HOW TO GET LOW ENERGY COSTS

Often decision-makers and politicians miss that low energy costs are a combination of low energy prices and low energy consumption. The primary learning is that low energy costs can be achieved if industry, heating, and electricity sectors are integrated by establishing district heating networks able to collect losses, save consumption and provide flexibility. This article explores 20 learnings that will lead to low energy costs for industry and consumers if decision-makers go for it.

By John Tang Jensen, DESNZ

Published in Hot Cool, edition no. 3/2023 | ISSN 0904 9681 |

It is often the ambition of governments to have the cheapest energy prices of all. The purpose of this understandable and, by most people, approved target is to ensure that the industry is competitive and that energy is affordable for consumers. In this context, energy for industry and consumers are defined as electricity and fuels for processes, transportation, and buildings. When setting low-cost targets like this, most governments look at electricity and fuel prices, and the target is to hold these prices below or on the same level as in other countries.

Some countries recognise it as a matter of low fuel and electricity prices and lowering consumption in industry, vehicles, and buildings, i.e., if the consumption can be lower than in other countries, the costs will be lower if prices are the same. Standards for equipment and buildings have been developed in most countries, and the need for energy per produced piece of goods, per transported km, or heated sqm has decreased. Still, the population, consumption of goods, vehicles, and total square meters of buildings have increased simultaneously, and in most countries, the total energy demand hasn’t decreased significantly.

The present energy price crisis on fossil fuels due to the Russian-Ukrainian war has shown that some countries are more vulnerable regarding energy prices and costs than others. This cannot only be explained by having poorly insulated buildings or a high energy-demanding industry. There are other explanations from which countries most exposed to high prices could learn.

The below statements are observations and recommendations to governments wanting energy prices and costs to be as low as possible for industry and consumers. The learnings are divided into fuel, electricity, heat, and infrastructure chapters and can be used separately or combined.

Learnings regarding the use of fuels

Oil and natural gas prices have increased dramatically from the beginning of the Russian-Ukrainian war until October 2022. All countries have had the same price increases on fossil fuels. Differences in actual fuel prices are mainly related to fuel transportation costs and, in a few cases, long contracts or government subsidies.

The transportation sector in most countries has seen the same price increases, maybe to a lesser degree in Norway, which is fortunate to be less dependent on fossil fuels and have a large share of electric vehicles compared to other countries.

For countries not using much natural gas and oil for industry and heating buildings, the impact of increased fuel prices has been low compared to very dependent countries. Especially for countries with high winter heat demand based on fossil fuels, the crisis has hit hard, though it seems that countries with high building standards have managed better than countries without.

Renewable fuels have to some degree, followed the increase in fossil fuels, and shortages have been seen due to increased consumption and hoarding. Generally, prices for residues and waste used for incineration and gasification have been least affected without significant increases compared to fossil fuels. Most renewable fuels are not following the same market mechanisms. Still, they will more likely follow the price of the fuel they replace, which means prices will follow other fuels, and often the deviation in prices is developing slowly.

Renewable fuels are getting more competitive when fossil fuel prices go up, which speeds up the replacement of fossil fuels. As with fossil fuels, a country can depend on the import of renewables, which can increase price risks. To avoid this, the government should monitor available resources – like straw, wood, food, garden waste, building waste, municipal waste, manure, etc.- and implement resource strategies to avoid imbalances between demand and supply.

Countries with a large share of combined heat and power (CHP) production have managed much better than those without. The reason for this is simple. The costs for fuels used for CHP production are shared between the electricity and heat sides. Then marginal heat and electricity production price does not go up as much compared to producing heat and electricity alone. CHP is simply more efficient than heat and power-alone production, and the saved fuel costs keep price increases lower.

Learning 1: High building standards and standards for energy conversation prevent high energy costs, no matter the type of energy used.

Learning 2: CHP ensures low fuel consumption and lower costs.

Learning 3: Alternative and renewable fuels lower risks for fast price deviations and get more competitive when fossil fuel prices increase.

Learning 4: A resource strategy to reuse and recycle as much as possible and allocate residues suitable for energy to CHP or biomethane plants ensures lower costs.

Learnings about getting low electricity prices

Electricity prices vary significantly from price area to price area in Europa during the war. The countries with an electricity sector mainly dependent on natural gas power alone plants setting the marginal power production price in most hours have been hit hardest. Even large renewable electricity production from wind turbines and solar collectors hasn’t led to low prices if renewable electricity production does not exceed demand.

Renewable power producers have increased profit significantly, and consumers have often paid the natural gas-related electricity price around 2.5 times higher than the natural gas price per kWh. When the renewable share of capacity is getting higher than demand, the number of hours where natural gas power alone will set the market price will decrease. At that point, electricity prices will drop.

