BARRIERS TO DISTRICT HEATING DEVELOPMENT IN SOME EUROPEAN COUNTRIES (0)

Stefani Kask 134461IASB
BARRIERS TO DISTRICT HEATING DEVELOPMENT IN SOME EUROPEAN COUNTRIES

Abstract

District heating (DH) offers low primary energy demand , high security of supply and small CO2 emissions . Barriers to DH in the UK, Ireland , France , Romania and the Czech   Republic have been compiled through publications and interviews.
DH systems require large investments, have negative initial cash flow and long payback time, which obstructs financing . One actor should control DH from source to consumption . If the value chain is fragmented, contracts are required between the links . It increases risks and financing costs , like in the UK and Ireland, where DH is not established . There are few multi -family houses with central heating and it is expensive to build DH networks in built areas .
Most French DH systems are operated according to long- term concessions by companies that sell electricity and gas. No strong actor provides unbiased DH support . In the Czech Republic, gas offers DH severe competition . Much DH is produced at the expense of electricity that is considered more valuable , and waste incineration is not popular . In Romania, DH consumption was reduced by one- half . Distribution losses are enormous. New less polluting plants are needed.
Consortia from established DH countries could offer DH systems from fuel to customer if local policies facilitate DH development.

Introduction

This paper describes barriers to district heating (DH) in various parts of Europe and to Swedish involvement in district-heating business abroad . The paper is based on a report called “District Heating in Europe: Barriers to overcome for Swedish export ” [1], which was prepared for The Swedish District Heating Association.
The losses by energy conversion in Europe are of the same magnitude as the European heat demand and consist mainly of heat that is wasted by electricity generation [2]. District heating is a means to utilise such surplus heat to cover heat demand.
District heating can utilise the heat from electricity generation in combined heat and power (CHP) plants. District heating can also use other heat sources that are difficult to use for individual buildings, such as unrefined biomass fuels , heat from waste incineration and industrial surplus heat. The latter may, for example, be a by-product from production of automotive biofuel. District heating can provide cheap energy to consumers by using low- cost energy sources, such as wood , waste and surplus heat. Many of these resources can be of local origin and promote local business and industry.
The main advantages with district heating are high security of supply through utilisation of domestic renewable energy resources, if available, low primary energy demand due to high conversion efficiency, as well as small CO2 emissions thanks to low fossil fuel use and the high energy efficiency. Incineration of waste with heat recovery to district heating may be used at very low cost. District heating also gives opportunity for cogeneration of power and heat with very high efficiency. District heating enables profitable heat supply with outstanding environmental performance but there are in many places various barriers to a prosperous DH development.
Barriers to district heating in the United Kingdom (UK), Ireland, France, Romania and the Czech Republic, as well as barriers to export of Swedish district heating knowledge and products to these countries have been compiled from publications and through personal communication with people in public and private energy bodies and companies in Sweden and abroad [1].
In the studied countries, there are large potentials for district-heating development and for Swedish sales of DH related goods and services . But for district heating and export to succeed, there are several barriers to overcome in Sweden as well as in the other countries. It should be emphasised that this paper focuses barriers and does not give the full picture of the conditions for district heating, which also includes many possibilities.

barriers IN WELL- developed Dh countries

In many countries with well-developed district-heating industry, such as Sweden, much DH competence resides in municipally owned energy companies. They have system knowledge, which could be applicable in other countries. District-heating companies owned by Swedish municipalities must, for judicial reasons, limit their business abroad to sales of services, and to a very limited extent goods. For municipal district heating companies, domestic judicial restrictions are the first barriers to overcome before operations in other countries can commence.
Only certain components for production and distribution of district heating are manufactured in a single country , which calls for international cooperation . The Swedish Government provides certain but limited support to promotion of district heating business abroad. For example, Swedish district heating consultants work abroad but it is seldom followed by goods export.

