Intermediate report

Nordic Energy Perspectives

The Future of Nordic District Heating

A First Look at District Heat Pricing and Regulation

March, 2009

Preface
NordicEnergyPerspectives(NEP)isaninterdisciplinaryNordicenergyresearchprojectwiththe overallgoalofdemonstratingmeansforstrongerandsustainablegrowthanddevelopmentinthe Nordiccountries. NEPanalysesthenationalandinternationalpoliticalgoals,directives,andpolicyinstrumentswithin theenergyarea,aswellastheirinfluenceontheNordicenergymarketsandenergysystemsandthe infrastructuresandinstitutionalstructures.NEPaimsatclarifyingtodecisionmakersthe consequencesofpoliticalandstrategicdecisionsforpoliticians,energyactorsandthepublic.The projectistopromoteaconstructivedialogueamongresearchers,politicians,authoritiesandactors ontheenergymarkets. Forfurtherinformationabouttheproject,pleasevisit:www.nordicenergyperspectives.org. Thisseriesofreportsarethesecondreportingfromthesecondphaseoftheproject.Thefollowing intermediateandfinalreportsarenowpresented: Synthesisreport,March2009: Finalreports,March2009: Intermediatereports,March2009: OurintentioninNEPistopresentallreportsinEnglish.Duetolackoftime,someofthetextsinsome ofthereportsareatthisstagestillinScandinavianlanguages.Weapologizeforthis.Thesetextswill assoonaspossiblebetranslatedintoEnglish.Thetranslatedtexts/reportswillbeavailableonthe projectswebsite,www.nordicenergyperspectives.org,soonaftertheOsloconference. Oslo,March2009 TheNEPResearchGroup 3 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) Widenedviewofenergyefficiencyandtheresourcemanagement(Responsible:BoRydn) TechnologyoptionsforalowCO2energysystem(Responsible:TiinaKoljonen) WoodmarketsandthesituationoftheforestindustryintheNordiccountries(Responsible: PerErikSpringfeldt) SecondNEP2synthesisreport(Responsible:PeterFritz,HkanSkldberg,BoRydn)

Tableofcontents
1 DistrictheatingintheNordicCountries.......................................................................................... 7 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3 4 Briefstatus............................................................................................................................... 7 PolicyupdateofdistrictheatingintheNordiccounties ......................................................... 8 Businesslifecycleandfuturedevelopmentofdistrictheating ............................................ 12 Energyefficiencyathreat? ................................................................................................. 15 Modelresults......................................................................................................................... 16 Introduction........................................................................................................................... 17 Theenergyfee....................................................................................................................... 18 Variableenergyproductioncosts ......................................................................................... 20 Variableincomeandvariableaveragecosts ......................................................................... 22 Variablecostsfordistrictheatingbasedonmarginalcosts.................................................. 23 Marginalcostsduringdifferentseasons ............................................................................... 26 Discussionandconclusions ................................................................................................... 27 Furtherwork.......................................................................................................................... 30

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

PriceofdistrictheatinginFinland................................................................................................. 31 PriceofdistrictheatineightNorwegiancompanies .................................................................... 34 4.1 4.2 Surveyresults ........................................................................................................................ 34 Casestudy.............................................................................................................................. 37 Rivalingheatsolutions,andconsequencesforpricing ......................................................... 39 Existingdistrictheating,conversionofthetotalheatingdemand ....................................... 40 Existingdistrictheating,conversionofafractionoftheheatingdemand ........................... 41 Presentlyheatedbyanotherheatingalternative,conversiontodistrictheating ................ 44 Newbuilding,allalternativesstartingfromscratch,districtheatingisoneoftheoptions. 45 Introduction........................................................................................................................... 46 Status..................................................................................................................................... 46

CompetitivenessofdistrictheatinginthefutureadiscussionbasedonSwedishconditions .. 39 5.1 5.2 5.3 5.4 5.5

Regulation ..................................................................................................................................... 46 6.1 6.2

References..................................................................................................................................... 52

1 DistrictheatingintheNordicCountries
1.1 Briefstatus
DistrictheatingisanimportantcarrierinallNordiccountriesexceptforNorway.AsshowninFigure 11,Swedenhasmorethan50TWhdistrictheating,DenmarkandFinlandapproximately35TWh whileinNorwayonly3TWhdistrictheatingissupplied.Whiletheincreaseinvolumeseemstolevel offinSweden,FinlandandDenmark,theannualgrowthislargeandincreasinginNorway.Thisis discussedmorecloselyinchapter5.
60000 50000 40000

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Figure11DistrictheatproductionintheNordiccountries

Thechoiceofenergyresourcesdependsonlocalavailabilityandenergyinfrastructure,thusthe differencesshowninFigure12areasexpected.Inallcountries,biomass,peat1and/ormunicipal wasteisamajorrenewableenergyresource.

Peatisnotseenasrenewableinallcountries

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sweden (2006) Denmark (2007) Finland (2007) Norway (2007) Others Oil Coal Naturalgas Electricity Peat Biomass Heatpump Wasteheat Waste

Figure12Energycarriersindistrictheatproduction2.

1.2 PolicyupdateofdistrictheatingintheNordiccounties
1.2.1 Sweden DistrictheatingisthedominatingenergycarrierontheSwedishheatingmarket.54TWhdistrict heatingwasdeliveredin2007.Thedeliverieshaveincreasedrapidlyduringalongperiodofyears, butduringthelastfiveyearsthegrowthhassloweddownconsiderably.Districtheatinghasbeen oneofthemostsuccessfulareasinthetransformationoftheSwedishenergysystemtowardsamore sustainabledevelopment.Fossilfuelshavebeenphasedout,biofuelshavebeenintroduced(andis nowthedominatingfuel)andcombinedheatandpowerproductionisgrowingrapidly.
55000 50000 45000 40000 35000 DistrictheatinSweden 30000

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Figure13DevelopmentofdistrictheatinSweden

TheFinnishnumbersareforfuelconsumptioninproductionofDHandcombinedproductionofDHandelectricity

On1July2008thenewdistrictheatinglawcameintoforce.Itaimsatstrengtheningthedistrict heatingcustomerssituation,e.g.throughincreasingthetransparencyintothedistrictheating business.Thelawspecifyanobligationforthedistrictheatingcompanytonegotiatewithadistrict heatingcustomerregardingcertaincontractconditions,e.g.price.Iftheycannotreacghan agreement,theycouldaskforexternalmediation.Thedistrictheatingcompanyshouldpresentits priceseasilyavailableforcustomersandthegeneralpublic.Ifthedistrictheatingcompanygetsa requestfromsomeonewhowantstosellheattothedistrictheatingcompanyortousethedistrict heatingnetworktodistributeheat,thedistrictheatingcompanymustnegotiateaboutthepossibility togetaccesstothedistrictheatingsystem.Thelawdoesnotincludeanypriceregulation.(Inthemid 1990iestheselfcostprincipledisappearedandpricingofdistrictheatingbecamefree.) Therehavebeendiscussionsaboutgeneralthirdpartyaccesstothedistrictheatingsystem.Theidea washoweverrejectedbyagovernmentalinvestigationin2005. Thepriceofdistrictheatinghas,asanaverage,increasedslowerthanformostcompetingenergy carriers.

Figure14CommercialenergypricesinSweden(Fjrrvrme=Districtheating)

1.2.2 Denmark TheenergypolicyinDenmarkhasastrongfocusonenergyefficiencyandincreasedutilizationof renewableenergyresources.Districtheatinghasbeenoneofthecentralmeasuresforthedramatic reductionofCO2emissionduetoheatingofbuildingandtapwaterfrom25kg/m2in1980till10 kg/m2in2008. Throughenergyplanning,themunicipalitieshavedesignatedsomeareastodistrictheatingand otherstonaturalgasdistribution.Electricheatingofhouseslocatedintheseareasisforbiddenby law(elvarmeforbudet).Themunicipalitiesmaychoosetomakeaccessiontocollectiveenergy distributionsystems(naturalgasordistrictheating)mandatory.Amajorchallengenowarisingfor themunicipalitiesistodrawthelinebetweendistrictheatingareasandareasforlocalheat productionlikeheatpumps. DistrictheatingisconsideredanaturalmonopolyinDenmark,andisobligedtobeanonprofit business.Thecompaniesarenotallowedtohaveeithernetprofitorloss(hvileisigselvprincippet). Duringaperiodofseveralyearstheheatpriceshouldbeequaltotheheatcost.Severalmeasures areconsideredtofurtherincreasetheefficiencyindistrictheatingoperations,thusreducingthecost ofheattothecustomers. 9

ThenewnationalgoalofadramaticreductionofCO2emissionandinthelongtermfullpenetration ofrenewableenergyhasbroughtdistrictheatinginfocusoncemore.Naturalgasareasmaynowbe convertedtodistrictheating,thusfurtherincreasingitsmarketshare.Anewlypublicizedreport VarmeplanDanmarksuggestpossibilitiesforthedistrictheatingtoincreaseitsmarketsharefrom 47%todayto6070%inthelongterm(20202050).Highfocusonenergyefficiency,extensive utilizationofrenewablesourcesinthedistrictheatingsystemsandlocalheatpumps,pelletstoves andsolarenergyenablesnoCO2emissionsfromtheheatingsector.

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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.

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Figure16DevelopmentofdistrictheatinFinland

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DistrictheatinghasaverystablepricingpolicyinFinland.Mostfuelpriceshaverisensteeperthan thepriceofdistrictheatingsince1999.OnereasonwhytheDHsectorhasmanagedthiswellisthe diversifieduseoffuels,anotheristheincreaseintheuseofpeatandwastewoodandathirdisthe widespreaduseofcoal.Thepriceofcoalhasonlyinrecently,sincesummerof2007experienceda steeppricehike.

