Project No: IEE/13/650 District Heating market roles and structures

Transcription

1 Project No: IEE/13/650 District Heating market roles and structures WP 3 Task 3.3 Annex to Deliverable 3.c Kortrijk (Annex to Deliverable 3.3. Kortrijk)

2 District heating systems - Theoretical best practices 13/12/2015 Authors: Virginia Gómez Oñate; Erwin Cornelis, VITO Contact: erwin.cornelis@vito.be Deliverable No. 3.c Support to local project in target city Kortrijk, Belgium: public document. (Deliverable No 3.3 Business model for local project in target city Kortrijjk, Belgium) The STRATEGO project (Multi-level actions for enhanced Heating & Cooling plans) is supported by the Intelligent Energy Europe Programme. The sole responsibility for the content of this document lies with the authors. It does not necessarily reflect the opinion of the funding authorities. The funding authorities are not responsible for any use that may be made of the information contained therein. STRATEGO website: Page 2

3 Contents 1 Introduction Introduction to the STRATEGO project The Kortrijk case Purpose of this report; method used; structure of this report 9 2 Roles in a DH system 11 3 Market structures in a DH system Analysis of the possible heat market structures Combination 1: Fully integrated heat company where the production, transport, retail and balancing are integrated Combination 2.1: The production is unbundled Combination 2.2: The transportation is unbundled Combination 2.3: The retailing is unbundled Combination 2.4: The balancing role is unbundled Combination 2.5. Party one: production and transport. Party two: retailing and balancing Combination 2.6. Party one: production and retailing. Party two: transportation and balancing Combination 2.7. Party one: production and balancing. Party two: transportation and retailing Combination 3.1. Production and transport bundled Combination 3.2. Production and retailing bundled Combination 3.3. Production and balancing bundled Combination 3.4. Transport and retailing bundled Combination 3.5. Transport and balancing bundled Combination 3.6. Retailing and balancing bundled Combination 4. Four market players: market unbundled Market structures evolution 33 4 Heat prices in DH systems Heat price mechanisms Heat price evolution 40 5 Show case: Kortrijk district heating system and its market structure Heat market structure Heat price calculation 45 Page 3

4 6 Conclusions On heat market structure in general On the case of Kortrijk 49 Bibliography 51 Annex A. Assumed annual fixed and variable costs in the Kortrijk case 52 Annex B. Calculation of the fixed fee and variable of the cost plus methodology in the Kortrijk case 52 Page 4

5 1 Introduction 1.1 Introduction to the STRATEGO project The STRATEGO project is a European co-funded project developed in the framework of the Intelligent Energy Europe Program. The purpose of the project Multi level actions for enhanced Heating and Cooling plans STRATEGO is to: provide tangible support in developing National Heating and Cooling Plans, assist local authorities in evaluating their Heating and Cooling potential, find their priority area for intervention, and identify concrete projects that should be implemented. This support to national and local authorities in the implementation of more efficient heating and cooling solutions is organised in different work packages (WPs), see Figure 1. Figure 1: Infographic on the STRATEGO project structure The geographical focus of STRATEGO is Austria, Belgium, Croatia, Czech Republic, Germany, Italy, Romania and the United Kingdom, with support from experienced partners from Denmark and Sweden, provide their support. The transferability and implementation of the project results outside the targeted countries is ensured by involving partners from Spain and Poland. Page 5

6 WP3 National plan local action: supporting local authorities see the red line in Figure 1 which is the focus of this report, provides support to local authorities. Support is given to in total 29 target cities (or regions) in the focus countries of STRATEGO, see Figure 2. Aberdeen Dundee Edinburgh Glasgow Inverness Perth Stirling Alsdorf Ostrava Nový Jičin Antwerp Brussels Kortrijk Limburg Mol Veurne Vienna Graz Großschönau Niederösterreich Milan Brescia Karlovac Osijek Topusko Velika - Gorica Zagreb Alba Iulia Tulcea Figure 2: Map of the STRATEGO target cities This support to the local authorities of these target cities is organised in five tasks, see Figure 3. Mapping local heating and cooling demand and supply Identificatio n of areas of priority for intervention Business models for local partners Involvement of local stakeholders (stakeholder workshop) Input to local heating and cooling action plans Figure 3: Infographic on the tasks in WP3 supporting local authorities 1. In the first task, demand of heating and cooling is mapped, as well as potential supply points and renewable energy sources. The starting point is the Pan-European Thermal Atlas (PETA) 1, from which data are extracted. This is complemented with locally available data; a manual is written in the framework of the STRATEGO project to give guidance to this exercise (Cornelis E., 2015). 1 Link to PETA: Page 6

7 2. Based on the map of local heating and cooling demand and supply, areas of priority for intervention are defined. These are areas where the local conditions are favourable for developing projects first. In total 44 projects will be defined in the STRATEGO project. 3. Business models are then developed for each of the identified projects. An interim report gauging the current status on business models in the target countries, including a SWOT analysis of these was drafted in the framework of the STRATEGO project (Lauersen, 2015). 4. The results of the previous steps are then discussed with local stakeholders. 5. The results of the previous steps, including the conclusions of the stakeholder meeting, are summarised and are presented to the representatives of the target cities, so they can integrate this information in their local heating and cooling action plan. WP3 builds upon WP2 which supports the development of advanced heating and cooling plans on national level. WP3 provides input to WP4, which supports key actors in policy and industry by exchanging best-practice knowledge between various regions across Europe. 1.2 The Kortrijk case This report is written in the framework of the support given to the Kortrijk, one of the target cities in Belgium. Kortrijk is situated in West Flanders; it has more than inhabitants 2 on 80,02 km² (population density of approx. 940 inhabitants / km²), see Figure 4. Figure 4: Location of Kortrijk on the Pan-European Thermal Atlas The heat consumption of Kortrijk amounts to 954 GWh (final energy), which leads to an average heat density for the city of 11.9 GWh/a.km² or 42.9 TJ/a.km². Mainly low grade heat (for space heating and sanitary hot water) is demanded; about half of the heat is consumed by the residential sector, while the other half is almost equally spread over the commercial and industrial sector, see Table 1. Only 4% of the heat is from renewable sources (including CHP) in January Page 7

8 Table 1: Final energy demand of Kortrijk by carrier and sector (excluding transport) Final (GWh) Fuel (GWh) Elec. (GWh) Electricity 423 Residential CHP heat 1 Commercial Fossil fuels 896 Industry non-ets Renewables 57 Industry ETS TOTAL 1377 TOTAL Kortrijk plans about 12 refurbishment projects all over the city, which would add amongst others more than 800 living units to the city and a new swimming pool, see the yellow circles in Figure 5. The city council considers developing a district heating grid connecting these new developments. A first district heating grid is being constructed in the Venning neighbourhood in the east of the city, indicated by the blue circle. Part of the existing buildings have been renovated to low-energy standard buildings, other are replaced by new passive house apartments. A district heating grid will supply the remainder of the demanded heat. A 1 MW wood chip boiler and a 10 kwe CHP will provide the heat. A 450 kw gas boiler will serve as a back-up. A 15 m³ water reservoir will be installed as well. Figure 5: Planned refurbishment projects in Kortrijk There is a waste incineration plant in the municipality Harelbeke, at a distance of 2.5 km (north-east) from the city centre of Kortrijk, (red square on the map). Its residual heat capacity is estimated at 4000 MW. There are specific plans to develop district heating grids tapping this waste heat and bringing it to new urban developments in Harelbeke. The project that has been identified by Kortrijk is the refurbishment of an old hangar in the east of the town. An old railway shed will be converted into 5 new units; a micro-district heating grid will Page 8

9 provide heat to these units. A new swimming pool, replacing an older one nearby, will be built next to this shed, see Figure 6. A gas boiler will provide heat to this swimming pool and to the microdistrict heating grid. Old railway shed Location of new swimming pool High school Existing swimming pool Train station Figure 6: Picture of the identified project by Kortrijk Kortrijk has looked for alternatives to gas; the option of a biomass boiler is disregarded by the city because of environmental concerns (pollution by particulate matter basically) and of logistic concerns (avoiding heavy transport in the city centre). Neither is there a waste heat source nearby, the waste incinerator of Harelbeke is at the other side of the city. The site is locked in by railways and highways. This makes an expansion of the district heating grid to the site of the high school in the west, where new buildings are planned, challenging. The railway needs to be crossed for that. 1.3 Purpose of this report; method used; structure of this report The main question the City of Kortrijk currently has is how it needs to structure this local heat market. The purpose of this report is hence to give guidance on how to structure incipient heat markets and to give indications on how they can evolve. This report distinguishes to this end four market roles: production, transportation, retailing (invoicing and data management) and balancing. These market roles can all be bundled into one market participant; they can also be completely unbundled and taken up by four different market players. Theoretically, 15 possible heat market configurations are possible. Each of these will be described and their advantages and disadvantages will be analysed. In practice, some of the possible heat market configurations will demonstrate to be unpractical as the analysis will demonstrate. This analysis is the basis to give hands-on advice for this specific heat market development in the town of Kortrijk. This report has following structure. Chapter 2 describes the different possible market role in a district heating system. Chapter 3 analyses the 15 theoretically possible heat market configurations and Page 9

