Economies of scale in the Korean district heating system: A variable cost function approach

This paper aims to investigate the cost efficiency of South Korea’s district heating (DH) system by using a variable cost function and cost-share equation. We employ a seemingly unrelated regression model, with quarterly time-series data from the Korea District Heating Corporation (KDHC)—a public utility that covers about 59% of the DH system market in South Korea—over the 1987–2011 period. The explanatory variables are price of labor, price of material, capital cost, and production level. The results indicate that economies of scale are present and statistically significant. Thus, expansion of its DH business would allow KDHC to obtain substantial economies of scale. According to our forecasts vis-à-vis scale economies, the KDHC will enjoy cost efficiency for some time yet. To ensure a socially efficient supply of DH, it is recommended that the KDHC expand its business proactively. With regard to informing policy or regulations, our empirical results could play a significant role in decision-making processes.     

The introduction and expansion of biomass use in Swedish district heating systems

District heating satisfies about 60% of the heat demand in Swedish buildings. Today, more than two thirds of the heat supply to the district heating systems is based on biomass and waste, and biomass alone accounts for about half of the heat supply. The purpose of this paper is to present the Swedish experiences of introducing and expanding the use of biomass in the district heating systems and to identify the main drivers behind this development. Our five research questions and the corresponding conclusions consider the driving forces from energy policy tools and local initiatives, the biomass prices, the established infrastructures in forestry and district heating, the technology paths for biomass conversion, and finally the future challenge of competing uses of biomass.     

National energy policies: Obstructing the reduction of global CO2 emissions? An analysis of Swedish energy policies for the district heating sector

The effect of national energy policies on a local Swedish district heating (DH) system has been studied, regarding the profitability of new investments and the potential for climate change mitigation. The DH system has been optimised regarding three investments: biomass-fuelled CHP (bio CHP), natural gas-fuelled combined cycle CHP (NGCC CHP) and biomass-fuelled heat-only boiler (bio HOB) in two scenarios (with or without national taxes and policy instruments). In both scenarios EU’s tradable CO₂ emission permits are included. Results from the study show that when national policies are included, the most cost-effective investment option is the bio CHP technology. However, when national taxes and policy instruments are excluded, the DH system containing the NGCC CHP plant has 30% lower system cost than the bio CHP system. Regardless of the scenario and when coal condensing is considered as marginal electricity production, the NGCC CHP has the largest global CO₂ reduction potential, about 300 ktonne CO₂. However, the CO₂ reduction potential is highly dependent on the marginal electricity production. Demonstrated here is that national policies such as tradable green certificates can, when applied to DH systems, contribute to investments that will not fully utilise the DH systems’ potential for global CO₂ emissions reductions.     

Co-production of synthetic fuels and district heat from biomass residues,carbon dioxide and electricity: Performance and cost analysis

Large-scale systems suitable for the production of synthetic natural gas (SNG), methanol or gasoline (MTG) are examined using a self-consistent design, simulation and cost analysis framework. Three basic production routes are considered: (1) production from biomass via gasification; (2) from carbon dioxide and electricity via water electrolysis; (3) from biomass and electricity via hybrid process combining elements from routes (1) and (2). Process designs are developed based on technologies that are either commercially available or successfully demonstrated at precommercial scale. The prospective economics of future facilities coproducing fuels and district heat are evaluated from the perspective of a synthetic fuel producer. The levelised production costs range from 18–37 €/GJ for natural gas, 21–40 €/GJ for methanol and 23–48 €/GJ for gasoline, depending on the production route. For a given end-product, the lowest costs are associated with thermochemical plant configurations, followed by hybrid and electrochemical plants.     

