While district cooling offers remarkable energy efficiency and environmental benefits, its adaptation to energy systems is still scarce. When investigating both the benefits and challenges, conflicts appear when comparing the two. The focus is primarily on the technical aspects and is missing one key point. First and foremost, District Cooling must be considered a business investment before it can reach its full potential.
By Jakob Bjerregaard, partner, and Lea Riber Junge, junior consultant , DEVCCO
Published in Hot Cool, edition no. 7/2024 | ISSN 0904 9681 |
District Cooling (DC) has inevitably become an important topic for future energy systems. The challenges of a drastically changing climate and increasing temperatures emphasize the need for sustainable cooling. Cooling is currently responsible for 10% of the world’s greenhouse gas emissions, and a fifth of the world’s electricity consumption is dedicated to cooling. Increasing electricity consumption requires that energy efficiency is prioritized to maintain the current security of supply. DC has been touted to be the “new cool kid on the block”, and it holds the key to some of the problems we are all facing.
Currently, DC is mainly discussed as a technology and not as a business development case. To secure investors, one must consider it with a more holistic approach and evaluate the business ecosystem around it.
Exploring the benefits: The untapped potential of district cooling
- Contribution to climate goals: DC holds the potential to reduce the environmental impact drastically compared to conventional cooling methods such as air conditioning. Examples of up to 70% decrease in greenhouse gas emissions have been proven possible when implanting modern DC systems. Converting cooling into a large-scale technology can utilize much more renewable energy than the individual cooling units we see today. It encourages a holistic approach to the energy system through sector coupling and optimizing resource usage and increased efficiency. One obvious example is adding storage to decouple cooling consumption from production and utilize electricity when it is green, cheap, and abundant.
- Reducing Urban Heat Island Effect: Cities are often significantly warmer than rural areas due to infrastructure like roads and buildings absorbing and retaining heat. Another key factor is the heat generated by individual cooling units emitting hot air. District cooling can reduce the heat island as an effect of the decreased capacity needed for cooling.
- Industry goal setting: By integrating with renewable energy and higher efficiency, DC systems are critical for cities aiming to reduce greenhouse gas emissions and meet international climate goals, such as those set in the Paris Agreement. Furthermore, they are also valuable for companies committed to reducing their carbon footprint, which is incentivized by the ESG (Environment, Social og Governance) reporting and CSRD (Corporate Sustainability Reporting Directive) directive, among other things. In relation to this, there is also the Science-Based Target, which most large companies try to abide by.
- Grid stability: DC systems can contribute to energy system stability by providing flexibility services that reduce demand during peak hours or utilize the energy when the green energy mix is high.
The efficiency can be up to 50% greater than that of traditional cooling systems, meaning energy use in the urban area can be significantly reduced, and the strain on the electricity grid lessened. This is most often due to a combination of more efficient production setup and load shifting through integrated cooling storage.
District cooling systems are more efficient because they centralize production, optimize energy use through advanced control systems, and reduce losses compared to decentralized, traditional cooling systems.
Understanding the Causes of Unrealized Potential
Undoubtedly, DC systems have many perks. They hold great unrealized potential. But they are just that—unrealized. If they truly live up to their reputation, why haven’t they been widely implemented worldwide? Is it due to the potential being inflated, or is there another reason behind the scarcity of active systems?
The demand for cooling is undoubtedly increasing fast. Research from IEA suggests the demand will more than double before 2050. (Figure 2 – Cooling demand predictions)*
A critical approach to district cooling implementation
To investigate the reasoning behind the unrealized potential, it is essential to observe how the ecosystem of the society that we live in is composed. Are the benefits of implementing the DC simply just not large enough for the responsible parties?
The role of the utility companies
For instance, who should be the frontrunner in promoting and investing in DC systems? Utility companies already delivering district heating would be the obvious actor who could add DC to their portfolio. The two systems work well in symbiosis and would complement each other’s businesses.
Despite the resemblance between the two district systems, the quantities are very different. District heating outnumbers DC by far.
As can be seen in Europe, DC systems only represent 1% of all heating/cooling systems.**
While utility companies might be the most suited for promoting DC, they still lack the necessary incentives. At the end of the day, it is still a business, and the investment would have to be viable and more attractive than other investment opportunities.
District Heating versus District Cooling in Europe
In recent years, most district heating utilities have had their hands full coping with the heating transition to renewables and the energy crisis. On top of that, we’ve seen a challenged investment climate in general, with increasing supply costs and high interest rates making capital-intensive developments, like DC, difficult.