10 depicts their possible evolution. Chapter 4 is devoted to the heat tariffs. In a first part of this chapter, standard heat tariff mechanisms are described. Afterwards, the heat tariffs are related to the market structure and their influence in the market evolution is discussed. In Chapter 5, the general discussion on market structures and heat tariffs is crystallized in the show case of Kortrijk. Chapter 6 summarises the conclusions. Page 10

11 2 Roles in a DH system In a DH system, the generated heat has to be transported to the load location to be consumed. The main steps in this chain are: production, transportation and supply or retailing. Moreover, the investor in the heat production, distribution or transport network does not necessarily have to be the same market player as the one exploiting the DH system. Therefore, another stakeholder could be involved in the project. In a nutshell, the possible stakeholders in a DH system are: - Consumer - Heat producer - Heat distributor - Heat retailer - Heat balancing party - Investor - Regulatory body These are briefly described below: Consumer The heat consumer seeks to cover his/her heat demand by the most affordable and safe mean. Depending on certain social factors, the consumer could be actively participating to the environment by implementing low carbon emission technologies for heat supply. In the latter case, the consumer will actively take part of the incipient implementation of the technology in the country either by installing himself innovative technologies or by investing in e.g. cooperative organizations. This can take place in the framework of a refurbishing project by exchanging the previous heat source by district heating for example, or a new building construction. In the cooperative setting, a group of consumers in an area or district get actively involved in the implementation of DH by investing themselves in the DH project instead of only contracting the supply. Since the benefits of the DH system revert to himself, the consumer cares for the efficiency and maintenance of the installation. A different case is when the policy maker of the region decides to implement DH in that area. In this case, the DH is sort of imposed to the consumer. This is more common in new development areas. The level of active involvement of the consumer is lower in this case. Heat producer This role refers to the company or companies involved in the physical production of the heat. There exist a large variety of heat sources such as gas boilers, geothermal, combined heat and power, waste heat, etc. Heat distributor In this document we will refer to the heat distribution as the company in charge of moving the heat from the production to the consumer site. At the electricity market, there is a difference between transmission and distribution. In DH systems, that distinction is not clearly defined. Moreover, due to Page 11

12 the local nature of heat distribution, the majority of networks are composed of only a distribution network. A distinction between transmission and distribution of heat is possible in more mature heat market, such as for example in the Port of Rotterdam where a transmission pipe transports the heat from the port to the city to feed heat to two different distribution grids in Rotterdam. Each of the transmission system and the two distribution systems are operated by different companies. Heat retailer The heat retailer refers to the company that handles the data and invoices accordingly to the consumer. The retailer can be seen as the heat supplier and he will be always in contact with the consumer. The retailer also communicates all the necessary information to the other parties in the market to ensure smooth operation of the system. Heat balancing party The heat balancing party is responsible for balancing the heat demand from and the heat supply to the network. He then must have the authority to module heat supply. This role is usually combined either with the heat production or with the heat transportation. A distinct balancing role is only found in very mature heat markets. Investor At this point in time it is unclear which party will take the investor role for DH in Belgium. It seems very likely that the investor will be a combination of the company doing the later exploitation of the project and a participation of the administration. Diving deeper into the party taking up this role is out of the scope of this report. Regulatory body The regulatory body is in charge of watching the good overall and ethics performance of DH systems. They can decide on the bundling level of the market as well as the regulation level. As an example, heat prices could be totally or partially regulated or an obligation to connect could be imposed to new consumers buildings. Page 12

13 3 Market structures in a DH system The market structures depend on the number of roles taken up by separate companies. In this chapter, the possible market structure combinations are described more in detail as well as their advantages and disadvantages. Four market roles that are relevant for incipient heat markets are considered in this exercise: production, transportation, retailing (invoicing and data management) and balancing. The possibility to evolve in the market structure when the heat market is growing is discussed in the second section of the chapter. 3.1 Analysis of the possible heat market structures In this section, all possible heat market structures are described more in detail. This description includes an analysis of their advantages and disadvantages. The market structures will be represented by using e3value ontology 3. This ontology allows also to represent the value exchanges in between the different market actors. The symbology used in this ontology is presented below. : value activity : market actor : market segment : Or and And elements : end and start of stimuli : value exchange Figure 7: Symbology used to represent heat market structures Four market roles are relevant for incipient heat markets and are considers in this exercise: - Production - Transportation (i.e. distribution) - Retailing (invoicing and data management) an - Balancing 3 Page 13