Profitability of sparse district heating

The expansion of district heating into areas of low heat densities (heat sparse areas) constitutes a challenge due to the higher distribution costs. The profitability of sparse district heating has been analysed from actual investments in 74 areas with 3227 one-family houses connected to district heating between 2000 and 2004 in Göteborg, Sweden. The profitability was estimated from a probable price model, a typical marginal heat generation cost, and the investments from the actual connections made. The analysis identified factors as the linear heat density and heat sold per house explaining the main variations in profitability. The profitability analysis was concluded with a competition analysis. The main conclusion is that sparse district heating is possible when reaching low investment costs for the local distribution network and low marginal costs for the heat generation. In Sweden, the general competitiveness of sparse district heating is facilitated by the high consumption taxes for fuel oil, natural gas, and electricity. Hence, it should be more difficult to introduce sparse district heating in other countries with low energy taxes.     

A model of district heating using a CHP plant

The paper presents a static linear programming model of a district heating system in which the base load is covered by a cogenerating station producing heat and electricity. The model provides optimal investment decisions (generating station, hot water accumulator, peak units, distribution network) as well as optimal operating rules. The reliability of the cogenerating station is taken explicitly into account by introducing shortage costs in case of failure. It is assumed the electricity produced is sold at time-variable transfer prices to the public grid. Numerical results are provided for a medium-size city.     

Short- and long-run marginal cost pricing: On their alleged equivalence

The equivalence between short-run marginal cost (SRMC) and long-run marginal cost (LRMC) in a fully adjusted equilibrium has been proved over and over again. In the literature dealing with public utility pricing, this basic result has been taken to imply that it is optimal to set prices at LRMC. Important contributions to this literature are reviewed in this paper. The equivalence, however, is valid only under the very restrictive assumption that the capacity can be varied continuously. This means that indivisibilities, irreversibilities and durability of investments are ignored. Where such phenomena exist, as in electricity production and distribution, pricing according to LRMC is neither theoretically valid nor applicable. It is not surprising that it has been difficult for public utilities to define the LRMC concept operationally; average cost concepts are used as ‘approximations’. Under these circumstances we find it advisable to dispense with the LRMC concept altogether and rely on pricing based on SRMC.     

Heat distribution and the future competitiveness of district heating

The competitiveness of present and future district heating systems can be at risk when residential and service sector heat demands are expected to decrease in the future. In this study, the future competitiveness of district heating has been examined by an in depth analysis of the distribution capital cost at various city characteristics, city sizes, and heat demands. Hereby, this study explores an important market condition often neglected or badly recognised in traditional comparisons between centralised and decentralised heat supply.     

Metamorphoses of cogeneration-based district heating in Romania: A case study

The paper presents the birth and evolution of the cogeneration-based district heating (DH) system in a medium size city in Romania (Targoviste). The evolution of the industrialization degree was the main factor which controlled the population growth and led to a continuous reconfiguration of the DH system. The DH system assisted by cogeneration emerged as a solution in a certain phase of the demographic development of the city. The political and social changes occurring in Romania after 1990 have had important negative consequences on the DH systems in small towns. In Targoviste the DH system survived but in 2001 the solution based on cogeneration became economically inefficient, due to the low technical quality of the existing equipment and the low gas prices, to the procedure of setting the DH tariffs and the service cost at consumer’s level and to some bureaucratic problems. Energy policy measures taken at national and local levels in 2003 and 2005 led to the re-establishment of the cogeneration-based district heating in 2005. However, a different technical solution has been adopted. Details about the present (2009) cogeneration-based DH system in Targoviste are presented together with several technical and economical indicators. The main conclusion is that by a proper amendment of the technical solutions, cogeneration could be a viable solution for DH even in case of abrupt social and demographic changes, such as those occurring in Romania after 1990.     

Market opening and third party access in district heating networks

The purpose of this paper is to analyse the possible effects of introducing TPA in district heating networks by identifying and scrutinizing a number of possible scenarios for increased competition. The analysis builds on a theoretical discussion of economic efficiency in district heating operations, and the possible impacts on consumer prices of a market opening. An important conclusion is that regulated TPA may have small positive effects on competition, and at the same time it can have a negative impact on the possibility to run the integrated district heating operations in a cost-effective manner. This conclusion stems in part from the observation that most district heating networks are local in scope. Moreover, district heating operations are highly interdependent in, for instance, that the level of the return temperature of the water will affect the efficiency of combined heat and power plants. For these reasons, the introduction of the so-called single-buyer model or, perhaps even more preferable, an extended and more transparent producer market could represent more efficient market designs. Moreover, in networks with clear natural monopoly characteristics an ex ante price regulation must be considered.     