Prices of district heat and fuels in heat production as well as cost-of-living index
index, June 1999 = 100 360 Sources: Statistics Finland Ministry of Employment and the Economy Energy Market Authority

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Figure17Indexseries(1999=100)ofpricesinFinlandofDHandseveralfuelsforheatproduction,andthe costofliving.(FEI2009)

1.2.4 Norway DistrictheatingisgrowingextensivelyinNorway,butfromasmallbase,withanetproductionof3 TWhin2007. EnovaSFwasestablishedin2001withamainmissiontocontributetoenvironmentallysoundand rationaluseandproductionofenergy,relyingonfinancialinstrumentsandincentivestostimulate marketactorsandmechanismstoachievenationalenergypolicygoals. Enovaisobligedthroughacontractwiththegovernmenttoreachasumof18TWhthroughenergy efficiencyornewrenewableenergybeforetheendof2011,and40TWhbeforetheendof2020.No specificgoalissetfordistrictheating,butaccordingtoEnovarenewableheatingisoneoftheleast expensivewaystoincreasetherenewableshareofstationaryenergyuse.Recently3thegovernment grantedEnovaanadditionofapproximately150M.Oneofthefocusareasforthisextrafunding wasdistrictheating.Alotofactorsarenowcompetingtoestablishnewdistrictheatingsystemsin Norway. Aconcessionfordistrictheatingismandatoryforplantwithmorethan10MWmaximumheatloads, butalsosmallersystemsmayapplyforaconcession.Municipalitiesmaydecidemandatory connectionsofnewbuildingstothedistrictheatingsystem,giventheyhaveaconcession.According totheEnergyLaw,thepricefordistrictheatingmaynotbeabovethecostofelectricheating.
3

January2009

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TheMinistryofPetroleumandEnergyisnowconsideringthefutureregulationofthedistrictheating businessinNorway.
3500 3000 2500

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Figure18DevelopmentofdistrictheatinNorway

1.3 Businesslifecycleandfuturedevelopmentofdistrictheating
BusinessdevelopmenttendstofollowanSshapedcurve(seeFigure19).Inadistrictheating context,thevolumeofenergysoldisrelatedtothepenetrationrate.When(if)youreachalevel whereallcustomershavedistrictheating,thevolumeisboundtobeatthesamelevelordeclinedue tobothenergyefficiencyandsubstitutiontolocalsolutions(e.g.heatpumps).Ontheotherhand,as longasthebuildingstockincreasesnewpotentialcustomersenterthemarket. DH Volume

Energy efficiency Substitution

EMERGING

GROWTH

MATURITY

DECLINING

Time

Figure19Scurve,businessdevelopment

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InthisintermediatereportthefutureoftheDHmarketinthedifferentNordiccountriesmarketis justbrieflydescribed.Thetopicwillbemoreextensivelytreatedinthefinalreport.

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Figure110DevelopmentofDistrictHeatingintheNordicCountries

Swedenseemstobeinalategrowthperiodorperhapscrossingoverintothematurityperiod.In Finlandthedistrictheatingbusinessseemstobeinthematurityface,whiletheDanishdistrict heatingbusinessseemstohavestartedthedecliningface.InNorwaydistrictheatingisstillinthe emerging/growthphase.Thechallengesfacingtheactorsarethusalsodifferent. SowhatisexpectedoffuturedevelopmentofdistrictheatingintheNordiccountries? 1.3.1 Sweden Energimyndigheten4expectsthegrowthindistrictheatusetobebetween4and8TWhintheperiod 20042025.Dependingonwhereinthisgaptheexpectationslie,thedistrictheatbusinessinSweden willmoreorlessstepintothematurityface. However,manydistrictheatingsystemsexperienceasituationwheretheintroductionofnew districtheatingcustomersisoffsetbymoreefficientuseofenergybyexistingcustomers,leadingto stagnatingheatdeliveries. 1.3.2 Denmark AccordingtoEnergistyrelsen5,thetotalenergydemandinDenmarkisexpectedtodecrease,andin addition,thefractionsuppliedbydistrictheatingisalsoreduced,thusthetotaldemandfordistrict heatinginDenmarkisdecliningintheperiod20082025.Duetoenergyefficiencymeasuresexpected tobeappliedtheheatdemandinthehouseholdsischanging.Theelectrificationoftheservicesector duetothetechnologicaldevelopmentwillalsoaffecttheheatingdemand.
4

PrognoserfrutslppochupptagavvxthusgaserDelrapport1iEnergimyndighetensoch NaturvrdsverketsunderlagtillKontrollstation2008 5 FremskrivningafDanmarksenergiforbrugogudledningafdrivhusgasserfremtil2025, ISBNwww:9788778447401

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PJ

(Finalenergydemandextransport)

Other Biomass/HeatPump NaturalGas Oil DistrictHeating Electricity

Figure111Businessasusualscenario,Denmark(Source:Energistyrelsen2008)

1.3.3 Finland Asseenbefore,itseemsthatFinnishDHproductionhasachievedmaturity.However,ifwelookat thetemperaturecorrectedDHconsumptionasshowninFigure112weseeanaltogetherdifferent picture.DHconsumptionisincreasing;itistheweatherconditionswhichgiveadistortedviewof maturity.ClimatechangeontheotherhandisexpectedtodecreasetheincreaseofDHinthefuture.

TWh

Temperature corrected district heat consumption

35 30 25 20 15 10 5 0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Figure112DevelopmentoftemperaturecorrecteddistrictheatconsumptioninFinland19702008(Source: FEI2009)

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TheMinistryforEmploymentandtheEconomyhasdevelopedaprognosis6wheredistrictheating demanddevelopsfrom30,6TWhin2006,to33,0TWhin2020and33,1TWhin2030.Thegrowthis thusslowingdownmarkedlyfrom2020,thusreachingmaturity. 1.3.4 Norway AnanalysesoftheexpecteddistrictheatingvolumeinNorwayin20207concludedthatthereis potentialforagrowthofapproximately7,5TWhdistrictheatinginadditiontothe3TWhalready established.Thetechnicalpotentialissignificantlyhigher(18TWh),sonewmeasuresandincentives mayfurtherincreasethisvolume.

Elec tricity

Oil
Nat.gas

MarketPotential

TechnicalPotential

Energysupply for Heating

Figure113Marketpotentialfordistrictheatingin2020(Xrgia2007)

1.4 Energyefficiencyathreat?
EUhassethightargets,20%,forenergyefficiencyimprovementsby2020.Thisaffectstheheatingof buildingsanddomestichotwateraswellasallothersectors.Asthebuildingcodesgetstricter,with consumptionleveltargetsreachingthatoflowenergyhousesorevenpassiveenergyhouses,the overallheatdemandinnewhousesandareaswillbemuchsmallerthanbefore. Anotheraspecthavingagoatthedistrictheatingpotentialistheincreaseduseofelectricfloor heatingandforsupplementaryheatingofincomingair.Themajorityofnewdetachedhousesin Finlandhavefloorheatingatleastinthebathrooms.Evendistrictheatedhousesgetelectricfloor heatinginstalled. IfastandardsmallresidentialhouseinforexampleFinlandtodayhasafinalheatconsumptionof 21,6MWh/a,astandardlowenergyhasonly12,9MWh/a(Motiva2008).Willtherebeenoughheat demandleftaftertheincreaseininternalheatsources(floorheating,ventilationairheating, increasedamountsofappliancesetc)toletinvestmentsinDHbeprofitable?Thelessenergy,the morethoseheatingformswithlargeinvestmentsbutlowrunningcostssufferincomparison.
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Thelongtermclimateandenergystrategy.GovernmentReporttoParliament,November2008 Enova:Potensialstudien2020,Xrgia

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Especiallynewareastobebuiltwithonefamilyhousesandsemidetachedhouseswillfinditvery difficulttomaketheinvestmentsinDHinfrastructureprofitablebothfortheconsumersandtheDH company.

1.5 Modelresults

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Finland Sweden Norway Denmark

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Figure114DevelopmentofDHintheNordiccountries,MARKAL

ThemodelgroupofNEPisdoingalotofscenariosandrunswithdifferentmodels.Unfortunately onlyMARKALmodelsdistrictheatinginalltheNordiccountries.OneresultisgiveninFigure114. Examplesoftopicstodiscussbasedontheresultis(1)whatcausesthereductioninFinlandand(2) whysuchincreaseinDenmark? Theseresultswillbefurtherinvestigatedinthefinaldistrictheatingreport.

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2 DistrictheatingpricesinSwedenfixedorvariable?
2.1 Introduction
Whenthisanalysisbegan,wehadtheperceptionthatthedistrictheatingratesinSwedencontaina largepartthatisrelatedtothedistrictheatingcustomersenergyusage.Atthesametimeour 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 profitablecanbeexplainedtosomeextentbytheenergypartofthedistrictheatingpricebeinghigh. Anadjacentissueisthedistrictheatingcompaniesargumentationinrelationtotheircustomers.The companiesoftenmaintainthatalargepartofthedistrictheatingconsistsofdiversetypesofwaste heat(industrialwasteheat,heatfromcombinedheatandpowerproduction,etc.).Itthenbecomes peculiartotakelargepaymentfortheenergydeliveryitself.Shouldwasteheatnotgivelowenergy costs? SincealargepartofthedistrictheatinginSwedenconsistsofwasteheatofdiversetypes,onemay askwhetheritisreallyalwaysjustifiedtopreventlargepartsoftheheatusage.Thisquestionis connectedwiththeongoingdiscussionofenergyandenvironmentperformanceforvariousenergy carriers,e.g.forheatingofbuildings.Theprimaryenergyconsumptionisaconceptfrequently discussedinthiscontext.Shouldtheenergysavingambitionsnotstandinproportiontohow valuablethesuppliedenergyis,andtowhatenvironmentalconsequencesaredirectlyorindirectly associatedwiththeenergyusage? Inourstudywehaveassumedthatthetotallevelofthedistrictheatingpriceiscorrect,withregard tothecompaniesrealcostsandyieldrequirementsetc.Weareinterestedonlyinthedistribution betweenfixedandvariablepartsoftherate. Thepresentationisdividedintoseveralparts.Insection2.2wediscusshowSwedishdistrictheating pricesaretypicallybuiltupbyfixedandvariableparts.Thediscussionisbasedonastudyof15 SwedishdistrictheatingcompaniesthattogetherrepresentsnearlyhalfofthetotalSwedishdistrict heatingdeliveries. Insection2.3wecalculatehowmuchofthe15studieddistrictheatingcompaniescoststhatare connectedwithaveragevariableenergyproductioncosts.Thecalculationsarebasedonproduction 17

statisticsandassumedfuelprices.Insection4wecomparetheseaveragevariablecostswiththe variableincomefromthedistrictheatingprice. Theanalysispresentedinsections2.3and2.4dealswiththeaveragevariablecosts.Insection2.5we insteadstudythemarginaldistrictheatingproductioncosts,themarginalvariablecost.This analysisisbasedonproductionstatisticsforallSwedishdistrictheatingsystems(fromtheSwedish DistrictHeatingAssociation),whichhavebeenprocessedfurtherbyProfuinordertoidentifythe marginalproduction.Thismarginalvariablecostisalsocomparedtothetypicalvariableincomefrom thedistrictheatingprice. Themarginalvariablecostshavebeenidentifiedmonthbymonth.Insection2.6wediscussthe seasonaldifferencesandhowtheycouldinfluencethepricingofdistrictheating. Insection2.7wediscusstheresultsandconsequencesifthedistrictheatingrateswouldnotbecost correct.Insection2.8finally,wementionsomeareasforcontinuedstudiesinthefuture.

