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Policy paradigms for optimal residential heat savings in a transition to 100% renewable energy systems
Energy Policy 134 (2019) 110944
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Policy paradigms for optimal residential heat savings in a transition to 100% renewable energy systems
T
Frede Hvelplunda, , Louise Kroga, Steffen Nielsena, Elsebeth Terkelsenb, Kristian Brun Madsena ⁎
a b
Department of Planning, Aalborg University, Rendsburggade 14, 9000, Aalborg C, Denmark European Green Cities, Norsgade 17, 8000, Aarhus C, Denmark
ARTICLE INFO
Heat conservation Incentives Smart energy systems Policy suggestions Renewable energy
ABSTRACT
In a transition to 100% renewable energy (RE) systems we move from a sector-based to an energy system-based heat conservation paradigm. This implies both liberation from the institutional path dependencies of the present heat sector approach and the creation of the new institutional conditions for heat conservation in integrated (RE) systems. In these systems it is much more important than in fossil fuel systems to synchronize the right amount, in time and of the right types of investments in heat conservation with investments in the energy supply system. The key findings firstly are that this synchronization is not happening in the Danish case due to institutional path dependencies in the shape of high fixed tariffs, low subsidies, split incentives and renovation codes that can be evaded. Secondly that this synchronization can be implemented by means of tariffs that reflect levelized costs of future supply systems in combination with a public guaranty for long-term low-interest loans when following the advice of certified energy consultants. Thirdly tariff philosophy should change to include the long term energy system benefits of heat conservation. The principles behind these findings are of generic interest for heat supply and heat conservation planning in the EU.
1. Introduction In several European countries, district heating is a core technology for a transition to low carbon energy supply. It currently covers 60% of the Danish heat market, and 12% of the EU28 heat market which has a district heating potential of around 50% (Hansen et al., 2016a,b). A discussion of the role of district heating in relation to energy conservation is relevant both for the Danish case analyzed, for existing EU28 district heating systems, and even more in relation to EU28 if the large EU28 district heating potential is being implemented (Connolly et al., 2014a,b)(Hansen et al., 2016a,b). Another report on district heating in the EU examines the future prospects of district heating in EU27 for residential buildings and services, and it foresees an economically efficient threefold district heating increase during 2010–2030 and a fourfold increase by 2050 (Connolly, 2017). This conclusion is supported by (Persson et al., 2014), concluding that district heating can expand cost-efficiently more than threefold in the large EU cities. In a transition to 100% renewable energy it is necessary to increase the cross-sectoral linkages between heat, power and transportation in a smart energy system (Lund et al., 2014a) in order to handle the fluctuating character of wind power, photovoltaics and low-temperature ⁎
heat sources. The type, costs and benefits of heat conservation is thus changed from the effects within a heat sector system to being derived from the effects in an integrated smart energy system. This system approach can be described as the smart energy system paradigm of heat conservation. One of the main purposes of this article is to describe both the present incentives and the needed incentive changes in the transition from a sector-based to a smart energy system-based heat conservation paradigm with a focus on energy conservation incentives in apartments in rental buildings. Meanwhile it is hampered by both the difficulties of abolishing the old institutional conditions of the heat system and the hindrances for new heat conservation policies in a smart energy system. In addition to the optimization question above, this article focuses on heat conservation incentives in rental buildings, and since around 80% of rental buildings are situated in district heating areas, the incentive analysis is also linked to the heat tariffs in these areas (Mathiesen et al., 2015b). 2. The new role of energy conservation in a smart energy system In a future smart energy system based on 100% renewable energy, economic (and socio-political) optimization between investments in the
Corresponding author. E-mail address: [email protected] (F. Hvelplund).
https://doi.org/10.1016/j.enpol.2019.110944 Received 2 May 2018; Received in revised form 14 April 2019; Accepted 18 August 2019 0301-4215/ © 2019 Elsevier Ltd. All rights reserved.
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Table 1 Requirements for heat conservation in a smart energy system. 1. Heat conservation should: a. Be implemented in the right amount.
b. Be implemented in time (before possible overinvestment in the very asset specific investments in the supply side)
c. The right type Support low temperature systems.
2. Why these requirements? Optimizing investments in supply and demand systems is replacing minimization of fossil fuel use. - In a transition to renewable energy supply side technologies, investments are increased and replacing annual fuel use. - In this transition the task has changed from minimizing the supply side use of fossil fuels to optimizing the balance between investments in the supply- and demand side technologies. Renewable energy systems have a higher asset specificity share than fossil fuel heat supply systems. It is necessary and possible to make this “in time” optimization of investments in both the supply and demand sides: - Necessary because overcapacity in smart energy supply systems, such as solar heating systems, heat pumps, heat storage, district heating pipes etc. cannot be removed and used elsewhere. In the fossil fuel supply system, saved fossil fuels can be used at another location. - Possible because investors in energy supply such as solar heating, heat pumps and heat storage systems are often the same or very close to the investors in heat conservation. This may give a strong organizational ability to keep transaction costs low when synchronizing investments in supply systems with heat conservation activities. Heat demand reductions in combination with low-temperature district heating has a higher efficiency improvement value in a renewable energy based system than in a fossil fuel based system, because: - Heat demand reductions make it possible to meet heat demand in low-temperature systems without new investments in district heating pipes. - Heat pump efficiency (COP factor) is high in low-temperature district heating systems. Therefore, the competitiveness of wind power for heat is increased in a low-temperature heat pump based district heating system. - Higher heat pump efficiency reduces the wind power supply side capacity needs for a given heat market. - Low-temperature heat increased the efficiency of solar- and geothermal heat and the use of industrial low-temperature waste heat. - -etc.
energy supply system and energy conservation determines the optimal level of annual heat consumption per m2 to be reduced from the present 132 kWh/m2 per year (Mathiesen et al., 2015b) average heat and hot water use to around 80 kWh/m2 for existing buildings and 55 kWh/m2 per year for new houses (Lund et al., 2014b). If this reduction is implemented, it will release a substantial fraction (30–40%) of the district heating network capacity, making a change to low-temperature district heating possible without new investments in the district heating capacity. Furthermore, the supply side asset specificity is increased from around 30–40% in fossil fuel systems to 80–90% in renewable energy systems. Asset specificity measures to which degree potential overinvestments on the supply side can be transferred to other purposes elsewhere. In a fossil fuel supply system saved fuel can be used elsewhere, whereas in a renewable energy based district heating system overinvestments in heat pumps, distribution pipes, heat storage systems, etc. cannot be removed and used elsewhere. In Denmark, the main heat supply system will consist of wind power used in combination with district heating, heat pumps and heat storage. It is all based on smart energy system sector integration that benefits from low-temperature district heating systems. In this change of the supply side, the heat market will also serve as an important means to integrate the large amount of varying renewable energy sources. Therefore, the right type and amount of energy conservation consequently has to be determined and implemented with reference to both the need for heat and the integration of fluctuating energy sources in the total energy system. A remarkable result from the system calculations in (Lund et al., 2014b) (Hansen et al., 2016b) is that the heat supply costs per kWh may decrease when reducing the consumption per m2 from 132 kWh to 60–80 kWh. The reasons behind this surprising conclusion are found in the sum of several of the following external system benefits of heat conservation in a smart energy system.
b.
c.
d. e.
f.
a. Reduced heat losses in houses make it possible to satisfy heat demand with a lower water temperature without investments in new 2
heat distribution network capacity. In some cases it furthermore supplies spare capacity for expansion in new district heating markets. Heat conservation can result in reduced needs for wind power capacity and heat pump capacity for a given heat market because heat conservation and the resulting lower heat supply temperature result in a higher heat pump coefficient of performance, or COP factor, and thus a lower consumption of kWh electricity for a given amount of heat (Østergaard and Andersen, 2018, 2016). The exact change in the COP factor depends on the heat source and the heat pump type and size, but 1 kWh electricity supplied to a heat pump could typically have a COP factor of 3, and thus deliver 3 kWh heat at 80° Celsius. If we imagine that heat conservation makes it possible to lower the required heat supply temperature to 50° Celsius, the COP factor would increase by around 40% and supply around 4.2 kWh heat per kWh electricity. In this example, reduced district heating temperature would reduce the needed wind turbine and heat pump capacity by almost 30%. A reduction in the heat supply temperature will increase both the efficiency of solar and geothermal heating (Hvelplund et al., 2017; Lund et al., 2018), and the efficiency of using waste heat from industry. The reduced heat supply temperature reduces losses in the district heating network. Integrating heat and power expands the market for wind power and counterbalances the ongoing merit order induced decrease in wind power prices (Hvelplund et al., 2013). The value of wind power is increased because heat conservation facilitates low-temperature systems resulting in higher heat pump efficiency (COP factors). The integration of heat and electricity requires integrative planning Sperling et al., 2010and evens out the fluctuating character of wind power by storing heat from windy periods for later use in heat storages linked to the district heating system. This added value, resulting from energy conservation that facilitates the integration of the heat and electricity markets, can be shared by heat users and wind power producers, both making heat cheaper and wind power
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more profitable (Lund et al., 2014b).