Countries dependent on coal or nuclear power alone production for marginal electricity production have managed better, and prices have not increased as much as for natural gas power alone countries.

Countries with natural gas CHP setting the marginal electricity price have managed much better than power-alone countries, primarily when CHP plants also use other fuels like waste for waste incineration, biomass, residues, coal, and biomethane CHP.

Having electric interconnectors to other countries will only benefit your consumers if the price in the neighboring area is below your own. Suppose your country is situated between a neighboring price area with high prices and another with low prices. In that case, your price will always be between the two depending on the connector capacity. Suppose capacity is the same for both cables to neighboring price areas. In that case, your area will mainly deliver transition capacity, and your price will be close to the country with the highest electricity price.

The price difference between the two areas should pay for the interconnectors’ cost, including electricity loss costs. If the economy on interconnectors is not transparent, there is a risk that the end consumer will pay costs unrelated to consumption, leading to higher tariffs. If interconnectors lead to higher tariffs for consumers, it can be considered to increase tariffs for producers using the interconnectors for export and transition.

Electricity tariffs often discriminate against certain consumers and flexibility providers. An electricity kWh tariff may give high incentives for energy conservation but indirectly tends to support energy loss in the transportation and production systems by discriminating solutions with low marginal transportation costs. Suppose the electricity tariff system supports flexibility for avoiding expensive import of electricity from neighboring areas and electricity production by high loss (high marginal price) in peak hours.

In this case, the share of low marginal price electricity will be higher and decrease overall costs for all. Additionally, tariff systems often cross-subsidize high-capacity demanding consumers and transport costs for electricity exported out of the local grid on behalf of consumers able to deliver local demand and supply flexibility. This makes it more expensive for everybody because it requires more investments in grid capacity.

The consumer gets the lowest electricity prices if local cheap marginal electricity capacity exceeds local demand, and surplus electricity production can be exported to neighboring price areas. Companies and consumers producing electricity for their own use decrease local demand and support low marginal electricity prices for all.

Learning 5: Expand solar, wind turbine, and water turbine capacity – lowest marginal prices.

Learning 6: If fuel-based capacity is needed, establish only CHP – income from the heat side decreases marginal electricity price. Place CHP plants nearby industry and heat networks or establish a heat network if necessary.

Learning 7: Monitor the economy on interconnectors. Interconnectors do not necessarily deliver lower prices for consumers. The price difference must pay heat loss in interconnectors.

Learning 8: If local solutions can avoid investments in transmission lines (interconnectors), share saved investments with consumers delivering solutions. This benefit depends on how local solutions can be established to the same costs as large, centralised solutions. Additionally, the security of supply can be achieved.

Learning 9: Allow direct lines and energy communities, which will decrease local demand and increase the number of hours with low marginal electricity prices.

Learning 10: The electricity tariff system should support flexibility, and payments should follow actual costs.

Learnings getting low-cost heat sector

If the heating sector is primarily based on individual solutions using fuels or electricity, the consumers are exposed to price variations directly. The better the building standards, the less exposed consumers are to increasing prices, which can explain why some countries with good building standards manage better. Heat pumps for individual buildings are more efficient than other individual technologies.

Still, if the power market marginal price setting is related to power-alone production, the electricity price is around 2.5 times higher than the fuel price. Then it does not help much if the heat pump COP (Coefficient of Performance) is on the same level (COP 2.5). And that is because the heating price using electricity will be close to the fuel price and often higher due to high electricity transportation costs. Then learning about low-cost electricity is also important for individual electricity-based heat prices.

CHP and waste heat from the incineration of waste and industrial processes delivered to a district heating system is the most important way to decrease fuel and electricity consumption and heat prices. Ultimately, a district heating system can be almost independent of fuel price variations. Combined with an electrical boiler, the CHP plant can deliver flexibility to the power system both when the electricity prices are high and low, which will benefit heat and electricity consumers.

Electrical boilers can avoid curtailing renewable electricity from wind turbines and solar PV collectors. This is possible if production exceeds demand in a price area and may be cheaper and more flexible than building more cables to other areas with the same renewable electricity production profile.

District heating systems can be non-fuel-based but will still depend on electricity prices for heat pumps to collect low-temperature waste and ambient heat sources. However, these sources have higher temperatures than individual heat solutions. This means that large heat pumps in district heating network systems will be more efficient than individual heat pumps, including losses in heat networks, which will decrease costs and heat prices compared to individual solutions.

Fuels should only be used in district heating systems for reserve and peak load purposes or if electricity prices, for some reason, are getting very high and CHP capacity is needed. Waste CHP incineration and, in some countries, not having much renewable electricity production, fuel-based CHP may be the exemption.