Another reason behind it, in particular Scandinavian countries, is the ownership structure. The public largely owns utility companies and run as non-profits, making it more complicated to create and prioritize commercial investment opportunities targeting fewer, large customers.
Electricity prices and variability
A great deal of the advantages of DC systems depend on the variability of electricity prices. If these do not vary, the economic incentive to shift consumption is not present. This means that the benefit of the DC is cancelled despite the benefit for the electricity system when demand is moved away from peak hours. Moreover, this also affects the economic benefits as the operational cost cannot be decreased.
Who takes on the expense?
A sentiment often expressed in business and strategy-related content is, “Accentuate the positive and minimize the negative.” The phrase emphasises that to make a case appealing, the project’s advantages should be centred on a few. Meanwhile, disadvantages should be spread out between several actors, minimizing the feeling of the impact.
Looking at DC, we see the opposite. Because it contributes to sector coupling, grid stability, and local conditions, such as heat islands and noise, many of the benefits will be spread out among many. Meanwhile, the disadvantages, in this case, the costs, are carried by the clients and project developers.
To increase the positive appearance of such a project, it is important to aggregate the positive effect of each consumer and measure the value created through sector coupling and other indirect benefits.
Navigating the dilemma of sustainable capital and finance
As previously mentioned, the regulatory and policy attention to DC is minimal. In EU taxonomy, sustainable capital regulations have been implemented to guide investors toward more environmentally sustainable activities. It is a key part of the European Green Deal and the Sustainable Finance Disclosure Regulation (SFDR). Despite all its positive attributes, DC is yet to be defined as an environmentally sustainable solution. In the context of the relation between district heating and DC, this is a key factor. District heating is mentioned in a by-sentence, increasing the incentive of the technology. One can, of course, argue about the optimality of politics. Nonetheless, it is an obstacle to implementing DC at the present time. If policies supported DC, it would be easier for industries to utilize and build a business case around it.
Furthermore, there is a general lack of insight into how DC is defined from an investor’s perspective. Utility companies and financiers generally do not have a clear definition of which asset class they belong to. It is safe to say it falls between two stools, complicating the business case scenario.
Building regulations: Turning investments into rewards
In Denmark and other markets, the building regulations present a reward system for local RE investments. Multiple different subsidies are provided for investments in RE implementations. But once again, DC has been left outside in the cold. Currently, an investment in DC would often negatively impact the energy frame of the building, presenting yet another obstacle to DC implementation.
Currently, it is more beneficial for a building manager to invest in separate cooling units and add solar cells, even though this would have a greater environmental footprint. While waiting for regulations to change, it is more convenient to invest in individual cooling units with a relatively short lifetime. If the regulation then rules in favour of DC, the consideration of changing the cooling system would be taken, but it would often be too little, too late.
Strategies for Success
There is a tendency to talk mainly about the technological feasibility of DC. In doing so, the perspective narrows greatly. Instead, would it not be more appropriate to use a wide-lensed view and evaluate DC with a holistic approach? Even though the conflicts may indicate that using conventional cooling is more convenient, it does mean there is no solution to the problem.
Undoubtedly, local adjustments could be made in regulations, which could tip the scale in favour of DC. But there is also a more general solution. Instead of approaching DC as a technology, it could be approached as a business development. To convince an investor, early business case models must be developed to create the basis for implementation. This means that there would need to be more focus on early-stage phases.
After all, if it is not possible to convince a finance partner, what is the purpose of dimensioning pipes? This does not mean that the technicalities are not important because they still are. However, by developing a framework for overcoming different obstacles, both societal and regulatory, the process would run more smoothly.
As for all other new beginnings, the challenges phased only strengthen the product. If it is possible to make a viable business case with this foundation, imagine what can be done when it is appreciated as an efficient climate mitigation solution for an ever-growing problem, namely, keeping cool.
* TIEA: https://www.iea.org/data-and-statistics/charts/growth-in-global-air-conditioner-stock-1990-2050
** TDH/DC: https://iifiir.org/en/news/state-of-play-of-district-heating-and-cooling-in-europe
For further information, please contact: Jakob Bjerregaard, jakob.bjerregaard@devcco.dk
“The Challenge of District Heating: Turning Vision into Reality” was published in Hot Cool, edition no. 7/2024. You can download the article here:
