Commercial heat network modelling Presentation to Heat Modelling Unit at the Department of Energy and Climate Change 11 th June 2015
Agenda Introduction to decentralised energy practice at LE; How to build a district heating model in 7 steps; What impacts financial viability of district heat networks? Key differences between commercial and socioeconomic modelling of district heating networks; Key differences between Danish and UK commercial modelling of district heating networks; How pricing of a district heating model interacts with costs; Further questions.
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How to build a district heating model 7 steps 1. Estimate heat demand A. Net heat demand: survey of attitudes and historic net heat consumption (MWh and costs) for consumers in target area; B. Gross heat demand: choice of technology, network and area size will provide estimates of heat loss, annual availability and conversion efficiency; 2. Estimate number of connecting pipes (based on number of interested/available consumers) and equipment size; 3. Estimate annual fuel costs discuss long term contracts with suppliers; 4. Estimate overall construction and investment costs (incl. network installation, network connection, heat meters, site, utility connection, equipment, building, construction, engineering, waste and unexpected costs); 5. Estimate annual operation and maintenance costs (incl. fuel, interest rates, servicing, ongoing maintenance of equipment, administration, management, environmental audit, financial audit and insurance); 6. Choose network fee type; 7. Set network fee at appropriate level to recoup costs.
What impacts the financial viability? The value of heat or, if using CHP, the efficiency of the electricity generation (around 40% net efficiency for electricity generation is rule-of-thumb profitable in most circumstances). System heat losses for the Danish example shown, heat losses were estimated as 760 MWh annually for the central pipeline with an additional 1.43 MWh annually per connection note that this data is almost 10 years old; current efficiencies should be greater. This will strongly depend on the density of the area serviced. Difference between final delivered heat (net consumption) and fuel energy content (which includes energy transformation losses, efficiency losses and distribution losses). Baseload of heat demand what is the summer demand for heat? What is the heat demand? Available subsidies/financing.
Key differences between commercial and socioeconomic modelling of district heating Commercial modelling Uses payback period, return on investment and IRR to decide on (and rank) projects Does not include externalities Socioeconomic modelling Uses NPV with Green Book discount rate, supplements with IRR Does include externalities Usually not discounted Discount rate applied = 3.5% Hurdle rate usually 10-15% Hurdle rate may include loan interest rate payments Hurdle rate likely to include internal risk assessment Hurdle rate equal to discount rate (social time preference rate) Interest rate payments may not be included Investment risk may not be included Preferred payback period 6-8 years Investment approved for NPV greater than 0 Ignores avoided replacement costs of existing systems Ignores degradation of system over time Includes avoided replacement costs of existing systems Ignores degradation of system over time
Key differences between UK and DK district heat modelling UK Commercial district heating Decentralised energy centres typically sized for maximising electricity production or income from subsidies Profitability requirement (for commercial investors) Loan assumptions of private sector interest rates Typically uses an ESCo model or independent FM model No dominant charging structure yet, though most common either mixed fixed/variable or variable only Project lifetime assumption=? Connection fee? Meters not included in cost projections(?) DK commercial district heating Systems sized for heat load Regulations prohibit profitability Loan assumptions of municipally guaranteed rates (KommuneKredit) Typically uses a shared ownership model (share is part of property value) Typically charges a mixed fixed/variable fee Project lifetime = 20 years (no assumptions of residual/scrap value) Early bird installers avoid connection fee (~45,000DKK/4,400GBP) Meters included in cost projections
Thank you for listening Dr. Tanja Groth, Senior Economic Consultant, 020 3701 7721 tgroth@londoneconomics.co.uk