6 Mar 2018

District heating in cities: good enough?

Kiki writes:*

The future of our heat supply is both sustainable and without gas. The new Dutch cabinet has changed the law of the “right for gas” to the “right for heat” instead. The “right for heat” proposes that new buildings are not obliged to have a connection with the gas network but have the freedom to be connected to any heat source. An example of an alternative source to gas is district heating: a network of pipelines connecting waste heat from industry, like incinerators, with the demand of households and offices. District heating will increase heat efficiency, because in the previous situation heat was released to the environment. In addition, it decreases carbon dioxide emissions because of the more sustainable heat that is supplied: waste heat instead of gas. With this increased efficiency, municipalities are able to live up to their climate agreements to reduce carbon dioxide emissions. However, the sustainability of such a heat network is dependent on the sustainability its (waste) heat source. Additionally, a system change from gas to sustainable heat is a complicated process and comes with a high price. Is district heating the solution to a climate neutral heat supply? And if so, who will pay for these networks?

A major threat on the sustainable performances of district heating is that of a monopoly. This natural monopoly occurs when the cost of building new infrastructure is too high to make it profitable to compete with the incumbent's existing infrastructure. Therefore, the monopoly must be regulated by law and checked to ensure that the monopoly lives up to the sustainable performances it agreed on. The monopoly brings a risk of not innovating in favor of climate performances if profits are prioritized over cost. Competition on awarding the infrastructure contract can increase sustainability performance, but one might also question whether a heating network should be privately owned.

Public ownership still creates a monopoly on the heat network owned by the municipality, province or state. Although sustainability performances might be prioritized in this situation, the biggest concern is cost. Who will pay for the investment -- the tax payer or the people living in that area? Using the principle of “let the user pay” would translate that the people who live in the area of the heat network, pay the costs of the infrastructure.

Unfortunately, this solution brings a collective action problem: All inhabitants living in that area need to share the investment cost. In return they will receive lower energy prices in the consumption phase since the municipality doesn’t have to pay profits to shareholders (the case with private ownership). Getting all inhabitants on board is a complicated process that might take a long time to establish. The alternative is spreading the investment costs of the heat network across all inhabitants of the municipality, instead of just the users. This approach will speed up the transition towards sustainable heat and would decrease the overall costs of the heat transition for the consumer. It would however, be an additional costs for the tax payers.

Maybe the most important question whether district heating will lead to sustainable heat consumption or not. There is a real threat of the rebound effect, i.e., greater consumption based on lower prices and  the knowledge that supply is climate neutral.

Bottom line: There are still many questions for district heating that need to be answered to enable the heat transition towards large district heating networks in municipalities, but the first one is how should it be financed?

* Please help my environmental economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)


Mike Fagan said...

A more obvious problem is timing and storage. The transfer of waste heat from industry must be coordinated with peak domestic heat demand unless you introduce some form of heat storage to mediate the timing problem, in which case your capital and maintenance costs are even higher than they already are.

Ebe Blok said...

Im wondering about this 'right to heat'-thing. How is it a right for an inhabitant if you have to make a quite substantial investment in a new heating system, even though you did not ask for it... Sure, the government wants to make all households sustainable, but not all inhabitants are on the same page. And what about the inhabitants that just bought a new boiler, which would normally last them ~15 years. Are they going to be compensated?

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