HOW TO HELP COMMUNITIES ESTABLISH DISTRICT HEATING NETWORKS?

If authorities want to help communities establish and develop new district heating networks, it is essential that the community can get the first investigations financed. This can be obtained by loans from future suppliers and private funds that must only be paid back if the district heating network is established.

Alternatively, the money must be given to the community from public funds or energy suppliers without conditions. If investigations show that a district heating network is the best solution, the government can help community-owned companies establish the district heating network system by guaranteeing the needed loans.

By John Tang Jensen, District Heating Expert, and Jørgen Røhr Jensen, NIRAS

Published in Hot Cool, edition no. 3/2024 | ISSN 0904 9681 |

Community-owned district heating networks in Denmark

In Denmark, consumers own around 280 out of 360 district heating companies, with one share of the company per dwelling connected to the district heating network. This community ownership is unique for Denmark and has proven suitable for district heating network companies in urban areas.

The story of how these companies were established is often forgotten, and this article aims to recount it. The story may guide urban areas and governments in setting up similar community-owned district heating companies.

First, exploring why consumer-owned companies can be a suitable organisational solution compared to private ownership might be helpful. Consumer ownership has some of the same advantages as public ownership but requires less involvement from local authorities. It also avoids some disadvantages, such as getting involved in delivering on local political targets that are not related to heating and are covered by the legal regulations of local authorities.

Why community-owned companies?

Privately owned district heating companies will set their heat prices just below the apparent and potential prices of individual heat supply technologies, which, from a company perspective, is the best way to maximize profit. The economic advantages of having a district heating network compared to individual solutions will only be shared with the consumers to some extent.

Community ownership has four main advantages:

1. Non-profit monopoly
2. Local involvement
3. Long-term planning and investments
4. Focus on efficiency, energy security, and comfort

Non-profit monopoly

From a consumer perspective, it is an advantage if the operation of the district heating network company does not have to generate a profit for an owner. The profit can be used to lower heat prices. The precondition is that the driver for both the board and the management of the company is to achieve the lowest heat price possible.

If low heat prices are not the ‘driver,’ there is a monopoly risk with community ownership if managers work for their benefit, accumulate capital for no reason, use it for purposes unrelated to heating, and do not develop efficient, low-cost solutions. If the company board is elected among consumers, the board will probably require management to prioritise affordable heat prices, avoid accumulating capital, and stick to the main business – heat supply.

Local Involvement

When consumers are involved in their own heat supply company and benefit from good company management, they will require management and the board to work for consumer benefits. Local engagement also makes it easier to get solutions approved and accepted locally, which benefits everyone.

Long-term planning and investments

The combination of monopoly, non-profit, and community ownership requiring low prices makes management prefer implementing long-term planning and investment strategies. These will include long-term loans and low-risk loans with low interest and long depreciation time according to technical lifetime. All this will support low heat prices compared to a profit-based and short-term approach.

Focus on efficiency, energy security, and comfort.

Consumer-owned companies will focus on energy-efficient solutions because saved fuels and purchased heat will decrease heat prices for all. High efficiency and combining heat source technologies will reduce demand for capacity investments. At the same time, the security of supply and comfort can be increased without additional costs.

If management focuses on efficiency, a part of this is also to attract new consumers. If the existing supply becomes more efficient, capacity is released and available for new consumers who can share some costs with existing consumers, lowering the heating price.

In the same way, insulation and energy conservation inside buildings indirectly benefit all if they allow the district heating network company to expand to new areas and to connect new consumers not yet connected. Low carbon objectives can then align with heat pricing objectives.

The same incentives could be present in private district heating network companies. Still, investments in energy conservation and saved investment costs are often converted to increased profit, which does not incentivise connecting new consumers and lowering prices by sharing costs.

Expanding district heating networks requires a burning platform.

This chapter explores how district heating networks were established in Denmark.

The very first district heating networks in Denmark were established due to common sense! The waste heat from city power plants was collected and used to heat nearby buildings. It was built because heat was available, and the companies were owned mainly by local authorities.

At that time, it was about eliminating individual coal, coke, and oil polluting the cities with dust and smog. The ‘burning platform’ was the pollution from individual heating solutions. Many of these companies were established in the 60s, and the ‘driver’ was low-priced coal and heavy fuel oil. Most of these companies were established by local frontrunners and owned by the consumers.

In the second phase, district heating companies were established in connection with the oil crisis, creating a ‘burning platform’ at the beginning of the 1970s. Consumers were forced to replace the individual oil boilers with something much cheaper. The solution was more district heating networks based on centralised large coal CHP plants in large cities and, in other cases, district heating networks based on heavy fuel oil or coal boilers in decentralised cities.

This crisis mainly resulted in local authority-owned district heating networks and, in some cases, in community-owned district heating network companies associated with existing community-owned water companies and community-owned power grid companies.

This development was mainly seen in the 1970s. The main driver of the widespread deployment of district heating in Denmark has been lowering the costs of heating – not the environmental aspects, as many might assume.

Denmark’s third ‘burning platform’ was the second oil crisis and natural gas discovery in the 1970th. Consumers were forced to convert to either individual natural gas boilers or district heating CHP plants. Again, the target was to develop independence for imported oil and, in this case, replace it with natural gas from the fields in the North Sea.

The government used zoning to find areas suitable for district heating and others for natural gas boilers within the gas network supply chain. After the zones were designated, local authorities were responsible for establishing networks and designing the heat sources. In zones for district heating, companies were required to establish CHP based on natural gas, but biomass CHP and waste incineration CHP were also allowed. Existing coal CHP plants could continue using coal.

Local authorities were allowed to find their own heating solutions, and many small villages chose to establish a district heating network system based on natural gas CHP incentivised by subsidised electricity production. In some cases, if natural gas was unavailable, district heating networks were established and based on straw or wood pellet boilers. The remaining part of mainly rural areas kept oil boilers.

All centralised cities were already converted to coal and waste incineration CHP at the third’ burning platform.’ The plants were relatively new and difficult to convert to natural gas, as they were more expensive, so where could the government ensure the use of natural gas?

The answer was industry, zoning for individual natural gas boilers, and new zoning for natural gas CHP plants delivering heat to district heating networks in high-heat density areas. This story focuses on the third burning platform where most new district heating networks became community owned. This deployment of district heating has continued until today – partly because of the recent energy crisis and the technology-agnostic nature of district heating.

How did the community-owned companies get established?

Many small cities and urban areas in Denmark have quite strong communities used to make associations for all kinds of purposes , and if local stakeholders and local authorities are responsible for getting a solution benefitting the community established, it is not unusual that local frontrunners call for a meeting with the purpose to develop an “Association” for joint lobbying against local authorities.

Frontrunners can be local politicians, business owners, or private persons willing to work for the cause. Many new “Heat Associations” were established during the 1980s up to the middle of the 1990s. The steps for establishing these community-owned companies were as follows:

1. The first action is to establish a local group of frontrunners. Often, local engineering advisors contacted the local civic association and offered assistance in evaluating the possible establishment of a community-owned company. A working group was established, including people elected for local government and local frontrunners.
   Often, local people with technical or economic skills were included. It was published in the community that it was intended to establish this group. Usually, everybody was invited to a public meeting to find out who would be interested in participating. The local frontrunners and politicians were not legally elected, and the group had no legal rights.
2. The next step was to investigate a district heating project, which included all technical, economic, and legal circumstances for district heating, and make a plan for financing and establishing a district heating network.
   This was a tremendous job, and the group usually could not do this independently. The group and the advisor had to cooperate to get funding to make it possible for the advisor to conduct the investigations. The funding was typically donations and loans from companies delivering equipment for heat networks.
   When established, it could be companies delivering heat-producing equipment, companies delivering heat network pipes, local natural gas companies, and advisory companies. If decided upon, the loans were included in the total investment for establishing the district heating network company afterward. If it had not been agreed upon to establish the district heating company, the loans would not have been paid back and would have been lost. The companies giving the loans this way took the risk.
   The companies were promised to be included in the tendering process in competition with other suppliers. The companies offering the loans then could not be sure to win the project, but if the project was realised, they got their loan paid back by including the loan in the investment for establishing the district heating network. It is essential to highlight that these agreements are “Gentlemen’s agreements” since the working group had no legality.
   Local natural gas companies often gave the most significant loans, which were not required to be paid back because the gas company had a monopoly on selling gas when the network was established. Often, loans from natural gas companies could finance investigations, and other loans were not necessary.
3. The advisor and the working group made the project proposal. Their cooperation ensured that the members of the working group received education and skills regarding the details of the project. It was common in projects to investigate different solutions, including different fuels and technologies for heat supply, etc.
4. The project report and information were then shared with all community citizens. Public meetings were arranged to discuss project details, economic consequences, and connection requirements. The projects typically showed that between 60% and 70% of all consumers needed to connect from the start to be viable, which depends on local conditions.
5. Consumer agreements were made, but these were, at this point, not legally binding.
6. A founding meeting for the legal district heating company was arranged if the number of agreements was near or above the required 60% to 70%. The consumers participating in the meeting elected a board for the company, which took over the project. The community-owned company was established, where shareholders were liable for their share of capital, which typically was very low and between 10 and 1000 £ paid per share (dwelling)
7. After establishing the company, binding consumer agreements were made, tenders were published, and the final decision to establish the district heating network was prepared based on the bids received from the tendering.
8. If the expectations from project proposals were met, the final decision was made. In this phase, all normal actions for establishing a company were carried out, including contracts with suppliers, authority approvals, land purchases, etc.
9. Financing the development and construction of the district heating solution is essential for establishing the district heating network. In Denmark, it is possible to apply for a guarantee for a loan from the local government to get the district heating network company established.
   This guarantee makes it possible to get a low-interest rate loan from national or private banks. The loan pays all investment costs, including development costs, until consumer payments take over and operational costs are paid.
   When loans are secured, the first employee can be hired, who will often be the future plant manager. Afterward, the chairman and the plant manager will be responsible for hiring staff and making contracts with suppliers, though advisors typically help with contracts and agreements.

Community ownership gives the consumer the possibility to make their own decisions, get involved, and elect their board among neighbours in a democratic process which offers an additional benefit to the local community and local confidence that can affect other local activities.

When the district heating network company was established, and delivery began, new consumers/shareholders were required to pay for a share if they wanted to connect to the network. The share is only paid once and is transferred free to a new building owner if the first shareholder moves away.

This way of establishing district heating networks was generally a success. Still, some companies struggled in the first 10 to 15 years because they were forced to use expensive natural gas due to decreasing subsidies and a high energy tax. An additional issue was the falling electricity price, which made natural gas-based CHP networks unable to keep heat prices low.

After the government removed the requirements regarding using natural gas, most companies managed to decrease the heating price and get more consumers connected. However, it still can be an issue if the population decreases and buildings are left empty or torn down.

If heat loss increases due to decreasing supply to consumers, it can be challenging to maintain a good economy in the company. Then it becomes essential to find very low-cost heat sources, such as solar collectors or own integrated wind turbine combined with a heat-pump-based source like air, water, or waste heat.