Simulating conditions for combined heat and power in the Swedish district heating sector

Transcription

1 THESIS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY Simulating conditions for combined heat and power in the Swedish district heating sector David Knutsson Department of Energy and Environment CHALMERS UNIVERSITY OF TECHNOLOGY Göteborg, Sweden 2005

2 Simulating conditions for combined heat and power in the Swedish district heating sector David Knutsson Göteborg 2005 ISBN David Knutsson Doktorsavhandlingar vid Chalmers tekniska högskola Ny serie Nr 2356 ISSN X Department of Energy and Environment Chalmers University of Technology SE Göteborg Sweden Telephone +46 (0) Chalmers Reproservice Göteborg, Sweden, 2005.

3 Simulating conditions for combined heat and power in the Swedish district heating sector DAVID KNUTSSON Department of Energy and Environment Chalmers University of Technology Abstract The most important issues in the European energy sector today are how to increase competitiveness on the energy markets, reduce both CO 2 emissions and dependence on imported fuels. These issues are also important aspects of Swedish energy policy. In Sweden, the district heating (DH) sector has commonly been used to achieve Swedish energy policy goals. However, the ongoing integration and deregulation of the energy markets in Europe now means that the Swedish DH sector can also play an important role in achieving international targets. This thesis investigates the extent to which the Swedish DH sector can contribute to compliance with current energy policy targets, both international and Swedish. The study consisted of simulations of the Swedish DH sector response to various policy instruments in a model that takes the local features of virtually all Swedish DH systems into account. The findings show, for example, that there is great potential for combined heat and power (CHP) generation in the Swedish DH sector. By exporting this CHP electricity to other European countries with less effective and fossil dependent power generation plants, the CO 2 emissions from the European energy sector could be substantially reduced. This would also result in increased security of supply and competitiveness in the EU, since fuel use would be more effective. In Sweden, increased CHP generation would also be a way of maintaining an effective national security of supply of power. Keywords: district heating, combined heat and power, tradable green certificates, tradable emission permits, system analysis iii

4 iv

5 List of appended papers This thesis is based on the following papers, referred to in the text by Roman numerals: I. Knutsson, D., Sahlin, J., Werner, S., Ekvall, T. and Ahlgren E. O. (2006) HEATSPOT a simulation tool for national district heating analyses. Energy, 31 (2-3): pp II. III. IV. Knutsson, D. and Werner, S. (2002) Potential for natural gas based CHP generation in the Swedish district heating systems. International Association for Energy Economics 25 th Annual International Conference, June 26-29, 2002, Aberdeen, Scotland. Sahlin, J., Knutsson, D. and Ekvall, T. (2004) Effects of planned expansion of waste incineration in the Swedish district heating systems. Resources, Conservation and Recycling, 41 (4): pp Knutsson, D. Werner, S. and Ahlgren E.O. (2005) Short-term impact of green certificate and CO 2 trade in the Swedish district heating sector. Submitted for journal publication (September 2005). V. Knutsson, D. Werner, S. and Ahlgren E.O. (2005) Combined heat and power in the Swedish district heating sector - impact of green certificates and CO 2 -trading on new investments. Accepted for publication in Energy Policy (September 2005). David Knutsson is the main author of papers I, II, IV and V, and he also conducted the modelling. Jenny Sahlin did all the writing for Paper III. David Knutsson did the modelling that served as comparisons to the answers from the questionnaire. An earlier version of paper IV was presented at the 9 th international symposium on district heating and cooling in Espoo, Finland in August, 2004 (Knutsson et al., 2004). v

6 vi

7 Table of contents Abstract...iii List of appended papers... v 1 Introduction Background Aim Scope of this study Short presentation of appended papers Organisation of the thesis Model object: The Swedish DH sector Development and current position Comparison with the DH sectors in other European countries Policies expected to affect the development of the Swedish DH sector Climate and environment Competitiveness on the energy markets Security of energy supply Instruments to implement the policies Possible effects of the policy instruments on the Swedish DH sector Models of the Swedish district heating sector Other approaches and previous studies The HEATSPOT model Comments on appended papers Paper II: Potential for natural gas based CHP generation in the Swedish district heating systems Paper III: Effects of planned expansion of waste incineration in the Swedish district heating systems Paper IV: Short-term impact of green certificate and carbon dioxide trade on the Swedish district heating sector Paper V: Combined heat and power in the Swedish district heating sector - impact of green certificates and CO 2 trading on new investments Concluding discussion Studies of the Swedish DH/CHP potential Relevance of main results Implications of the system boundary choice and boundary conditions Contributions of the thesis Future work Acknowledgements References vii

