District Heating is a solution for decarbonisation, energy security, and cheaper heat

Insight into District Heating and Cooling

District heating and cooling is the centralised generation and distribution of the energy. Dependent on a region and local circumstances, these networks can deliver the cheapest and lower carbon footprint heating and cooling solutions, thanks to a diversified portfolio.

District heating has a long history. Hot water-heated baths and greenhouses existed in the ancient Roman Empire. A 14th century hot water distribution system in Chaudes-Aigues (Hot Waters in French) in France is regarded as the first real district heating system. It used geothermal energy. In the 1880s, coal and waste fuelled steam were used in the US. The 19th century saw the invention of the radiator in Russia and of the electric heater by Thomas Edison in 1883. In Sweden, district heating was introduced in Uppsala in 1961, in spite of residents’ initial scepticism.

Today’s Energy Trilemma (environmental impact, costs, and energy security) puts heating and cooling in the spotlight. 17.5 % of global emissions are attributable to energy use in buildings [1]. The Russia-Ukraine conflict highlighted energy security questions, with sky-rocketing prices for gas, which is the dominant heating fuel in many countries, possibly due to gas delivery manipulations.

District Heating and Cooling solves the Energy Trilemma, as it operates on a principle- based hierarchy, relying on the cheapest and lowest carbon emission sources within its fuel portfolio. Fuel diversification increases energy security. A quasi-monopoly solution provider ensures that District Heating operators’ operation and profits are regulated.

Today, we are in the 4th generation of District Heating and Cooling evolution, moving away from coal- and natural gas-burning to integrate renewable sources and the use of waste heat, lowering network temperature, and increasing efficiency by insulation and digitalisation [2].

Trends in District Heating

1. Move to Low Temperature District Heating – LTDH

Historically, District Heating systems operated at higher temperatures due to: 1) dominant heat supply from Combined Heat and Power (CHP) plants where heat was a byproduct; 2) compensating for distribution heat losses; 3) buildings and network poorly insulated. The plan is to now move from the current temperature range of 70-120°C down to 50-70°C.

The main benefit of LTDH is Energy efficiency, cornerstone of sustainability: 1) reducing heat losses; 2) integrating low-grade heat sources like waste heat; 3) integrating renewables at more efficient operations, unlock wider range of materials and equipment, e.g., plastic pipework.

Segmenting heat consumers is important: 1) residential and apartment buildings operate at lower temperatures; 2) commercial buildings: offices, retail spaces and public facilities have higher heat demand (and cooling requirements); 3) industrial processes: need significantly higher temperatures.

2. Renovation and insulation of network and apartment buildings

The move to Lower Temperature District Heating network necessitates Network Renovation. Network pipe replacement is required to reduce heat losses.

The insulation of Apartment Buildings is key to reduce heat demand in apartments whilst ensuring thermal comfort. Insulation improves building envelope by adding insulation to walls, roofs and floors, and upgrading windows and doors with energy-efficient alternatives.

As Vilnius District Heating expert Ugn? Umbrasien? puts it:

Energy efficiency from renovation and thermal insulation drives down energy bills by 15-20 % already today.

Apartment Building renovation company Director Edgars Augusti?? further says:

The challenge behind apartment building’s insulation is the slow pace due to previously cheap heat energy, lack of funding, bureaucracy, and complicated renovation process. Solutions are residents’ education on savings, factory-produced panels for insulation to speed it up on large scale, and state co-financing as an economy boost.

Green Liberty climate and sustainable consumption expert Maksis Rūdolfs Apinis adds:

Financial and legislative incentives are a key for private sector’s involvement to achieve a renovation rate 2% of buildings per year and end the reliance on EU grants.

3. Integration of renewable and carbon-free sources

Natural gas delivery manipulation and sky-rocketing prices in 2022 triggered phasing out gas from energy production. The initial step was replacing it with biomass (burning wood). It is not fully renewable and wood has better uses, so it should not be more than an interim solution.

Heat-pumps use electricity to transfer heat from a low-temperature source to a higher one. To ensure zero-emissions, electricity should be sourced from renewable sources. The barriers to implementation are physical space, installation proximity to the district heating network, high initial investment, and sometimes noise levels.