The role of district heating in future renewable energy systems

Based on the case of Denmark, this paper analyses the role of district heating in future Renewable Energy Systems. At present, the share of renewable energy is coming close to 20 per cent. From such point of departure, the paper defines a scenario framework in which the Danish system is converted to 100 per cent Renewable Energy Sources (RES) in the year 2060 including reductions in space heating demands by 75 per cent. By use of a detailed energy system analysis of the complete national energy system, the consequences in relation to fuel demand, CO₂ emissions and cost are calculated for various heating options, including district heating as well as individual heat pumps and micro CHPs (Combined Heat and Power). The study includes almost 25 per cent of the Danish building stock, namely those buildings which have individual gas or oil boilers today and could be substituted by district heating or a more efficient individual heat source. In such overall perspective, the best solution will be to combine a gradual expansion of district heating with individual heat pumps in the remaining houses. Such conclusion is valid in the present systems, which are mainly based on fossil fuels, as well as in a potential future system based 100 per cent on renewable energy.     

The potential of district heating using geothermal energy. A case study, Greece

The purpose of this study is to investigate the possibility of using low-enthalpy geothermal energy from the geothermal field of Sousaki in the province of Korinthos, Greece, to cover the thermal needs of the nearby town of Ag. Theodori. The possibility of developing a system of district heating was examined based on a proposed town model. Total thermal demands were calculated on the basis of a model dwelling and prevailing weather conditions in the area. Subsequently, a heat transfer circuit is proposed, including the distribution network, the heat exchanger, the production and reinjection pumps, and the pumping station. Finally, energy indices are presented, such as demand in tons of equivalent oil and CO₂ emissions.     

A critical review of distance function based economic research on China’s marginal abatement cost of carbon dioxide emissions

The last few years have witnessed a rapidly emerging literature estimating the marginal abatement cost, or the shadow price of carbon dioxide (CO₂) emissions in China using parametric or non-parametric distance function approaches. This is largely driven by the fact that China has become the world’s largest carbon emitter and thus faced mounting domestic and international pressure to mitigate emissions. There is an urgent policy need to model and predict the cost burdens of various mitigation scenarios. Consistent information about the marginal abatement cost of CO₂ emissions plays a crucial role in addressing this need. However, the existing literature has suffered from various issues that have severely weakened the scientific support that these studies could potentially provide for sound policy making. This paper provides a thorough and critical review of this rapidly emerging literature and identifies important research directions that need the most attention from scholars.     

Barriers and enablers to geothermal district heating system development in the United States

According to the US Energy Information Administration, space and hot water heating represented about 20% of total US energy demand in 2006. Given that most of this demand is met by burning natural gas, propane, and fuel oil, an enormous opportunity exists for directly utilizing indigenous geothermal energy as a cleaner, nearly emissions-free renewable alternative. Although the US is rich in geothermal energy resources, they have been frequently undervalued in America's portfolio of options as a means of offsetting fossil fuel emissions while providing a local, reliable energy source for communities. Currently, there are only 21 operating GDHS in the US with a capacity of about 100 MW thermal. Interviews with current US district heating operators were used to collect data on and analyze the development of these systems. This article presents the current structure of the US regulatory and market environment for GDHS along with a comparative study of district heating in Iceland where geothermal energy is extensively utilized. It goes on to review the barriers and enablers to utilizing geothermal district heating systems (GDHS) in the US for space and hot water heating and provides policy recommendations on how to advance this energy sector in the US.     