8 viii

9 1 Introduction 1.1 Background The energy sector in the European Union (EU) is the object of interest for achieving numerous policy goals. The most important issues are reduction of CO 2 emissions, increasing competitiveness on the energy markets, and reduction of the dependence on imported fuels. This focus on the energy sector is mainly attributable to the widespread use of fossil fuels and the potential of the sector to increase resource efficiency. CO 2 reduction and energy market competitiveness are important national issues in Sweden as well. In Sweden, however, the perhaps most important energy policy question in recent decades has been decommissioning and replacement of nuclear power capacity. 1 In Sweden the district heating (DH) sector has been used to achieve Swedish energy policy goals in the past. Since 1970, the Swedish DH sector has tripled its heat deliveries, and currently supplies about 50% of the final heat required for both housing and other premises. During the same time period, the energy supply to the DH sector has shifted from total oil dependence to include a wide range of heat sources, predominantly biofuels. This development has largely been a result of Swedish energy policy, which has encouraged DH expansion, oil substitution, and biofuel use, in combination with the ability of the DH systems to adapt to the policies. This development has contributed to improved local environments as well as to lower CO 2 emissions and thereby less global climate impact. The proven adaptability of the DH sector gives us reason to believe that the DH sector could play an important role in achieving energy policy goals in the future as well. The ongoing integration and deregulation of the electricity markets in Europe has enabled the Swedish DH sector become part of the international electricity market. Sweden can, therefore, also play an active role in achieving internationally formulated targets. The fundamental idea underpinning DH is to utilise local resources that would otherwise be wasted for heat supply through a network of pipes. Examples of such resources are heat released from incineration of municipal solid waste and wood waste, low temperate heat wasted from process industries or from power generation. Another resource, although not available to any significant extent in Sweden, is hot underground water (geothermal energy). The set of resources used in DH systems depends mainly on the local preconditions. Incineration of municipal solid waste occurs, for example, mostly in the DH systems of large cities, where large volumes of waste are generated. Heat from wood waste incineration, on the other hand, is mostly available in sparsely populated municipalities with large forest assets. Industrial waste heat is available mainly in coastal municipalities, since industries are often situated there to satisfy their sea transport needs. Waste heat from power generation, combined heat and power (CHP), however, is not bound to any specific geographical locations since no specific fuel is required for power generation. 2 Often, in fact, several local heat sources are available in the same geographical area and then interact with each other within the DH system. The locally available heat sources are also often supplemented with primary energy sources such as coal, oil, and, natural gas. This is both for reasons of supply security and to enable cost-effective operation of the plants. 1 Currently, nuclear power accounts for approximately 50% of the Swedish power supply. The remaining 50% of the power supply is mainly based on hydropower. Two nuclear blocks of 600 MW each have recently been shut down. The decommissioning date for the remaining ones has not yet been determined. 2 The electricity-generating efficiency of the plant is, however, very dependent on the fuel used. 1

10 How can the Swedish DH sector contribute to fulfilment of energy political goals in the future? The direct reduction potential for CO 2 in the Swedish DH sector is small, since replacement of fossil fuels with alternative heat sources has, to a large extent, already been done. This implies that the Swedish DH sector is dependent on imported fuels only to a very limited extent. In terms of energy-efficiency, the plants and distribution networks in the Swedish DH systems are up-to-date and in good condition. The main key for goal compliance is, therefore, neither fuel-shifting nor refurbishing of either the existing plants or the existing distribution networks. The main potential for goal achievement is a shift in DH production technologies. The main motive for constructing DH grids is often to make use of the heat rejected from power generation (CHP). In an international perspective, CHP generation is also the most common source for DH. In Sweden, however, the CHP technology has not been utilized to any significant extent. The main reason for this is the ambitious nuclear power programme of the 1970s and 80s, which resulted in low power prices and made CHP investments unprofitable. Instead of CHP plants, the DH utilities invested in heat only boilers (HOBs) and even in electricity-powered heat pumps. In an increasingly integrated European power market, replacement of the HOBs and heat pumps with CHP plants would increase the possibilities of exporting Swedish CHP electricity to other European countries that have less effective and fossil dependent power generation capacity. The overall CO 2 emissions in the European power generation sector should, thereby, be substantially reduced. Increased Swedish CHP electricity exports would also result in increased supply security and competitiveness within the EU, since the fuels would be utilised more effectively. Increased CHP generation could also be a way of compensating for future decommissioning of Swedish nuclear power capacity. Will the current policy instruments stimulate the DH sector to conform towards the goals of CO 2 reduction, energy market competitiveness, and increased security of energy supply? Two strategies for increasing the security of energy supply within the EU are to increase the share of renewable energy sources (RES) in the energy system and to encourage effective power generation. 3 In Sweden, a scheme for tradable green certificates (TGCs) was introduced on May 1, 2003 to stimulate and increase renewable power generation. The basic idea underpinning the scheme is that TGCs are granted to renewable power generators in relation to the quantity of renewable power they generate. The TGCs can then be sold on a certificate market, providing an extra income from renewable power generation. The question is: will this scheme actually result in any additional renewable power generation from the DH sector or will it just increase revenues for renewable CHP generators? As a means of complying with the Kyoto commitments on greenhouse gas reduction 4, a scheme for tradable CO 2 emission permits (TEPs) came into force in the EU on January 1, The basic idea underpinning this scheme is that TEPs are allocated to CO 2 emitting companies, correspondent to the reduced volume of CO 2 emissions that is committed to be achieved (a total reduction of 8% for the companies in the EU). If measures taken by the 3 These two strategies are also important means of reducing CO 2 emissions. Examples of RES are solar, wind, hydropower, and biofuels. CHP is an example on effective power generation, since the total conversion efficiency in CHP plants is about twice as high as for condensing plants, which are the most common power generation technology in the EU. 4 EU has undertaken to reduce greenhouse gas by 8 % during the period , as compared with the 1990 level in the Kyoto protocol (UNFCCC, 1997). 2

