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HOW TO START A DISTRICT HEATING COMPANY

by Linda Bertelsen

If we are to become independent of fossil fuels such as coal, oil, and natural gas and instead base the heating of our homes on renewable energy sources like sustainable biomass, surplus heat, solar and wind power, and geothermal energy, it is necessary to establish district heating wherever it is technically feasible and economically viable. Therefore, it may be relevant for you to get inspiration – a guideline – on how to start a district heating company. This article introduces the process. Circumstances vary from country to country, so pick the parts that give meaning to your plans – and hopefully, you will be inspired.

By Lars Gullev, Senior Consultant, VEKS

This article was published in Hot Cool, edition no. 5/2023

This article is inspired by the Danish District Heating Association guidance on how to establish a cooperative district heating (DH) company and, at the same time, reflects the author’s vast international experience. Some of the content is relevant everywhere; for many, other parts may be less relevant. It is important that the recommendations are not seen as a final work plan for how to establish a DH company – it is for inspiration and guidance only.

9 steps toward establishing a DH company

9 steps in this plan bring a project from the first idea to a final DH system with pipes in the ground.

Link to the plan in Danish.

This article will exclusively focus on establishing a new collective heat supply in areas away from existing DH networks. Some of the recommendations are also relevant for expanding existing networks. Still, for now, we focus on the many large and small cities, towns, and villages where DH could be the sustainable heat supply in the future, who have no DH at present and need to start from scratch.

“Before start,” “find out who is doing what.”

If the use of natural gas is to be reduced – and possibly phased out – it is crucial to expand existing DH networks and establish DH in cities/villages geographically isolated from the existing DH networks.

First and foremost, it is crucial to investigate if others have had the same good idea. If so, contact the municipality to clarify the climate and energy policy goals in the municipality. Then, contact the nearest DH companies (including small companies) to get information about their plans to supply DH to your city or area.

Establishing DH from scratch requires significant resources, such as many volunteer hours from local enthusiasts to contact neighbors and dialogue with advisors and the municipality. Preparing a project proposal and technical, economic, and legal screening and preparation for a completely new DH company also requires financial resources.

A good starting point for a group of persons who want DH is to gather information:

      • From the municipality regarding climate plans, green transition, or heat planning.
      • From existing similar district heating companies from other places.
      • From private companies that establish DH systems as turnkey projects. 

    Planning and rolling out collective heat supply takes time. Expect a minimum of 1.5-2 years for processing in the municipality, excavation work, etc., before DH is established in a new area.

    “Start an initiative group.”

    It needs to be investigated whether the area is suitable for DH. Are the properties reasonably close to each other? How many could be expected to connect to DH? If it is believed that there is a basis for a company, the “enthusiasts” can convene a founding general meeting to elect a board.

    At an early stage in the process, it is also recommended to initiate a dialogue with significant heat consumers, such as industry/commerce, municipal buildings, property associations, housing cooperatives, etc., to gauge their interest. Also, preliminary considerations of potential heat sources/production – the possibility of surplus heat from industry, data centers, wastewater, water purification, or similar should be investigated. The municipality is an essential sparring partner in this process. The result is a very early assessment of the opportunities and interests.

    “Investigate start-up capital and cooperation with the municipality.”

    If no DH is planned for your area, you should contact the municipality and gain insight into local climate, energy, and heat plans. It is always a good idea to involve the municipality from the beginning if you consider establishing your own DH company. The municipality can assist with various aspects, including organizing public meetings.

    One challenge in the start-up phase is often financing, and a 360-degree advisory approach – technical, economic, and legal – is recommended. However, a group of citizens rarely has the financial resources to pay for expert advice and other costs. Screening and establishing a company (technical, economic, legal assistance) costs €15,000-17,000 in Denmark, while a project proposal costs €10,000-15,000. Again, the municipality can often be a good partner and source of support. Sometimes, the municipality may support advisory services and project proposal preparation concerning the municipal heat planning task.

    To raise funds for project proposal development, etc., membership shares of, for example, €1,000 can be sold to interested customers/shareholders. Alternatively, a turnkey supplier can cover these costs up-front if an agreement has been made.

    “Screening (technical, economic, legal)”

    It’d be important to clarify whether there is a basis for establishing a new DH company as early as possible. DH (collective heat supply) should only be established where it is economically and environmentally sustainable in the long run. There is currently significant pressure to transition from natural gas, volatile energy prices, and high demand for materials (pipes, meters, etc.) and personnel (contractors, plumbers, planners, etc.).

    Therefore, a technical, economic, and legal screening of the project is crucial, focusing on the following points:

        • Agree with a competent advisor who can provide comprehensive guidance.
        • Be cautious with “no-cure, no-pay” advice. It may incentivize establishing DH networks that are not viable in the long run. 

      Prepare technical sensitivities/scenarios:

          • Check heat density and calculate heat loss in the network.
          • Utilize existing boilers (greenhouses, schools) or surplus heat (industry, wastewater, seawater, etc.) and investigate the placement of technical facilities.
          • Consider supply security, resilience, peak load, and backup capacity.
          • Consider organization and long-term operation.