Solar thermal is the most efficient use of sun power, yet solar irradiation limits its use to mostly hot-water production in summer. Deep (high temperature)

Geothermal harnesses the use of natural heat stored in the ground for heating, cooling, and electricity generation at zero-emissions, but it is limited to resource availability and exploration challenges.

Wastewater heat recovery utilises thermal energy from wastewater processing, it is a proven solution, yet its application in the district heating requires close proximity to the heating network.

4. Use of Waste-Heat as by-product

The heat used in District Heating from Combined Heat and Power plants (CHPs) was initially a by-product of electricity generation. Similarly, today the major use of electricity and source of emissions in datacentres is for running and cooling the IT equipment. This waste heat can be captured.

Sandra ?lihte , District Heating and Cooling expert says:

Waste heat from datacentres is often at a lower temperature than needed in heating system, heat-pumps can lift the temperature up to the required level.

Equally, industrial processes, as food and beverage production, chemical manufacturing, and textile industries, produce waste heat. Among the barriers to implementation are the proximity to heat network, as industrial plants are usually remote, investment in infrastructure, and lengthy negotiation with District Heating operators.

Ability to utilise heat from industrial and commercial processes often is not possible due to their remote location with no demand nearby. To avoid otherwise wasted heat in the atmosphere, businesses should be incentivised to plan new plants close to heat networks.

5. Digitalisation

Digitalisation in District Heating provides monitoring, analysing and optimising system operation, predicting maintenance needs and identifying potential issues or inefficiencies, but most importantly perfecting demand and load management to maximise zero carbon heat source utilisation. Data analyses can lower future investment needs. Emerging Digital Twins are virtual representations of physical systems visualising their operation in real-time. A Dutch software provider (recently a start-up) Gradyent offers Digital Twins specifically for District Heating operators to facilitate the integration of renewables and waste heat into networks. It uses data and AI for balancing and optimisation purpose [3].

Hervé Huisman , CEO and Co-founder of Gradyent notes:

To navigate the new reality, district heating operators need resilient grids. Our market research identified 10 best practices, digitalisation is key in most of them.

5. Decentralisation and Prosumers

Traditionally, district heating systems were centralised, based on large-scale heat plants. Decentralisation is a growing trend, in some regions separate smaller scale networks are built instead of connecting to existing ones.

Prosumers are emerging, consuming but also producing and supplying heat to the network from heat-pumps, solar thermal or cogeneration units. Major challenges are technical integration, investments, regulatory, administration and balancing.

6. Storage and electricity load management

Sandra ?lihte , District Heating and Cooling expert says:

Installing a heat-pump with a large tank to accumulate hot water is the cheapest battery, running it during the night at cheap prices and providing hot water in the morning peak time, saving money and balancing the electricity grid.

Electrification of heat means that energy is consolidated to electricity, which is more flexible and district heating can ensure that extra load on the electricity network is not required. Similarly, algorithms may adjust running the heat-pump during off-peak times easing electricity balancing, avoiding carbon emissions and shaving off costs. Estonian start-up FuseBox provides a platform for load shifting, and heat-pumps are ideal assets [4].

Best practice examples

1. Salaspils District Heating, Latvia

Salaspils District Heating is heat and hot water provider to Salaspils and suburbs with 170 customers, including 6,500 households. Annual heat production is 60 GWh with 90 % already from renewable sources, including pioneering the use of solar thermal, which is limited to providing mostly hot water during summer months (still it constitutes 20 % of output). 70 % are biomass based – an interim step, to be replaced by diversified zero-emission sources, including large-scale heat-pumps. An important step was insulating the network to minimise heat losses. Since biomass is a popular interim replacement fuel for natural gas, Salaspils Siltums Functionality Department Manager Ilze Sili?a highlights:

Flue Gas Condenser increases boiler efficiency to 95 % or higher. What no one tells you, or rather does not measure, is that efficiency of individual house biomass boiler is 50 %. The quality and type of woodchips are also important contributors.

2. Vilnius District Heating, Lithuania

Vilnius District Heating is the largest heat and hot water supplier in Lithuania, servicing 220,000 private households and businesses. It annually produces 1,830 GWh of heat, today 18 % from renewable sources, and planned to be fossil-free by 2030. Historically the dominating fuel was natural gas in the Combined Heat and Power (CHP) plant, replaced in the interim by biomass.

Its 2040 Strategy plans achieving these goals with an investment of € 614 M to transform its business model and increase efficiency: network renovation, moving to low-temperature network, integration of renewable energy resources, installing smart meters to empower clients’ efficiency, integrating production by Prosumers, waste heat collection, and efficient use through storage. It will complete fossil fuel phase out in Vilnius by 2030 [5].

Vilnius District Heating Strategy Partner Ugn? Umbrasien? shares that support from European funds and European Investment Bank are vital, and recommends to combine all activities into one holistic project balancing the financial viability to be more attractive for capital providers. Apartment buildings’ renovation is an integral part – to be compatible with the low-temperature network, as do new constructed buildings. Ugn? highlights:

Partnerships with key stakeholders like municipalities, building managers, construction companies, technology and capital providers are a key success factor.

3. Examples from Danish municipalities

District Heating is the cornerstone of Denmark’s energy transition to low-carbon economy. Delivering heat and hot water to 64 % of households, it maintains a sustainable energy sector and fulfils country’s long-term energy policy targets. Initially, based on Combined Heat and Power (CHP), today it is 75 % renewable source based (biomass, solar thermal and geothermal energy), aiming at zero-emission target in 2030. 20 % of electricity in 2030 is forecasted to be consumed in datacentres, thus already now the country is at the forefront of utilising waste heat from industrial processes, datacentres, and wastewater [6].

Policies and Regulations in Denmark encourage District Heating expansion with quantified and clear ambitious targets and financial support from the government. Fair pricing, quality standards, and reliable heat supply is ensured by regulating District Heating operators [7].

Asbj?rn Ebbesen , Public Affairs Advisor and District Heating expert at Grundfos, says:

Timely planning and coordination is an important factor in these projects.

H?je Taastrup municipality demonstrates the value of collaboration. To utilise waste heat efficiently, it is already moving to LTDH. For instance, Microsoft has a commitment to be Carbon negative by 2030 [8], and before building a new datacentre, it must agree with a local District Heating to utilise its waste heat in their network from day one. This is the case with current construction of 35,000 m2 in this district, and proves that planning is key.

Recommendations for law makers and market players

1. Ministries

Mid and long-term clear and ambitious targets in electricity and heating sectors are vital. Targets must be ambitious to enforce progress, even if not achieved, the progress will be faster than left to its device. These targets will ensure direction, certainty and reliability to market players, like service and capital providers, and District Heating Operators.

Clear and visible energy policy will direct the required investment to the industry. Without it, market players are uncertain and may stall due to complexity, especially, with competing technologies (e.g., hydrogen, individual heat pumps, individual direct electric solutions).

Law and regulation must dictate the mandatory sale of heat waste in relevant sectors where it is a by-product exceeding certain levels, with, in parallel, the mandatory purchase by District Heating operators of it along with the excess heat from prosumers.

Apartment buildings’ renovation and thermal insulation is key in the new heat network, it also reduces Personal Consumption Expenditure. Financial aid is an economy stimulator. Municipalities are key in promoting and encouraging. Legislative and tax incentives are an important promoter.

2. Municipalities

Municipality is a key player of cascading energy ambitions, ensuring waste heat locally is captured by heat network, assuming financial risk in projects and acting as a guarantee provider, and holding dialogue with building managers to accelerate thermal insulation.

A good result is a developed local plan indicating clear zones where district heating network is the most viable option (for heat decarbonisation). Users are incentivised to connect to this network to ensure suitable loads are met and “heat wasters” are obliged to sell the otherwise wasted heat to the network.

3. Consumers, inhabitants of apartment buildings, building managers

Thermal insulation of apartment buildings already today reduces energy bills by 20 %, and is a pre-requisite for the future heating network efficient operation (deep renovation may result higher reductions). The most frequent barriers are capital investment availability and the simultaneous agreement by all residents. Among the solution are using services by the providers allowing monthly payments, currently piloted factory-produced panels for insulation, and coordination from a third party, for instance NGOs.

4. Companies with Heat as a by-product: its own or in its supply chain

Operating datacentres or industrial processes, as food and beverage production, chemical manufacturing, and textile industries, directly or in your supply chain may generate heat as a byproduct. When building, acquiring or leasing a new or existing site, it is wise to assess the proximity to the heating network and to agree with the local District Heating operator on capturing and utilising this heat. District Heating operator will purchase your waste heat if it is at a lower price than the variable cost component of the production. You avoid cooling, hence carbon emissions and feed into circular economy. Selling waste heat enhances your company’s reputation and it provides recurring additional revenue.

5. Companies that need heat or search ways to cut carbon emissions

Assessing the best heating solution for existing or new building will depend on geographical position and proximity to the heating network. If close enough, the recommendation is to connect to it. With diverse sources of fuels and technologies within portfolio, District Heating operator is in the best position to dispatch the cheapest and least carbon-intense source* (unless the system is still on its decarbonisation path), and regulatory framework does not allow unjustified increase in prices.

6. District Heating operators

First step towards the Low-Temperature operation is Renovation and Insulation of the existing network, compiling funding from diverse sources: European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB) and Commercial Banks.

Buying waste heat as by-product and heat from Prosumers, will get you additional emission-free capacity, enhance your reputation and ESG score, and cut operational expenses. In 2019, KPMG estimated more than 400 GWh annual heat waste [9] in Estonia alone. The major challenge is finding capital for network adjustment, but capital providers are becoming keener as it feeds into enhancing environmental sustainability.

Digital Twins visualising the real time operation of the assets is the key for operation optimisation and the balancing of diverse sources (including purchased waste and Prosumer heat), and dispatching the cheapest and least carbon-intense production, as well as increasing efficiency and maximising Return on Assets. It can efficiency combine geographical, weather and sensor data with physics-based models and AI to optimise operations.

7. Investors, Commercial and Investment Banks, Private Equity

District Heating is a key component in energy transition towards low-carbon economy. Capital towards necessary activities aligns with the Taxonomy's criteria for environmental sustainability. District Heating operators are decarbonising their operation, seek efficiency, maximise ROA (Return of Assets) and optimise operation of the assets. Albeit a regulated business, a steady growth at 5.9% CAGR [10] is expected between 2022 and 2030, the District Heating market size in 2021 was valued globally at US$ 181.15 B. It is positioned in the centre of cutting carbon emissions in supply chain for multiple sectors desperately seeking solutions.

The fastest acceleration pace observed in the trendy Waste Heat Recovery System market evaluated globally at US$ 62.9 B in 2021 and increasing at a CAGR 9.2% [11] until 2030. The integral system part – multi-apartment Building Thermal Insulation market was estimated at US$ 31.40 B in 2022 globally and is expected to grow at CAGR of 4.5% until 2030 [12].

8. Start-ups and Service Providers

Pressured by the regulatory framework and financial sector, District Heating operators are poised to change their operation, support the national transformation of the energy sector, and help other sectors cut their emissions in the supply chains. At the same time, the energy sector historically has been slow to innovate (as opposed to sectors where innovation means survival like Telco or ICT). They do not have cutting-edge innovation talents or IT engineers, yet they desperately need solutions in digitalisation, new business models, finding efficiency solutions and ways to optimise operation. Due to cybersecurity threats and unwillingness to let external service providers to handle their proprietary data, as it is a nationally important network, District Heating operators are quite likely to acquire the solution provider via M&A to secure in-house solutions.

9. National Transmissions System Operators

Electrification of heat will increase electricity consumption. It is recommended to set up frameworks to facilitate load management for the assets where it is possible (e.g., heat-pumps) via aggregators’ load shifting or hot water accumulation tanks to ease balancing.

Article was produced in cooperation with Green Liberty | Za?ā brīvība and Udenrigsministeriet , based on discussion at LAMPA, available online.

Many thanks to District Heating and Cooling expert Sandra ?lihte , video interview available online.