11 companies reduce emissions, the corresponding surplus of TEPs may be sold to other parties in the trading scheme. These parties will typically be companies that have more costly options for reducing the emissions than the selling company. This system will certainly affect the economy and operation of the Swedish DH plants, since TEPs will either have to be purchased or sold, depending on the allocation of TEPs in relation to the actual emissions of CO 2. The questions are: will this system actually lower the CO 2 emissions from the DH sector or will it just affect the economy of the DH utilities? How will the TEP system interact with the TGC system? How will the TGC and TEP schemes interact with the rest of the Swedish regulatory framework on energy? The Swedish DH sector comprises a major part of the Swedish energy systems, and may substantially contribute to carrying out energy policy goals, both in Sweden and in Europe as a whole. However, to get the DH sector to effectively develop in a way that corresponds to the goals, policy instruments that stimulate actions toward goal accomplishment will have to be implemented. Like the TGC and TEP schemes, such instruments are often prepared for national legislation and applied generally to all DH systems. But all Swedish DH systems are different and diversified, depending on the local preconditions and they will, therefore, respond differently to the policies. It is therefore necessary to investigate the aggregated response from the DH sector to changes in national policy and implementation of new national policy instruments using a system by system approach. 1.2 Aim The purpose of this thesis is to develop and apply a method that accurately assesses and analyses the effects that different policy schemes will have on the Swedish DH sector as a whole. The aim is to use this method to: investigate to what extent the Swedish DH sector can contribute to fulfilment of Swedish and international energy policy goals and how policy instruments that have already been implemented affect these possibilities, and to improve the possibilities for national policy makers to draw up well-prepared policy instruments for the DH sector in the future. 1.3 Scope of this study The scope of this study comprises development and application of the HEATSPOT model. 5 The HEATSPOT model considers the supply side of the existing Swedish DH sector, described system by system. The demand for DH in each respective system can be satisfied either with the current technologies or by investments in new plants. The model is simulative in a sense that it only reflects the situation before and after a change. In evaluation of new investment alternatives in the model, it is assumed below that everything remains unchanged in the DH systems but the direct changes caused by the new investment. It is, for instance, assumed that DH demand is constant, and that the plants that were in operation before the investment are still in function after the investment is implemented. This means that the model only provides short-term insights, such as What happens tomorrow if a change is applied today? 5 HEATSPOT is an acronym for Simulating POTential changes in the Swedish district HEATing sector. 3

12 Throughout the work, three result parameters have been evaluated: CO 2 emissions, power generation from CHP plants and system costs. CO 2 emissions are interesting owing to their importance from a global warming perspective. Power generation is interesting owing to the potential for reducing less effective power generation in Europe and replacing nuclear power capacity. System costs are interesting since system cost reductions are the main reason for changing the systems. A schematic illustration of the HEATSPOT model is given in Figure 1. More detailed descriptions of how the model works and its boundary conditions are provided in Section 3.2 and in all the appended papers. The choice of system boundary is motivated by the potential importance of the sector in achieving energy policy goals. The system by system resolution, in turn, is motivated by the major diversities in heat sources and technologies among the DH systems. The application of the model has its main focus on CHP generation, since increased CHP generation is regarded as the Swedish DH sector s main opportunity for contributing to fulfilment of energy policy targets. 4

13 System boundary: The Swedish district heating (DH) sector Results: CO 2 emissions Power generation in CHP plants System cost 170 local DH systems described system by system Set of existing plants Distribution of annual heat demand Boundary conditions: Fuel prices Power prices Taxes Green certificates CO 2 emission permits Fuel availability Figure 1 Schematic illustration of the HEATSPOT model 1.4 Short presentation of appended papers The thesis is based on five papers investigating the effects of different changes in the Swedish DH sector. More extensive comments on the papers are found in Chapter 4. Paper I (description of the HEATSPOT model) In Paper I the HEATSPOT model is described and demonstrated. The demonstration is a study in which the results from the HEATSPOT model are compared with the results from two less detailed DH analysis methods (that both merge all DH systems before analysis). The comparison reflects the extent to which other fuels are displaced owing to increased waste 5