The analysis of heat conservation incentives is structured as shown in items 1–4 below. Based on this analysis new policy measures are designed and evaluated as mentioned in item 5.
The above energy system benefits are included in the EnergyPLAN calculations in (Lund et al., 2011), and are amongst the reasons why the cost per supplied kWh may decrease concurrently with a reduction in the amount of supplied kWh per m2 heating (Thellufsen and Lund, 2016). The benefits a-f are external effects of heat conservation that are generally not included in the tariffs and therefore not paid for in the present heat conservation incentive system. In order to internalize these benefits in the price system, among other reasons, a new incentive system should be established that ensures investments in heat conservation in the right amount, in time and of the right type as substantiated in Table 1. Table 1 lists the requirements for heat conservation in the context of a transition to an integrated smart energy system. These requirements represent a paradigmatic shift compared with the requirements of energy conservation in a fossil fuel based system. Investments in integrated smart energy systems (Mathiesen et al., 2015a) replace those made in fossil fuel systems. Investments in heat pumps, district heating, heat storage, etc. are asset specific and cannot be transferred to other areas. It is thus important to avoid supply side overinvestments. The situation is new, and coordination between investment in heat supply and heat conservation is economically more important than in a fossil fuel system.
1. Do existing tariffs provide sufficient incentives for heat conservation? The levelized heat conservation costs for different levels of heat conservation are compared with the heat tariffs, and it is analyzed to which extent existing economic incentives are sufficient to support investments that reduce heat and hot water consumption to an optimal level of around 80 kWh/m2 per year. 2. Are there subsidies that make optimal energy conservation economical, and thus compensate for possible deficiencies in the economic incentives in item 1? 3. Does public regulation based on energy renovation codes compensate for possible lack of economic incentives in items 1 and 2? Does this work in practice, or is it possible to circumvent the renovation code regulation? 4. To which extent is it economical for owners of rental apartments to implement the needed conservation measures? It is the combination of incentives in these four areas that constitutes Denmark's existing energy conservation incentives in rental residential buildings. 5. Once having concluded on the incentive structures in items 1–4, new policy measures that cover potential incentive deficiencies in items 1–4 are suggested, and the heat conservation consequences of these are estimated.
3. Research question and methodology Due to institutional lock-in mechanismsHvelplund, 2001 such as high fixed tariffs, weak landowner incentives, etc., there is a risk that heat conservation investments will neither achieve the right amount (an optimal balance between heat supply and demand), be implemented in time, nor develop the right type of heat conservation. This is a serious problem, as it may result in a transition to sustainable energy systems which is too expensive and which could lead to a loss of political support and consequently hamper the needed momentum for the energy transition process. The research questions dealing with these problems are:
In addition to the incentive analysis in items 1–4, a discussion of heat tariffs in district heating systems is undertaken in section 6. This is done in order to start a discussion of the paradigmatic change in tariff philosophy caused by the combination of the ongoing change from heat sector tariffing to tariffs reflecting the costs in an integrated energy system. The focus of this article is the heat and hot water conservation incentives in the residential housing sector that constitutes more than 70% of the heat consumption in the district heating companies (Danish Energy Agency, 2017). If policies for the residential sector are in place and low-temperature district heating made possible for this part of the market, a decisive part of the supply/demand synchronization has been dealt with.
a. To which extent does the present heat conservation incentive system for rental buildings further heat conservation in the right amount, in time and of the right type. b. Which types of policy measures may improve the incentive system where it is deficient, and which economic consequences do these improved heat conservation incentives imply.
4. The numeral settings of costs of energy renovation in multi floor buildings
The focus will be on the right amount in time, as success within these two parameters is a precondition for measures that support the right type of heat conservation and thus the development of low-temperature district heating systems. The methodology in this paper is to systematically envisage the costs of energy conservation in the residential sector and compare these with the present heat conservation incentives. To determine the conservation potential of end-use heat savings within each district heating area, the Danish Heat Atlas is used (Möller and Nielsen, 2014). The Danish Heat Atlas is a GIS database that includes building level estimates of annual heat demands, savings potential and costs for various savings scenarios. The input data for the heat atlas is the Danish Building Register combined with a heat demand model made by the Danish Building Research Institute (Kragh and Wittchen, 2010). The heat demand model estimates heat demands based on the building floor area, age, type and use. As the heat atlas is a GIS database, the total potential within different district heating areas can be assessed. In combination with heat prices from the district heating areas, the economic feasibility of the investments in heat conservation can be estimated.
Table 2 shows the costs of energy renovation in Danish multi floor buildings. This offers a good approximation of the energy conservation costs of rental buildings. Cost data are increased by 10% compared to the 2010 cost data. This is done in accordance with the 10% increase in the building cost index during the period 2010–2014. Row 7 in Table 2, the dark grey, shows the most interesting numbers; “Marginal investment cost in DKK per kWh for saving 1/kWh/year in the investment lifetime”, which is calculated by dividing the marginal investment costs in row 5 by kWh heat conservation (row 2 minus row 3). These numbers for instance indicate that in buildings dating from the period 1850–1930 it costs 14.3 DKK on average to make an energy conservation investment that lowers the consumption from 3390 GWh/year (row 2) to 1326 GWh/year (row 3). These are marginal costs related to added investments in energy renovation measures in addition to other costs linked to renovating a building. In Fig. 1 the investment costs per saved kWh in the lifetime of the investment seen in Table 2 are converted into costs per kWh. Fig. 1 shows a large group of buildings from 1961 to 1972, with conservation potential of approx. 1 TWh, which “only” have an average 3
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Table 2 Cost of energy renovation to reach the level of scenario A (60% reduction of heat losses). (based on the Danish heat atlas and SBI 2010:56, Danske Bygningers Energibehov I 2050 (Kragh and Wittchen, 2010).
marginal investment cost per annually saved kWh of 8.8 DKK (Table 2 row 7), or, at a 2% discount rate and 30 year discount period, a cost of around 0.39 DKK/kWh (Fig. 1). At an annual discount rate of 4%, the cost per kWh in Fig. 1 would increase by around 25%. The most expensive 2 TWh from Table 2 and Fig. 1, going from 4 to 6 TWh heat conservation potential, have an investment cost of 14.3 DKK/kWh (Table 2, row 7), or, at a 2% discount rate and 30 year discount period, a cost of around 0.64 DKK/kWh (around 0.83 DKK/ kWh at a 4% discount rate). We know from calculations in (Mathiesen et al., 2015b) that the marginal heat supply costs are 0.5–0.6 DKK/kWh on average at a heat and hot water conservation rate of 10–40% of the present consumption. Fig. 1 shows that at a conservation level of approx. 4 TWh the heat conservation costs are in the range of 0.54–0.64 DKK/kWh. In Figs. 1 and 4 TWh heat conservation therefore represents an approximation of the optimal balance between investment in heat
conservation and heat supply. However, will this level be achieved under the present business economic conditions? Fig. 2 shows the marginal business economic costs per saved kWh under the assumption that an average landlord can take out a 20 year loan at an interest rate of 3% p.a. (nominal interest rate). This is the relevant discount rate, as landlords are not permitted to increase rent linked to housing investments with the inflation rate if the apartment was built prior to 1991. Moreover, apartments built prior to 1991 represent around 75% of the heat and hot water conservation potential. Therefore, rent increases caused by inflation can, in general, be excluded from the calculations. Regarding the loan period, banks typically give loans of up to 20 years, and some credit institutions up to 30 years. As a crude estimate, it seems reasonable to use a 3% discount rate and a 20 year loan period as a way of simulating the average actual business economic financial conditions.
Fig. 1. Marginal socio-economic costs per kWh saved.
4
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Fig. 2. Marginal house owner economic costs per saved kWh.
levelized costs of heat conservation are higher than the heat tariffs. The green horizontal line in Fig. 4 shows the lowest heat conservation costs per MWh within the 1 TWh conservation range between 0 and 1 TWh heat conservation, as reflected in Fig. 2 (3% discount rate, 20 year loan, investment cost 8.8 DKK for a 1 kWh/year reduction of heat consumption). As seen in Fig. 4, the levelized costs of 1 MWh energy conservation is higher than the blue pillars, or variable tariffs in approx. 2/3 of the 40 district heating systems. This means that even the cheapest 10% of the energy renovation is only economical in a minor portion of the 40 district heating companies. This is not far from the results in another analysis made with other methods (Zvingilaite and Balyk, 2014). If the discount rate is lowered to 2%, the levelized costs of energy renovation would be lower than heat tariffs in approx. 50% of the district heating companies. The purple dotted horizontal line in Fig. 3 shows the costs of making an energy renovation before it is technically necessary to renovate a building. Here, the investment costs in a building dating from 1999 to 2006 are 24.2 DKK to save 1 kWh annually in the technical lifetime of the investment, and the saved heat costs far from cover the renovation costs. The problem is that these buildings from a technical point of view do not need renovation before 2030–2040, despite the fact that their low energy efficiency standards make low-temperature heat supply difficult in a time when low-temperature systems are needed. In summary, it can be concluded that in the two cases in which the costs for saving 1 kWh per year in the technical lifetime of the investment are 8.8 DKK and 12.1 DKK, respectively, levelized costs of heat conservation are only lower than variable heat tariffs in a minor part of the socio-economically profitable energy conservation activities. The following sections examine whether there are other incentives that might compensate for the indicated lack of positive economy for potential investors in heat conservation.
The relevant information regarding costs per kWh of energy conservation in the building stock dealt with is now available. The next step in the analysis is to evaluate to what extent the present incentive system is able to optimize investments in heat supply and heat conservation by use of a 4 TWh reduction in the annual heat consumption. In the next section, it is analyzed whether the present institutional and market systems provide sufficient economic incentives to reach the 40% energy conservation goal in rental apartment buildings. 5. Incentives for heat conservation compared with conservation costs in the Danish district heating system 5.1. Does the optimal amount of heat conservation have a positive economy? Around 80% of rental buildings in Denmark are located in district heating systems. The question is now: To what extent are the levelized energy conservation costs per MWh lower than the tariff per MWh of purchased heat and hot water. In Fig. 3 below, heat prices in some Danish district heating companies are shown and compared with the costs of heat and hot water conservation (the red and the green horizontal lines, respectively). Heat and hot water costs per MWh: As seen in Fig. 3, the tariff structure can be divided into a fixed and a variable part, where the blue variable part gives the present incentive for heat conservation. The question is now: Do these “market prices” provide sufficient incentive for investments in energy conservation when considering the costs as described in Table 2. Energy conservation costs per MWh: The levelized heat and hot water conservation costs are represented by the horizontal lines in Fig. 3. They are calculated with a discount rate of 3% p.a. and a discount period of 20 years. An investment of 8.8 DKK per saved kWh/year gives a heat and hot water conservation price of 590 DKK/MWh (green line). An investment of 12.1 DKK per saved kWh/year equates to a heat and hot water conservation cost of 810 DKK/MWh (red line). The red horizontal line shows the levelized heat and hot water conservation costs per MWh within the 1 TWh conservation range between 3 and 4 TWh, as reflected in Fig. 3 (3% discount rate, 20 year loan, investment cost 12.1 DKK for a 1 kWh/year reduction of heat and hot water consumption). As seen in Fig. 4, the red line is higher than the blue pillars, or the marginal part of the heat tariff in all district heating companies. The levelized costs of investing 12.1 DKK in energy conservation is thus higher than the tariffs in all district heating areas. In a sensitivity analysis, even with a discount rate lowered to 2%, the
5.2. Do heat conservation subsidies compensate for the negative economy? It is possible to sell energy conservation to large energy companies for a price of approx. 0.3–0.6 DKK/kWh saved annually in the technical lifetime of the investment. As seen in Section 4, the investment costs are between 8.8 DKK and 16.4 DKK per kWh annually saved in the technical lifetime of the investment. Therefore, the 0.3–0.6 DKK/kWh range represents a subsidy of 2–5% of the energy conservation investment costs. Furthermore, the state gives 50 million DKK annually for energy conservation subsidies for rental buildings. This is approx. 150 DKK/ 100 m2 apartment per year, or 1–2% of an apartment's annual heat 5
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Fig. 3. Heat supply tariffs in some district heating areas divided into fixed and variable tariff shares in DKK/MWh. (75 m2 apartment with an annual heat and hot water consumption of 10 MWh). Based on 2014 data from the district heating companies. The green and red horizontal lines represents the levelized costs of heat conservation for 20 years loans and a discount rate of 3%. The costs are based on numbers in Fig. 2 and Table 2. (For interpretation of the references to colour in this figure legend, the reader is referred to the Web version of this article.)
