Lessons to be Learned from the Danish neighbor
With the adoption of the Wärmeplanungsgesetz (WPG) (the Heat Planning Law) in Germany, the regulatory framework for heat planning has been established. In implementing the WPG, German municipalities systematically evaluate which supply variant offers strategic advantages within an overarching sustainable heat supply concept for their municipal area.
By Susanne Schmelcher, Head of Department for Neighborhood and City, German Energy Agency (dena)
Published in Hot Cool, edition no. 5/2024 | ISSN 0904 9681 |
The question of implementation options within specific spatial contexts and local heat generation is gaining prominence. In the past, this level has played a minor role in Germany because the supply options were usually decided at the individual building level. Even though the entire municipal area is affected by the heat planning, there will still be significant differences in the options that can be drawn for the respective individual neighborhoods.
If we set aside the efficiency gains from building envelope renovations, which must be carried out by building owners and are undoubtedly crucial, the situation in municipalities simplifies as follows: For areas currently served by district heating or designated for future expansion, a sustainably implemented heat plan provides a decarbonization service for potential heat customers. District heating companies are legally obliged by the WPG to decarbonize their networks.
Therefore, residents of these areas no longer need to concern themselves with transitioning their heating systems, as this responsibility is outsourced to professional entities such as private companies or municipal utilities (Stadtwerke). In areas designated for decentralized heating, residents must individually select the appropriate heating technology—a process already well-established in Germany due to the high rate of individual supply.
While residents of these areas may need to engage more intensively in their own decarbonization path, in the future, the electricity grid will largely serve as the backbone of their heat supply. This infrastructure, too, will undergo decarbonization efforts led by professional entities.
A key question arises concerning areas that are unsuitable for individual heat pumps and lack district heating plans: who will organise and implement the transformation within these areas?
To establish heating networks in existing neighborhoods, the following components are always required: expertise, labor, capital, and an accessible heat source. Finding an actor who brings all these components together is challenging. Private individuals often lack the necessary expertise, despite their intrinsic motivation and willingness to invest labor and capital, while professional actors lack incentives if the effort is not economically viable in the medium term. This creates what we refer to as an ‘actor vacuum,’ particularly in areas with heterogeneous ownership structures.
Key lessons from Denmark
Denmark has extensive experience with district heating. From a German perspective, looking at Denmark offers valuable lessons. Initially motivated by socio-economic concerns rather than environmental issues, Denmark prioritized national energy independence. Over time, there has been a shift towards climate-neutral energy sources, with district heating playing a central role. Political measures and national guidelines strongly promote district heating, enhancing local communities and value creation.
Rooted in local responsibility, Denmark follows the “hvile-i-sig-selv” principle (principle of “non-profit” self-financing), ensuring trust and collaboration are fostered locally. Experiences and innovations are openly shared, leading to greater acceptance of risks and advancements in supply technology. Transparency in technical solutions, implementation processes, and heat pricing is ensured, with the Danish Utility Regulatory Authority publishing heat prices biannually to promote competition and efficiency. Surpluses are either distributed to customers or reinvested, while losses prompt necessary price adjustments.
Status quo in Germany
The current situation in Germany demonstrates that the approach to heat energy procurement as a neighborhood-driven project to foster local value creation is only sporadically implemented in rural areas. For the most part, the value chain for energy carriers extends beyond national borders.
Therefore, strategic planning of heat supply at the local level as a community project contradicts the German status quo at least partially. This is evident in the current structure of German heating systems, where out of a total of 41.9 million residential units, the most common heating systems include 33.7% gas central heating, 23% oil central heating, 11.6% individual gas heating, and only 15.2% district heating (BDEW (2023: BDEW-Studie: „Wie heizt Deutschland?“).
The procurement of energy sources for heating in Germany involves a complex interplay of market actors, trading platforms, and political frameworks aimed at ensuring reliable and cost-efficient heat supply. An established market largely delivers heat energy carriers directly to end customers through centralized infrastructures. In essence, Germans primarily rely on the state and markets to deliver heat energy carriers to their doorstep and manage heat generation independently within their own premises.
This dependence became evident during the recent energy crisis stemming from the Russian invasion of Ukraine, prompting political measures such as the energy price break to protect citizens and businesses and ensure affordable heat supply, production, and employment security. Despite the past success of this system, weaknesses are apparent, especially during times of political uncertainty.
Currently, the discussion in Germany revolves around the extent to which the decarbonization of heat supply should primarily occur locally, leveraging local potentials, or by importing climate-neutral energy carriers across national borders. The former would represent a new approach for Germany.
Scenario studies suggest that the efficient transformation of Germany’s heat sector should primarily occur through heat pumps and heating networks. Heat pumps can align with the principle of individual decision-making by building owners, enabling them to manage heat generation as their personal choice. Other conditions apply to district heating networks. These require local community support.
Currently, Germany lacks a framework that assigns the initiation, organization, and operation of energy supply concepts to local communities, which is crucial for such areas. Neighborhood-based approaches prioritize collective benefits over individual buildings.
Key actors within the Heat Networks Sector
The aforementioned 15,2% share of district heating indicates that heating networks in Germany already represent a viable supply option. Unfortunately, there is not enough data available for an in-depth analysis of this segment. Therefore, only an overview of the currently involved actors can be provided, with very vague quantitative statements regarding their shares.
Private companies hold a significant share of district heating networks in Germany. This includes large energy supply companies as well as smaller private operators. Municipal utility companies (Stadtwerke), often publicly owned, also operate a significant portion of district heating networks in Germany.
Municipal utility companies play a central role in the energy supply landscape, especially in the context of municipal heat transition. They have high market shares in heat and gas supply, accounting for 88% of the heat and 60% of the gas business in the end customer sector (Fachrat Energieunabhängigkeit (2024): Sicherheitsorientierte Energiepolitik – Eine Finanzierungsstrategie für die Erdgasunabhängigkeit von Deutschland).
In addition, there are other actors with relatively small market shares. Larger industrial companies operate their own district heating networks for industrial processes and heating factory buildings. While their share is relatively small, it is significant in industrial areas. Some public institutions, such as universities, hospitals, and municipal buildings, also operate their own district heating networks.
However, their overall share is limited and varies greatly by region. The described actors are characterized by their ability to combine the components of expertise, labor, and capital. With an accessible and economically feasible heat source, they can implement heating networks.
Role and Limits of Cooperatives
Cooperatives and citizen energy projects are other actors in the context of local heat network implementation. In rural areas, a mix of expertise, labor, capital, and accessible heat sources can sometimes be found. Here, waste heat from agricultural biogas plants or self-operated biomass plants is often used for heat generation.
These solutions are technically less demanding and, therefore, easier to operate, thus requiring less expertise. However, due to the limited availability of the energy source biomass, especially in urban areas, these concepts are less scalable.
Future-oriented heat supply strategies are crucial as they integrate electricity, heat, and, ideally, industrial processes to maximize the utilization of renewable energies and promote local value creation. Sector coupling, which enhances efficiency through increased electrification, frequently offers economic benefits.
However, implementing sector coupling concepts faces technical challenges and complexity within the German regulatory framework. Due to the described absence of communal utilization of local potentials, there are few established actors capable of initiating such projects.
Additionally, there are limited examples of business models that could economically sustain the implementation of these projects. Therefore, expertise might already be described as the missing component here. Moreover, in the traditional sense, cooperatives only make sense where the actual building owners also live in the buildings, meaning that the heat customer and the cooperative member are identical.
The Path to Scalable Heat Networks Models
Cooperatives offer a model structurally resembling the Danish approach and strongly focuses on local communities and value creation. A central challenge is that cooperatives in Germany need to go beyond their traditional applications to create a scalable option for heating networks in heterogeneous, densely populated areas, which are often characterized by a strong presence of tenants.
Furthermore, heat grids are more efficient when combining different demand profiles, such as from the commerce, trade, and services sectors or non-residential public buildings. Here, the one-share-one-vote principle is difficult to accept for larger entities or stakeholders with special interests.
The assumption is that in this deviation from the traditional cooperative model, the necessary components (labor, capital, expertise) for successful implementation are not sufficiently available. Additionally, the specific question arises regarding who feels responsible for the initiation. In terms of expertise, professional know-how and consolidated knowledge is important.
Non-professional actors cannot provide the required competence everywhere, and it is not feasible for scaling purposes for them to acquire this knowledge. It is to be expected that the realization of heating network projects with local participation will require a broad alliance of local actors working together on implementation. The roles and necessary qualifications of the various parties must be clearly defined according to their competencies.
In this constellation of actors, municipalities play a central role in various areas. They can initiate projects and moderate the development process. Additionally, they can support the planning and development process by implementing necessary measures in urban planning, such as land allocation, permit agreements, and approval procedures. Also, their properties can serve as heat production sites or anchor customers for heat projects. This can lead to greater investment security and engagement from all involved parties.
Ultimately, municipalities can also act entrepreneurially, allocate budgetary resources, and thus become investors in heating network projects. However, in fulfilling these tasks, municipalities rely on support from other actors, as they themselves are constrained by limitations such as staff shortages, know-how, and limited budgetary resources.
