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A review of the value of district heating schemes in the domestic market - Scott Petersen, Head of Marketing for Dalkia

The measures put in place by central government to reduce the consumption of fossil fuels and the consequent carbon emissions are important drivers for the development of district heating schemes. The most significant of these measures tackle climate change, fuel poverty targets and cost savings for households, which are set via local authorities.

Many local authorities and housing schemes are waking up to the benefits of using energy generated by a Combined Heat and Power (CHP) installation in district heating schemes. This type of system works by recovering the heat from power generation and transporting it to individual homes as heated water.

This type of system has strong Green credentials considering that every one megawatt of CHP operating in the UK helps reduce carbon emissions by up to an impressive 1250 tonnes each year. The UK's current CHP capacity of approximately 5,000 megawatts is helping to deliver savings of over four million tonnes of carbon annually, with CHP representing one of the largest carbon reducing measures in place.

A district heating scheme typically comprises a central energy centre, with CHP often sized to deliver summer heat load and backed up by conventional boilers. Underground insulated heating mains then deliver hot water to the end user systems, which distribute, or store, and control the heat in each residential dwelling. Electricity generated by the CHP plant is also supplied to residents with excess sold to the grid.

Since the introduction of NETA (New Electricity Trading Arrangements) in 2001, the main influence for the viability of CHP in district heating schemes is the government's Community Energy funding Programme (CEP), launched in 2001 and subsequently extended in 2003 and 2005. This is designed to encourage investment in the refurbishment of existing public sector district heating schemes and the development of new ones. Providing up to 40% of the capital costs for a scheme, to date, over 114 public sector organisations have been awarded a CEP development grant.

The advantages of CHP to local authorities are two-fold: the resultant heat can be used in district heating schemes, where social and financial benefits are shared by both the individual householder and the local authority. The savings made from higher efficiency power generation can be passed on through lower fuel costs to consumers. In this way, CHP's delivery of affordable warmth can reduce fuel poverty, improve comfort and reduce incidences of cold-related and respiratory illnesses.

CHP currently operates on over 1,500 schemes across the country, ranging from sheltered housing projects and hospitals, to city-wide district energy networks and industrial schemes.

In the UK, a deep-rooted owner-occupier mindset has resulted in just 23% of all homes owned and controlled by local authorities with only 1.8% of homes using district heating. A far more comprehensive model for the success of CHP in local authority-run district heating schemes can be found in countries in northern and central Europe, such as Scandinavia, where district heating is well established. In Scandinavia 60% of homes use district heating, taking advantage of the affordable warmth, low-cost electricity and abundant hot water it provides.

The key driver for a local authority using a CHP based district heating scheme is that it can help to meet the green energy targets set by central government, making a saving of up to 25% on emissions of CO₂. This saving is manifested via the waiver of climate change levies for CHP, improving the economics of CHP relative to heat-only boilers

A case in point is the Nottingham District Heating Scheme, run and managed by an independent energy services company (ESCo) where the combustion of household waste generates enough power to heat some 5,000 homes, civic buildings, schools and even Nottingham Trent University. The installation in this case is a 15 MW CHP plant, burning 145,000 tonnes of waste with a saving of 149,000 tonnes of CO₂.

Whilst Nottingham is one of only a few city wide schemes in the UK, most plants are used for local authority schemes where the housing density is high - usually blocks of flatted dwellings in urban environments - the persuasion being the expensive piping required to transport the hot water between units. CHP is itself an example of distributed generation. However, by generating power onsite where the energy is needed, CHP helps avoid the transmission and distribution losses experienced by larger generating plant. A total of around 7.5% of electricity supplied in the UK is wasted every year due to the delivery of electricity over the transmission and distribution grids.

There are inherent risks involved in the set up and running of a district heating scheme for a local authority, which is why many turn to an outsourced energy services company. Prime examples of CHP schemes which are run on behalf of local authorities by an experienced ESCo are, Barkantine in London, Sheffield and Nottingham.

Primarily the concern for an operator is the considerable initial outlay of setting up such a scheme, with feasibility studies typically costing around 5% of the total capital cost, including the upfront project costs of the ESCo. When bringing an energy services company on board, this risk can be absorbed in the contract, taking the burden away from the client company. The heating mains themselves are responsible for around 30% of the total scheme capital costs, but can be higher on widely distributed schemes, often rendering a CHP project unviable in comparison to individual boiler systems.

Sheffield City Council's CHP initiative provides a good example of the capital value of having the installation run and managed by an independent company. All investment has been raised by limited recourse bank borrowing and as such is not considered as borrowing by the local authority. However, the financial arrangements for CHP schemes are treated more favourably than other enterprises in which a local authority may have an interest, due to its energy efficiency and contribution to the reduction in CO₂ emissions.

Secondly, the development risk must be managed. The cost of the construction risk, underpinned by the financial penalties on the time and budget restrictions placed on the scheme, must be taken into account and managed effectively.

In the energy markets, the spark spread, or differential between the price of electricity and the price of natural gas directly impacts the viability of CHP for district heating.

For a CHP plant which is financed over 30 years, there is no way to predict the volatility of the energy market, and therefore the economics of procuring the fuel to create the energy generated by the CHP and selling the resulting electricity and heat. The spark spread is therefore the most critical factor governing project viability for CHP in district heating schemes.

Ultimately the return on investment for a district heating scheme must be attractive for CHP to be viable. Using CHP as a heat source and selling the electricity generated can make a considerable difference to the economics of a scheme. This is because electricity is worth much more than heat and therefore contributes the bulk of the revenue from energy sales. Meanwhile the electricity generation part of a CHP based district heating system is less expensive than the heat distribution system, despite producing electricity, which is a more valuable form of energy.

In conclusion, an outsourced energy company can finance, design, build, own and operate a large and complex CHP based district heating scheme, from the energy centre and energy plant to the underground heating mains and end-user systems. This expertise can be returned to the benefit of the end user, on behalf of a client company or local authority.

 

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