14 incineration in the respective methods. The purpose of the demonstration is to illustrate the improved quality in the results from analysing the DH systems separately (using the HEATSPOT model) instead of handling them on a nationally aggregated level. Paper II (CHP potential with and without an expanded natural gas grid) Paper II deals with the technical potential for natural gas based CHP generation in Sweden. The analysis is made in two scenarios with different geographical access to natural gas. The benefit of utilizing the natural gas CHP potential is calculated in terms of changes in CO 2 emissions in the European power generation sector. The results are compared with a situation in which the biomass CHP potential had been utilised instead. The analysis was performed with the HEATSPOT model. Paper III (Increased waste incineration) In Paper III the effects of expanding waste incineration in the Swedish DH systems is investigated. This paper is based on results from a questionnaire survey of the largest DH suppliers in Sweden about their plans for waste incineration and what effects waste incineration would have on their DH systems. The findings from the questionnaire survey are also compared to results generated using the HEATSPOT model. The findings from the questionnaire survey were also used as input in paper I. Papers IV and V (Short-term impact and change in investment potential for CHP owing to TGC and TEP trading) In Paper IV and Paper V the HEATSPOT model was used to investigate the impact of TGCs and TEPs on the Swedish DH sector. In Paper IV, the impact of TGCs and TEPs on the operation regimes of the existing plants was investigated, and in Paper V, the effects of the TGC and TEP schemes on the profitability of investments in CHP plants are analysed. 1.5 Organisation of the thesis In Chapter 2, the development and current position of the Swedish DH sector are described. A comparison is also made between the Swedish DH sector and the DH sectors of other European countries. This is followed by a review of current policies, and policy instruments on global, EU and Swedish levels that may affect the development of the Swedish DH sector. Chapter 3 is devoted to methods for analysing the Swedish DH sector. First, other approaches and studies made using those approaches are accounted for. Thereafter, the HEATSPOT model and its boundary conditions are described briefly. Detailed comments on appended papers are given in Chapter 4. Chapter 5 provides a discussion on the relevance of the results and the implications of the system boundary choice. In Chapter 6, suggestions for future work are made. 6

15 2 Model object: The Swedish DH sector 2.1 Development and current position Since 1970, the Swedish DH sector has tripled its heat deliveries and currently accounts for about 47% of the total energy supply for heating to residential and other premises (conversion efficiencies in individual boilers not accounted for). The corresponding figure for heating of apartment buildings and other premises (single-family houses excluded) is about 82% (Statistics Sweden, 2005a). These market shares correspond to annual DH deliveries of about 50 TWh. The growth of the DH sector has emerged through the creation of hundreds of local DH systems all over the country. One of the main reasons for the rapid expansion of the DH sector was the large housing construction programme that was carried out from 1965 to 1974 (known as the million programme because the ambition was to create one million new residences). This resulted in many new housing areas, with highly concentrated heat needs, suitable for DH. Another important factor to the growth of DH demand since 1970 has been the constant increase in costs for heating from oil. This began with the oil crisis in the 1970s that resulted in large price increases for oil. In more recent years the increased costs of oil have mainly been a result of increased taxes on fossil fuels owing to the governmental green tax recycling policy that aims to finance lower taxes on labour with higher taxes on energy. The governmental policy to reduce power consumption has also been important to the DH growth, since subsides for converting homes with electric heating to DH have been available. Perhaps the most decisive factor to the growth of the DH sector, however, has been the municipal ownership of the DH utilities, in combination with the municipalities rights to tax their inhabitants, which has given the utilities financial security enough to undertake large and long-term investments in DH grids and DH production units. Figure 2 shows the development of the use of DH between 1970 and Losses TWh Residential, service 10 Industry Figure 2 Demand for district heating Source: Swedish Energy Agency (2003a). The increased demand for DH has been met by investments in different types of DH production technologies over the years. Prior to the oil crisis in the 1970s, the increased DH 7

16 demand was largely met by oil-fired CHP plants. This development changed, however, in the mid 1970s when nuclear power expansion began. Along with the major resources of hydropower, the nuclear power expansion resulted in low power prices and poor profitability of CHP investments. Instead, the growth in DH demand was met by investments in plants for heat production only (HOBs). The good access to low cost power also resulted in the HOBs often being supplied with electricity. For the same reason, electricity-powered heat pumps also became common in the DH systems. In more recent years, as power prices have risen, the growth of CHP has been restrained by disadvantageous taxation. Figure 3 shows the annual power generation in hydropower, nuclear and DH/CHP plants in Sweden between 1970 and DH/CHP TWh Other Nuclear power Hydro power Figure 3 Annual power generation in Sweden between 1970 and Other is the sum of condensing power generation, CHP generation in industrial applications and wind power generation. Source: Swedish Energy Agency (2003a) and Statistics Sweden (2005b). In 1970, the DH sector was totally dependent on oil. As oil became more expensive and the vulnerability of total oil dependency became clear, many DH system operators switched from oil to coal and biofuels, which were cheaper and appeared more secure of supply than oil. In 1991, a carbon dioxide tax was introduced that hampered the expansion of coal in favour of additional biofuel. As the power generation surplus decreased, owing to higher domestic power demand and increased trade between Sweden and neighbouring countries, the use of electric boilers has also decreased. The production from heat pumps has, however, remained quite constant over the years, since they have better conversion efficiency from power to heat than electric boilers. Natural gas, introduced in Sweden in 1985 has been very limited in use in the DH sector owing to limited geographical availability 7 and the high CO 2 tax. Table 1 6 The meaning of DH/CHP is CHP plants in the DH sector. CHP generation in industrial applications is excluded from the figure. The current annual power generation from industrial CHP plants is, however, of the same order of magnitude as for DH/CHP. 7 Natural gas is only available on the Swedish west coast. 8

17 shows the energy tax and CO 2 tax for An exchange rate of SEK 9 per has been used in the conversion from SEK to. Table 1 Energy tax and CO 2 tax in Sweden Source Swedish National Tax Board (2005). Fuel Energy tax for heat generation ( /MWh fuel ) CO 2 tax for heat generation ( /MWh fuel ) Coal LPG Natural gas Oil Today, the heat supply is quite diversified in the DH sector as a whole as well as in many local DH systems. The largest source of heat is biofuels. Oil is now mostly used in periods of peak demand. The development of the energy supply to the Swedish DH sector between 1970 and 2003 is shown in Figure 4. Figure 5 shows the energy supply to the Swedish DH sector and to the ten largest DH systems in Sweden. Further reading on the history of district heating and the development of the Swedish DH sector can be found in Werner (1989), (1991), and (1999). Assessments of the history of Swedish energy policy can be found in e.g. NUTEK (1995) and IVA (2003) Heat pumps Electric boilers Waste heat etc. TWh Coal incl. blast furnace gas Biofuels, peat etc. 10 Oil products Natural gas incl.lpg Figure 4 Growth and energy sources for district heating in Sweden Source: Swedish Energy Agency (2003a). 8 Since January 1, 2004, the fuel used for heat generation in CHP plants is exempted from the energy tax and charged with 21% of the CO 2 tax. For fuels used in HOBs, 100% of both energy and CO 2 tax are charged. Prior to this date the fuel used for heat generation in CHP plants was charged with 50% of the energy tax and 100% of the CO 2 tax. Additionally, since this date, free allocation of the fuels between heat and power generation is no longer permitted. Instead, each fuel is allocated proportionally in relation to the heat and power generation (Swedish Parliament, 1994). For a coal-fired CHP plant with a power-to-heat ratio of 0.5, the CO 2 tax is thus 33.4 * 0.21* 0.67 = 14.4 / tco2 where is the CO 2 emission factor for coal [ Environmental Protection Agency, 2005). Power generation is always tax exempt. tco 2 MWh fuel ] (Swedish 9

18 Natural gas 5% Electricity 4% Coal 6% Peat 3% Oil 10% Waste 10% Industrial waste heat 7% Heat pump 12% PJ/year TWh/year 0 0 Biomass 43% GÖTEBORG STOCKHOLM central MALMÖ STOCKHOLM south VÄSTERÅS STOCKHOLM west UPPSALA LINKÖPING ÖREBRO NORRKÖPING Figure 5 Total annual energy supply to the Swedish DH sector (pie chart) and total annual energy supply in the ten largest Swedish DH systems during a normal climate year based on 1999 statistics from Swedish District Heating Association (SDHA) (2000). The same patterns are used in the bar graph as in the pie chart. (The figure originates from appended paper I) 2.2 Comparison with the DH sectors in other European countries Sweden has the third largest DH sector in the EU after Poland and Germany in terms of heat delivery (Euroheat & Power, 2005). Two other Nordic countries - Denmark and Finland - also have large DH sectors. In terms of market share, Iceland has the largest penetration of DH in the world. 9 The DH producers in the three Nordic countries have between 45 and 55% of their domestic heat markets. In Germany, DH covers about 12% of the heat demand. In Germany, Denmark and Finland, the majority of the DH is produced in CHP plants. In Sweden, Poland and the Baltic states, the situation is the opposite, i.e. DH has a large market share but with very little CHP generation. Compared to the Swedish DH sector, the DH systems in other European countries are more homogenous in their sources of energy supply, using more fossil fuels (oil, coal and natural gas). In Poland, Germany, Finland and Denmark the respective shares of fossil fuels for heat and CHP generation in the DH sectors are 97%, 93%, 67% and, 61%. In Poland and Germany coal is the dominant fuel, while in Finland and Denmark it is natural gas. In Sweden, the share of fossil fuels for heat and CHP generation is 22% (Euroheat & Power, 2005). Figure 6 and Figure 7 show DH generation, market share of DH, and share of DH from CHP generation for some European countries. 9 Owing to their large resources of geothermal heat. 10