2.2 Theenergyfee
Howmuchofthedistrictheatingpricecomprisestheenergyfee?Wehaveturnedtodiversesources forinformationaboutthis.Herewehavechosentoconcentrateononeofthesesources,which containsdetailedinformationaboutthepricecomposition.ByassignmentoftheSwedishDistrict HeatingAssociation,theEKANGrouphasstudiedstatisticsondistrictheatingprices.Theworkis describedinthereportStatisticsproject,astudyofdistrictheatingpricesdated20060130(EKAN 2006).ThisreportpresentsdistrictheatingpricesandtheircompositioninSwedenstenlarge municipalitiesandinfiveadditionalmunicipalities.Inthese15,thedistrictheatingmakesup49%of thetotaldistrictheatingdeliveryintheSwedishDistrictHeatingAssociationsstatistics;seeFigure 21. Forthegivenmunicipalities,thelevelandcompositionofdistrictheatingpriceshavebeenstudied forahousetypethatisusedinthesocalledNilsHolgerssonstudy,whichismadeannuallybythe FeeGroup.Thehousetypeisamultiresidentialbuildingwithanannualheatconsumptionof193 MWhperyear.

Figure21DHdeliveriesinthe15studiedmunicipalities(EKAN2006)

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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 districtheatingdeliveriesinthe15municipalities,theaveragetotaldistrictheatingpriceandenergy feecanbecalculatedforthehousetype.Thedistrictheatingpricethenbecomes523SEK/MWh,in 19

whichtheenergyfeeis345SEK/MWh,bothexcludingVAT.Thus,theenergyfeesshareofthe districtheatingpriceis66%. Thecapacityshareofthedistrictheatingprice,Effektinthefigureabove,isgenerallynotagenuine capacityprice.Inmostcasesitisapricewhichisdirectlycoupledtotheyearlyenergyconsumption throughasimpleconversionfactor(oftenreferredtoascategoryfactor).Thereforethecapacity pricecouldalsobeseenasavariableincome.Ifthecapacitypriceisaddedtotheenergyfeethetotal variableincomewouldbe490SEK/MWh. Doesthislargesharefortheenergypartofthetotaldistrictheatingpricecorrespondtoequallylarge costsconnectedwithvariableenergyproductioncosts?Weshalltrytofindthatoutinthenext section.

2.3 Variableenergyproductioncosts
Togetanideaofthe15districtheatingcompaniesvariableheatproductioncosts,wehavemadean attemptwithgenerallyaccessiblestatisticstocalculatetheheatproductioncostsbasedonassumed fuelpricesandtaxcosts. Toestimatethevariableheatproductioncostsinthechosenmunicipalities,wehaveusedthe SwedishDistrictHeatingAssociationspreliminarystatisticsfortheyear2005(SvenskFjrrvrme 2007).Thesegivestatisticsonwhichfuelswereutilisedforheatandelectricityproduction.They werethelatestavailablestatisticsatthetimewhentheanalysiswasmade.Thismeansthattherates (for2006)andtheheatproductionstatistics(for2005)donotactuallyrefertothesameyear. However,wejudgethattheresultanterrorissmallanddoesnottoanygreatextentinfluenceour analysisandtheconclusionswedraw. Ourcalculationhasmadethesimplificationthatthevariableheatproductioncostsconsistsolelyof fuelcostsforheatandelectricityproduction,includingrelevanttaxesforenergy,carbondioxideand sulphur.Thecombinedpowerandheatingplantselectricityproductionhasbeencountedinthe calculationasanincomewhichtherebyreducesthevariableheatproductioncosts.Forrenewable electricityproductionincombinedpowerandheatingoperation,theelectricitycertificateincome 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 01andhavebeentakenfromtheSwedishTaxAgency(Skatteverket2007).Theemissionrightsprice consistsoftheyearaveragespotpricefor2006ontheEuropeanEnergyExchange(EEX2007).A certificatepriceof200SEK/MWhhasbeenassumed.Totheenergypricesrelevanttaxesareaddedin thecalculations,dependingonforwhatpurposestheenergyisused. Inreality,partsoftheoperationandmaintenancecostsarealsovariable,butthisisneglectedinthe presentintroductorystudy.Examplesoflargefixedcostsarethecapitalcostsforproductionfacilities anddistributionsystemsaswellaspersonnelcosts. Inatrulylongperspective,suchas50years,almostallcostscanbeconsideredvariable.Duringsuch alongperiod,probablytheentireproductionanddistributionsystemmustbereplaced,andthe costsforthiscanthenbeseenasvariable.Butinthepresentstudywefocusonshorterperspectives
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Ini.e.Finland,mixingofincomesfromelectricitysaleswithdistrictheatingcostsisnotseenasappropriate.

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suchas10years,wherecostsconnectedwithexistingproductionfacilitiesanddistributionsystems canberegardedasfixed. Figure24showstheresultfromthecalculationofthevariablefuelandtaxcosts(variablegross cost)forheatandelectricityproduction,andofthevariablefuelandtaxcostsminustheincomefor electricityproducedincombinedpowerandheatingoperation(variablenetcost).Inbothcases thecostsperdeliveredheatunitarereported.Inthesubsequentanalysis,itisthevariablenetcost 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.
Lysekil Ume stersund Borlnge Huddinge Jnkping Helsingborg Norrkping rebro Vsters Linkping Uppsala Malm Gteborg Stockholm 0 100 200 SEK/MWh 300 400

Variable cost, net Variable cost, gross

Figure24Estimatedvariablecostsofdistrictheatproductionin15studiedmunicipalities(notethatthe costsbuildonestimatesmadewithintheproject).

Onecanassumethatthemunicipalitiesthatshowthelowestvariabledistrictheatingproduction costshavemaderelativelygreatinvestmentsinordertoenableexploitationofcheapenergycarriers, andtoenablelargeelectricityproductionincombinedpowerandheatingplants.Thisprobablyleads tocomparativelyhighfixedcosts.However,wedonotanalyzeitfurthersincethevariablecostsand theenergypartoftheratearewhatwefocusuponinthiswork. Ourconvictionisthatthedistrictheatproductionwillbebasedtoanevergreaterextenton combinedpowerandheating,wasteincineration,industrialwasteheatetc.Therebythedistrict

21

heatingconsistsincreasinglyofwhatmoreorlesscanberegardedaswasteheat,witheverlower variablecosts.Wethussuspectthattherealvariablenetcostfordistrictheatproductionwill decreaseinthefuture. Inthissectionwedescribetheresultofanestimationoftheaveragevariableheatproductioncosts, i.e.thetotalvariablecostsdividedbytheheatdelivery.Anothermeasurewhichisusedsometimesis theshorttermmarginalcost,i.e.thevariableproductioncostforthelastproducedheatunit.This variesovertheyearandishigherthantheaverageprice.Marginalcostsareoftenusedasabasisfor pricesetting,astheygiveinformationonwhatitcoststoproducetheutilitythatcustomersare abouttouseornotuse.Marginalcostsasabasisforvariablecostsfordistrictheatingispresentedin section2.5below.

2.4 Variableincomeandvariableaveragecosts
Intheabovesectionwehavepartlystudiedtheenergyfeessizeandshareofthetotaldistrict heatingprice,andpartlycalculatedthevariablecostsfordistrictheatproduction.Inthissectionwe willcomparethesetwoperspectivesandanalyzetowhatextentthedistrictheatingratesenergyfee correspondstorealvariablecosts. Figure25showsforeachofthe15municipalitiesthetotaldistrictheatingprice(blue),thepartof thatpricewhichisdirectlycoupledtotheenergyusage,namelytheenergyfee(red),andthe variablenetcostsfordistrictheatproduction(yellow).

Lysekil Ume stersund Borlnge Huddinge Jnkping Helsingborg Norrkping rebro Vsters Linkping Uppsala Malm Gteborg Stockholm Variable cost, net Energy fee District heating price

200

400
SEK/MWh

600

800

Figure25Comparisonofdistrictheatingprice,energyfee,andvariablenetcostfor15studiedmunicipalities (notethatthecostsbuildonestimatesmadewithintheproject

Fromthefigureitcanbeseenthatthevariablecostscompriseasmallpartofthedistrictheating prices.Onaverage,thevariablenetcostsmakeup28%ofthedistrictheatingprice.Alsoinrelation tothepricesenergyfee,thevariablenetcostissmall;seeFigure26.Onaverage,thevariablenet costsfordistrictheatproductionmakeuplessthanhalf,43%,ofthedistrictheatingpricesenergy fee.However,thespreadisverygreat,andthesharevariesbetween14%and98%.Inallcases, though,thevariablecostsarelessthantheenergyfee. 22

Inconnectionwiththedesignofrates,itisgenerallyrecommendedthattherateshouldbecost correct,i.e.thattheratescompositionshouldcorrespondtothatofthecostside.Thiscouldbe takentomeanthatthefeesvariablepartshouldcompriseaboutthesameshareofthetotalpriceas thevariablecostsshareofthetotalcosts.Ourintroductorystudyshowsthatsuchisnotthecase.If costcorrectnessaccordingtothisdefinitionwerestrivenfor,theenergyfeewouldonaveragebe halftheleveltheyaretoday,andfixedratepartsorpartsrelatedtopowerconsumptionwouldbe correspondinglyhigher.Thisconclusionisunderlinedevenmoreifyoutakeintoaccountthatthe capacityrelatedpartoftheprice,whichonecouldassumeshouldreflectthecapacitydimensionin realityisdirectlycoupledtotheyearlyenergyuseinmostcompaniesdistrictheatingprice.