Regulating district heating in Romania: Legislative challenges and energy efficiency barriers

Many states in Eastern and Central Europe (ECE) possess extensive district heating (DH) networks that were constructed during the days of communist rule in order to provide a universally accessible energy service that supported Soviet development policies. But the post-communist transition was marked by the exacerbation of the sector’s numerous technical, economic, regulatory and environmental problems, accompanied by its abandonment in favour of alternative methods of domestic heating. Recent efforts to increase the use of DH in ECE as a result of environmental and energy security concerns have taken place in an absence of critical, context-sensitive research.     

Low-energy district heating in energy-efficient building areas

This paper presents an innovative low-energy district heating (DH) concept based on low-temperature operation. The decreased heating demand from low-energy buildings affects the cost-effectiveness of traditionally-designed DH systems, so we carried out a case study of the annual energy performance of a low-energy network for low-energy houses in Denmark. We took into account the effect of human behaviour on energy demand, the effect of the number of buildings connected to the network, a socio-economic comparison with ground source heat pumps, and opportunities for the optimization of the network design, and operational temperature and pressure. In the north-European climate, we found that human behaviour can lead to 50% higher heating demand and 60% higher heating power than those anticipated in the reference values in the standard calculations for energy demand patterns in energy-efficient buildings. This considerable impact of human behaviour should clearly be included in energy simulations. We also showed that low-energy DH systems are robust systems that ensure security of supply for each customer in a cost-effective and environmentally friendly way in areas with linear heat density down to 0.20 MWh/(m year), and that the levelized cost of energy in low-energy DH supply is competitive with a scenario based on ground source heat pumps. The investment costs represent up to three quarters of the overall expenditure, over a time horizon of 30 years; so, the implementation of an energy system that fully relies on renewable energy needs substantial capital investment, but in the long term this is sustainable from the environmental and socio-economic points of view. Having demonstrated the value of the low-energy DH concept, we evaluated various possible designs with the aim of finding the optimal solution with regard to economic and energy efficiency issues. Here we showed the advantage of low supply and return temperatures, their effect on energy efficiency and that a DH design that relies on low-temperature operation is superior to a design based on low-flow operation. The total primary energy use in the best design was 14.3% lower than the primary energy use for standard, recently designed networks, and distribution heat losses were halved. Moreover, the exploitation of the entire available pressure by means of careful network design decreased the average pipe size required, which slightly lowers the investment costs for purchasing and laying the pipelines in the ground. This low-temperature DH concept fits the vision of the future energy-sustainable society.     

Analyzing variables for district heating collaborations between energy utilities and industries

One vital means of raising energy efficiency is to introduce district heating in industry. The aim of this paper is to study factors which promote and inhibit district heating collaborations between industries and utilities. The human factors involved showed to affect district heating collaborations more than anything else does. Particularly risk, imperfect and asymmetric information, credibility and trust, inertia and values are adequate variables when explaining the establishment or failure of industry-energy utility collaborations, while heterogeneity, access to capital and hidden costs appear to be of lower importance. A key conclusion from this study is that in an industry-energy utility collaboration, it is essential to nurture the business relationship. In summary, successful collaboration depends more on the individuals and organizations involved in the relationship between the two parties than on the technology used in the collaboration.     

Practical modelling of micro combined heat and power applications for local authority district heating schemes

The primary purposes of this paper are to describe a practical model which can be used to assist economic evaluation of district heating proposals, with particular reference to potential micro combined heat and power (CHP) applications, and to discuss the results of applying this model to a proposal for a particular scheme. The problems of realistic simulation of demand patterns, and the sensitivity of micro-CHP project values to scale, fuel prices, differential purchase/selling tariffs for electricity, duty cycle and plant utilization factors are discussed. Of several options, two were shown to be economically viable, relative to existing methods of supply (gas-fired boilers); however, the margin of benefit is small relative to wisely chosen modern boiler installations. A brief discussion of alternative methods of finance is provided; ceteris paribus, the proposed scheme would not be likely to attract venture capital from would-be lease-hire agencies. There is scope however for pilot schemes, whose results could be used to define more closely the limits of uncertainty of, for example, annual availability and duty cycle influences on the cost economics of operations.