District heating needs a green transition—but how can we achieve a cost-efficient transition process? A literature review has shown: There are several scientific approaches to developing theoretical heat strategies. However, when it comes to implementing and operating district heating systems, no systematically developed methodology facilitates the green transition over its lifetime.
By Peter Lorenzen, Ph.D. in industrial engineering, CEO of Wärmewerk GmbH
Published in Hot Cool, edition no. 4/2023 | ISSN 0904 9681 |
In Germany and many other European countries, natural gas has been seen as a climate-friendly substitute for coal and oil. But it is neither an emission-free technology nor a low-cost alternative (since February 2022). To achieve the climate targets with large social support, we need a fast green transition in the heating sector, which is economically affordable to all consumers. Although the green transition of district heating systems (DHSs) started years ago, there are still barriers to a beneficial integration of renewable (combustion-free) heat sources. This derives—at least partly—from the existing business logic that is based on the established fossil technologies and their high temperatures.
Therefore, the objective of my dissertation was to develop a methodology that facilitates the green transition cost-efficiently. The result is a framework that aligns relevant activities in the scopes of design, operative planning, and operation by technical and economic mechanisms. This article presents an overview of the main development and results.
Lock-in to high temperatures
Established technologies in DHSs are mainly based on the combustion of fuels like coal, oil, gas, and non-biomass waste. These combustion processes can produce high supply temperatures. In contrast, most renewable technologies—such as heat pumps, solar-thermal plants, geothermal plants, and surplus heat from industry—are not able or not cost-effective to produce heat at high temperatures. This leads to a lock-in effect of the established business models at high temperatures (figure 1).
Figure 1. The log-in effect of high temperatures
The figure illustrates the lock-in effect of high system temperatures. Since conventional plants do not benefit greatly from lower system temperatures, there is no significant incentive to reduce the temperatures in existing DHSs with high temperatures from conventional heating plants. At the same time, the high temperatures impede a cost-effective connection of renewable (combustion-free) heating technologies. And if no renewable heating technologies are connected, there is no direct benefit from reducing temperatures in the existing system.
Identifying structural challenges in the lifetime of a DHS
Structural challenges were analyzed from a systemic perspective to resolve this lock-in effect. To do so, a systematic literature research was carried out to identify the fields of activity. Figure 2 summarizes the specified DH scopes.
Figure 2. Activities in DHS clustered into eight DH scopes.
The figure depicts the developed DH scopes. Each of the eight scopes represents a field of activities that accompany a DHS through its lifetime. The scopes are related to each other. In the implementation process, the higher-level scopes define the conditions for the other scopes. In the bottom-up direction, there is no direct impact. Instead, learning cycles should be implemented to adjust the requirements in a transition-facilitating way.
As a further result of this research, available methods, technologies, and tools were clustered to these DH scopes. Finally, it was identified that there is no comprehensive methodology for the scope of the organization, design, operational planning, and operation that aligns the related activities so that all facilitate the green transition.
Competition enables a green and social transition.
One of the most relevant decisions in the scope of the organization is the question if competition should be allowed inside the DHS. It is important to integrate renewable technologies while optimizing the long-term total costs of the system to fulfill the objective of a low-cost and socially green transition. To do so, DHSs must be developed as economically efficient as possible.
For example, established (monopolistic) companies can rest on the lock-in effect of high temperatures, which reduces the pressure to change to new technologies[1]. Further, since some of the latest technologies are very complex and require a great deal of expertise (e.g., deep geothermal plants), their market introduction has high costs when the individual expertise of each DH company is low.
Under these conditions, it seems rational to introduce competition to DHSs from a macroeconomic perspective: By allowing independent heat producers to connect plants to different DHSs, the economy of scale and scope can be used to reduce the heat production costs on a national scale. Thereby, companies from other sectors can bring their expertise to the DH sector (e.g., oil companies building and operating geothermal plants). Companies may focus on single technologies while up scaling the number of plants.
Due to these and further qualitative arguments (presented in the dissertation), a single buyer model for DHSs is proposed to introduce competition (see Figure 3). With this new structure, the core business of the DH operator changes from selling heat to reducing the total costs while meeting the ecological requirements.
Figure 3. Proposed organizational structure
The proposed organizational structure includes three types of agents. The single buyer is the network owner and operator of the entire system. Unbundled heat producers produce the heat. The customers are supplied by the single buyer, but they receive a separate bill for heat production and network operation.
Even though many advantages can be identified by introducing competition, some challenges arise with it:
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- Besides the costs for production, the prices for transportation (electricity demand of the pumps) should also be considered.