financing the DH value chain

Financing is a large barrier to district heating development. DH systems require large investments and may have long payback times. The cash flow is negative for a long time during the establishment of a new DH system. Time horizons are distant, which stresses financers in our present situation of rapidly changing conditions. Private companies often focus on short-term profit and public involvement may be necessary for the deployment , modernisation and long-term development of district heating systems.
District heating is a comprehensive concept for heat from source to consumption. Its strength lies in maintaining the value chain (Tabel 1). This may fit badly in an exaggerated market context where every little link of the value chain is organised separately with an interface of costs and revenues to other links. A fragmented value chain increases interface costs and total risk. EU regulations have a tendency to promote such fragmentation. Between the links of a fragmented supply value chain, many complicated agreements are required, which all include risks. It means a larger total financing risk, which raises interest rates and shortens amortisation periods for loans. This implies a mismatch with the depreciation in the balance sheet due to the long economical lifetime of district heating versus the short amortisation time.

two general dh barriers

Two general district-heating barriers are related to CO2 emissions and the attempts to reduce these through, for example, reduced energy use. Global warming and better insulated houses reduce heating demand and, hence , the advantages of district heating because investment costs must be carried by less supplied heat. Another general barrier to district heating is the EU emission trading scheme, which favours individual heating because individual CO2 emissions do not need allowances.

types of dh barriers

In the countries analysed in this project, the barriers are of very diverse nature . The obstacles are dominated by difficulties for district heating itself rather than for foreign companies’ operations in the countries. In the British Isles, it is largely a question of establishing district heating as a natural element in society. In France, it is about large domestic companies that may offer superior competition to foreign firms . In the Czech Republic, French and other companies from abroad dominate the DH business but the technical design of district-heating production may hamper DH development. In Romania, there are several problems with facilities in bad shape and public bodies that have not addressed the issues properly.
Table I is an attempt to assess how large the various barriers are in the studied countries. The table starts with some general conditions. Ownership and organisation considers if district-heating companies are owned, or DH operations are organised, in ways that make it more difficult for Swedish companies to do business. Corruption may be a problem through, for example, indirect bribes by procurement. National and local control encompasses national laws and policy instruments that are disadvantageous for district heating, DH price regulations, as well as municipalities not facilitating district heating by planning of new developments. But rules complicating combined heat and power production are included in the CHP line in Table I.
Financing is one of the largest barriers to district heating, primarily because DH schemes give a low rate of return. A fragmented value chain cause contract risks at several instances. Entrance barriers for foreign companies in Table I consider additional difficulties for foreign firms besides the other parameters and the general disadvantage of not being familiar with the domestic business culture.
Some parameters in Table I are related to district-heating sales. DH competitiveness includes the availability and price of other forms of heating, primarily natural gas. Customer relations concern customer attitudes toward district heating, customers’ and suppliers’ perceived insecurity whether they can establish and maintain relations, as well as if disconnections have occurred or may occur . Built environment relates to how common multi-family buildings are and if these have a central heating system for the whole house.
Tabel 1
Tabel 1. District heating value chain with heat production, distribution and sales in focus [1]
Table I ends with district-heating production and distribution issues. Biomass considers domestic biomass supplies and infrastructure for biomass fuel supply. Waste includes current waste management and attitudes toward waste incineration. CHP concerns regulations hampering CHP production as well as problems in existing plants. Finally , district heating distribution in Table I encompasses difficulties with building networks and deficiencies in existing distribution.
The assessments in Table I were primarily made within each country and secondly countries were compared but mostly the ranking of countries for a parameter is appropriate. However , every grade has a certain ”width” and two countries with the same digit may differ . As an example, district heating is assessed to be somewhat less competitive in Romania than in the Czech Republic. It follows a description of barriers in the individual countries emphasising the largest barriers.

tHE BRITISH ISLES

In the United Kingdom (UK), and even more in Ireland, district heating is not really an established phenomenon . Fig 1 shows that residences mostly are heated with gas in the UK, often through a gas boiler for the individual household. Oil is the most common fuel in Irish homes but gas is expanding.
The largest problem is district heating distribution (Table I). It is expensive and complicated to build DH networks in already built areas and, at least in the UK, it is not straightforward to obtain a licence for putting district heating pipes into streets. The financing difficulties in the British Isles are primarily due to a fragmented value chain with many contract issues that need to be solved before a larger district heating scheme can be deployed. British thinking is based on competition and individual choices. A collective large scale solution , such as district heating, may conflict with principles and tradition . Another large barrier is the built environment. Few people live in multi-family houses in the UK and even fewer in Ireland [3], and even these buildings often lack central heating, but individual heating of apartments is common. Biomass is rated as a rather large barrier in Table I because supplies are limited in the British Isles and fuel supply systems are less developed.
UK Government and municipalities have hitherto not facilitated district-heating development sufficiently and strong incentives for deploying district heating systems are lacking. Heating is generally not regarded as a public concern, but as a concern for each individual. National and local control is therefore indicated as a rather large barrier in Table I. In Ireland, the situation seems to be slightly better but in both countries certain regulations, designed with electricity and gas in mind, are disadvantageous for district heating. CHP suffers especially from rules on how produced heat and power may be supplied.
Customer relations are complicated because district heating is a rather unknown energy form and there is a certain resistance against collective solutions [3]. There is a lack of standardised terms of contract for connection to and delivery of district heating. Potential heat suppliers and customers feel insecure concerning how many users that will connect to a DH grid , for how long they will stay and if heat supply may be interrupted. The competitiveness of district heating compared to gas concerning availability and price is considered as a medium severe barrier in the British Isles (Tabel 2).
Tabel 2. [1]
Tabel 2 - Height of DH barriers in analysed countries
BARRIER
UK
IRELAND
FRANCE
CZECH REPUBLIC
ROMANIA
Ownership and organisation
1
0
4
2
3
Corruption
0
0
0
2
3
National and local control
3
2
1
2
Financing
4
3
2
3
3
Fragmented value chain
4
3
1
2
1
Entrance barrier for foreign companies
1
1
4
2
2
DH competitiveness
2
1
3
4
4
Customer relations
2
2
1
4
Built environment
3
4
2
0
0
Biomass
3
3
1
3
1
Waste
1
1
3
4
2
CHP
3
3
2
4
4
DH distribution
4
4
1
4
Legend: Grade
4 Large barrier
3
2
1 Small barrier
0 Assessed not to be a barrier
No grade No assessment Fig 1
Fig 1. Heating of residences [1], [4]- [5]

FRANCE

Table I shows that one of the largest barriers in France concerns the organisation of district-heating operations. Most DH systems are managed by private French companies according to long-term concessions [6]. The companies have successfully applied this DH management model in several other countries. By such arrangements, it is important that operators have incentives to make investments even if these have payback times longer than the concession period [7]. It is unclear if the French DH management model is disadvantageous for district heating development but it should anyway be a large barrier for foreign companies wanting to enter the French market. In general, domestic solutions are preferred . There is no strong actor who provides unbiased support for district heating. The dominating DH operators also sell electricity and gas, which both cover a large fraction of the heat demand (Fig. 2) and offer district heating severe competition. Only ten percent of the apartments and four percent of all residences have district heating today , and DH expansion is slow [5].
Figure 3 shows that one-half of the district heating in France is produced with natural gas, mostly in CHP plants. The main part of the renewable energy used for district heating production is waste, which is used to a slowly growing extent [6]. But French waste incineration plants are mostly built far away from towns, which makes it difficult to utilise the heat [5]. Fig 2 District heating production in France [9]
Financing is considered to be a smaller problem in France. The market domination by a few actors may present an indirect financial barrier. Quite a few people live in apartments but most multi-family houses lack central heating. The large French nuclear power production is one reason for worse CHP conditions, which is assessed as a medium-grade barrier (Tabel 2).