14 Combination Production Transportation Retailing Balancing Number of parties involved STRATEGO This leads to 15 theoretically possible heat market configurations in which heat market players take up one or combine more than one market role, see Table 2. Role of parties 1 A A A A 1 Completely integrated; 1 party combines all roles 2.1 A B B B 2 production split off; other roles integrated into 1 party 2.2 A B A A 2 transportation split off; other roles integrated into 1 party 2.3 A A C A 2 retailing split off; other roles integrated into 1 party 2.4 A A A D 2 balancing split off; other roles integrated into 1 party 2.5 A A C C 2 one combining production and transportation, the other retailing and balancing 2.6 A B A B 2 one combining production and retailing, the other transportation and balancing 2.7 A B B A 2 one combining production and balancing, the other transportation and retailing 3.1 A A C D 3 one combining production and transportation, the other two roles each in a distinct party 3.2 A B A D 3 one combining production and retailing, the other two roles each in a distinct party 3.3 A B C A 3 one combining production and balancing, the other two roles each in a distinct party 3.4 A B B D 3 one combining transportation and retailing, the other two roles each in a distinct party 3.5 A B C B 3 one combining transportation and balancing, the other two roles each in a distinct party 3.6 A B C C 3 one combining retailing and balancing, the other two roles each in a distinct party 4 A B C D 4 Completely unbundled; 4 distinct parties each have a dedicated role Table 2: Overview of the possible heat market configurations Summarizing, the combinations can be grouped as follows: - 1. One market player: market bundled - 2. Two market players: o 2.1. Production unbundled o 2.2. Transportation unbundled o 2.3. Retailing unbundled Page 14

15 o o o o 2.4. Balancing unbundled 2.5. Party one: production and transport. Party two: retailing and balancing 2.6. Party one: production and retailing. Party two: transportation and balancing 2.7. Party one: production and balancing. Party two: transportation and retailing - 3. Three market players o 3.1. Production and transport bundled. o 3.2. Production and retailing bundled. o 3.3. Production and balancing bundled. o 3.4. Transport and retailing bundled. o 3.5. Transport and balancing bundled. o 3.6. Retailing and balancing bundled - 4. Four market players: market unbundled Combination 1: Fully integrated heat company where the production, transport, retail and balancing are integrated In this first combination, there are two actors on the heat market: the consumer and the heat company that combines the role of producer, transporter, retailer and balancing. Within this option, there are two main possibilities: 1) the heat company is owned by the consumers and structured in a cooperative way or; 2) the company is owned by a third party, either private or public. This structure is typical in incipient markets and small-sized projects. Figure 8 represents the market actors and the value exchange. Figure 8:e3value representation of fully integrated heat company market model The competition in the distributed market configuration is rather limited. However, heat companies still an experience pressure from heat provided by alternative technologies, such as individual heat pumps or natural gas boilers. Due to the simplicity of this market structure, the administration costs are kept to a minimum. On the other hand, the heat company undertakes all the risks and investment. The risks and advantages for both parties are summarized in Table 3. Privately owned company Consumer Heat company Risk Page 15 Lack of competition in case of a connection obligation; a consequent risk for a high heat price if not regulated or capped. Investment in production and network. Runs all the risks. Risk of non-payment by the consumer

16 Advantages If regulation is in place, it limits the risks. Disconnection by the heat consumer if he has the ability to apply a cheaper heat source Not administrative intensive. Receives all the money. In case of a connection obligation of the heat consumer: no competition. Table 3: Risks and advantages of a fully integrated heat company market model Combination 2.1: The production is unbundled This combination presents the structure when the producer is a separate company. The roles of transport, retailer and balancing are bundled in one heat company. This market player buys the heat from an external producer. The heat company has the possibility is to release a tender to encourage competition for the heat production. The combined heat company is also the single point of contact to the consumer. Figure 9 and Table 4 show the organizational model and the risks and advantages per market player. Figure 9:e3value representation of bundled retailer and distribution activities market model. Consumer Producer Retailer, transport & balancing Risk In case of an obligation to connect to the DH Investment risk in production capacity. Investment in network. Page 16

17 network: no competition to choose the retailer. May have competition from other producers. Risk of non-payment by the retailer/ transport/ balancing party Depends on the heat producer to comply with his contracts with the consumer. Higher administration costs. Risk of non-payment by consumer Advantages Heat at a competitive price as a result of the competition between the heat producers Limited investment. Has the contract with the consumer. He can encourage competition on production by releasing tenders. Table 4: Risks and advantages of a bundled retailer and distribution activities market model Combination 2.2: The transportation is unbundled In this case, the transportation role is unbundled. It transports the heat for heat companies from entry points, where heat companies add heat to the network, to supply points, where heat is provided to the heat consumers. The heat companies combine the heat production, retail and balancing. Figure 10 represent the market structure. This combination is a purely theoretical one and does not exist in practice. Page 17 Figure 10: e3value representation of transport unbundled.