- By giving the supply temperature a price, the DHSs may be operated with locally different temperatures. This enables the operator to optimize the supply temperature considering the demanded temperature of the customers, heat losses, thermal stress, costs for temperature production, and network capacities.
To include these effects in the short-term markets, the principle of smart markets should be applied, as depicted in Figure 6.
Figure 6. Smart market dispatch model
Smart markets consider physical effects that induce costs in the market clearing algorithm. The DHS is transferred to a dispatch model based on nodes and edges. Energy centers and customers are connected to the nodes. The edges represent the pipes, including the costs for transmission, heat losses, and temperatures. This model is used inside the smart market to minimize the variable costs, including all cost-causing effects.
Finally, these market routines are combined with a complete control and monitoring platform to control the relevant actuators for the system’s temperature, pressure, and flow rates. In case of deviation, this system control must be able to differ from the market results to keep the system stable and efficient.
Conclusion
The research shows that existing DHSs have a lock-in to high temperatures. Operators have only a low incentive to reduce these temperatures if existing (combustion-based) heating plants are still beneficial. The literature research identified that no comprehensive methodology is available to solve this issue from a systemic perspective. Therefore, concepts were developed to contribute to research and practice.
The presented eight DH scopes provide an orientation for all stakeholders involved in the transition or implementation of DHSs. The framework for design, operative planning, and operation depicts a target system for the transition in existing DHSs and can work as a blueprint for new DHSs. These contributions align the relevant activities in a transition-facilitating and economically efficient way. Different stakeholders, such as policymakers, municipalities, and DH companies, can apply them.
Since the development was limited in time and scope, further innovations are needed. For example, the advantage of introducing competition to accelerate the transition requires further evaluation on a macroeconomic level. It should consider the effects of the economy of scale and scope if competition were introduced on a national or even supernational (EU-wide) level. Further, the proposed concepts require further implementation. For example, the smart market dispatch model must be implemented and tested. Such an exemplary implementation is done in our current research project “Integrierter Wärmemarkt (Iwm)” [https://www.iw3-hamburg.de/iwm-waermemarktplatz/]. Finally, the entire framework requires a practical implementation.
This article is based on the research presented in the Ph.D. thesis’ A Comprehensive Framework and Associated Methodology for the Design, Operative Planning, and Operation of District Heating Systems to Facilitate the Transition Towards a Fully Renewable Heat Supply’. Figures are reused from the thesis and the defense presentation. For further information, see [https://www.doi.org/10.4995/Thesis/10251/185882].
For further information please contact: Dr. Peter Lorenzen, peter.lorenzen@haw-hamburg.de
Dr. Peter Lorenzen
What makes this subject exciting to you?
In practice, I have seen many internal processes designed by people only considering their individual perspectives. Usually, a systematic evaluation of the interference of all processes in a way that facilitated the green transition was missing. So, I particularly enjoyed looking at the different processes and activities from this generalist perspective. In addition, I liked the fact that this topic is so multifaceted and complex. It encompasses many different disciplines and connects innovative technical tools and best practices.
What will your findings do for DH?
Specifically, my findings can be directly applied to the daily DH business. The eight DH scopes have the potential to cluster different research topics and give an orientation of current tools and methods. The new framework depicts a target system for design, operative planning, and operation. All the different contributions shown in the dissertation align the relevant activities in a transition-facilitating and economically efficient way.
Furthermore, I think that the issue of competition in the district heating sector is seen as negative by many companies. However, I see it as an excellent opportunity to build more knowledge and more efficient processes. The entire DH industry would benefit from this and make district heating a pioneer in the green transition, also in economic terms. I would be delighted if my dissertation could provide an impetus for a factual discussion of competition in the DH sector.
“Boosting green district heating transition” was published in Hot Cool, edition no. 4/2023
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- The single buyer and the customers risk that the independent producers might take advantage of their market power on the small-scale DHS (compared to the electricity system).
- On the other side, there is an investment risk for the producers to build new plants since there might be another new plant that may produce cheaper in the future.
- The overall system might suffer from suboptimization, which means every agent will try to optimize its subsystem, which can work against the overall optimum.
A framework was developed to solve these issues and weaken the arguments against competition in DHS.
The solution: A new framework
The framework is built upon the experiences from current planning and operation processes identified by literature review and interviews with Danish DH companies (figure 4).
Figure 4. Main elements of the new framework
As the first element of the framework, a capacity market is introduced to solve the issues of the design scope. It is connected to the short-term markets by long-term contracts, including a contract for differences (CFD) mechanism. In the short-term markets, two routines are implemented: a day-ahead and an intraday market. Finally, the resulting schedules are used to control the plants in operation.