Lysekil Ume stersund Borlnge Huddinge Jnkping Helsingborg Norrkping rebro Vsters Linkping Uppsala Malm Gteborg Stockholm

0%

20%

40%

60%

80%

100%

Figure26Thevariablenetcostsasashareofthedistrictheatingpricesenergyfeefor15studied municipalities(notethatthecostsbuildonestimatesmadewithintheproject)

Therearehoweverdifferentwaysofpresentingthevariablecost.Intheanalysispresentedabove, theaveragevariablecostshavebeencalculatedandcomparedtotheenergyfee.Ifinsteadthe marginalcostsareusedasvariablecoststheconclusionmightbedifferent.Thisispresentedin chapter2.5.

2.5 Variablecostsfordistrictheatingbasedonmarginalcosts
Intheabovereasoningwehavestartedfromthevariableaveragecostofdistrictheatproduction.If oneinsteadpresupposesthatitistheshorttermmarginalcostwhichshouldreflectthecostsand providethebasisforpricesetting,thesituationisdifferent.Marginalcostsareoftenusedasabasis forpricesetting,astheygiveinformationonwhatitcoststoproducetheutilitythatcustomersare abouttouseornotuse. Thereisasignificantdifferencebetweentheaveragedistrictheatingproductionandtheenergy weightedmarginalproduction.(Byenergyweightedwerefertoamarginalproductionresultingofan addeddemandwiththesameseasonalprofileasthetotaldistrictheatingproduction.)The differencebetweenaverageandmarginaldistrictheatingproductionisillustratedbyFigure27.

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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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0,25

0,20 2006 2007 0,15 Share

0,10

0,05

0,00
in In cine d. r w atio as n Ex te he te at rn Bi al h o fu eat el Pe CH at P C Co HP al C H Bi P o fu el Pe He at a Pe t pu Na ll m tu ets p ra l g CH as P C HP Pe lle O ts i Na l CH tu P ra lg as Co al El O ec il tri ci ty

W as te

Figure28DistrictheatinginSwedenthemarginalproductionmixfortheyears2006and2007

Thefigureaboveclearlyshows,asmentionedabove,thatthemarginaldistrictheatingproductionis madeupfromaverylargenumberofproductionalternatives.Thisispartlyaresultofthefactthat differentproductionalternativesmakeupthemarginalproductionduringdifferentseasons,and partlythatthedifferentdistrictheatingsystemsareverydifferentlybuiltupwhenitcomestotheir productionmix.Thefigurealsoshowsthattherearedifferencesinthecompositionofthemarginal productionbetweendifferentyears.Thereasonforthisismainlythatthepricesofdifferentenergy carriersvarybetweentheyears,therebychangingthemeritorderbetweentheproduction alternatives.Newproductionunitsarealsointroduced,whichinfluencestheresultingproduction mix. Therearethreeproductionalternativeswhichplayadominatingroleinthetotalmarginal productionmixofdistrictheatingduringthetwoanalysedyears.Theyareheatingplantsfiredbyfuel oilandbiomass,bothrefinedbiomass(pelletsinthefigureabove)andunrefinedbiomass(bio fuelinthefigureabove).Togethertheyaccountforapproximately50%ofthemarginaldistrict heatingproduction. Thecalculationmethodalsofacilitatestheidentificationofaweightedaveragemarginaldistrict 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 representativeforallSwedishdistrictheatingsystemsthisenergyfeewouldcorrespondratherwell

25

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 thiscouldbeseenasanindicationthatthetypicaldistrictheatingpriceisreasonablecostcorrectand thereforewelldesignedinthisrespect.However,sincethecapacitypartofthepriceisoftendirectly coupledtotheyearlyenergyconsumption,andthereforecouldbeseenasavariableincome,the variableincomeisgenerallyhighinrelationtothevariablemarginalcosts.Itwouldthereforebe positiveifthecapacitypricewouldbemoredirectlycoupledtotheactualcapacitydemand. Withthemarginalcostasapointofdepartureforthepricesetting,thedistrictheatingprices compositionmaynotgowrongatallandthecustomermightgetcorrectinformationaboutthecost structure.Inthiscasethesuboptimizationsdiscussedabovedonotarise.However,itisimportantto beawareofthefactthatthedifferencesbetweenthedistrictheatingsystemsarelarge,both regardingthemarginalproductioncostandtheenergyfee.Therefore,althoughtheconclusionatthe nationallevelisthattheenergyfeecorrespondswelltothemarginalcost,theremaybemany districtheatingsystemswherethisisnottrue.Itcouldgobothwayseitherthattheenergyfeeisto largecomparedtothemarginalcost,ortheotherwayaround. Intheanalysispresentedabovewehaveusedtheyearlyaverageofthemarginalcostfordistrict heatingproduction.Therearehowever,significantdifferencesinmarginalcostfordistrictheat productionovertheyear.Thisisdiscussedinchapter6below.

2.6 Marginalcostsduringdifferentseasons
Sincedistrictheatingproductionistypicallymadeupfromamixofbaseload,mediumloadandpeak loadproductiontherearesignificantdifferencesinmarginalcostfordistrictheatingproductionover theyear.Thebaseloadischaracterisedbylargeinvestmentcostsandlowvariablecosts(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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180% 160% 140% 120% 100% 80% 60% 40%

Winter

Average marginal production cost: 360 SEK/MWh

Autumn/spring

Summer
20% 0% Jan Feb Mar Apr Maj Jun Jul Aug Sep Okt Nov Dec

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 seasonalprices,maybewithmorethantwoseasonsandwithseasonalpricelevelsrelatedtoactual marginalcosts.Towhatextentthiswouldinpracticeinfluencetheheatcustomersbehaviourisno easytoforesee.Atthisstagewedonoteventrytospeculateaboutthis.

2.7 Discussionandconclusions
Swedishdistrictheatingpricestypicallyincludealargevariableshare,theenergyfee.Astudyofthe districtheatingpricefor15Swedishdistrictheatingcompaniesshowsanaverageenergyfeeof345 SEK/MWh,or66%ofthetotalprice.Theaveragevariableproductioncostsareconsiderablylower thanthat,lessthanhalftheleveloftheenergyfee. However,forthepurposeofdesigningcostcorrecttariffstheshorttermmarginalcostisamore relevantvaluationofvariablecoststhantheaveragevariablecost.Marginalcostsareoftenusedasa basisforpricesetting,astheygiveinformationonwhatitcoststoproducetheutilitythatcustomers areabouttouseornotuse.Themarginalcostsareconsiderablyhigherthantheaveragecosts,since 27

theyreflectthecostforthemostexpensiveproductionalternativethatismadeuseoftosatisfythe demand. Therearelargevariationsinmarginalcostsforthedistrictheatingproductionindifferentdistrict heatingsystems,duetothedifferencesinproductionmix.However,asanationalaveragethisstudy showsthatthemarginalcostsareofthesamemagnitudeastheenergyfeeinthedistrictheating price.Thismeansthatthepriceisgenerallycostcorrectinthisrespect. However,sincethecapacitypartofthepriceisoftendirectlycoupledtotheenergyconsumption, andthereforecouldbeseenasavariableincome,thevariableincomeisgenerallyhighinrelationto thevariablemarginalcosts.Itwouldthereforebepositiveifthecapacitypricewouldbemore directlycoupledtotheactualcapacitydemand. Inouranalysiswehavenotincludedanyvariablecostsrelatedtothedistributionofdistrictheating. Theassumptionhasbeenthatthedistributionscostsdonotchangewhentheenergydemand changesmarginally.Thisisasimplification,butwedonotthinkthatitaffectstheresultsinany significantway. Thelargevariationsinbothvariableprice(energyfee)andvariablecost(marginalcostofproduction) betweendifferentdistrictheatingsystemsindicatethat,althoughthepriceappearstobecost correctonatotalnationallevel,therearemanysystemswithpricesthatarenotcostcorrect.This goesbothways,i.e.bothsystemswithtoolargevariableshareofthetotalpriceandsystemswith toosmallvariableprice. Asmentionedabovethedistrictheatingpriceisdesignedwithmoregoalsthantobecostcorrect. Thepriceshoulde.g.besimpletounderstand.Thecustomersalsooftendesiresforalargepartof thedistrictheatingpricetobevariableandguidedbyhowmuchenergyisused.Thereasonisthat thecustomerswanttobeabletoinfluencetheircoststhroughtheirbehaviour.Thereforewe understandthattheremaybequiterationalreasonsforchoosingadistrictheatingpricethatmay lackincostcorrectness.However,westilldiscussthisissue,sincewefeelthatitisimportantto reflectonthisandmakeaconsciouschoiceonhowtodesignthepricestructure. Althoughthemarginalcostsasanationalaveragecorrespondswelltotheleveloftheenergyfeeof thedistrictheatingprice,thestudyindicatesthatmarginalcoststypicallyvariesalotbetween differentseasons.Themarginalcostfordistrictheatingproductioncouldoftenbefivetimeshigher duringwinterthanduringthesummer.Thestudyatthesametimeindicatesthatmanydistrict heatingcompaniesdonotdifferentiatethevariablepricebetweenseasonsatall,andthecompanies thatdoso,oftenonlyapplyrelativelysmallpricedifferencesbetweenseasons.Iftheambitionisto haveacostcorrectpriceinthisrespect,largerpricedifferencesbetweenseasonswouldgenerallybe encouraged. Whatcouldthenbetheconsequencesifadistrictheatingpricewhichdoesnotcorrectlyreflectthe truevariablecosts?Herewediscussacasewherethedistrictheatingpricesenergyrelatedpart constitutesaclearlylargershareofthepricethanthevariablecosts(marginalcost)sharejustifies. Asmentionedabovetherecouldjustaswellbetheoppositesituation,thatthevariableprice elementistoosmall.Forthatsituationthediscussionbelowcouldgenerallybeseentheotherway around. Asituationwherethevariablepartsinthepricearepresentedasalargershareofthedistrictheating costthantheyactuallyconstituteleadsto,orrisksleadingto,anumberofphenomena.Belowwe listsomeofthese: Greaterenergysavingthanwhatwouldbeeconomicallyoptimal Heatpumpscouldbeintroducedindistrictheatedbuildingstodecreasetheuseofdistrict heatenergy

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Thedistrictheatingsenergydeliveriesdecrease,whichamongotherthingsreducestheheat basisforresourceconservingcombinedpowerandheating Thedistrictheatingproducersriskdecreasingtheirownmarket Thespecificenergyfeemustberaisedtocoverthecosts Ifthedistrictheatingispresentedasifconsistinglargelyofvariouskindsofwasteenergy,it canbedifficulttoexplainhighenergyfees