energy bill. The above subsidies are close to insignificant and do not change the general conclusion in Section 5.1 and Fig. 3 regarding the lack of incentives for energy conservation in rental buildings.
In houses built prior to 1991, it is optional to increase the rent in accordance with “levels of rent in the specific part of town”. This means that if an investment in energy conservation increases the value of the apartment in the area where it is situated, the landlord has the right to increase the rent in accordance with a typical rent for apartments of that quality in that part of town. What this means in practice is difficult to say, but probably this will not generally be a better option for the landlord than the “total economy estimation” described in option a.
5.3. Does it pay for the landlord to invest in heat conservation? This section examines whether the landlord incentive system can compensate for that levelized costs of energy renovation which are higher than the incentives discussed in 5.1. and 5.2. The landlord can increase the rent according to a set of rules regarding inclusion of heat conservation costs in the rent Danish Ministry of Transport Building and Housing, 2015().
Hence, situations a, b and c do not seem to add any extra incentives for heat conservation, compared to those described in Section 4. However, if a situation occurs, in which the levelized costs of heat and hot water conservation are lower than the heat tariff, the landlord will in all three cases, a, b and c, have a clear economic incentive to invest in energy renovation.
The “Total economy neutrality” principle: Any landlord has the right to increase the rent in any rented apartment equivalent to the reduction in the energy bill caused by a given investment in energy conservation. It is thus only economical for the landlord to invest in energy renovation if the cost of saving 1 MWh is lower than the tariffs in Fig. 3. In houses built after 1991, which represent around 25% of the heat conservation potential (see Table 2), rent is set in a free process between landlord and tenant. If energy conservation measures are uneconomical, the landlord has the right to freely increase the rent to cover the heat conservation investment costs plus a profit. Whether energy conservation is implemented thus depends on the competitive situation on the rental housing market.
5.4. Will building renovation codes ensure the optimal heat conservation in time? It could be claimed that the economic incentives at the level of house owners and tenants are unimportant, as ambitious energy renovation codes could ensure that, over time, all parts of a house will be replaced with high energy quality alternatives. This is the subject of this section. When a building in Denmark is renovated, no matter the reason, it is required to be done in an energy optimised way, following the current 6
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building code (BR15) as long as it is economically feasible (Danish Ministry of Transport and Buildings, 2016). This means, theoretically, that energy renovations should be done continually in line with necessary building renovations, such as a new roof, facade, windows, etc. (Wittchen, K.B., Kragh, 2013). When looking into reconstruction or renovation of the building stock, there are three possible situations in the Danish building code; repair, replacement or reconstruction. In the first case, energy repair does not have to meet the renovation codes. In the second case, if part of the building is replaced, the construction must meet the current building code requirements. However, if the case is a reconstruction of a building or parts of a building, calculations are required to ensure that energy saving initiatives are feasible. Only if such initiatives are economically feasible is the owner obligated to implement the energy saving initiatives (Danish Transport and Construction Agency, 2016). In a renovation situation where a new roof is needed, or new windows are technically necessary, the renovation building codes will be implemented and may result in a 30% reduction in heat consumption (Wittchen, K.B., Kragh, 2013). This is based on the assumption that 80% of replacements and renovations will meet the building codes’ standards, and 20% will not. Meanwhile, the major issue is whether the renovation building codes can ensure this relatively high reduction in heat consumption against a headwind of very weak and/or even nonexistent heat conservation incentives. It would be too risky to assume that an 80% success rate in building code implementation will happen before 2050. The “before 2050” is essential, as a lot of supply side new investments in pipes, heat pumps, heat storages, wind turbines, biomass plants and geothermal energy has to be made before 2050. Reliance on the building code as a driving force for heat conservation has weaknesses within the following areas: First of all, if the economic incentives for replacing e.g. roofs and windows are not in place, it is often economically profitable and technically possible to prolong the lifetime of the building parts by means of repairs, which are not subject to any building code requirements. Thus, if a building's roof was built according to the 1979 building code, it can be expected to have an energy consumption of 180 kWh/m2, or more than double the optimal standard of 75 kWh/m2. A typical roof is made of tile, concrete etc. and has a technical lifetime