18 3.1.4 Combination 2.3: The retailing is unbundled This configuration is the natural evolution when the market is growing from an unbundled situation. The administration role and contact with consumers is outsourced to a third party. The main core activity of the heat company is to produce and transport heat. The heat company continues being a monopoly due to the network ownership, but might face competition anyhow from individual heating if there is no obligation to connect. There may be competition at the retailer role. The market structure representation and the risks and advantages are shown in Figure 11 and in Table 5. Figure 11: e3value representation of the market structure with retailing unbundled. Consumer Retailer Production, transport & balancing Risk High heat price if not regulated or capped. May have competition from other retailers. Risk of non-payment by the consumer Investment in network and production capacity. Risk of non-payment by the retailer Advantages If regulation is in place, it limits the risks. No investment. There may be competition when choosing the retailer. Table 5: Advantages and risks per market participant when the retail role is unbundled. Page 18

19 3.1.5 Combination 2.4: The balancing role is unbundled In this configuration, the balancing role is unbundled from the production, transport and retailing. This could be interpreted in two ways, either there is a third party providing this balancing service or there exist an exchange heat platform that ensures the balancing as explained above. In the first case, it will result impractical to outsource a task crucial for the well-functioning of the system. Specially in this case where close contact is needed with the production and the network side; the same company in this case. Administration will dramatically increase as well as the risk of failure. The case of a heat exchange platform is an interesting future scenario that is only found in very large systems. This would provide a higher visibility of the consumers preference on the type of heat source. It does not seem straight forward to organize due to the locality of heat. In the situation of a heat exchange platform, the regulatory body should take care of the implementation. Figure 12 and Table 6 show the representation of the market structure and the advantages per market player considering the balancing role performed by a third party company. Figure 12: e3value representation of with balancing role unbundled. Consumer Balancing Production, transport & retailer Risk In case of obligation to connect: no competition to choose the retailer. A consequent risk of high heat price if not regulated or capped. As it is a core service, the heat company may decide to insource it, if it is a company performing the role. High administration and close collaboration is needed. Investment in network and production. Higher administration costs. High risk of failure. Risk of non-payment by the consumer Page 19

20 Risk of non-payment by the producer/ transporter/ retailer Advantages If regulation is in place, it limits the risks Limited investment. Has the contract with the consumer. He can encourage competition at the balancing role by releasing tenders. Table 6: Advantages and risks per market player when the balancing role is unbundled Combination 2.5. Party one: production and transport. Party two: retailing and balancing Because of the reasons explained in the combination 2.4. it is highly unlikely that the balancing role is separated from the transport one. Therefore, this configuration where the balancing role is combined with the retailer is not of easy implementation. It increases administration and risk of failure. Moreover, even though the competition may be encourage at the retailing and balancing side, the company delivering production and transport services continue being a monopoly. The market representation and the risks and advantages can be found in Figure 13 and Table 7 below. Figure 13: e3value representation of a market structure with two parties, one combining balancing and retailer and the second one with production and transport bundled. Consumer Balancing & Retailing Production & Transport Risk In case of obligation to connect: no competition to choose the retailer. A consequent risk of high heat price if not As it is a core service, the heat company may decide to insource it. High administration and close collaboration is Investment in network and production capacity. High administration costs and high risk of Page 20

21 regulated or capped. needed. failure. Risk of non-payment by the consumer Risk of non-payment by the retailer/balancing party Advantages If regulation is in place, it limits the risks Limited investment. Has the contract with the consumer. He can encourage competition by releasing tenders. Table 7: Advantages and risks per market participant where party one provides production and transport and party two retailing and balancing services Combination 2.6. Party one: production and retailing. Party two: transportation and balancing As mentioned before, this configuration is a more logic split of roles, where the balancing is kept together with the network management. In this case, the monopoly is kept at the network side and competition may be promoted at the production role. As the retailing is taken up by the producer, the level of competition at these two roles is linked. The retailer and producer depends on the transport company to deliver the heat, therefore the producer will most probably not take pro-active actions towards the consumer as long as he does not count with the security of transport. From a theoretical point of view, this market structure seems a natural evolution from the combination 2.3. where the retailing role was unbundled. This configuration may be also chosen in an earlier stage by the regulator in order to enhance competition. The regulatory body may own the network installation. Figure 14 and Table 8 summarize the market structure and the risks and advantages. Figure 14: e3value representation of a market structure with two parties, one combining production and retailer and the second one with balancing and transport bundled. Page 21 Consumer Production & Balancing &

22 Retailing Transport Risk In case of obligation to connect: no competition to choose the retailer. A consequent risk of high heat price if not regulated or capped. Investment risk in production capacity. May have competition from other producers. Depends on the transport Investment in network. Depends on the heat producer. Risk of non-payment by the retailer/producer Risk of non-payment by the consumer Advantages If regulation is in place, it limits the risks Limited investment. Has the contract with the consumer. He can encourage competition by releasing tenders. Table 8: Advantages and risks per market participant with two parties, one combining production and retailer and the second one with balancing and transport bundled Combination 2.7. Party one: production and balancing. Party two: transportation and retailing As mentioned before, it is very unlikely that the balancing role will be combined with other role apart from the transport. The administration costs and risk of failure increases when separating the balancing role from the network operation. In this case, the network operator may release tenders for the production side but a good network management is dependent on the producer and balancing party. In case of an obligation to connect to the grid, the consumer is bounded to choose as retailer the network operator without competition in the retailing role due to the natural monopoly the network. In absence of such an obligation has the consumer the possibility to disconnect and to choose other technologies (such as individual gas boilers or heat pumps) to satisfy his needs for heating. Figure 15 and Table 9 show the market structure representation and the table with risks and advantages per party. Page 22

23 Figure 15: e3value representation of a market structure with two parties, one combining transport and retailer and the second one with balancing and production bundled. Consumer Retailing & Transport Balancing & Production Risk In case of obligation to connect: no competition to choose the retailer. A consequent risk of high heat price if not regulated or capped. Investment risk in network. Strong dependence on the heat producer and balancing. High administration costs and high risk of failure. Risk of non-payment by the consumer Investment in production capacity. May have competition from other producers. As balancing is a core service, the heat company may decide to insource it, if it is a company performing the role. Risk of non-payment by the retailer/ transporter Advantages If regulation is in place, it limits the risks Limited investment. Has the contract with the consumer. He can encourage competition by releasing tenders. Natural monopoly. Table 9: Advantages and risks per market participant with two parties, one combining transport and retailer and the second one with balancing and production bundled. Page 23

24 3.1.9 Combination 3.1. Production and transport bundled. This configuration is similar to the market structure described in combination 2.4. where the balancing role is unbundled. The difference is that competition at the retailer role is added when being unbundled from the heat company. Production and transport continues as natural monopoly. Figure 16 and Table 10 outline the market structure and the advantages and risks per party. Figure 16: e3value representation of a market structure with production and transport bundled. Risk Consumer Retailing Production & Transport High heat price if not regulated or capped. May have competition from other retailers. Risk of nonpayment by the consumer Investment in network and production capacity. High administration costs and risk of failure. Risk of nonpayment by the retailer Balancing As it is a core service, the heat company may decide to insource it, if it is a company performing the role. High administration and close collaboration is needed Risk of nonpayment by the producer/ transporter Advantages If regulation is in place, it limits the risks Limited investment. Has the contract He can encourage competition by releasing tenders. Limited investment. Page 24

25 with the consumer. Table 10: Advantages and risks per market participant where production and transport is bundled Combination 3.2. Production and retailing bundled. In this configuration, the transport and balancing role are unbundled in two distinct companies. In order to keep the balance, this company must be in contact with the producer and network operator either it is a company or a heat exchange platform. The network operation stays a monopoly. It can be either be owned by the regulatory body or it can be closely surveyed. On the other hand, there is competition at the producer and retailer role. The consumer may have several options to choose from as retailer. The sketch and summary of the advantages and risks are to be found in Figure 17 and Table 11. Figure 17: e3value representation of a market structure with retailer and production bundled. Consumer Retailing & Production Transport Balancing Risk Investment risk in production capacity. May have competition from other producers. Risk of nonpayment by the consumer Investment in network. Depends on the heat producer. Higher administration costs and risks of failure. Risk of nonpayment by the retailer/ producer As it is a core service, the heat company may decide to insource it, if it is a company performing the role. High administration and close collaboration is needed with two parties Risk of non- Page 25

26 payment by the retailer/ producer and transporter Advantages If regulation is in place, it limits the risks. Competition at retailer role. Limited investment. Has the contract with the consumer. He can encourage competition by releasing tenders. Table 11: Advantages and risks per market participant where retailer and producer are bundled. Limited investment Combination 3.3. Production and balancing bundled. In this configuration, the transport network is operated separately as the monopoly it is. The balancing role is integrated with the production one. This means that a very close collaboration is needed between these two parties. The retailer is unbundled which helps also the competition in this role. The consumer may have a choice on retailer. Figure 18 represents a market structure where the transport company is only in contact with the producer and balancing one and the latter one in relation with the retailer. Nevertheless, it could very well be that the transport company is in relation with the production and balancing from one side and with the retailer on the other side. This second case would be more complicated from the administrative point of view. Table 12 outlines the main risks and advantages per market participant in this configuration. Figure 18: e3value representation of a market structure with production and balancing bundled. Risk Consumer Retailing Balancing & production May have competition from other retailers. Investment in production capacity. Transport Investment in network. High Page 26