The Czech Republic

Figure 2 shows that district heating covers a substantial part of residential heating in the Czech Republic, but electricity is used to the same extent and gas is the most common heat source. District heating covers one-half of the apartments and 60% of urban heating [6].
A large barrier in the Czech Republic is, according to Table I, the competitiveness of district heating. Gas prices make it difficult for gas-based district heating to compete with individual gas heating [6]. There are some disconnections from DH systems.
Fig 3
Fig 3. District heating production in the Czech Republic [8]
Domestic coal dominates Czech district heating production (Fig 3). Most of the district heating is produced in CHP plants. The problem concerning CHP (Table I) is that a large share of Czech district heating comes from coal- fired power plants with extraction turbines where the heat is produced at the expense of electricity [6], which is considered more valuable. The benefit of this CHP production is not allocated to the heat [7]. Some biomass is used to produce district heating, but biomass use is complicated due to deficient fuel supply systems [6] and government scepticism toward renewable energy. There is also much resistance to waste incineration from the public as well as from politicians.
Financing may be a rather large barrier, partly due to a certain district heating disconnection tendency. The many private foreign district-heating companies in the Czech Republic [6] may be a difficult target for Swedish and other district heating companies from abroad that are not established in the country. There may also be some reluctance toward foreign enterprises. A certain barrier is the common corruption by public procurement (Tabel 2). The value chain is sometimes fragmented into production and distribution run by different actors.

ROMANIA

In Romania, biomass covers the largest fraction of residential heat demand among the countries under study (Tabel 1). Individual boilers and stoves for wood and gas cover more than one-half of the heat use in households. Gas is the most widely used heating source for residences and it is expanding at the expense of district heating [6].
Tabel 2 shows that district heating has large problems with competitiveness and customer relations. Today, the DH consumption is just one-half of the previous use. Many district heating users switched to gas due to low gas prices and heavy , government-regulated DH price increases [6], whereas households and district heating plants had the same gas price.
Fig 4
Fig 4. District heating production in Romania in 2005 [6]
Figure 5 shows that Romanian district heating production is completely based on fossil fuels. One-half of the heat is produced in, normally coal-fired, CHP plants. Large investments are required in the Romanian district heating systems. CHP plants and heat-only boilers must be replaced for environmental reasons. Distribution losses are enormous [6].
Organisation is a rather large obstacle for district heating in Romania (Tabel 2). The municipalities are now mostly in charge of the district heating systems [6] but much lobbying is required to achieve improvements and it takes time to reach an investment decision . Corruption is common. Some politicians and employees try to make their own profit on DH business. Financing difficulties largely concern insecurity whether customers will remain because many have disconnected from district heating. National and local control is a certain barrier because DH companies partly get heat production costs covered by central Government and City Councils [6]. Besides the mentioned problems, the entrance barrier for foreign companies should be rather low. Waste collection and sorting are now deficient but, on the other hand , new possibilities should emerge when Romania wants to introduce waste incineration, and waste is therefore considered to be a medium- size barrier in Table I.

HOW TO OVERCOME BARRIERS

This paper focuses barriers and omits more positive circumstances for district heating. It may be depressing but the message is not that district heating has no prospects. The report should rather be understood as a realistic guide to DH development in the studied countries.
To have a chance to overcome the outlined barriers to any significant extent, powerful initiatives are required from countries with established district-heating industries, such as Sweden. Initiatives should comprise many different players, for example, district-heating companies, equipment manufacturers, consultants and governmental bodies. Such consortia could offer district-heating systems from fuel supply, via heat production plants and DH networks to customer contracts. Now, many foreign groups visit municipal district-heating systems in Sweden but these opportunities are seldom utilised to sell a comprehensive DH solution.
Municipally owned district heating companies have system knowledge that can be applicable in other countries. A competence transfer may be realised through deeper involvement that might include ownership of plants in other countries. Business models should be developed, which allow utilisation of municipal knowledge abroad and give municipalities reasonable returns.
For a successful transfer of district-heating solutions from established to emerging markets , private and public companies must focus marketing on the countries, places, projects and forms of involvement that have the greatest expectations to succeed. At the same time, national and local policies should reduce and remove described barriers and facilitate district heating development as a means for increased efficiency of energy utilisation, higher security of supply and decreased environmental impact.

Conclusion

There are several barriers to district heating development in the countries under study. In the UK, there are not many district heating systems. There are few multi-family buildings with central heating in Ireland. The long-term operating concessions of French district heating systems might hamper their development. In the Czech Republic, much district heating is produced in extraction turbines at the expense of more valuable electricity. Romanian district heating use was reduced by one-half by cheap gas.
In general, it should be advantageous that one actor controls the whole district-heating value chain from source to consumption in order to utilise synergies and to avoid economic risks with contracts between the separate entities of a fragmented value chain. Like for other long-term large-scale infrastructure investments, public involvement may be necessary for district heating development.
Through cooperation among various well-established players in the district heating industry, knowledge, products and services can be transferred to evolving district heating markets, which promotes industrial prosperity for all parties and helps building sustainable energy systems in Europe.

Acknowledgement

The Swedish District Heating Association and The Swedish Energy Agency are gratefully acknowledged for financing this study through the Fjärrsyn programme. We would also like to thank everybody who has contributed to the study with facts and viewpoints.

References

[1] D. Henning and O. Mårdsjö, Fjärrvärme i Europa: Hinder att övervinna för svensk export, Rapport 2009:3, Fjärrsyn, Svensk Fjärrvärme, Stockholm (2009) http://www.svenskfjarrvarme.se/index.php3?use=biblo&cmd=detailed&id=1440
[2] S. Werner , Ecoheatcool work package 4: Possibilities with more district heating in Europe, Euroheat, Brussels (2006) www.euroheat.org/ecoheatcool
[3] WS Atkins Consultants Ltd, Assessment of the Barriers and Opportunities Facing the Deployment of District Heating in Ireland, Sustainable Energy Ireland, Dublin (2002) www.sei.ie/uploadedfiles/InfoCentre/DistrictHeatingReportatk.pdf
[4] S. Werner, Ecoheatcool work package 1: The European heat market, Euroheat, Brussels (2006) www.euroheat.org/ecoheatcool
[5] SEI, Energy in Ireland: Key Statistics, Sustainable Energy Ireland, Dublin (2008) www.sei.ie/Publications/Statistics_Publications/EPSSU_Publications/Energy_in_Ireland_Key_Statistics/Energy_in_Ireland_Key_Statistics_Final.pdf
[6] P. Cousinat, District Heating: A Tool for Rational Heat Management, Master thesis 2006:21, Department of Civil and Environmental Engineering , Chalmers , Gothenburg (2006).
[7] Euroheat, District heating and Cooling country by country 2007 survey , Euroheat, Brussels (2007).
[8] J. Zeman and S. Werner, District Heating System Ownership Guide, DHCAN project, BRE, Watford (2004) http://projects.bre.co.uk/DHCAN/guides.html
[9] SNCU, Les réseaux de chaleur et de froid: l’énergie citoyenne, SNCU, Paris (2004) www.fg3e.fr/public/federation/syndicats/plaquettes.php?root_page=6
[10] T. Zenaty, CHP/DH sector in the Czech Republic: situation / problems / wishes, Energy Policy EHP meeting , Budapest, 11 September 2008, www.lsta.lt/files/seminarai/080911_Budapestas/CZ.pdf

Sisukord

Abstract 1
Introduction 1
barriers IN WELL-developed Dh countries 2
financing the DH value chain 2
two general dh barriers 2
types of dh barriers 2
tHE BRITISH ISLES 4
FRANCE 5
The Czech Republic 6
ROMANIA 6
HOW TO OVERCOME BARRIERS 7
Conclusion 8
Acknowledgement 8
References 9
Bibliography 11
Tabel 1 3
Tabel 2 - Height of DH barriers in analysed countries 4
Fig 1 5
Fig 2 District heating production in France [9] 6
Fig 3 6
Fig 4 7

Bibliography

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[2]
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[3]
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[4]
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[5]
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[6]
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[7]
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[8]
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[9]
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