Landkreise (counties) play a crucial role in the context of district heating networks, particularly through their local energy agencies (examples from Baden-Württemberg) and county offices. These institutions are often well-positioned to consolidate the necessary expertise and conduct analyses of local heat potentials.
Due to their proximity to the affected communities, they can initiate and coordinate cross-municipal projects tailored to the specific needs and resources of the region. Moreover, counties, as well as municipalities, can act as promoters and supporters by providing financial resources, facilitating approval processes, and promoting acceptance among the population. Their role as regional actors is crucial to maximize local value-added effects.
Local potential end users are also key stakeholders in the acceptance and implementation of such projects. A “local advocate” can influence acceptance and help maximize local participation. This role should ideally be filled by someone from the directly affected area and is often based on voluntary work driven by intrinsic motivation for sustainable development of their own neighborhood. It can also be fulfilled by a group of individuals serving as the nucleus for a community energy initiative or cooperative.
Local energy generation companies with experience in planning and implementing renewable energy projects also play an important role in tapping regional energy sources and pooling energy generation facilities. The local value-added effects depend significantly on who owns the heat generation plants, where they are built, and which companies are involved. Value-added is significantly increased when the generation plants are owned by local actors or when they are at least involved in them.
External capital providers are also necessary, as the minimum equity share required by banks needs to be met. For many local banks, the investments are too high and concentrate too much risk in a specific sector and place, leading to higher needs for equity by the lender. Equity cannot always be brought in by the above-mentioned stakeholders alone, and therefore, the projects need to be opened for other investors if required. Large industries, suppliers of energy sources, waste heat, or grid operators might also be interested and motivated to invest. Another possibility is to bundle investments in a larger number of heating networks within the framework of investment funds.
The Qx Model for 100% Renewable Heat
The following example of the Q1 district heating project in Gettorf, Schleswig-Holstein, conducted by Q.X Projekt GmbH, illustrates how a renewable energy-based heating supply concept can be successfully implemented. This model involves both local and regional actors from the public and private sectors. Notably, this model integrates the need to promote local interests with the aggregation of professional stakeholders. There is no universal solution for such projects, as they must always be adapted to the specific local conditions while considering the interests of all involved parties.
The model includes five key stakeholders who collectively invest in the heating supply project: the manager and operator, the owners of local energy generation facilities, the municipality, a citizen representation through a cooperative, and external capital providers. The central conflicts of interest arise from the municipality’s obligations for public service and public interests on one hand and private sector engagement on the other.
Additionally, conflicts may arise between the interests of the cooperative as a representative of the citizens and the economic goals of private investors. Therefore, the question of which resources each limited partner brings to the table and with what objectives must be considered when allocating company shares. It is crucial that no party holds an excessively large share to prevent other stakeholders from losing interest.
In the case of the Q1 project model, it is assumed that involving all five stakeholders is beneficial. Even though not all stakeholders might be involved in every case, their inclusion enhances the project’s bankability. Lenders prefer projects with multiple participants as this significantly reduces the risk of defaults. However, a higher number of participants requires effective management of the increased complexity and transparency. Therefore, a balanced approach between the number of participants, complexity, and transparency is essential.
An optimally structured model can minimize the required equity share, which allows for a higher leverage effect. It is particularly attractive if only 10% equity is needed, as this increases the possibility of mobilizing additional funds without relying on external sources.
The Q1 project in Gettorf is currently testing this model to expand it to other suitable cities across Germany if successful. The prospect of accessing a larger market with this model is intended to attract investors with larger organizational structures – both external and cooperative – to participate. This could enhance professionalism, especially on the cooperative side, and improve access to more favorable financing options, which might not be fully utilized in single-project scenarios.
The model is based on the legal structure of a GmbH & Co. KG, represented here by the Quartiersgesellschaft. This entity acts as the central player, taking on the roles of manager and operator. It technically implements and operates the concept while securing the financial resources provided by the limited partners.
Info Box:
One organizational form that can effectively integrate a local actor structure is the GmbH & Co. KG, where the described actors can become part of the GmbH & Co. KG in different roles. The GmbH part takes on the initiation of the local heating supply project. The GmbH is directly legally liable and manages the daily operations of the GmbH & Co. KG. Limited partners (Kommanditisten) are silent partners in the GmbH & Co. KG, contributing capital to finance the heating network and participate in the profit and loss of the GmbH & Co. KG.
Thus, the capital for construction and operation of the heating network is provided through the equity of the limited partners, public funding and bank loans. Limited partners are liable only up to the amount of their investment. They can be individuals, companies, local investors, or even the municipality itself.
The technical implementation is planned and executed by commissioned professional engineering firms and specialized companies, bringing in the expertise component. This includes the planning and installation of heat generators, heat transfer stations, and the laying of heat pipes. After the construction work is completed, the heating network is put into operation, with the GmbH & Co. KG taking over the ongoing management, maintenance, and servicing of the heating network.
On the production side, the Quartiersgesellschaft aggregates regional renewable energy providers who supply various components of the heating supply system. To achieve 100 percent renewable energy, a diverse mix of generators and energy sources beyond the power grid is required to ensure high resilience and flexibility.
By providing their generation facilities as technical resources, these providers participate as limited partners in the project. In practice, however, the operators of these facilities have their own business models and act as suppliers within the context of the supply concept. They are equipped with the necessary interfaces to the heating supply concept but do not necessarily provide the majority of the required financing.
The total investment costs for the Gettorf Q1 heating supply concept, including the generation facilities, amount to €10,000 per resident, corresponding to a total volume of €80 million. This sum exceeds the financial capabilities of the involved parties, such as the facility operators and the municipality, necessitating external capital.
This is where investors come in, who specialize in financing large infrastructure projects and are willing to accept longer durations (e.g., 15 years). These investors seek ESG (Environmental, Social, and Governance) titles that are specifically used to finance projects or initiatives that positively impact the environment, society, and corporate governance and meet their own ESG criteria. Projects like Q1 in Gettorf could precisely meet these requirements. External investors can thus participate as limited partners in the project, accepting moderate returns and ensuring that customers benefit from more favorable heating prices.
The municipality plays a crucial role as the landowner and responsible party for public services. Through right-of-way agreements, the Quartiersgesellschaft gains the right to lay the network infrastructure, which remains the property of the Quartiersgesellschaft.
Alternatively, a concession could be considered, where the municipality leases the network infrastructure for twenty years. Several factors need to be considered here: The municipality might be able to finance infrastructure investments more cheaply (longer depreciation periods = lower interest rates) to ensure favorable heating prices.
However, financing on the investor side of the generation park poses a challenge due to the need to account for a potential “exit” after 20 years, which must be factored into the financing and could lead to higher heating prices. In the presented model, the Quartiersgesellschaft is to be granted the right of way.
To safeguard the interests of the citizens and the municipality, it is important that these two stakeholders hold at least minority shares, i.e., 25.1% of the shares, which corresponds to a blocking minority. This allows both parties to jointly influence key development aspects of the heating supply concept.
This means that decisions, such as the sale of the entire company or parts thereof, the admission of additional shareholders, or the setting of heating prices, are generally subject to a three-quarter majority. In this model, the cooperative and the municipality jointly hold this blocking minority.
The citizen cooperative acts as a bridge between public shareholders and private investors. Its role is to represent and secure the interests of citizens vis-à-vis the municipality and external investors. In this case, it is a professionally managed cooperative operating nationwide and implementing concepts in the interest of citizens.
If these concepts are viable, the cooperative becomes involved and engages only in economically successful projects. The cooperative is currently in its founding phase. However, once it reaches a sufficient size, it could engage nationwide and participate in additional projects.
The Q1 model is now being tested in practice and, if successful, will be continuously adapted and expanded to other projects.
Summary / Result
In summary, Denmark’s experiences in the field of heat supply offer valuable insights for Germany, particularly regarding the implementation of the Heat Planning Law (WPG).
The following factors should be considered:
Local Involvement: Denmark’s success highlights the importance of local involvement and expertise. Germany could address the “actor vacuum” by strengthening local actors and integrating them into heat supply systems.
Cooperation Models: Danish cooperatives demonstrate the benefits of local management in heat networks. In Germany, new cooperation models could enhance the implementation of 100% renewable concepts, potentially leading to moderate heat prices and increased local value creation. The example of the Q1 project in Gettorf provides initial guidance in this regard.
Role of Municipalities and Counties: Municipalities and counties are crucial for initiating and supporting heat projects. They should utilize their resources, act as facilitators, and seek support to overcome existing constraints.
Investment Strategies: Various perspectives emphasize the need to acquire private capital for the German ‘Wärmewende. ‘ Therefore, it is important to find models that align with local interests while ensuring financial viability.
The Q1 project in Gettorf illustrates how these lessons can be practically applied. By adapting and integrating these strategies, Germany can work towards a more sustainable and effective heat supply system.
For further information, please contact: Susanne Schmelcher, susanne.schmelcher@dena.de
“Lessons to be learned from the Danish Neighbor: The missing actor in the heat market: How to fill the gap in Germany?” was published in Hot Cool, edition no. 5/2024. You can download the article here:
