Commentary: District heating needs flexibility to navigate the energy transition

6 June 2019

Amager Bakke is a combined heating and power plant in Copenhagen that produces either electricity or heat depending on local heat demand and power prices (Photograph: Shutterstock)

Heating in buildings is at the core of energy consumption – space heating and hot water production account for around 70% of energy consumption in residential buildings in IEA countries, resulting in significant CO2 emissions. This is receiving increasing attention in many countries, including through a renewed focus in IEA’s in-depth reviews of energy policies of IEA member countries.

There are a range of solutions for reducing energy consumption and emissions from heat. District heating is one option; a system that uses heat produced in a centralised way and distributes it to consumers through pipelines using hot water or steam.

The centralisation of heat production enables the use of different energy sources, including excess heat from industry. It also allows heat from biomass and waste to be produced with low emissions thanks to effective flue gas cleaning, a process that is not typically available at a local building scale. While most district heating systems globally still rely on fossil fuels, some Nordic countries have utilised the benefits of centralised heating systems to decarbonise large shares of their heat supply. In Sweden, for example, district heating provides over one third of total residential energy demand and only 10% of that heat is produced from burning fossil fuels (coal, peat, oil and natural gas). 

	Share district heat in residential energy consumption	Share of fossil fuels in district heating generation
Denmark	38.08331436	30.31699906
Sweden	34.81619606	9.653146014
Estonia	33.72216331	44.14080211
Finland	31.5529367	46.00365855
Slovak Republic	21.43195827	77.46751012
Poland	19.68836391	94.617009
Czech Republic	15.03526093	89.02661201
Austria	12.04520824	45.98340753
Korea	8.806738418	85.03180465
Germany	7.981482816	75.66336457
Hungary	7.93448879	76.7881549
Switzerland	3.561334087	19.77668602
France	3.452118699	45.91902277
Netherlands	2.956738251	72.49764937
Italy	2.759398725	80.40784851
Norway	2.66048328	5.541572644
Greece	1.171875	99.95322732
United Kingdom	0.736189677	93.73617852
Japan	0.058768474	67.22779545
Portugal	0.038880249	100
Belgium	0.012402332	56.02402438
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Note: Fossil fuels do not include fossil shares of waste

Yet despite the potential benefits, many district heating markets are facing an ironic challenge: energy efficiency improvements in buildings are reducing the demand for heat. This is a positive development for the energy system as a whole, but can have negative impacts on the business models of companies that sell heat. It can also affect the willingness to make investments in cleaner and more efficient heat production, which is greatly needed for district heating systems globally.

Many existing district heating systems were built to accommodate higher heat demand than what is typically required today, and at the same time infrastructure can be old and inefficient. Those systems need to be modernised to supply heat more efficiently, which requires strategic investments. But who wants to invest in a technology where the market is shrinking?

A big part of the solution is to increase flexibility, not only in terms of the generation and distribution of heat, but also in the market and business models used for selling that heat and in the integration with other parts of the energy sector. Industry and policy makers both have a role to play in enabling this.

In generation and distribution, the next big thing is so-called fourth generation district heating (4GDH), which refers to district heat at temperatures that match the lower energy requirements of more efficient buildings. Lowering supply temperatures leads to reduced losses in heat distribution and enables suppliers to use additional heat sources available at those temperatures, notably industrial excess heat, solar and geothermal energy. Developing 4GDH requires new infrastructure in heat production, distribution and consumption .

On the market side, district heat suppliers will need to develop more flexible business models. For example, instead of selling heat as an energy unit, district energy companies can sell heat as a service, and guarantee a certain level of indoor comfort. This would allow them to optimise their operations to find the most productive and cost-effective way of providing that service. New market models can also be introduced on the supply side, where third-party access to district heat networks can allow for greater use of industrial excess heat.

There are some companies already developing new business models for pricing and heat supply, especially in deregulated markets. In Stockholm for example, the district heat supplier has introduced a heat market called Open District Heating that allows data centres, supermarkets and industries to sell excess heat into the network. Policy makers should encourage the development of such market-based initiatives and remove barriers for further market innovation.

Sector coupling between heat and electricity systems is another important area for development. District heating can be linked to electricity systems through co‑generation of electricity and heat, and through power‑to‑heat production in large-scale heat pumps. In a well‑integrated energy system, a district heat supplier can respond to price fluctuations in the electricity market and help balance the grid by producing or consuming more electricity. District heating companies can also use thermal energy storage, which is generally less expensive than electricity storage, to provide further flexibility in an integrated energy system.

As electricity generation increasingly relies on variable renewable energy sources, flexibility provided through sector coupling becomes more valuable. Denmark in particular has a strong case for sector coupling, thanks to the combination of large district heating networks and high shares of wind power (though high electricity taxes have posed a barrier). In the IEA’s most recent in‑depth review of Denmark, the IEA recommended the government adapt its energy taxation to allow for better integration of the heat and power systems, which the government decided on in its Energy Agreement from 2018.

District heating market conditions are changing and the sector must modernise to remain a relevant part of the clean energy transition. Low-temperature heat and increased integration with other energy sectors offer interesting opportunities, but this will require additional investments and a more adaptive market framework, supported by appropriate policy packages. Regulation should promote innovation and flexibility, and policy makers should take a systems-based approach when supporting the clean energy transition. This can include increased funding for research and development in efficient and low-carbon heating technologies. The IEA will continue to help countries in this development through its in-depth policy reviews and other work on sustainable heat.