassesIVbasedontheiraverageheatdemand.The

classesarepresentedinTable1.

Table31.

Customer

classes

used

in

Figure

31

Heat demand, MWh/a Volume, m3

I 20 500

II 100 2000

III 225 5000

IV 450 10000

V 1125 250000


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32

Figure32showsthecompositionofthedistrictheatpriceforsmallscaleblockhouseisinselected

districtheating

companies.

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

comp

any1

comp

any2

comp

any3

comp

any4

comp

any5

comp

any6

comp

any7

comp

any8

comp

any9

comp

any10

fixed feevariable fee

Figure32 Compositionofdistrictheattariffsforsmallscaleblockhouseinselectedcompanies.Average

heatdemandofasmallscaleblockhouseis225MWh/a.

Companies1through4produceonlyheatwhilecompanies5through10haveCHPplants.Therange

ofthevariablefeesshareoftotalcustomercostswas6792,5%.Theweightedaverageforvariable

feesharesisabout76%forcompanieswithCHPplantsandabout81%forheatonlycompanies.

InFigure33thereisasimilarcomparisonofthetariffcompositions,butnowforhouseholdswitha

heatdemand20MWh/a.Thecompaniesarethesameasbefore.


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33

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

compa

ny1

compa

ny2

compa

ny3

compa

ny4

compa

ny5

compa

ny6

compa

ny7

compa

ny8

compa

ny9

compa

ny10

fixed fee

variable fee

Figure33. CompositionofDHtariffsforhouseholdsinselectedcompanies.Averageheatdemandofa

householdis20MWh/a.

Ifwecomparedtheresultswiththoseforblockhouseswecannoticethattheshareofthefixedfee

isgreaterforsmallconsumers(households)thanforlargerconsumers(blockhouses).Therangeof

thevariablefeesshareoftotalcustomercostswasfrom52%to90%.CompanieswithCHPplants

hasthe

weighted

average

of

the

variable

fee

shares

is

around

71

%

and

around

76

%

for

heat

only

companies.


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34

4 PriceofdistrictheatineightNorwegiancompaniesDistrictheatingisfarfromascommoninNorwayasitisintheotherNordiccountries.Figure41

showsthedevelopmentininvestmentindistrictheatfacilitiesinNorway,demonstratingthatthe

balancebetweeninvestmentsinproductionfacilitiesanddistributionfacilitiesaremoreorless

equal,with

some

yearly

variations.

0

100

200

300

400

500

600

700

800

900

1000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

MNOK AndreinvesteringerInvesteringer idistribusjonsanleggInvesteringer iproduksjonsanlegg

Figure41HistoricinvestmentindistrictheatinNorway

Waste

is

the

most

common

energy

carrier

used

for

district

heat;

biomass

and

electricity

are

also

frequentlyused.

AsshowninFel!Hittarintereferensklla.,theaveragepriceofdistrictheatinNorwaytendsto

followtheelectricitypriceclosely.Asmentionedearlier,thedistrictheatingpricehastobelower

thantheelectricityprice,butapartfromthatthedistrictheatingprovidersarefreetosettheprice.

4.1 SurveyresultsAsurveyhasbeenexecutedtolookcloserattheconnectionbetweencostofdistrictheating

productionanddistributionandthepriceofdistrictheating.Thesurveylooksateightdistrictheating

companies.ThecompaniesinstalledcapacityofdifferenttypesofboilersisdepictedinFigure42.

Thetotalinstalledcapacityfortheeightcompaniesvariesfrom10MWto781MW.


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35

0%10%20%30%40%50%60%70%80%90%

100 %

Installed

effect

Electricity

OilandgasWasteheatHeatpumpBiomass

Waste

Figure42Installedcapacity

Tocalculatetheactualsizeofthebaseload,thetimeofuseisassumedtobe1750hoursandthe

baseloadisassumedtorunonfulleffectconstantly.Thesearecoarsesimplifications,butgiveagood

enoughestimateforthisuse.TheresultsofthiscalculationareshowninFigure43.Company7is

mostlikelyinaninitializingphase,whichiswhyitseemstohavenopeakloadyet. Fortheothers,

thebaseloadvariesbetween20and40%.

0%10%20%30%40%50%60%70%80%90%

100 %

Lowinvestment,highenergypriceLow

investment,

lowenergypriceMediuminvestment,mediumenergypriceHighinvestment,lowenergyprice

Figure43Useofboilersfordistrictheatingin%oftotalenergyproduction

Thetariff

structures

vary

between

the

companies

and

between

different

user

groups.

There

are

threepartsofthetariffs;theannualfee,thefixedfeewhichdependsonthemaximumcapacitythat

thecostumerrequiresandthevariablefeewhichdependsontheactualenergyuse.Thelargerthe

variablepartsofthetariff,thelargerarethecustomersincentivestoreducetheenergyuse. But

thatdoesnotreflecttheactualcostsforthedistrictheatingcompanies.Figure44showshowthe

districtheatingpriceforhouseholdsiscomposed.


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36

0%

10%

20%

30%

40%

50%

60%70

%

80%

90%

100 % Household

Variablefee

Fixedfee

Annualfee

Figure44Constructionoftariffhouseholdthatrequires8,5kWcapacityand15MWhheatpryear(based

onEnova(2004):EnkNormtall)Figure45showsthecompositionofdistrictheatingforanofficebuilding.

0%

10%

20%

30%

40%

50%60

%

70%

80%

90%

100 %Office

Variable fee

Fixedfee

Annualfee

Figure45Constructionoftariffs officebuildingthatrequires138kWcapacityand128MWhheatpryear

(basedonEnova(2004):EnkNormtall)Whydothecompositionsofthepricevarysomuch?Onehypothesiscouldbethatcompaniesthat

areinaninitialphasehaverecentlymadebiginvestmentsandwillthereforehavealargerfixedpart

oftheirprice.Butanalysesshownoconnectionbetweenageofthecompanyandcompositionofthe

tariffs.

Anotherhypothesiscouldbethatdistrictheatingcompaniesthathaveinvestedinalargeproportion

ofbaseloadboilerswillhavealargerpartoftheirpriceasafixedfee,becausebaseloadboilershave

highinvestmentcostsandlowerenergycost.Butthisalsoturnsouttobeuntruefortheeight

companiesinthissurvey.


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37

4.2 CasestudyOneofthecompaniesintheNorwegiansurveyhasgraciouslygivenusdetaileddataoftheirenergy

useindistrictheatingproduction,asshowninFigure46.Thiscompanyusesatotalofeightdifferent

energycarriersintheirproduction,locatedinseveralplants.Wasteisbyfarthemostusedenergy

carrier.Itisusedeverymonththroughouttheyear.Landfillgasistheleastusedenergycarrier.The

electricityuse

is

highest

in

the

months

of

January

and

February,

indicating

that

the

electricity

price

wasfairlylowinthisperiod.

GWh

Oil

Butane(LPG)

Naturalgas(LNG)

Electricity

Biomass

Heatpump

Landfillgas

Waste

Figure46Useofenergycarriers

AsseeninFigure47,thelowcostenergycarriersdominatetheuseinthesummertime.Themore

expensiveenergy

carriers

constitute

alarger

part

of

the

energy

use

in

the

winter.

Although

this

is

expected,theuseofbaseloadenergycarriersseemsunusuallylowinthebeginningoftheyear.

Theremightbeseveralreasonsforthis;onepossiblecausemightbethatoneofthebaseload

incineratorsistakenoutofusebecauseofmaintenance.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100 %

Jan

Feb

Mar

April

May

June

July

Aug

Sept

Oct

Nov

Dec

Partoftotalenerg

yinput

Highcost

Mediumcost

Lowcost

Figure47Useofdifferentcostenergycarriers


38/52

38

Ofalltheenergycarriersusedbythiscompany,oilwasthemostexpensiveeverymonth.Itcan

thereforebeassumedthateventhoughoilisusedeverymonth,aslittleoilaspossibleisused. But

whentherearenootherenergycarrierstouse,oilisaddedtothemix.Sinceoilisusedthroughout

theyear,itislikelythatifanextracostumerweretobeconnectedtothedistrictheatingsystem,

moreoilwouldbeusedtoproducetheextraheatthatwouldbeneeded.ThekWhcostfortheextra

costumer

is

shown

in

Figure

4

8.

Jan Feb Mar April May June July Aug Sep Oct Nov Dec

/kWh

CostofmarginalkWh

Figure48CostperkWhformarginalproduction


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39

5 CompetitivenessofdistrictheatinginthefutureadiscussionbasedonSwedishconditions

Althoughdistrictheatingisvaluedasanenvironmentallyfriendlywayofsupplyingheating,other

solutionsarecompetingforthesamemarket.InalltheNordiccountries,themainentrantsseemto

beheatpumpsandlocalbiomassfiredproduction(i.e.pelletstoves).Solarheatingisalsoattracting

increasedinterest.Energyefficiencyishighonthepoliticalagenda,andreduceddemandforheat

mayinfluencethedistrictheatingbusinessseverelyinthelongterm.Alltheseaspectsarediscussed

inthefollowingchapters.

5.1 Rivalingheatsolutions,andconsequencesforpricingDistrictheatingisoneofthealternativesthatareavailableonthemarketforheatingofbuildingsand

fortapwater.OtherimportantalternativesontheNordicheatingmarketsareoilfiredboiler,electric

heating(bothdirectradiatorsandwithwaterdistributedheating),naturalgasfiredboilerandheat

pumps(groundsource,outdoorairorexhaustair).

Forseveral

decades

district

heating

has

been

acompetitive

heating

alternative

in

at

least

three

of

the

fourNordiccountriescoveredbytheNEPproject.Norwayisinthisrespecttheexception.Mainlydue

toanabundanceofhydropowerandlowelectricitypricestheNorwegianheatingmarketis

dominatedbyelectricalheating.Intherestofthecountrieshowever,districtheatinghasbeenthe

dominatingheatingalternativeindenselypopulatedareas,especiallyformultifamilyhousesandfor

publicandcommercialbuildings.

Districtheatinghasmainlytakenmarketsharesfromheatingbasedonindividualoilboilers.The

competitivenessofdistrictheatingcanbeexplainedbyanumberoffactors,e.g.cogeneration

providinghightotalefficiency,thepossibilitytoutilizecheapbutcomplexfuelsprovidinglow

variablecosts,andaflexibleproductionthatfacilitatesrapidadaptationtochangingfuelcosts.

Inmanyrespectsdistrictheatingisstillacompetitiveheatingalternative,butcompetitionfromother

alternativesisgettingincreasinglytough.AtleastinSwedenheatpumpsandtosomeextentpellets

boilersarethemostcompetitivealternatives.

DistrictheatingistreateddifferentlyintheNordiccountriesfromaregulatingpointofview.In

NorwayandinDenmarkaconnectiontodistrictheatingismandatoryincertainspecifiedareas,

whereasthechoiceisfreeinFinlandandSweden.Thelegislationalsodiffersinotherareas.

InthischapterweconcentrateontheconditionsapplicableinSweden.Thismeansthatthe

competitionbetweendifferentenergycarriersandenergyconversionalternativesismainlydecided

bytheeconomicconsiderationsandnotregulationoftheheatingmarket.

Inthisintroductorystudywefocusondistrictheating,andanalyzethecompetitionfromother

heatingalternatives.

We

have

identified

four

principal

cases

for

aspecific

building,

seen

from

the

districtheatingperspective:

1. Existingdistrictheating,conversionofthetotalheatingdemandtoanotherenergycarrier

andanotherenergyconversionalternative

2. Existingdistrictheating,conversionofafractionoftheheatingdemandtoanotherenergy

carrierandanotherenergyconversionalternative

3. Presentlyheatedbyanotherenergycarrierandanotherenergyconversionalternative,

conversiontodistrictheating

4. Newbuilding,allalternativesstartingfromscratch,districtheatingisoneoftheoptions.

In

chapter

1.4

we

discuss

the

effects

of

increased

energy

efficiency

on

the

demand

for

district

heating.Thereforethisissueisnotconsideredinthischapter.


40/52

40

Themostimportantfactordecidingthecompetitionbetweentheheatingalternativesisthetotal

costforheating,presentandfuture.Otherfactorsinfluencingthecompetitivenesscouldbehow

easyordifficultoperationoftheheatingalternativeis,howspaceconsumingtheequipmentis,and

howthealternativeisgenerallyviewedbytheuser,e.g.environmentalaspects,theriskofbeingin

thehandsofonesupplier(districtheating).

Onefactor

that

also

influences

the

competition

between

district

heating

and

other

heating

alternativesishowthedistrictheatingpriceisdesigned,e.g.themixbetweenvariableandfixed

parts,andpossiblepricedifferencesbetweenseasons.Thepricestructureisespeciallyimportantfor

thecompetitivenessofdistrictheatinginbuildingsthatarealreadyconnectedtodistrictheating.

Inthesectionsbelowwebrieflydiscussthecompetitionbetweendistrictheatingandotherheating

alternativesfordifferentprincipalcases,asdescribedabove.

5.2 Existingdistrictheating,conversionofthetotalheatingdemandInbuildingsalreadyconnectedtodistrictheating,theeconomiccompetitionbetweentheexisting

heatingandotherheatingalternativesisdecidedbythecomparisonofthetotaldistrictheating

priceandthetotalcostincludinginvestmentsfortheotheralternatives.Inthiscase,thedistrict

heatingprice

structure

is

of

limited

importance,

i.e.

the

balance

between

variable

and

fixed

price

elementsanddifferentiatedvariablepriceduringdifferentseasonsisoflimitedornoimportance.

Itisnotatallcommontoconvertfromdistrictheatingtoanotherheatingalternative.Ifyouget

districtheatingyoukeepit.However,inSwedenwehaverecentlyseenexamplesofdistrictheating

customerswhoaredisappointedwiththedistrictheatingprice,andwhohavetakenthedrasticstep

toconverttoanotherheatingalternative,e.g.groundheatpump.

Heatpumpsandpelletsboilerareexamplesofheatingalternativeswhichinmanycasesare

economicallycompetitivecomparedtodistrictheating.Thecompetitivenessofdistrictheating

dependsonwhichdistrictheatingsystemwelookatandhowhighthelocalcostsareforthe

alternatives,e.g.fordrillingholesforagroundheatpump.InSweden,thedistrictheatingpricevaries

considerablybetween

different

systems.

As

presented

in

areport

from

Swedish

Energy

Markets

Inspectorate,themostexpensivedistrictheatingsupplierhasapricethatistwiceashighasthe

supplierwiththelowestprice9.

Inthesamereportafigureshowingthetotalcostforsupplyingamultifamilyhousewithheatingis

presented.Thecostfortheheatpumpalternativeisillustratedbyalowandahighcost,whilethe

costforthedistrictheatingalternativedependsonthepriceindifferentsystems.

9Energimarknadsinspektionen,UppvrmningiSverige2008,Eskilstuna,June2008


41/52

41

Figure51Costdifferencebetweendistrictheatingandgroundheatpumpforamultifamilyhouse(193

MWh/yr)[SEK/yr].

(Onthexaxisdifferentdistrictheatingsystemsarepresented.Thetwocurvesindicatehighandlow

costfortheheatpumpalternative.)

A

negative

number

in

the

figure

indicates

that

district

heating

is

less

expensive

compared

to

a

heat

pump(leftpartofthefigure),whileapositivenumberindicatesthatdistrictheatingismore

expensivethantheheatpumpalternative(rightpartofthefigure).Thefigureshowsthatheat

pumpscouldcompetesuccessfullywithdistrictheatinginanumberofSwedishmunicipalities.

Similarresultscanbefoundforpelletsboilerandthegeneralimpressionisthesameifthesituation

forsinglefamilyhousesisanalyzed.TheresultspresentedinFigure51arebasedonanassumed

heatpumpCOPof3(yearlyaverage).Newheatpumpsshowbetterandbetterperformanceandif

higherCOPisassumeddistrictheatingwillhaveevenlessfavorablecompetitiveness.

Theanalysisshowsthatdistrictheatinghasstrongcompetitionfromheatpumpsandpelletsboilers.

Thepossibilitytoabandondistrictheatingandchoseadifferentheatingalternativewillprobablybe

evaluatedbyanincreasingnumberofcustomers.Forsomedistrictheatingcompaniesitwillbe

necessaryto

do

their

very

utmost

to

regain

competitiveness.

5.3 Existingdistrictheating,conversionofafractionoftheheatingdemand

Districtheatingdeliveriestoexistingcustomersarenotonlythreatenedbyfullconversiontoother

heatingalternatives.Thereisalsoathreatthatpartsoftheheatingcouldbesuppliedbyother

heatingalternatives,althoughthecustomercontinuestousedistrictheatingasmain(or

complementing)heatingsource.Thereareanumberofalternativesforpartialconversionfrom

districtheatingthatcanbeconsidered,e.g.solarheating,heatpumps(exhaustair,air/airor

air/water)andpelletsstove.Energysavingsinbuildingsisanothermeasurethatreducesthedemand

fordistrictheating.ThisisdiscussedinChapter1.4.

Theeconomics

of

partial

conversion

is

not

only

decided

by

the

total

price

for

district

heating.

Since

theadditionalheatingalternativeshavevariousheatingprofilesovertheyear,thebalance


42/52

42

betweenvariableandfixedpriceelementsanddifferentiatedvariablepriceduringdifferentseasons

areimportant.

Theimportanceofthepricestructurecouldbeillustratedbyaprincipleexample.Theexample

consistsofamultifamilyhousewithayearlyheatingdemandof193MWhandatypicalload

durationcurve.(ThisbuildingsizeisoftenreferredtoinSwedishpricestatistics.)Hereweassume

thatbase

load

up

to

10

%

of

the

capacity

is

converted

to

another

heating

alternative,

Figure

52.

0

10

20

30

40

50

60

70

80

90

100

0 2000 4000 6000 8000

10 % of the capacity

=> 39 % of the energy

Figure52Loaddurationcurveforheating.10%ofthecapacityisindicated

0

10

20

30

40

50

60

70

80

90

100

0 2000 4000 6000 8000

Winterprice

Summerprice

Figure53Loaddurationcurveforheating.Twopriceseasonsareindicated

Figure54Loaddurationcurveforheating.Threepriceseasonsareindicated

10%ofthecapacitycorrespondshereto

39%oftheheatingenergy,whichmeans

75MWh/yr.Dependingonhowthedistrict

heatingprice

is

designed

the

reduction

of

cost

relatedtothedistrictheatingdeliveryvaries.

Hereweanalyzefourdifferentdistrictheating

pricealternativesthatonayearlybasisgivethe

sametotalcostforthefulldistrictheating

deliveryof193MWh/yr.

Thepricealternativesare:

100%variableprice(100%relatedtotheenergydelivery),nopricedifferentiationfor

differentseasons.Thepriceis530SEK/MWh,excl.VAT

0

10

20

30

40

50

60

70

80

90

100

0 2000 4000 6000 8000

%

Winterprice

Spring /autumnprice

Summerprice


43/52

43

70%variablepriceand30%fixedprice10,nopricedifferentiationfordifferentseasons.The

variablepriceis370SEK/MWh.

70%variablepriceand30%fixedprice,pricedifferentiationfortwodifferentseasons,

figure3.Thevariablepricesare:winter=410SEK/MWhandsummer=240SEK/MWh.

70%variablepriceand30%fixedprice,pricedifferentiationforthreedifferentseasons,

figure4.

The

variable

prices

are:

winter

=580

SEK/MWh,

Spring/autumn

=290

SEK/MWh

and

summer=100SEK/MWh.

TheseasonalpricespresentedinthethirdalternativeabovearechosentoillustratetypicalSwedish

differencesbetweenwinterandsummerprices(forthosecompaniesthatuseseasons differentiated

prices),asbrieflydiscussedinchapter2above,DistrictheatingpricesinSwedenfixedor

variable?11

.Theseasonspricelevelsarealsochosentogiveenergyweightedaveragepriceof370

SEK/MWh.Thewinterseasonishere6,5monthsandtherestoftheyearissummerseason.

TheseasonalpricespresentedinthefourthalternativeabovearechosentoillustratetypicalSwedish

differencesinmarginaldistrictheatingproductioncostsfordifferentseasons,aspresentedin

chapter

2.1

above,

District

heating

prices

fixed

or

variable?.

The

seasons

price

levels

are

also

chosentogiveenergyweightedaveragepriceof370SEK/MWh.Thewinterseasonisthreemonths,

thespring/autumnfourmonthsandthesummerseasonis,consequently,fivemonths.

Asmentionedabovethefourpricealternativesresultsinexactlythesameyearlytotalcostforthe

heatingofthechosenbuildingthroughdistrictheating(193MWh/yr).However,theprice

alternativesleadtodifferenteconomicconsequencesif,asdiscussedabove,thebaseloadupto10%

oftheheatcapacityisconvertedtoanotherheatingalternative,Figure52.(Inthisexamplewedo

notpayanyattentiontothecostofthisalternativeheating,asthecostishereassumedtobethe

sameregardlessofwhichdistrictheatingpricemodelisapplied.)

Howmuchdoestheincomefromthedistrictheatingdeliverytothechosenbuildingdecreasewhen

nordic district heat

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