        Prepare a budget estimate:

            • Check competitiveness (pricing structure). Calculate the estimated heat price per consumer based on estimated production and administrative costs.
            • Calculate the necessary and probable connection percentage (verify pre-interest among the properties involved).
            • Ensure close dialogue with the municipality’s departments for climate, the heat planning authority, properties (major public heat consumers that can connect), and land use/ local planning (placement of technical facilities). 

          “Start district heating company.”

          Most DH companies in Denmark are organized as cooperative societies (a.m.b.a.) owned by the DH consumers. Another option may be for the municipality or a private entity to own the DH company.
          If the DH company is established as a limited liability cooperative, the owners’ responsibility is limited to the share capital each has contributed. In practice, it often starts with a group of enthusiasts deciding that they want district heating in an area.

          In Denmark, the organization Danish District Heating Association has developed a set of Standard Articles of Association, which is used by most DH companies in Denmark and can be used by new companies at no cost. Before the physical establishment, the company should consider how the project will be tendered. There are specific tendering rules to be followed, which vary from country to country and depend on factors such as the type and size of the project.

          “Develop project proposal, obtain municipal approval and financing.”

          In Denmark, municipalities are the authority for heat planning and approval, which may differ in other countries. However, in Denmark, it means that the municipal councils make the final decision on how heat planning and the expansion of heat supply will take place in the municipality. The Danish Energy Agency sets the framework for municipal heat planning and the municipality’s handling of heat projects. The rules are outlined in the “Executive Order on Approval of Projects for Collective Heat Supply Systems,” also known as the “Project Executive Order.”

          The proposal describes the project in detail and is usually prepared by a consulting engineering firm commissioned by the DH company or the municipality. Once the project proposal is approved, loans must be secured to finance future infrastructure investments. Examples of project proposals can be requested through DBDH.

          One of the reasons for the success of DH in Denmark (where DH heats 66% of all households) is the simple and attractive financing model used. A similar should be investigated in your country. Under this model, a DH company can finance infrastructure investments with loans through KommuneKredit, a special-purpose credit institution in Denmark, with a 100% guarantee from the municipality. However, DH companies can also choose private mortgage credit institutions, banks, or leasing companies as an alternative to KommuneKredit. In such cases, the DH company may be able to finance only 80% of the infrastructure investments, unlike KommuneKredit, which can finance 100%.

          “Maximizing connection rates: Strategic communication channels for DH projects.”

          The decision-making process varies from person to person. It is essential to recognize that people’s decision-making processes differ. This is even more relevant for long-term decisions like connection to a DH network, which may be perceived as a new technology and riskier than the classic solution. Therefore, the DH company should utilize various communication channels over an extended period to capture individuals at the right moment in their decision-making process.

          Facebook, meetings, brochures, and many others are obvious choices that can be used. I would suggest that you have a communication plan from early in the process. Maybe even from the very start. After the project proposal is approved, the physical establishment of the DH network and other related infrastructure can commence, provided there are enough customers (sufficient connection percentage) to make the project economically viable.

          It is crucial that the DH company considers marketing and communication with citizens as an integral part of the project since its success depends on the number of sign-ups. Therefore, the company must address a wide range of points regarding how it will offer DH before starting the communication process to ensure high initial connection rates.

          “Operation”

          Running a DH company today requires various competencies, such as technical knowledge, financial understanding, communication skills, administrative expertise, and legal understanding. Smaller DH companies may have some of these competencies in-house, which is why many collaborate in operations, sharing the necessary core competencies.

          In Denmark, there are nearly 400 DH companies in 2023, many of which were initiated locally and have local roots, which is essential and beneficial in the initial stages. However, in the long run, establishing joint operation companies or shared emergency response arrangements can yield significant economic advantages since district heating companies must be able to provide a stable heat supply to their customers 24/7/365.

          Therefore, it is a good idea to consider, from the beginning of the project, whether a local DH company or another external operator can handle the operation of the DH system in the long term. In Denmark, several smaller DH companies have established joint operation companies to minimize operating costs in recent years.

          “Assistance and support”

          Establishing a new DH company requires time and dedication, but once it thrives, it is worth considering membership in the National DH Association. As a member, one can gain insights into the latest professional knowledge, stay updated on energy policy topics, and have the opportunity to influence regulatory conditions and professional standards. Additionally, membership provides access to various services to support members’ core activities and development.

          The National DH Association has technical, financial, and legal consultants that an establishing company can draw upon. The
          association’s website also offers a wealth of knowledge about DH. The above eight points are intended to serve as inspiration and a checklist for establishing a new DH company. It will not be easy, but at the same time, it is not impossible.

          Summary

          The background is that most DH customers are supplied from plants using sustainable biomass, waste heat from waste energy plants, or waste heat from industrial facilities. Other DH customers use solar collectors in combination with large heat storage or water-to-water heat pumps from wastewater treatment plants. Others again use air-to-water heat pumps or various combinations of the above mentioned technologies. All in all, it has a flexible range of different production technologies. The fact that many DH companies also produce electricity or are contractually shared in the high electricity revenues obtained by waste energy plants further ensures low, stable DH prices for end consumers.

          For further information, please contact: Lars Gullev, lg@veks.dk

          Meet the author

          Lars Gullev
          Senior Consultant, VEKS
          “How to start a district heating company” was published in Hot Cool, edition no. 5/2023
          You can download the article here:
          How to start a district heating company, by Lars Gullev