19 TWh Poland Germany Sweden Czech Republic UK* Finland Denmark Romania Hungary Austria Lithuania Estonia Latvia Bulgaria Slovakia Netherlands Iceland Italy Swizerland Croatia Norway Figure 6 DH production in some European countries in Source: Euroheat & Power (2005). The figure for UK is for Share of heat from CHP in DH generation 100% 80% 60% 40% 20% The Netherlands Italy Belgium Switzerland France Germany Austria Hungary Slovakia 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% DH market share Finland Poland Sweden Denmark Estonia Czech republic Latvia Lithuania Figure 7 DH market share and share of heat from CHP in DH generation in selected European countries in Source: Werner (2001). 2.3 Policies expected to affect the development of the Swedish DH sector DH utilities are very good at conforming to new conditions. Thus, future developments in the DH sector may also be greatly influenced by the political situation. However, one difference compared with the past is that the Swedish DH sector will increasingly be influenced by the political current and by policies formulated at the EU or even at global level. In this section, the most important policies that will affect the Swedish DH sector in the years to come are discussed. These policies are divided into three groups: climate and environment, 11

20 competitiveness on the energy markets, and security of energy supply. The section concludes with an assessment of the policy instruments currently in use. In Section 2.4, the possible effects of these policy instruments on the DH sector are discussed Climate and environment The threat of global warming and climate change is possibly the global issue that will have the greatest impact on the development of the Swedish DH sector. It is widely accepted that global warming originates from emissions of greenhouse gases. 10 It is also recognized that one of the main greenhouse gases is CO 2. CO 2 emissions are released from combustion of fossil fuels. Since the world energy sector is dominated by the use of fossil fuels, a key factor to reducing the speed of climate change is to decrease the use of fossil fuels for energy purposes, or at least, in the shorter term, to reduce CO 2 emissions related to the use of these fuels. 11 At the third Conference of Parties (COP 3) held in Kyoto, Japan, on 11 December, 1997 the first international initiative to reduce the greenhouse gas emissions was taken within the United Nation Framework Convention on Climate Change (UNFCCC). The main content of what is known as the Kyoto protocol was an agreement among the Annex B countries to cut total greenhouse gas emissions by at least 5.2% from 1990 levels as an average for a commitment period between 2008 and 2012 (UNFCCC, 1997). 12 When the Russian federation ratified it on February 16, 2005 the Kyoto Protocol entered into force. Since one of the energy policies of the EU is to work towards long-term environmental sustainability, the EU was one of the most enthusiastic parties to the ratification process. The greenhouse gas reduction commitment of 8% from the EU as a whole is distributed among the member states according to the burden sharing agreement from 1998 (European Commission, 1999). 13 In Sweden, the use of fossil fuels in the energy sector is more limited than in most of the other EU countries, owing to the Sweden s extensive resources of hydropower and nuclear power. In the burden sharing agreement Sweden is therefore allowed to increase its greenhouse gas emissions by 4% during the commitment period as compared with 1990 levels. 14 But in spite of this, and in the effort to be a forerunner in realignment work towards environmental sustainability, the Swedish government has adopted a climate policy aiming to decrease greenhouse gas emissions by 4% in the commitment period instead (Swedish Government, 2001) Gases in the atmosphere that obstruct radiation of heat from the earth. The greenhouse gases are carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide (N 2 O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and, sulphur hexafluoride (SF 6 ) (UNFCCC, 1997). 11 Reduction of CO 2 emissions from fossil fuel use includes, for instance, fuel switching from coal to natural gas and capturing the CO 2 from combustion and storing it in underground cavities. 12 Annex B countries are the 39 emissions-capped industrialised countries and economies in transition listed in Annex B of the Kyoto Protocol. 13 Most of the 10 new EU member states since 2004 have individually negotiated reduction commitments of 8% (UNFCCC, 1997). 14 This was a result of negotiations taking into account that economic growth in Sweden may result in larger CO 2 emissions and that Sweden already has low CO 2 emissions since power generation is mainly based on nuclear and hydropower. Sweden also undertook to implement major CO 2 reduction measures during the 1990s, e.g. through the introduction of the CO 2 tax. 15 This target may, however, be reformulated if negative consequences for the Swedish industry are observed. 12

21 A second important environmental issue in the EU which, although it is not directly related to energy, has a potentially great influence on development of the Swedish DH sector, is the questions of how to handle the waste generated in the European Union. According to both EU and Swedish policy waste prevention, reuse, and material and energy recovery are generally preferable to landfilling. Increased volumes of waste directed to energy recovery may have a large impact on the Swedish DH sector, since the recovered energy often takes the form of heat supplied to the DH systems in Sweden Competitiveness on the energy markets In addition to concerns about environmental sustainability, including climate change, another important issue on the EU energy policy agenda is to ensure long-term economic sustainability. This is important not only for maintaining the competitiveness of EU industries, but also in terms of lowering the prices of energy services for EU citizens. As mean of increasing the competitiveness in the EU energy sector, a deregulation and integration process for the electricity and natural gas markets is currently taking place. The purpose is to make the markets work more cost effectively and thereby to lower the energy prices. In Sweden, the energy policy also aims to create conditions for effective use of energy (Swedish Government, 1997). The Swedish electricity market was deregulated in 1996, to some extent under the influence of deregulation in the UK and Norway. The Swedish natural gas market is currently open to non-household customers only, but will be open to all customers on July 1, One interesting aspect of the deregulation of the energy market is that no EU policy has been communicated regarding how the EU DH sectors are to be organised. Such a directive could have a large influence on overall resource efficiency and competitiveness in the EU, especially since many of the new EU member states have large DH shares in their respective heat markets. 16 In Sweden the deregulation process on the electricity and natural gas markets has also led to a focus on the competition situation for the DH sector. In 2003, a government commission (Fjärrvärmeutredningen) was established by the Swedish government to propose adequate changes to the regulatory framework so as to increase competition in the DH sector. The main proposals in the commission reports were that: separate accounts for heat and power generation activities should be established (SOU, 2003), the DH utilities should be obliged to report key figures on the relation between price and cost of their heat deliveries (SOU, 2004), to settle an independent institution where disputes between DH customers and utilities and issue recommendations to the parties should be setup (SOU, 2004). A draft bill from the government based on the commission s suggestions is expected during autumn For example the Baltic States, the Czech Republic, Poland, and Slovakia, see Figure 7. The DH sectors of Slovenia and Hungary also have large shares of the market (not included in Figure 7). 13

22 2.3.3 Security of energy supply The great dependence of many EU member states on imported fuels has put the security of energy supply issue high on the EU agenda. The strategy to achieve long-term security of energy supply includes policies both to increase the use of energy sources available in the EU, and to transform the fuels to useful energy products in the production units more effectively. In a European Commission Green Paper from 1996 the importance of indigenous renewable energy sources (RES) in efforts to reduce dependence on imported fuels was particularly addressed (European Commission, 1996). The Green Paper was followed by a White Paper in 1997 laying down a community strategy and action plan for increasing the utilisation of RES in the EU (European Commission, 1997a). The White Paper sets out an aim of doubling the Union's overall gross internal energy consumption of RES from 6% to 12% by In terms of effective use of energy sources, a Community strategy to promote CHP was formulated in 1997, and the target set in this document was to increase CHP generation from 9% of the total EU power generation to 18% by 2010 (European Commission, 1997b). In a Green Paper from the European Commission 2000, the importance of measures on the demand side in order to increase the security of energy supply was also emphasised (European Commission, 2000). In Sweden, too, secure supplies of energy and electricity have been important energy related issues for several years. However, the focus on the security of supply issue is, somewhat different in Sweden than in most other countries of the EU. In the EU in general, the focus is on reduction of the oil and natural gas dependence, since these fuels are both widely used and not available to any substantial extent in the member states. Apart from the transport sector, the oil and natural gas are mainly used to heat buildings. In Sweden, however, oil and natural gas are less used for heating owing to the high taxes on fossil fuels. Instead, electric heat is widely used owing to the Swedish heritage of cheap power generation. In Sweden, the security of energy supply issue is therefore focused instead on security of power supply, owing to the substantial power consumption and the decommissioning plans for the nuclear power capacity. In the draft Swedish energy bill from 1991 it was stated that domestic power supply should be secured through utilisation of sustainable, preferably domestic, energy sources (Swedish Government, 1991) Instruments to implement the policies Member states must implement EU directives, thereby enshrining the EU policies discussed in the previous sections in their national legislation. The section below is a brief description of the EU directives relevant to the subject of this thesis and the amendments to Swedish legislation made in order to implement them. The directive on tradable emission permits (TEPs) To facilitate satisfying greenhouse gas emission reductions commitment as cost-effectively as possible, the Kyoto protocol stipulates three flexible mechanisms which may be used. One is the scheme for emission allowance trading (tradable emission permits (TEPs)) 17, briefly described in Section 1.1 above. In order for the EU to be prepared for the TEP scheme when it starts in 2008, a test period from 2005 to 2007 began in the EU on January 1, The forms for this scheme are outlined in a directive from 2003 (European Parliament, 2003a). Since CO 2 emissions reductions can be achieved both by resource-effective power generation and reduction of fossil fuel use, the directive covers all three policy areas (climate and environment, competitiveness on the energy markets and, security of energy supply). 17 The other two flexible mechanisms are Joint Implementation (JI) and the Clean Development Mechanism (CDM) 14

