District Heating in Køge

Køge – A new Large Greenfield DH system in Denmark

There is a broad consensus in the Danish Parliament that Denmark in the long term has to be in-dependent of fossil fuels. The EU directives require that the reduction of CO2-emissions must be done in a costeffective way. The Renewable Energy Directive (RE-Directive) requires that cities must plan for district heating and cooling (DHC) in order to use RE where it is advantageous for heating, preparation of domestic hot water and cooling.
In the preparation of Heat Plan Greater Copenhagen was highlighted the possibility of converting existing natural gas supplied customers to district heat-ing (DH). One of the places where this opportunity is of particularly interest is in the town Køge, located 40 km from downtown Copenhagen.

To day there is no DH in Køge, but the city is of particular interest for three reasons:

  • Has as industrial city a large quantity of biomass-based surplus heat.
  • Has many large block heating plants, which make it particularly obvious to establish DH.
  • Is only 7 miles from the DH transmission network in Greater Copenhagen.

For these reasons, in autumn 2009, the municipality of Køge began collaboration with DONG En-ergy, Junckers Industrier and VEKS to prepare a development plan to examine the feasibility of establishing DH for all major properties in Køge town. A DH supply based on utilisation of surplus heat from DONG Energy’s biomass-fired CHP plant at Køge harbour.

The Development Plan for DH in Køge, which was presented in June 2010, highlights opportunities for developing a DH system with focus on supply of all properties over 300 m2 in urban areas. The supply will initially be based on heat from the biomass-fired CHP plant - peak and reserve load production will come from boilers at the larger DH customers.

What does the Development Plan?
The Development Plan is a study of the economic, customer-economic and environmental consequences of introducing DH in Køge;

  • A positive economy for the society is necessary to subsequently obtain authority approval of the project.
  • A positive customer economy is needed to motivate customers to connect to the DH system.
  • Environmental impact must be known before such a large project begins.

The precondition for the Development Plan is that the main parts of all buildings larger than 300 m2, - or approx. 1.8 million m2 - are connected to the DH system. According to estimates approx. 600,000 m2 of new buildings - including the new city area Køge Coast – will be connected during the project period 2011-2031. The estimated development means that:

  • From 2016 a natural gas consumption of 15 million m3 /year will be replaced by approx. 160,000 MWh DH - 1.4 million m2 building area connected to DH.
  • From 2020 a natural gas consumption of 19 million m3/year will be replaced by approx. 200,000 MWh DH.

The extension of DH is concentrated on larger buildings, and therefore there will be 700 to 800 heating customers for the final extension, of which 100 customers will cover about 70 % of the DH demand. The development of the DH system will, in the first approx. five years, has focus on a solid customer base of large customers, equivalent to approx. two-thirds of the final DH-market. The extension of the DH system will continue over the next 10-15 years for the connection of the remaining selected buildings.

There is an economic benefit that new settlements, constructed in the DH supply area, are con-nected to the DH system. This saves fossil fuels in the most economical and sustainable way in relation to individual alternatives. Therefore one assumes that new buildings, which according to local plans created for the DH supply area, will be connected to the DH system. This applies to terraced house, apartment houses and commercial buildings and partly one-family houses.

With current energy prices, however, it is not profitable within the project-period to supply the exist-ing one-family house areas with DH. Therefore it is proposes that natural gas supplies to these customers proceed as now, with an increased effort to get the remaining gasoil customers connected to natural gas. Flexibility in the DH system is ensured for later extension to one-family house areas, where it becomes profitable after 2020.

Not until around 2030 the prices of natural gas can be expected so high that it may be relevant with a massive extension of DH in residential areas - unless previously targeted subsidies to get the conversions completed are introduced.

Analysis shows a very robust reduction of economic costs over the project period. The economic cost of fuel purchases and operation and maintenance of the current natural gas supply will in the project period be approx. DKK 960 million (€ 128 million). The corresponding cost connected of the conversion to DH would be approx. DKK 790 million (€ 105 million) or equivalent to a saving (NPV) of DKK 170 million (€ 23 million) based on the assumptions set by the Danish Energy Authority (DEA). The internal rate of return for the project in relation to a reference with condensing gas boilers and heat pumps are calculated to 10 %.

Customer Economy
The customer economic analysis shows that with the assumed guaranteed reduction in DH price of 10 % for all current natural gas customers, which is considered to be a sufficient incentive to con-nect to DH, all DH investments will be repaid over the project period. For all connected clients the net present value (NPV) represents savings of DKK 112 million (€ 15 million).

The largest and most uncertain project risk is associated with future natural gas prices. The base-line scenario is based on the development in natural gas price, which DEA has provided to the community economic analysis. Sensitivity calculations show that with a reduction in natural gas price at 5 % throughout the project period, the corresponding lower DH tariff extend the amortization period from 20 to 23 years and accordingly if natural gas prices are reduced by 10 % throughout the project period the amortization period will be extended to 27 years. Since the Danish DH legal framework allows amortization periods up to 30 years, the economy for the project is considered to be robust.

Tariff Structure
It is crucial to the project economics and realizing, that DH is not only more environmentally-friendly but also competitive compared to alternative options, where natural gas is the market-determined alternative.

The project therefore propose a Price Guaranteed for DH of 90 % of the equivalent annual cost of heating based on natural gas - i.e. the purchase of natural gas, finance a new natural gas boiler and operation and maintenance of a natural gas boiler. The Price Guarantee is only in relation to natural gas supply whatever heat supply the customer has today. Does the customer have gasoil boiler, there will be an extra financial incentive to convert to DH.

Price Guarantee means that customers are not burdened financially with extraordinary one-time costs of converting to DH. The DH investments to be covered through the guaranteed price contain:

  • DH Company's financing of a new DH unit (user facilities) to the customer.
  • DH Company's total costs for the delivery of DH to the customer, i.e. financing of pipe net-work, heating purchase, administration and operation of the DH system etc.

The development of the natural gas price and thereby the development of the Guarantee Price is therefore of central importance to the project economy. The trend for the development of the natural gas price, which is used for the project, is based on the DEA price forecast for natural gas plus the current energy taxes and contributions to the natural gas company.

With the given tariff assumptions, only existing building will achieve savings of 10 % at the DH costs compared with natural gas, while DH for the coming new buildings is considered economi-cally neutral to the individual alternative.

Total investments
The total investment will be remunerated and depreciated by the DH customer via their contribution for the DH supply. Loans will be taken for financing the investments and loans are expected to be guaranteed by the municipality of Køge. The total DH investments are calculated to approx. DKK 600 million covering DH network and the associated customer installations. The primary part of the investments will be made in the period 2011 until 2016.

Security of supply
The project helps to increase the national security of supply by reducing its depending of natural gas and other fossil fuels, like DH in the future allows the society to switch to many different energy sources depending on market developments – for instance solar heating and geothermal energy.

Connection to the DH transmission network in Greater Copenhagen
If Køge municipality decides to join VEKS as a new stakeholder, VEKS is willing to extend the Greater Copenhagen DH transmission network to Køge, if the value of the heat transmission from Køge to VEKS or from VEKS to Køge can finance the investments in the pipe connection. It can e.g. be in 10 to 20 years if it’s not economically rational to extend the lifetime of the CHP plant in Køge, or it can be in a few years if it’s economically attractive to transmit the surplus heat from the CHP plant in Køge to the Greater Copenhagen DH system.

The further process
The further process toward the final decision in autumn 2010 on the establishment of DH in Køge includes:

  • Preparation of project proposal to regulatory approval.
  • Development of organizational model and resolution on organization DH in Køge.
  • Contacting VEKS for potential joining as stakeholder.
  • Contractual matters, including guarantees from the stakeholders regarding heat prices, production and distribution.
  • Marketing to potential customers.

The Technical and Environmental department in Køge municipality has to provide a basis for an organizational structure, a project proposal for authority approval and proposal regarding the possibility for joining VEKS as a new stakeholder for the Technique and Environment Committee, Economic Committee and the Town Council. After approval by the Town Council, the project proposal is send in consultation with external stakeholders for four weeks. Relevant responses from this process will then be included in the final project proposal and it will then be definitively approved by the Town Council around New Year 2010/2011.

The coming six months will be exciting - here the decision will be taken if  the majority of the heat demand in Køge will continue to be based on natural gas or whether the future in Køge will be a city of biomass-based, environmental friendly DH.