An often-overseen factor regarding district heating systems is that combining heat sources dependent on different fuels and electricity can provide flexibility to the electricity system. If this flexibility is combined with a heat storage system, the benefit for consumers and the electricity system will increase. This will result in low heat prices if the heat source with the lowest marginal heat price is always preferred first. The benefits only increase with increasing demand for flexibility from the electricity system.

It is not just heating. Most cooling can be produced in combination with heat, and especially for large buildings demanding both heat and cooling, combining the heat and cooling production can be beneficial, leading to lower prices for both. The heat can be used for heating, tap water, or delivered to a district heating network. The technologies are there and can be based on natural refrigerants not having significant greenhouse gas effects.

When district heating networks are established in zones near cheap waste heat sources, the heat delivery capacity is sometimes larger compared to heat demand. Then the heating network should be expanded into nearby urban areas. Alternatively, transmission lines can be established to nearby district heating networks areas having relatively high prices. Transmission lines for heat will only decrease heat prices for consumers if the price difference between the two areas can finance a transmission line.

It is for district heating networks important that tariff systems support flexibility in the same way as for electricity systems. Consumer payment according to actual costs should be preferred.

To avoid losses and ensure low heat prices, the payment for waste heat sources should never get higher than obvious alternative heat sources, which could be implemented in contracts or legislation. If many heat sources can deliver to a heat network, the lowest marginal price should always be preferred. It then can be considered to split heat source payment into marginal price payment and capacity payment.   

Learning 11: Establish district heating networks in all suitable urban areas. If a large heat pump solution in a heat network is cheaper than individual heat pump solutions for the same area and number of consumers, the area is suitable for district heating networks.

Learning 12: Do not allow direct fuel use in district heating boilers except for reserve load purposes. Peak load capacity and flexibility should be based on heat storage systems.

Learning 13: Collect waste heat from power production (CHP), waste incineration (CHP), hydrogen production, carbon capture and industrial processes, and any other renewable fuel production and use it in district heating networks.

Learning 14: Heat sources for district heating should be low-temperature infrastructure (heat from wastewater treatment, freshwater systems, mines, underground rails, electricity transformers, gas compressors, etc.), waste heat sources, and ambient heat sources in combination with high-temperature intermittent sources like CHP, waste heat (non-constant high temperature) and heat from cooling.

Learning 15: Establish electrical boilers in connection with CHP capacity when the number of annual hours with renewable electric production capacity is above electricity demand of more than 500 – 1500 hours/year.

Learning 16: Require that large cooling systems produce cooling combined with heat.

Learning 17: Establish district heating transmission lines if the price difference between the two areas can finance investments.

Learning 18: Tariff systems in district heating systems should follow costs without disruption and cross-subsidizing payments.

Learnings organising infrastructure

Infrastructure for transporting energy in networks like the electricity grid, natural gas grid, and district heating networks are natural monopolies. The costs for transporting energy in these networks depend on having a monopoly because it then can be optimised, benefitting all consumers.

If, for example, a heat network is present in an area natural gas grid for individual supply is not needed, the electricity grid does not need to expand to deliver capacity for heating, and everybody saves costs. Energy systems get expensive for consumers if the capacity for the same purpose is established in the same area. It will be cheaper for consumers if the type of heating system is decided for each area and zones are designated.

Commercial grid companies with a monopoly for transporting energy are an issue because a monopoly normally does not incentivize efficiency and deliver low-price service. Additionally, commercial companies with monopolies do not want to expand and develop the system if there are risks. They often try to get subsidies from the government if forced to develop and expand according to national objectives.

Suppose commercial grid companies are regulated on prices by a government-appointed regulator. In that case, they will always try to get higher prices and costs approved if the government asks them to make developments according to Government objectives. In general, all infrastructure systems like railways, water supply, sewage systems, waste collecting, roads, highways, digital networks, electricity grids, natural gas grids, district heating networks, etc., are essential for society and quality of life and Central and Local Governments should monitor, develop, and make joint planning for those infrastructure systems.

Infrastructure companies deliver service to all and should therefore be publicly owned and non-profit. Security of supply and low costs are essential for society and local revenue, which best can be achieved by local and public ownership of grid companies able to deliver on public objectives without subsidies.

Grid companies should establish and provide capacity, including the security of supply. A model with commercial companies delivering the energy to publicly owned grids is a proven model in countries with low energy costs and prices. However, transparency is important regardless of the model for organising grid companies.

Learning 19:  Designate zones for the specific heating system – district heating, electricity, or gas (Natural gas, biomethane, or hydrogen) and be aware that district heating delivers additional energy conservation, flexibility, and low-cost heat in urban areas, which electricity and gas grids cannot.

Learning 20: Energy grid companies should be transparent, non-profit, and publicly owned to ensure public objectives are met.

For further information please contact: John Tang Jensen, johntang.jensen@beis.gov.uk