23 In compliance with the directive, a Swedish law on trade in emission permits entered into force on January 1, 2005 (Swedish Parliament, 2004). The law comprises 600 plants in the industrial and energy sector, many active in the DH sector (Swedish Government, 2004). The introduction of the TEP scheme raised the question about whether the CO 2 tax (see Section 2.1) should continue to be levied on the parties involved in the TEP scheme. In the draft bill of September 2005 (Swedish Government, 2005), a removal of the CO 2 tax for the trading sector was proposed. Directives on deregulation of the electricity and natural gas markets Deregulation of the electricity and the natural gas markets has been seen by the EU administration as an important mean of increasing the competitiveness of the EU. The guidelines for the market openings of the electricity and natural gas markets are formulated in two directives (European Parliament, 2003b and 2003c). The directives comprise rules on unbundling the accounts for supply and grid activities, rules on third party access to the grids, time schedules for the deregulation, etc. In addition to increasing the cost efficiency and competitiveness of the EU energy sector, these directives are likely to promote resourceeffective use of fuels and thereby to be complements to directives aimed at improving the climate, environmental and, security of supply. In Sweden, complying with the deregulation directives entails amending the electricity and natural gas legislation. Directives on the promotion of renewable and energy-effective power generation To reduce EU dependence on imported fuels, two EU directives have been issued the Directive on the Promotion of Renewable Energy sources for power generation (European Parliament, 2001), and the Directive on the Promotion of Cogeneration (European Parliament, 2004). All EU member states must, according to the 2001 Directive, define national targets for the use of power generated from renewable energy sources and undertake adequate measures in order to achieve these targets. In the 2004 directive, no requests for CHP generation targets are expressed. The directive does state, however, that the national potential for CHP generation shall be assessed (which was also done in Sweden in 2005 using a simplified version of the HEATSPOT model, see Section 5.1). In addition to increasing the security of the energy supply, renewable and energy-effective power generation are also important means of reducing CO 2 emissions and enhancing the competitiveness of the EU energy markets. In Sweden, the national target for renewable power generation is an increase of 10 TWh/year until 2010 as compared with the 2002 level. One means of achieving the target was the introduction of the scheme for tradable green certificates (TGCs) (Swedish Parliament, 2003) as explained briefly in Section 1.1. The demand for TGCs is regulated through a quota obligation stating that a certain quota of the power consumption shall be based on RES. This quota is being increased every year until The Directive on the Promotion of Cogeneration (European Parliament, 2004) has not resulted in a concrete support schemes for CHP in Sweden. A measure, primarily aimed at improving the competitiveness of natural gas based CHP was, however, adopted shortly before the directive entered into force, reducing the tax level for fossil based CHP generation. 8 The Landfill Directive 18 The quota for 2003 was 7.4%. In 2010 the quota will be 16.9%, which will correspond to a 10 TWh increase. Quotas for the period 2010 to 2030 and an expansion of the TGC market to Norway are also currently being discussed. A draft bill from the Swedish government on these matters is scheduled for late

24 In the field of waste management, a landfill directive was issued in 1999 specifying requirements for waste and construction of landfills for EU member states (European Council, 1999). The result of this directive in Sweden was a legal ban on landfilling of sorted combustible waste, which came into force on January 1, 2002 (Swedish Parliament, 2001). One of the aims of the law was to redirect waste from landfilling to reuse and material and energy recovery. Increased energy recovery from waste in the DH sector may, however, negatively affect the possibilities for the DH sector to contribute to achieving the goals in other areas, such as increasing renewable power generation. The explanation for this is that the demand for heat is limited, implying that there will be less heat demand for biofuel-based CHP generation. 19 In order to implement stronger economic incentives for choosing other treatment methods than incineration, a Swedish government commission (Bras-utredningen) investigated the possibilities of increasing the competitiveness of other waste treatment methods through, for example, imposing a tax on waste incineration. On March 18, 2005 the commission presented its interim report, recommending that the fossil content of the waste should be subjected to the same kind of energy tax as other fossil fuels (SOU, 2005a). 2.4 Possible effects of the policy instruments on the Swedish DH sector In section 2.3, a number of different policies and policy instruments that will have major effects on the development of the Swedish DH sector were discussed. How the DH sector will actually develop is, of course, difficult to predict. In this section, likely effects of the policy instruments on the development of the DH sector are discussed in brief. The growth in DH demand between 1970 and 2003 was shown in Figure 2. The most important factor for future growth is that there is a need for potential new connectable heat. Since the market share for DH in apartment buildings and other premises (single-family houses excluded) is about 82%, a lot of the potential has already been utilised. There is, however, an ongoing project in Sweden aimed at finding ways of lowering the cost of connecting consumers in more sparsely populated areas to the DH grids (SDHA, 2005). There is also potential for connecting more industries to the DH grids. According to SDHA the annual DH deliveries are expected to increase about 2-3% per year until 2010, mainly in these market segments. In the longer term, the annual DH delivery potential is estimated to be about 80 TWh (SDHA, 2004). One important factor for utilising the DH potential is that the price of DH remains competitive in relation to other possible sources for heating. Essential components for low DH prices are that the producers have access to low-cost energy sources, effective production capacity and low transmission and distribution costs. The DH generation cost is also highly dependent on taxes and other surcharges for the use of the energy source, as well as on the revenues from power generation in CHP plants. Subsidies for converting buildings heated by electricity to other alternatives may also enhance potential customers interest in connecting to the DH grids. 19 There is a possibility that the fraction of the waste derived from renewable sources will be TGC eligible in the future. This, however, remains to be decided. Still, waste-based CHP plants generally have lower electricity efficiency than CHP plants based on biofuels and thus generate less power per unit of heat as compared with CHP plants using biofuels only. 16