ThedistrictheatinginSwedenistoanincreasingdegreebaseduponrenewableenergyandwaste heatofdiversekinds.Ifthedistrictheatingpriceconveystheinformationthattheenergybeing deliveredisveryvaluable,theuserswillstrivetodecreasetheuseofdistrictheatingenergy.This mayleadtointroductionofsavingsmeasuresthatreducetheheatingdemandmorethanwhat wouldbeeconomicallyoptimal.Somethinkthatthisisalwaysadesirableeffectforreasonsofthe environmentandclimate,andthatahighenergyfeeshouldthereforebestrivenfor.Buttheproblem isthatmostenergyusershavealimitedbudgetandalimitedinterestinenergysavingandenergy efficiency.Woulditperhapsbebetterthattheinterestandtheeconomicresourcesforsaving/ efficiencyarefocusedonotherareaswheretheutilityintermsofenvironmentandclimatemaybe greater,suchastransportand/orhouseholdelectricity? Exaggeratedheatsavingandpartialconversiontoheatpumpsdecreasestheheatmarketforthe districtheatingcompanies.Ifadistrictheatingcompanytakesoutalargepartoftheheatingpriceas anenergyfee,itthusriskseventuallygettingadistrictheatingmarketthatdeclinesnotbecause thetotaldistrictheatingpricelackscompetitiveness,butasaresultofthefeehavinganillogical composition. Alargelyvariabledistrictheatingpricegivesthecustomersgreatpossibilitiesofinfluencingtheir costsbysavingorpartiallyconvertingawaytheuseofdistrictheating.Ifthedistrictheating companyscostsinrealityarenotvariabletothesameextent,theresultisthatonemustgradually raisethespecificdistrictheatingpricetocoverthecostsandbeabletoretainonesprofit.Thiscan rebounduponthecustomersandonecanexpectdisappointmentamongthosecustomerswhohave carriedoutsavingsmeasurestodecreasetheirenergycosts,andwherethecostreductiondoesnot proveasbigasexpectedsincethespecificheatingpricerises. Inawiderperspective,adistrictheatingpricewithadisproportionatelylargeenergyfeebasiscan alsoleadtonegativeeffectsonthetotalresourceusage,aswellasontheenvironmentandclimate. Ifahighenergyfeeleadstodecreaseddistrictheatingdeliveries,theheatbasisisreducedfor resourceconservingcombinedpowerandheatproduction.Ifthedecreaseddistrictheating deliveriesarearesultofpartialconversiontoheatpumps,theNorthEuropeanelectricitybalanceis weakeneddoublytheelectricityproductionincombinedpowerandheatplantsdecreases,andthe electricityuseincreasesduetomoreheatpumps.Theconsequentadditionalneedforelectricity productionwillbecoveredpartlybycondensingpowerplants,whichinenvironmentaltermsare clearlyworsethancombinedpowerandheatingplants. Naturally,wearenotarguinghereforwastageofenergy.Weonlywishtodrawattentiontothefact thattheurgencyofdecreasingheatusagedependsonhowtheheatisproduced.Different investigations(e.g.Byggforskningsrdet1996)haveshownthattheoptimalenergysavinglevelis clearlylowerforbuildingsthatareheatedwithdistrictheating,incomparisontobuildingswithoil firingorelectricalheating. Asalreadymentionedintheintroductorysection,certaindistrictheatingcompaniesmaintainthat thedominantpartoftheirdistrictheatproductionconsistsofvariouskindsofwasteheat.Asa customer,onecanthenthinkitstrangethatthiswasteheatshouldhaveahighvariableprice.The conceptofwasteheatrathersuggestslowvariablecosts.Inthisperspectiveitseemsmore reasonabletohavealowshareofvariablepriceandarelativelyhighshareoffixedprice.The

29

argumentcanthenbethatthewasteheatischeap,butthatcostlyinvestmentshavebeenmadeto enabletheresourceconservingutilisationofthiswasteheat(whichisprobablytrue).

2.8 Furtherwork
Afterthisintroductorystudyweexpecttocontinuetheanalysisofthedistrictheatingprices compositionandtheconsequencesthatdifferentalternativesmayhave.Untilnow,theworkhas beendirectedmainlytowardSwedishconditions.Inthefurtherwork,otherNordiccountrieswillalso bestudied.Itisthennaturallyimportanttotakeaccountofthedifferingconditionsand requirementsinthosecountries. Duringthefurtherworkwemayseektocollaboratewiththedistrictheatingcompaniestrade organizationsintheNordiccountries.Itmaythenalsoberelevanttocontactindividualdistrict heatingcompanies.Obtainingthedistrictheatingindustrysviewofthecurrentissuesisvery valuable.Howareforexamplethetypicaldistrictheatingtariffsdesignedandwhy?Inaddition,we arehopefulthatthetradeorganizationswillbeabletocontributeinformationandbasic documentation.InitialcontactshavebeenmadewiththeSwedishDistrictHeatingAssociation. Itwouldalsobeofinteresttocomparethepricesettingofdistrictheatingwiththatofotherenergy carriers.Primarilyothergriddistributedkindsofenergyarerelevant,suchaselectricityandnatural gas.Inconnectionwiththis,itissuitabletodevelopthediscussionofaveragecostandmarginalcost further,andhowtheseshouldbeutilisedasabasisforratedesign.

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3 PriceofdistrictheatinginFinland
TheinformationisbasedonFinnishdistrictheatingstatisticsfrom2007(Kaukolmptilasto2007).In 2007districtheatingsoldtocustomerswas30100GWh.Thearithmeticaveragepriceofdistrict heatingwas50,7/MWhandtheaveragepriceweightedbyannualsalesofthedistrictheating companieswas45,6/MWh.Theaverageenergyfeeofalldistrictheatingcompanieswas46,8 /MWhandtheweightedaveragewas39,9/MWh.Theenergyfeevaried27102/MWh. Thetariffstructuresvarybetweenthecompaniesandbetweendifferentusergroups.Generally therearetwopartsintheFinnishtariffs;afixedfeethatdependsonthecontractedcapacityofthe costumerandavariablefeethatdependsontheactualenergyuse.Thelargersharethevariablefee formsofthetotalcosts,thelargerthecustomersincentivesaretoreducetheenergyuse.
60.00 50.00 40.00 /MWh 30.00 20.00 10.00 0.00 I II fixed fee III IV variable fee V

Figure31CompositionoftariffesinFinland.Weightedaveragefeesaccordingtocustomersize(IV)

InFigure31customersaredividedintofiveclassesIVbasedontheiraverageheatdemand.The classesarepresentedinTable1.
Table31.CustomerclassesusedinFigure31

Heat demand, MWh/a I II III IV V 20 100 225 450 1125

Volume, m3 500 2000 5000 10000 250000

31

 Figure32showsthecompositionofthedistrictheatpriceforsmallscaleblockhouseisinselected districtheatingcompanies.
100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0% fixed fee variable fee

9 pa ny co m

pa ny

pa ny

pa ny

pa ny

pa ny

pa ny

pa ny

pa ny

co m

co m

co m

co m

co m

co m

co m

co m

co m

pa ny

10

Figure32Compositionofdistrictheattariffsforsmallscaleblockhouseinselectedcompanies.Average heatdemandofasmallscaleblockhouseis225MWh/a.

Companies1through4produceonlyheatwhilecompanies5through10haveCHPplants.Therange ofthevariablefeesshareoftotalcustomercostswas6792,5%.Theweightedaverageforvariable feesharesisabout76%forcompanieswithCHPplantsandabout81%forheatonlycompanies. InFigure33thereisasimilarcomparisonofthetariffcompositions,butnowforhouseholdswitha heatdemand20MWh/a.Thecompaniesarethesameasbefore.

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100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0%
8 1 3 4 9 pa ny pa ny pa ny pa ny pa ny pa ny pa ny pa ny pa ny pa ny 10 2 5 6 7

fixed fee variable fee

co m

co m

co m

co m

co m

co m

co m

co m

co m

co m

Figure33.CompositionofDHtariffsforhouseholdsinselectedcompanies.Averageheatdemandofa householdis20MWh/a.

Ifwecomparedtheresultswiththoseforblockhouseswecannoticethattheshareofthefixedfee isgreaterforsmallconsumers(households)thanforlargerconsumers(blockhouses).Therangeof thevariablefeesshareoftotalcustomercostswasfrom52%to90%.CompanieswithCHPplants hastheweightedaverageofthevariablefeesharesisaround71%andaround76%forheatonly companies.

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4 PriceofdistrictheatineightNorwegiancompanies
DistrictheatingisfarfromascommoninNorwayasitisintheotherNordiccountries.Figure41 showsthedevelopmentininvestmentindistrictheatfacilitiesinNorway,demonstratingthatthe balancebetweeninvestmentsinproductionfacilitiesanddistributionfacilitiesaremoreorless equal,withsomeyearlyvariations.
1000 900 800 700 600 MNOK 500 400 300 200 100 0 Andreinvesteringer Investeringeridistribusjonsanlegg Investeringeriproduksjonsanlegg

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Figure41HistoricinvestmentindistrictheatinNorway

Wasteisthemostcommonenergycarrierusedfordistrictheat;biomassandelectricityarealso frequentlyused. AsshowninFel!Hittarintereferensklla.,theaveragepriceofdistrictheatinNorwaytendsto followtheelectricitypriceclosely.Asmentionedearlier,thedistrictheatingpricehastobelower thantheelectricityprice,butapartfromthatthedistrictheatingprovidersarefreetosettheprice.

4.1 Surveyresults
Asurveyhasbeenexecutedtolookcloserattheconnectionbetweencostofdistrictheating productionanddistributionandthepriceofdistrictheating.Thesurveylooksateightdistrictheating companies.ThecompaniesinstalledcapacityofdifferenttypesofboilersisdepictedinFigure42. Thetotalinstalledcapacityfortheeightcompaniesvariesfrom10MWto781MW.