27 Risk of nonpayment by the consumer Depends on the network. Balancing is a core service of the network, the transport company may decide to insource it, if it is a company performing the role. administration costs and risk of failure. Risk of nonpayment by the producer/ balancing party High administration and high risk of failure Advantages If regulation is in place, it limits the risks Competition at retailer role Limited investment. Has the contract with the consumer. Risk of nonpayment by the retailer Table 12: Advantages and risks per market participant where producer and balancing are bundled Combination 3.4. Transport and retailing bundled. He can encourage competition by releasing tenders. In this configuration the balancing and production roles are separated in two different entities. As mentioned before, it is unlikely that the balancing role is split from the transport unless it is organized as a heat exchange platform similar as for electricity at national level. It should be noted that heat is more local than electricity, so the platform exchange should be carefully evaluated before implementation. The party performing the balancing role must be in direct and close contact with the production and transport side. This increases the administration costs and the risks of failure of the system. As the retailer is combined with the network operation, the consumer does not have a choice when finalizing contracts with the retailer. Competition does not exist at the retailer side but it does at the production one. In Figure 19 and Table 13, the market structure and the table summarizing risks and advantages are shown. Page 27

28 Figure 19: e3value representation of a market structure with transport and retail bundled. Consumer Transport & Retailing Production Balancing Risk No competition to choose the retailer. Investment risk in network. High administration costs and risk of failure. Risk of nonpayment by the consumer Investment in production capacity. Depends on the network. May have competition from other producers. Risk of nonpayment by the retailer/ transporter As it is a core service, the network company may decide to insource it, if it is a company performing the role. High administration and close collaboration is needed with two parties Risk of nonpayment by the producer and retailer/ transporter Advantages If regulation is in place, it limits the risks He can encourage competition by releasing tenders. Limited investment. Page 28

29 Has the contract with the consumer. Table 13: Advantages and risks per market participant where transport and retail is bundled Combination 3.5. Transport and balancing bundled. In this configuration the transport and balancing role is kept bundled, as it is most commonly found in the real markets. The production and retailer role are unbundled increasing the competition at these both roles. For a sake of simplicity at the market players interaction, it is assumed that the production entity is in sole contact with the transport and balancing player. Another option would be that the producer is related to the retailer and the transport entities as shown in Figure 21. Figure 20 and Table 14 outline the market structure and the advantages and risks of this configuration. Figure 20: e3value representation of a market structure with balancing and transport bundled. Figure 21: e3value representation of the second option market structure with balancing and transport bundled. Page 29

30 Risk Consumer Retailing Transport & Balancing May have competition from other retailers. Risk of nonpayment by the consumer Investment in network. Depends on the heat producer. Risk of nonpayment by the retailer Production Investment risk in production capacity. May have competition from other producers. Risk of nonpayment by the transport/ balancing party Advantages If regulation is in place, it limits the risks Competition at retailer role Limited investment. Has the contract with the consumer. He can encourage competition by releasing tenders. Table 14: Advantages and risks per market participant with balancing and transport bundled Combination 3.6. Retailing and balancing bundled In this configuration, the balancing role is combined with the retailer. As mentioned before, it is unlikely that the balancing role will be separated from the network management due to the increase in administration and risk of failure of the system. In theory, the competition is present at the retailer and production role. Figure 22 and Table 15 outline the market structure and the risks and advantages per market player. Figure 22: e3value representation of a market structure with retail and balancing bundled. Page 30

31 Risk Advantages Consumer If regulation is in place, it limits the risks Competition at retailer role Retailing and Balancing Balancing is a core service, the network company may decide to insource it, if it is a company performing the role. Close interaction is needed with the producer and transport. High administrative costs Risk of nonpayment by the consumer Has the contract with the consumer. Production Investment risk in production capacity. May have competition from other producers. Risk of nonpayment by the retailer/ balancing Limited investment. Table 15: Advantages and risks per market participant with retailing and balancing bundled. Transport Investment in network. Depends on the retailer. High administration and risk of failure. Risk of nonpayment by the retailer/ balancing He can encourage competition by releasing tenders Combination 4. Four market players: market unbundled This last market configuration assumes four players in the market performing the four roles: retailer, transport, production and balancing. As mentioned before, the balancing role can be organized as a company or as heat exchanger platform. The regulatory body should survey the platform in case of implementation. In any case, the balancing party is in close collaboration with the transport and producer. This is the most administrative intensive configuration. The main advantage of the configuration is the fact that the risks are distributed amongst different market players. At the same time this creates some interdependencies in between the roles. Still the role of the regulatory body is important for the heat pricing control. This structure is more competitive than the previous one although distribution is a natural monopole and as such needs to be surveyed. In Figure 23, the retailer is also in contact with the transport and the producer. It could also be that the retailer receives all the invoicing information via the transport party. In this case, the producer will be in relation with the transport party, instead of the retailer. There is competition at the retailer side, so the consumer counts with a choice at that role. Table 16 presents the advantages and disadvantages of each market role. Page 31

