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BUSINESS MODELS FOR SURPLUS HEATING

by Linda Bertelsen
Business model

Green Energy provides an overview of the four most common business models concerning surplus heat, but it could as well be describing district cooling, a supply of district heating by incineration of residual products, etc.

Published in Hot Cool, edition no. 1/2020 | ISSN 0904 9681 |

Model 1

The District Heating Company invests in and owns the facility.

The District Heating Company can utilize surplus heat from the Enterprise’s energy return, i.e., flue gas or wastewater, and the Enterprise’s operation is unaffected by the surplus heat being used for district heating. The Enterprise will usually not invest in such facilities as there is no improvement in production. 

This type of surplus heat stream will usually be low-energy heat, where utilization requires significant investment and a long period before Return-Of-Investment. A business won’t invest like this. But a District Heating Company usually will if the Enterprise has a good operation and a stable future. The contract should hedge the District Heating Company’s risk: The Enterprise’s future operations and the risk of a decrease in the Enterprise’s energy flow. 

The Enterprise’s fee for the surplus heat in these projects is usually low because the District Heating Company invests the money and has the operational responsibility. However, the future district heating supply for the Enterprise is often negotiated at a low price.

Model 2

The Enterprise invests in and owns the facility.

The Enterprise’s processes of operation are integrated or closely related to the utilization of surplus heat, or surplus heat from the process is produced with low investment costs. The Enterprise thus benefits by replacing old cooling towers with a new cooling system/heat pump for district heating. In this situation, the Enterprise must ensure its process control and control of the refrigeration system. In Denmark, the electricity consumption tax will (regardless of ownership) ensure the Enterprise tax reimbursement.

If surplus heat can be extracted without using heat pumps, it will be even more attractive. That is if excess heat has a high temperature suitable for district heating. Here, the total cost of producing the surplus heat will be low, and the payback time for the Enterprise’s investment will be short. The Enterprise commits to allocating surplus heat in a specific flow temperature to the District Heating Company, and the agreements have relatively long maturities for both parties. The fee for the surplus heat will be substantially higher in model 2.

Model 3

The District Heating Company and the Enterprise both invest in and own the facility.

The Enterprise requires full control of the process influencing their operation and the installation linking the project to the existing district heating network owned by the District Heating Company. An example is the operation of cooling systems with combined cooling/heat pumps, where the cooling side of the system is fully integrated into the processes of the Enterprise, and the connection to the district heating network entails high costs. Here, the parts ownership will split at either one side of the cooling/heat pump. New examples show that the District Heating Company, or the Enterprise, owns the heat pumps. The significant costs on the district heating side could be extensive pipework, investment in accumulation tanks, and possibly an electric heater, etc.

Split ownership can be an ideal form of cooperation when combined with sharing the economic benefits. Such joint projects require “open books” where the parties are transparent about the economic benefits of the project. This can be a difficult step to take, especially for Enterprises. Experience shows, however, that joint projects with “open books” provide much more constructive dialogue and mutual benefit. This type of agreement is complex as all essential issues must be addressed before the project is implemented. Conflicts will arise if subsequent doubt arises about who has the obligation to pay a cost or who has financial benefit in the project. As a result, such surplus heat agreements contain detailed rules on the share of the economic benefits, including the repayment method of the parties’ investment and subsequent sharing of the economic benefits.

Model 4

Third-party investments

Third-party investing in utilizing surplus heat from an Enterprise and subsequently selling it to a District Heating Company. Three parties have separate contracts: Between the Investor and the Enterprise and another contract between the Investor and a District Heating Company.

The model may be of interest in the future for external investors wanting to invest in green energy projects. However, the authors of this inspiration catalog are not aware of this model having ever been practiced – yet! Cooperation directly between the Enterprise and the District Heating Company seems more obvious.

“Business models for surplus heating” was published in Hot Cool, edition no. 1/2020. You can download the article here:
Business Models for Surplus Heating, Hot Cool article, no. 1, 2020