of 50–70 years, similar to the lifetime of wall insulation (Aagaard et al., 2013). If the relatively high technical lifetime variability of roofs, wall insulation and windows is combined with a lack of any incentive for heat conservation at the landlord level (See Section 5.3), many landlords would tend to repair, rather than replace, windows, roofs, walls, etc. Therefore, there are strong indications that heat conservation resulting from renovation and implementation of the building code may be much lower than 30% within a 2050 time horizon. Summary of the heat conservation incentives. From chapters 5.1–5.4 it can be concluded that the economic incentives for energy conservation in rental houses are very weak, as summarized in Table 3. Table 3 summarizes the answers to the research question; Will energy conservation measures be implemented in the right amount, in time and in the right way. A rough conclusion is that the needed incentives regarding right amount, in time and right type of heat conservation are not in place. This conclusion is caused by levelized costs of energy renovation which are higher than heat tariffs in combination with energy renovation codes that can be circumvented by landowners with almost no economic incentives for energy renovation. Analysis of incentives in the RentalCal project (Brounen et al., 2018) clearly indicates that a similar lack of incentives for energy conservation are prevalent in an array of EU countries. In the following sections, it is analyzed how to improve the present deficient incentive system. Before that it is analyzed whether a change to 100% variable tariffs would represent a justifiable and efficient change of the incentive system.
6. From heat sector tariffs based on short-term marginal costs to smart energy system tariffs based on long-term marginal costs and benefits A typical heat bill for a 75 m2 apartment with an annual heat consumption of 10 MWh would in the city of Herning be 8450 DKK (1126 €)1 divided into 3588 DKK (478 €) as fixed payment and 4862 DKK (648 €) as variable payment. The philosophy behind this existing tariff structure illustrated in Fig. 3 is described in an official Tariff report from 2009 (The Danish Tariff Committee, 2009), which argues that the present tariff structure reflects the cost structure of the existing district heating supply sector. This tariff philosophy can be named the 3rd generation district heating tariff philosophy where the tariffs are derived from the cost structure in an established heat sector-based energy system. In this system, the variable part of the heat bill is the short-term marginal costs of the heat deliverance from a heat plant, and the fixed part of the heat bill reflects the investment costs in the heat plant, district heating networks, etc. This 3rd generation district heating tariff philosophy assumes that (a) the variable costs in existing heat supply systems are a valid representation of the long-term marginal costs of the heat supply system 10–20 years from now, and (b) all benefits of energy conservation can be found within the existing basically unchanged heat supply sector. This 3rd generation tariff philosophy is problematic due to an array of reasons: 1. It results in short-term supply side marginal costs that compete with the long-term marginal costs of new energy conservation measures, and thus tend to generate overinvestment in supply side technologies. 2. Overinvestment in the supply side may be especially economically harmful in the ongoing transition due to the increased asset specificity in a 100% renewable energy based heat supply system. Possible overinvestments in a renewable energy based smart energy supply system with heat pumps, heat storage systems and district heating networks cannot be removed and used elsewhere. Due to the high asset specificity of this heat supply system, the green energy transition enhances the need for in time heat conservation in order to avoid getting trapped in supply side overinvestments. 3. From sector-to energy system based benefits of heat conservation. Society is heading towards replacement of the present heat supply system with a smart energy system (Lund, 2014) where heat, power, transportation, etc. will be increasingly interrelated. This district heating system is called a 4th generation district heating system (Lund et al., 2018), and the 3rd generation tariff philosophy described above is no longer applicable in a smart energy system with heat conservation benefits being distributed between the different actors in an integrated energy system. Efficient energy conservation can make low-temperature heat supply possible without new investments in district heating pipes which increases the efficiency of wind power driven heat pumps, and increases the competitiveness of wind power for heat, the use of industrial waste heat as well as geothermal and solar energy. 4. Because of this period of energy system transition where very large parts of the supply system have to be replaced by new investments. In the long run all costs are variable. When dealing with strategical optimization between supply and demand sides, tariffs based on long-term variable costs thus give the right price signal, and 100% variable tariffs that encompass these long-term variable costs therefore seem well substantiated. The needed changes in tariff policy are summarized in Table 4. The above arguments are lines of reasoning against the present heat 1
7
1 € is 7.5 DKK.