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100% 90% 80%

Installedeffect

70% 60% 50% 40% 30% 20% 10% 0% Electricity Oilandgas Wasteheat Heatpump Biomass Waste

Figure42Installedcapacity

Tocalculatetheactualsizeofthebaseload,thetimeofuseisassumedtobe1750hoursandthe baseloadisassumedtorunonfulleffectconstantly.Thesearecoarsesimplifications,butgiveagood enoughestimateforthisuse.TheresultsofthiscalculationareshowninFigure43.Company7is mostlikelyinaninitializingphase,whichiswhyitseemstohavenopeakloadyet.Fortheothers, thebaseloadvariesbetween20and40%.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Lowinvestment, highenergyprice Lowinvestment, lowenergyprice Mediuminvestment, mediumenergyprice Highinvestment, lowenergyprice

Figure43Useofboilersfordistrictheatingin%oftotalenergyproduction

Thetariffstructuresvarybetweenthecompaniesandbetweendifferentusergroups.Thereare threepartsofthetariffs;theannualfee,thefixedfeewhichdependsonthemaximumcapacitythat thecostumerrequiresandthevariablefeewhichdependsontheactualenergyuse.Thelargerthe variablepartsofthetariff,thelargerarethecustomersincentivestoreducetheenergyuse.But thatdoesnotreflecttheactualcostsforthedistrictheatingcompanies.Figure44showshowthe districtheatingpriceforhouseholdsiscomposed.

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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Household

Variablefee Fixedfee Annualfee

Figure44Constructionoftariffhouseholdthatrequires8,5kWcapacityand15MWhheatpryear(based onEnova(2004):EnkNormtall)

Figure45showsthecompositionofdistrictheatingforanofficebuilding.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Office

Variablefee Fixedfee Annualfee

Figure45Constructionoftariffsofficebuildingthatrequires138kWcapacityand128MWhheatpryear (basedonEnova(2004):EnkNormtall)

Whydothecompositionsofthepricevarysomuch?Onehypothesiscouldbethatcompaniesthat areinaninitialphasehaverecentlymadebiginvestmentsandwillthereforehavealargerfixedpart oftheirprice.Butanalysesshownoconnectionbetweenageofthecompanyandcompositionofthe tariffs. Anotherhypothesiscouldbethatdistrictheatingcompaniesthathaveinvestedinalargeproportion ofbaseloadboilerswillhavealargerpartoftheirpriceasafixedfee,becausebaseloadboilershave highinvestmentcostsandlowerenergycost.Butthisalsoturnsouttobeuntruefortheeight companiesinthissurvey.

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4.2 Casestudy
OneofthecompaniesintheNorwegiansurveyhasgraciouslygivenusdetaileddataoftheirenergy useindistrictheatingproduction,asshowninFigure46.Thiscompanyusesatotalofeightdifferent energycarriersintheirproduction,locatedinseveralplants.Wasteisbyfarthemostusedenergy carrier.Itisusedeverymonththroughouttheyear.Landfillgasistheleastusedenergycarrier.The electricityuseishighestinthemonthsofJanuaryandFebruary,indicatingthattheelectricityprice wasfairlylowinthisperiod.

Oil Butane(LPG) GWh Naturalgas(LNG) Electricity Biomass Heatpump Landfillgas Waste

Figure46Useofenergycarriers

AsseeninFigure47,thelowcostenergycarriersdominatetheuseinthesummertime.Themore expensiveenergycarriersconstitutealargerpartoftheenergyuseinthewinter.Althoughthisis expected,theuseofbaseloadenergycarriersseemsunusuallylowinthebeginningoftheyear. Theremightbeseveralreasonsforthis;onepossiblecausemightbethatoneofthebaseload incineratorsistakenoutofusebecauseofmaintenance.

100% 90% Partoftotalenergyinput 80% 70% 60% 50% 40% 30% 20% 10% 0% April Aug Oct Sept June May Mar Nov Dec Jan Feb July Highcost Mediumcost Lowcost

Figure47Useofdifferentcostenergycarriers

37

Ofalltheenergycarriersusedbythiscompany,oilwasthemostexpensiveeverymonth.Itcan thereforebeassumedthateventhoughoilisusedeverymonth,aslittleoilaspossibleisused.But whentherearenootherenergycarrierstouse,oilisaddedtothemix.Sinceoilisusedthroughout theyear,itislikelythatifanextracostumerweretobeconnectedtothedistrictheatingsystem, moreoilwouldbeusedtoproducetheextraheatthatwouldbeneeded.ThekWhcostfortheextra costumerisshowninFigure48.

/kWh

CostofmarginalkWh

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

Figure48CostperkWhformarginalproduction

38

5 Competitivenessofdistrictheatinginthefutureadiscussion basedonSwedishconditions
Althoughdistrictheatingisvaluedasanenvironmentallyfriendlywayofsupplyingheating,other solutionsarecompetingforthesamemarket.InalltheNordiccountries,themainentrantsseemto beheatpumpsandlocalbiomassfiredproduction(i.e.pelletstoves).Solarheatingisalsoattracting increasedinterest.Energyefficiencyishighonthepoliticalagenda,andreduceddemandforheat mayinfluencethedistrictheatingbusinessseverelyinthelongterm.Alltheseaspectsarediscussed inthefollowingchapters.

5.1 Rivalingheatsolutions,andconsequencesforpricing
Districtheatingisoneofthealternativesthatareavailableonthemarketforheatingofbuildingsand fortapwater.OtherimportantalternativesontheNordicheatingmarketsareoilfiredboiler,electric heating(bothdirectradiatorsandwithwaterdistributedheating),naturalgasfiredboilerandheat pumps(groundsource,outdoorairorexhaustair). Forseveraldecadesdistrictheatinghasbeenacompetitiveheatingalternativeinatleastthreeofthe 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.Wehaveidentifiedfourprincipalcasesforaspecificbuilding,seenfromthe districtheatingperspective: 1. Existingdistrictheating,conversionofthetotalheatingdemandtoanotherenergycarrier andanotherenergyconversionalternative 2. Existingdistrictheating,conversionofafractionoftheheatingdemandtoanotherenergy carrierandanotherenergyconversionalternative 3. Presentlyheatedbyanotherenergycarrierandanotherenergyconversionalternative, conversiontodistrictheating 4. Newbuilding,allalternativesstartingfromscratch,districtheatingisoneoftheoptions. Inchapter1.4wediscusstheeffectsofincreasedenergyefficiencyonthedemandfordistrict heating.Thereforethisissueisnotconsideredinthischapter.

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Themostimportantfactordecidingthecompetitionbetweentheheatingalternativesisthetotal costforheating,presentandfuture.Otherfactorsinfluencingthecompetitivenesscouldbehow easyordifficultoperationoftheheatingalternativeis,howspaceconsumingtheequipmentis,and howthealternativeisgenerallyviewedbytheuser,e.g.environmentalaspects,theriskofbeingin thehandsofonesupplier(districtheating). Onefactorthatalsoinfluencesthecompetitionbetweendistrictheatingandotherheating alternativesishowthedistrictheatingpriceisdesigned,e.g.themixbetweenvariableandfixed parts,andpossiblepricedifferencesbetweenseasons.Thepricestructureisespeciallyimportantfor thecompetitivenessofdistrictheatinginbuildingsthatarealreadyconnectedtodistrictheating. Inthesectionsbelowwebrieflydiscussthecompetitionbetweendistrictheatingandotherheating alternativesfordifferentprincipalcases,asdescribedabove.

5.2 Existingdistrictheating,conversionofthetotalheatingdemand
Inbuildingsalreadyconnectedtodistrictheating,theeconomiccompetitionbetweentheexisting heatingandotherheatingalternativesisdecidedbythecomparisonofthetotaldistrictheating priceandthetotalcostincludinginvestmentsfortheotheralternatives.Inthiscase,thedistrict heatingpricestructureisoflimitedimportance,i.e.thebalancebetweenvariableandfixedprice elementsanddifferentiatedvariablepriceduringdifferentseasonsisoflimitedornoimportance. Itisnotatallcommontoconvertfromdistrictheatingtoanotherheatingalternative.Ifyouget districtheatingyoukeepit.However,inSwedenwehaverecentlyseenexamplesofdistrictheating customerswhoaredisappointedwiththedistrictheatingprice,andwhohavetakenthedrasticstep toconverttoanotherheatingalternative,e.g.groundheatpump. Heatpumpsandpelletsboilerareexamplesofheatingalternativeswhichinmanycasesare economicallycompetitivecomparedtodistrictheating.Thecompetitivenessofdistrictheating dependsonwhichdistrictheatingsystemwelookatandhowhighthelocalcostsareforthe alternatives,e.g.fordrillingholesforagroundheatpump.InSweden,thedistrictheatingpricevaries considerablybetweendifferentsystems.AspresentedinareportfromSwedishEnergyMarkets Inspectorate,themostexpensivedistrictheatingsupplierhasapricethatistwiceashighasthe supplierwiththelowestprice9. Inthesamereportafigureshowingthetotalcostforsupplyingamultifamilyhousewithheatingis presented.Thecostfortheheatpumpalternativeisillustratedbyalowandahighcost,whilethe costforthedistrictheatingalternativedependsonthepriceindifferentsystems.

Energimarknadsinspektionen,UppvrmningiSverige2008,Eskilstuna,June2008 40


Figure51Costdifferencebetweendistrictheatingandgroundheatpumpforamultifamilyhouse(193 MWh/yr)[SEK/yr].

(Onthexaxisdifferentdistrictheatingsystemsarepresented.Thetwocurvesindicatehighandlow costfortheheatpumpalternative.) Anegativenumberinthefigureindicatesthatdistrictheatingislessexpensivecomparedtoaheat pump(leftpartofthefigure),whileapositivenumberindicatesthatdistrictheatingismore expensivethantheheatpumpalternative(rightpartofthefigure).Thefigureshowsthatheat pumpscouldcompetesuccessfullywithdistrictheatinginanumberofSwedishmunicipalities. Similarresultscanbefoundforpelletsboilerandthegeneralimpressionisthesameifthesituation forsinglefamilyhousesisanalyzed.TheresultspresentedinFigure51arebasedonanassumed heatpumpCOPof3(yearlyaverage).Newheatpumpsshowbetterandbetterperformanceandif higherCOPisassumeddistrictheatingwillhaveevenlessfavorablecompetitiveness. Theanalysisshowsthatdistrictheatinghasstrongcompetitionfromheatpumpsandpelletsboilers. Thepossibilitytoabandondistrictheatingandchoseadifferentheatingalternativewillprobablybe evaluatedbyanincreasingnumberofcustomers.Forsomedistrictheatingcompaniesitwillbe necessarytodotheirveryutmosttoregaincompetitiveness.

5.3 Existingdistrictheating,conversionofafractionoftheheating demand

Districtheatingdeliveriestoexistingcustomersarenotonlythreatenedbyfullconversiontoother heatingalternatives.Thereisalsoathreatthatpartsoftheheatingcouldbesuppliedbyother heatingalternatives,althoughthecustomercontinuestousedistrictheatingasmain(or complementing)heatingsource.Thereareanumberofalternativesforpartialconversionfrom districtheatingthatcanbeconsidered,e.g.solarheating,heatpumps(exhaustair,air/airor air/water)andpelletsstove.Energysavingsinbuildingsisanothermeasurethatreducesthedemand fordistrictheating.ThisisdiscussedinChapter1.4. Theeconomicsofpartialconversionisnotonlydecidedbythetotalpricefordistrictheating.Since theadditionalheatingalternativeshavevariousheatingprofilesovertheyear,thebalance 41

betweenvariableandfixedpriceelementsanddifferentiatedvariablepriceduringdifferentseasons areimportant. Theimportanceofthepricestructurecouldbeillustratedbyaprincipleexample.Theexample consistsofamultifamilyhousewithayearlyheatingdemandof193MWhandatypicalload durationcurve.(ThisbuildingsizeisoftenreferredtoinSwedishpricestatistics.)Hereweassume thatbaseloadupto10%ofthecapacityisconvertedtoanotherheatingalternative,Figure52.

100 90 80 70 60 %

100 90 80 70 60 50 40 30 20 10 0
0 2000 4000 6000 8000

50 40 30 20 10 0

10 % of the capacity => 39 % of the energy

Winter price

Summer price

2000

4000

6000

8000

Figure52Loaddurationcurveforheating.10%of thecapacityisindicated

Figure53Loaddurationcurveforheating.Twoprice seasonsareindicated

10%ofthecapacitycorrespondshereto 39%oftheheatingenergy,whichmeans 75MWh/yr.Dependingonhowthedistrict heatingpriceisdesignedthereductionofcost relatedtothedistrictheatingdeliveryvaries. Hereweanalyzefourdifferentdistrictheating pricealternativesthatonayearlybasisgivethe sametotalcostforthefulldistrictheating deliveryof193MWh/yr.

100 90 80 70 60 % 50 40 30 20 10 0 0 2000 4000 6000 8000

Winter price Spring / autumn price Summer price

Figure54Loaddurationcurveforheating.Three priceseasonsareindicated

Thepricealternativesare: 100%variableprice(100%relatedtotheenergydelivery),nopricedifferentiationfor differentseasons.Thepriceis530SEK/MWh,excl.VAT

42

70%variablepriceand30%fixedprice10,nopricedifferentiationfordifferentseasons.The variablepriceis370SEK/MWh. 70%variablepriceand30%fixedprice,pricedifferentiationfortwodifferentseasons, figure3.Thevariablepricesare:winter=410SEK/MWhandsummer=240SEK/MWh. 70%variablepriceand30%fixedprice,pricedifferentiationforthreedifferentseasons, figure4.Thevariablepricesare:winter=580SEK/MWh,Spring/autumn=290SEK/MWhand summer=100SEK/MWh.

TheseasonalpricespresentedinthethirdalternativeabovearechosentoillustratetypicalSwedish differencesbetweenwinterandsummerprices(forthosecompaniesthatuseseasonsdifferentiated prices),asbrieflydiscussedinchapter2above,DistrictheatingpricesinSwedenfixedor variable?11.Theseasonspricelevelsarealsochosentogiveenergyweightedaveragepriceof370 SEK/MWh.Thewinterseasonishere6,5monthsandtherestoftheyearissummerseason. TheseasonalpricespresentedinthefourthalternativeabovearechosentoillustratetypicalSwedish differencesinmarginaldistrictheatingproductioncostsfordifferentseasons,aspresentedin chapter2.1above,Districtheatingpricesfixedorvariable?.Theseasonspricelevelsarealso chosentogiveenergyweightedaveragepriceof370SEK/MWh.Thewinterseasonisthreemonths, thespring/autumnfourmonthsandthesummerseasonis,consequently,fivemonths. Asmentionedabovethefourpricealternativesresultsinexactlythesameyearlytotalcostforthe heatingofthechosenbuildingthroughdistrictheating(193MWh/yr).However,theprice alternativesleadtodifferenteconomicconsequencesif,asdiscussedabove,thebaseloadupto10% oftheheatcapacityisconvertedtoanotherheatingalternative,Figure52.(Inthisexamplewedo notpayanyattentiontothecostofthisalternativeheating,asthecostishereassumedtobethe sameregardlessofwhichdistrictheatingpricemodelisapplied.) Howmuchdoestheincomefromthedistrictheatingdeliverytothechosenbuildingdecreasewhen 37%ofthebaseloadenergyissuppliedbyanotherheatingalternative?Calculationsbasedonthe pricesdescribedabovegivethefollowingresults: Thecalculationsshowtheconsequencesofthedifferentpricestructures.Ifa100%variablepriceis applied,theconsumercansave40000SEK/yrindistrictheatingcostsbyswitchingthebaseload fromdistrictheatingtoanotherheatingalternative.Ifinsteadathreeseasonsdifferentiatedprice with70%variableshareisappliedtheconsumeronlysaves22000SEK/yr.Thisisaclearindication thatthepricestructurereallymatters. Ifweassumethatthefourthpricealternative(70%variableprice,threeseasonsdifferentiated)is costcorrect(seediscussioninchapter2.1),theincomeforthedistrictheatingcompanydecreasesby 22000SEKyearlyandproductioncostsdecreasebythesameamount.Ifa100%variablepriceis appliedtheproductioncostsstilldecreaseby22000SEKyearly,butthedistrictheatingcompanys incomedropsby40000SEK.Ifalargenumberofcustomersdothesamethingthescaleofthe
10

100%variableprice:530x75=40000SEK/yr 70%variableprice:370x75=28000SEK/yr 70%variableprice,twoseasonsdifferentiated:410x39+240x36=25000SEK/yr 70%variableprice,threeseasonsdifferentiated:580x19+290x26+100x30=22000 SEK/yr

Weassumethatthisfixedpriceisnotchangedif10%ofthecapacityissuppliedfromanotherheatingsource.Inour examplethiscouldcorrespondtoagenuinelyfixedprice,oracapacityrelatedpricewherethecustomerchoosetostay

withthe100%capacityfromdistrictheating(needforbackupforthecomplementingheatsupply). 11 FolkessonT.,EKANGruppen,2006,StatistikprojektetEnstudieifjrrvrmepriser,20060130

43

economicconsequencescanbemuchgreater.Theresultsthusclearlyindicatethatcertainprice structuresmaybeharmfulforthedistrictheatingcompanyseconomicresult. Intheexamplewehaveassumedapartialalternativeheatingwithaconstantproductionprofileover theyear.Ifweassumesolarheatingthecentreofgravityoftheheatproductionismovedmore towardsthesummerseason.Ifa100%variabledistrictheatingpricewouldbeappliedinsuchacase theproblemdiscussedabovewouldbeevenmoresevere. Theprofitabilityofheatsavingsisalsoaffectedsignificantlybythedistrictheatingpricestructure. Reducedheatingdemandasaresultofmeasurestoimproveenergyefficiencyinbuildingsis discussedinchapter1.4.

5.4 Presentlyheatedbyanotherheatingalternative,conversiontodistrict heating

Districtheatingisinmostcasesstillaclearlycompetitivealternativeforheatingconversionfrome.g. oilfiredboilerorelectricboiler.ThecompetitivenessisindicatedbyFigure5512.Thefigureshows thetypicalsituationforamultifamilyhouse,butthesituationissimilarforsinglefamilyhouses. Thecompetitivenessindicatesthatdistrictheatingmaycontinuetotakemarketshare.However,the mostattractiveareas(=themostenergydenseareas)aretypicallyalreadyconnectedtodistrict heating.Lessandlessenergydenseareaswillthenbeconsideredfordistrictheatingandthe potentialadditionalmarketbecomessmaller. Whenconsideringconversiontodistrictheatingfromanotherheatingalternative,theeconomic competitionbetweentheexistingandnewheatingalternativesisdecidedbythecomparisonofthe totaldistrictheatingpriceplusinvestmentcostsandthevariableortotalcostfortheother alternatives(dependingoniftheexistingheatingequipmentneedsreinvestmentsornot).Inthis casethedistrictheatingpricestructureisoflimitedimportance,i.e.thebalancebetweenvariable andfixedpriceelementsanddifferentiatedvariablepriceduringdifferentseasonsisoflimitedorno importance.
SEK

Capitalcost Variablecost

Electricity

Ground source heatpump

District heating

NaturalGas

Oil

Pellets

Figure55Averageheatingcostsformultifamilyhouses,dividedoncapitalandvariablecosts

12

Energimarknadsinspektionen,UppvrmningiSverige2008,Eskilstuna,June2008 44

5.5 Newbuilding,allalternativesstartingfromscratch,districtheatingis oneoftheoptions.

Fornewbuildingsallheatingalternativesareevaluatedbasedontheirtotalcosts.Inthiscasethe districtheatingpricestructuremaybeoflimitedimportance.However,whenevaluatingdifferent levelsofinsulation,heatrecoveryalternatives,solarheating,etc.thedistrictheatingpricestructure, i.e.thebalancebetweenvariableandfixedpriceelementsanddifferentiatedvariablepriceduring differentseasons,influencestheevaluation.Withpricestructureisheremeanti.e.thebalance betweenvariableandfixedpriceelementsanddifferentiatedvariablepriceduringdifferentseasons.

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6 Regulation
Inthisintermediatereport,regulationisjustbrieflydescribed.Thetopicwillbemoreextensively treatedinthefinalreport.

6.1 Introduction
Thechoiceofinstrumentsforregulationdependsonalotoffactorsincludingthetypeofbusiness, thecompetitivesituationandwhichpartofthelifecyclethebusinessisin.Thus,thediscussionsin chapter1.3concerningthedifferencesintheNordiccountriesarerelevanthere. AsillustratedinFigure61,themeasurestoapplydifferaccordingtothelifecycle.Toassistnew technology/solutionsintheemergingphase,R&Dandtechnologysubsidiesareapplied.Inthe growthphase,specialnichemarketpoliciesmaybedeveloped,whiletechnologythathasreached maturitymayberegulatedmoretraditionallyaccordingtocompetitionpolicy,monopolyregulation, thirdpartyaccessetc. Volume

Competitionpolicy Accesspolicy Monopolyregulation

Niche market Technology subsidypolicy R&D policy

EMERGING GROWTH MATURITY DECLINING Time
Figure61Possiblepublicmeasuresinthelifecycle

6.2 Status
Evenifdistrictheatinginitselfisafairlyhomogeneousproduct,thehistoricaldevelopment,fuel choice,ownership,regulationandcompetitionvariessubstantiallybetweentheNordiccountries. Thisresultsindeviatingdistrictheatingprices,asindicatedinFigure62.

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Figure62PricesofDHintheNordiccountries(source:FEI2009)

Evenmoreremarkableisthedifferenceinelectricityprice,mainlyduetodifferencesintaxation,as illustratedinFigure63.DuetotheobviousdivergenceinthepricefordistrictheatinginDenmarkin Figure62andFigure63,thistopicwillbefurtherinvestigatedinthefinalreport.

200 180
El Electricity

NOK/MWh

160 140 120 100 80 60 40 20 0 Oslo

FV

District Heating

Stockholm

Kbenhavn

Figure63Districtheatingpricescomparedtoelectricityprices,per1.9.08(FortumFjernvarmeAS)

6.2.1 Sweden In2002,SwedishauthoritiesinitiatedthebiggeststudyofthedistrictheatingmarketinSwedish history.Thestudywasbasedoncustomersdissatisfaction,anditwastolookatcustomerprotection andpriceregulationamongothertopics.Thestudyconcludedwithaneedformorecustomer protection,moreopennessamongtheactorsandclearerrulesinthedistrictheatingmarket.

47

SeveraloftheresultsfromthestudyareincorporatedintothenewSwedishdistrictheating legislationofJuly2008.Thelawisdesignedtoimprovethecustomersrightsandconfidenceofthe producers,makingdistrictheatingthemostcustomerfriendlyheatingoptioninSweden.Thedistrict heatcompaniesareinstructedinthelawtonegotiatethepriceandothertermsofdeliverywiththe costumerswhenrequestedbythecostumers.Ifthepartiesareunabletofindanagreement,they canhavetheauthoritiesarbitrateforthem.Theownersofpipingareinstructedinthenewlawto alwaysnegotiatewithothersuppliersthatwanttodeliverheatintothepipes,althoughtheydonot havetoletanybodyelseusetheirpipes.Thiscausesmoreadministrationandmorecostsforthe suppliers,andmaythereforelowerthecompetitivenessofdistrictheatingsomewhatcomparedto othersolutionsforspaceheating. Therearesomecomplicationswiththenewlaw;foronethingitoverlapswithsomeotherlaws makingitunclearwhatregulationsaretobefollowed.Thereproblemsareexpectedtobesolvedin theupcomingsecondarylaws.InsomeareasinSweden,thepriceofdistrictheatinghasincreasedby almost50%overthelastfiveyears.Butthenewlawdoesnotincludepricecontrol.However,asa nationalaveragedistrictheatingpriceshaveincreasedbyonly22%duringthelastfiveyears(see alsoFigure14above).

Figure64PriceforheatinginSweden

6.2.2 Denmark ThedistrictheatingmarketinDenmarkisregulatedbythelawonheatdistribution.Itsaysthat districtheatproviderscanchargethecustomersenoughtocovertheirexpensesforproducingand distributingtheheat.TheMinisterfortransportationandenergycanestablishageneralrevenue ceilingforanumberofyears.TheDanishEnergyRegulatoryAuthorityestablishesspecificrevenue ceilingsforeachdistrictheatcompanyeachyear.TheMinistercanalsolaydownrulesforsplitting thecostbetweenelectricityandheatproductioninCHPplants. Thedistrictheatprovidersareallowedtochargedifferentpricesfromdifferentcustomers.And wheneveritistechnicallypossible,eachcustomershallhavetheirowngaugeandpayaccordingto theirownuse,eveniftheyareapartofabiggerbuilding. Danishmunicipalitiesarefreetoinstructbuildingownersinthewholeorpartofthemunicipalityto connecttothedistrictheatdistributingsystem.Thismeansthatthedistrictheatprovidercancharge connectionfeeorayearlyfee,butthebuildingownerscannotbeinstructedtobuydistrictheat.Both

48

newandexistingbuildingscanbeinstructedtoconnect,butexistingbuildingsgetanineyeardelay. Buildingsthataretoundergoarenovationduringthosenineyearscanbeinstructedtoconnect earlier.Ownerscanalsobeinstructedtokeeptheirbuildingsconnectedtothedistrictheatsystem.

Districtheatingprice,Denmark
wightedavg,130m2house,18,1MWh/year Source:DanskFjernvarme
0,7 0,6 0,5 h W0,4 k / K K 0,3 D 0,2 0,1 0 2002 2003 2004 2005 2006 2007 2008

Figure65Districtheatingprices,Denmark

6.2.3 Finland TheFinnishenergymarkedisregulatedbytheEnergyMarketAuthority.Finlandisoneoftheleast regulatedenergymarketsintheworld,withmuchflexibilityfortheenergycompaniestosettheir owntariffstructures. ThedistrictheatcompaniesinFinlandareoperatedonbusinesseconomicprinciples.Thepricehasto reflectthecostsofdistrictheatproduction,inadditiontoprovideforasufficientlongterm developmentofdistrictheatandallowforaprofit.Thereareabout200districtheatcompaniesin Finlandandtheyallhavetheirowntariffstrategies,sothepricecandifferconsiderablybetweenthe differentcompanies.MostofFinnishdistrictheatingcompaniesarepartoflargerentities (traditionalelectricityutilities),typicallyownedbymunicipalities Therearenotariffregulations,butthepricehastobeequalforsamekindofcostumers(residential, industrial,public).Thetariffsconsistofthreeelements:connectioncharge,whichisanonrecurrent fee,fixedcharge,whichdependsonthesizeofthecostumer,andtheenergychargewhichisper kWhused.Districtheatingcompaniesaresupervisedbygenerallegislationlikecompetitionand consumerprotectionlegislation,andrelatedauthorities. TheFinnishCompetitionAuthorityinterpretsthelegislationtostatethatdistrictheatingcompanies areconsideredtobeinsocalleddominantmarketpositiontowardstheircustomers.Competition legislationprohibitsthemisuseofthedominantmarketposition.SomerequirementsforaDH companythatisinadominantmarketpositionare:PricelevelofDHmaynotbeexcessive,price settinghastobesufficientlycostrelatedandtransparent,itisnotallowedtocatchcustomerswitha toofavorable(dumping)product,samekindofcustomersmustbetreatedinasameway,ifdifferent products(heat,steam,electricityetc.)aredeliveredtothesamecustomertheproductpricesmay 49

notbeartificiallyboundtoeachotherandextraservices,whichareundercompetition,mustbe pricedaccordingtheircosts. In2006,astudyonofficialsupervisionofdistrictheatingwascarriedout.Targetsofthestudywere: EvaluationofthecompetitivepositionofaheatingcustomerconnectedtoaDHnetwork(main target),evaluationofexistingsupervisionofDHandpossibleamendmentstosupervision,evaluation ofthepossibilitiesofcrosssubsidizationbetweenDHandelectricityandmeasurestoavoidcross subsidizationandevaluationtoincreasecompetitionbyopeningtheDHnetworksforcompetition (capitalarea).TheconclusionfromtheMinistryofTradeandIndustrywasthatthereisnoneedfor action.ThereisnoneedforDHspecificlegislation,noneedforchangingthecurrentofficial supervisionandrolesofdifferentauthorities,nocosteffectivebasisforopeningtheDHnetworks andnoproblemswiththepricelevelofDH.ThestabilityofDHpriceshasbeenverygood,and securityofsupplyis99,98%.However,thetransparencyofDHactivitiesshouldbeincreased.In energycompaniesDHactivityshouldbenumericallydifferentiatedfromotherbusiness,thatis separatebalancesheetsandprofitandlossaccountsshouldbepublished.Anotherrecommendation wastohavepubliccomparisonsofDHprices. 6.2.4 Norway Mandatorydistrictheatingconcession DistrictheatprovidersinNorwayneedalicensefromtheenergyregulatoriftheplantislargerthan 10MWandtheyaredeliveringtoexternalcustomers.Smallerplantscanalsogetthelicense voluntarily.Themunicipalitycanpassabylawthatsaysthatallnewandrehabilitatedbuildings insidetheareaofthelicensehavetoconnecttothedistrictheatingfacilityandbeadjustedtodistrict heatusage,althoughtheyarenotobligedtousethedistrictheat.

GWh
Numbers of applications pryear Numbers of concessions Numbers of declines Grossdistrict heating production

Figure66Numberoflicenses,Norway(Source:NVE)

AsthedistrictheatingbusinessinNorwayisstillinsteepgrowth,andthefinancialincentivesare sufficientlygood,thecompetitionforthemostattractivelocationsisfierce.Nospecificrulestowho

50

shouldhaveprioritytolocalconcessionsexisted,anduntil2006thefirstcomefirstservedwas applied.In20072008,theinterestfornewdistrictheatingplantsincreaseddramatically(seeFigure 66)duetonewsupportschemesforDH(Enova),andtheconcessionauthority(NVE)hadtodevelop criteriaforprioritizingbetweencompetingsupplicants.Themajorcriterionisefficientresource allocation,includingminimizedenvironmentalimpact,lowcost(economyofscale)andhighsecurity ofsupply.Amajorproblemforboththeauthoritiesandtheenergycompaniesarethedelaysinthe concessionprocess,andtheuncertaintyoftheoutcome,whichresultsindelaysinimplementationof districtheatinginNorway. Priceregulation TheEnergyactstatesthatthepriceofdistrictheatcannotbehigherthantheelectricityprice,thus theelectricitypriceisthepricecap.Duetothefactthatasubstantialpartofthecustomershave theirownlocaloilboilers(existingbuildings),thedistrictheatingpricealsohastobelowerthanthe costoflocaloilfiredheat.ThisisillustratedinFigure67.

70 60 50

h 40 W k / e30 r
20 10 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Figure67Norway:Developmentinpriceofelectricityanddistrictheat

Electricityprice(inclfees) Districtheatprice

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7 References
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