32 Figure 23: e3value representation of an unbundled market structure. Consumer Retailing Transport Production Balancing Risk May have competition from other retailer. Risk of nonpayment by the consumer Investment in network. Higher administration costs and close collaboration with two parties Investment risk in production capacity. May have competition from other producers. As it is a core service, the network company may decide to insource it, if it is a company performing the role. Risk of nonpayment by the retailer Higher administration costs and close collaboration with two parties High administration and close collaboration is needed with two parties Risk of nonpayment by the retailer Risk of nonpayment by the producer/ transporter Advantages If regulation is in place, it limits the risks Competition at retailer role Limited investment. Has the contract with the consumer He can encourage competition by releasing tenders. Table 16: Advantages and risks per market participant of an unbundled market. Limited investment. The next section describes the most plausible market structure evolution from incipient markets to more mature. Page 32

33 Combination Production Transportation Retailing Balancing STRATEGO 3.2 Market structures evolution Table 17 shows the classification of the market structures described in Section 3.1. per likelihood according to the size of the market. The larger the heat market, the more complex the market structure including more parties active in the it. The table represents the recommended market structures per market size. Nevertheless, it does not mean that those market structures cannot be found in other market sizes. Likely in incipient heat markets (small market) Likely in developing heat markets (medium markets) Likely in mature heat markets (large markets) Unlikely 1 A A A A X 2.1 A B B B X 2.2 A B A A X 2.3 A A C A X 2.4 A A A D X 2.5 A A C C X 2.6 A B A B X 2.7 A B B A X 3.1 A A C D X 3.2 A B A D X 3.3 A B C A X 3.4 A B B D X 3.5 A B C B X 3.6 A B C C X 4 A B C D X Table 17: Classification of market structures per likelihood in a market size. When markets are starting, the most common structure is a bundled one as shown in Figure 8. When the market is growing, there is a tendency is to unbundled certain roles in different market players. Usually the retailer or producer role are outsourced from the heat company (see Figure 11 and Figure 9). The main core business of the heat company usually lies in the production and transport of the heat, not at the administration part of dealing Depending on the market size, competition will be encouraged at the production side. To do that, the size of the heat market should be large enough to still encourage investments in other production facilities. All the producers would be using the same transport network. This has been defined as the Third Party Access (TPA) in Sweden. This step can be achieved with several market structures described above. From the one side, when the retailer is bundled with the producer (Figure 14) or when the retailer and the producer are as well unbundled, thus three parties are present in the market (Figure 20). Page 33

34 It is not clear whether the TPA implementation will be an advantage. Even though there will be more competition at the production side, the management of the network will be more complicated. New challenges arise, like how to rank the production facilities (merit order). The most common criteria for the merit order is economical: the cheapest source will have priority e.g. waste heat sources. This implies that operational costs should be known for each production site. Moreover, the heat provided by all the producers should be of a certain technical quality to meet the network requirements. It might be that an external market actor (maybe the regulatory body) will have to intervene to ensure fair and open operation. There are several degrees of TPA which will be described more in detail in the next section. When the heat market grows and acquires a certain level of maturity, it is possible that adjacent district heating systems are connected with a transport network. This would introduce a new market role in the market which is the management of that transport grid. This role can be taken up by the transporter role discussed in this document or it can be performed by a separate entity introducing then another actor in the market structure. The last role to be unbundled in the market evolution is the balancing role (Figure 23). This role can be organized as a heat exchange platform. So far only one example is known that implements a heat exchange platform in Copenhagen Page 34

35 Example of a heat market in which the balancing role is unbundled Varmelast.dk plans the heat production for the supply of local district heating companies' in 17 municipalities in the Greater Copenhagen area. The interconnected transmission and distribution networks in the Greater Copenhagen area represent a very large district heating requirement which may be supplied from many different facilities. This also offers an opportunity to make the production of district heating very economically efficient as a production can always be performed at the production facilities which have the lowest production costs at the time of production. The planning takes into account the prioritized production from the political point of view such as waste heat and geothermal sources, the baseload generation as well as the peak and reserve load. The schematic of the process is shown in Figure 24. Figure 24: Scheme of the planning procedure (Varmelast.dk) Some of the market structures are classified as Unlikely in Table 17 since although theoretically possible, they result rather impractical from the well-functioning of the system point of view. They are mainly related to the positioning of the balancing role in the market and its unbundling from the transportation role.. When evolving from a market size to another, a wise choice of market structure per category should occur. Not all the market structures within a category must be adopted before moving to the next market size structures, as mentioned before, it is rather a choice amongst the available possibilities. The selection of a certain departing market structure could determine the future market evolutions. Certain market structures have a smoother transitions from previous configurations than others. Two examples of plausible market evolutions depending on the chosen initial market structure are shown in Figure 25. Page 35