The single buyer enters long-term contracts with independent producers in the capacity market. By this, the single buyer secures the heat supply and reduces the investment risk for new producers.
Participation in the capacity market is optional for the producers. Participation in short-term markets is obligatory for all producers. Producers that only participate in the short-term markets must pay a connection fee.
Continuously evaluating and adjusting the heat sources
Independent from the organizational form (introducing competition or not), heating plant capacities, the network, and substations must be planned, built, and changed. In the process of transition, legal and economic conditions are continuously evolving. It is, therefore, necessary to evaluate regularly if the DHS still meets the requirements and supplies heat under the best economic conditions. This evaluation of the financial situation is done by the capacity market in five phases (figure 5).
Fig 5. Capacity market process
The capacities are planned in five phases. In phase 1, offers are obtained from independent producers. In phases 2-4, the optimal set of the different offers for supply is developed, designed, and tested in an internal iterative procedure. In phase 5, contracts are entered.
The objective of the capacity market is to minimize total costs by balancing investments into the network and customers or the heat supply. The network operator should secure a minimum capacity to reduce some producers’ market power and their investment risk in new plants. Further, annual environmental targets and the scheduling of seasonal storage should be considered.
When long-term contracts are entered, flexible pricing mechanisms must be used. This includes two price elements—one for capacity (thermal power) and one for thermal energy. Both must consider price revision clauses to allow long-term adjustments of costs. Once a contract is entered, the single buyer will pay the thermal power price for the whole duration of the contract. The energy price element is based on the contract concept for differences to allow for short-term price adjustments. This energy price will only be paid if the plant is selected at the short-term markets.
Cost-optimal operation of the plants
If the ownership of the system is split into multiple companies, suboptimization must be avoided in the operative planning. Therefore, the cost-by-cause principle is introduced to the short-term markets:
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- Besides the costs for production, the prices for transportation (electricity demand of the pumps) should also be considered.
- By giving the supply temperature a price, the DHSs may be operated with locally different temperatures. This enables the operator to optimize the supply temperature considering the demanded temperature of the customers, heat losses, thermal stress, costs for temperature production, and network capacities.
To include these effects in the short-term markets, the principle of smart markets should be applied, as depicted in Figure 6.
Figure 6. Smart market dispatch model
Smart markets consider physical effects that induce costs in the market clearing algorithm. The DHS is transferred to a dispatch model based on nodes and edges. Energy centers and customers are connected to the nodes. The edges represent the pipes, including the costs for transmission, heat losses, and temperatures. This model is used inside the smart market to minimize the variable costs, including all cost-causing effects.
Finally, these market routines are combined with a complete control and monitoring platform to control the relevant actuators for the system’s temperature, pressure, and flow rates. In case of deviation, this system control must be able to differ from the market results to keep the system stable and efficient.
Conclusion
The research shows that existing DHSs have a lock-in to high temperatures. Operators have only a low incentive to reduce these temperatures if existing (combustion-based) heating plants are still beneficial. The literature research identified that no comprehensive methodology is available to solve this issue from a systemic perspective. Therefore, concepts were developed to contribute to research and practice.
The presented eight DH scopes provide an orientation for all stakeholders involved in the transition or implementation of DHSs. The framework for design, operative planning, and operation depicts a target system for the transition in existing DHSs and can work as a blueprint for new DHSs. These contributions align the relevant activities in a transition-facilitating and economically efficient way. Different stakeholders, such as policymakers, municipalities, and DH companies, can apply them.
Since the development was limited in time and scope, further innovations are needed. For example, the advantage of introducing competition to accelerate the transition requires further evaluation on a macroeconomic level. It should consider the effects of the economy of scale and scope if competition were introduced on a national or even supernational (EU-wide) level. Further, the proposed concepts require further implementation. For example, the smart market dispatch model must be implemented and tested. Such an exemplary implementation is done in our current research project “Integrierter Wärmemarkt (Iwm)” [https://www.iw3-hamburg.de/iwm-waermemarktplatz/]. Finally, the entire framework requires a practical implementation.
This article is based on the research presented in the Ph.D. thesis’ A Comprehensive Framework and Associated Methodology for the Design, Operative Planning, and Operation of District Heating Systems to Facilitate the Transition Towards a Fully Renewable Heat Supply’. Figures are reused from the thesis and the defense presentation. For further information, see [https://www.doi.org/10.4995/Thesis/10251/185882].
For further information please contact: Dr. Peter Lorenzen, peter.lorenzen@haw-hamburg.de