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Table 3 Incentives for heat conservation in Danish rental houses. I. Incentive type
II. Incentive effect
III. The reason behind incentive deficiency
1. Does the optimal amount of heat conservation yield a positive economy?
No, only a small amount of the optimal heat conservation investments have levelized costs that are lower than heat tariffs.
2. Do the heat conservation subsidies compensate for the negative economy? 3. Does it pay for the landlord to invest in heat conservation?
No, the subsidies are only 2–5% of the heat conservation investment. In general no, as the economy is mostly negative, and landlords mostly cannot increase the rent more than the induced reduction of the energy bill. Not to a sufficient extent, as many energy renovation measures do not yield a positive economy, and therefore will be postponed as much as possible. The incentives are far too weak to generate the right amount and type of heat conservation in time.
One important reason for this incentive deficiency is the fixed tariff share which on average is approx. 30% of the heat price. Another is the general lack of long-term low-interest loans for energy conservation that do not have a positive Net Present Value. The subsides are too small to compensate for the negative NPV.
4. Will building renovation codes ensure the optimal heat conservation level in time? 5. Summarized incentive effects.
In 75% of the cases the landlord can only increase the rent by the reduction in the energy bill. It is possible to avoid meeting the legislative renovation codes by extending the technical lifetime of building parts by means of repairing instead of renovating. The incentive deficiency is strong and interwoven. A key to the deficiency is the lack of positive economy for heat conservation with present tariffs. This problem under (1) enhances the incentive problems under (2), (3) and (4).
Table 4 From tariffs based on heat sector cost structure to tariffs based on system cost structure and long-term marginal costs. Range of investment horizon
3rd generation district heating
4th generation district heating
Time range: Time horizon and supply system change Space range of investment Resulting tariff system
Fossil fuel sector based
Strategic transition to renewable energy based supply system
Sector based heat supply 3rd generation tariff system based on the short-term marginal cost structure in existing supply systems
Integrated smart energy system 4th generation tariff system based on long-term marginal costs in a smart energy system structure
analyzed incentive areas in Sections 5.1.-5.4. This is based on the conclusion in Table 4 that the root of all four incentive problems is the combination of high fixed tariffs, low-interest long-term borrowing difficulties resulting in levelized costs that are above variable tariffs for most investments in heat conservation. If the energy conservation investments have a positive net present value, renovation in accordance with the building codes will thus become economical, and the landowner will profit from investing in renovation instead of trying to postpone this with repairs, etc.
supply tariffs philosophy reflecting the cost structure of the existing heat supply system. Following the arguments below, we recommend 100% variable tariffs as a first step in a tariff reform. Changing to 100% variable heat tariffs is an approximation, mainly based on the argument above that the present situation is a system transition where all costs are variable. In addition to this argument, external energy system heat conservation benefits, discussed above and in Section 2 points a-f, indicate that a change to 100% variable tariffs might even underestimate the energy system value of heat conservation. Furthermore, the conclusion in Fig. 4 will show that a 100% variable tariffs scheme is part of an incentive structure leading closer to an optimal level of heat conservation.
7.2. Effects of the three policy suggestions Fig. 4 shows the calculated energy conservation consequences of a reform that includes the above recommendations for 100% variable tariffs in combination with a public guaranty that makes 30 year, 2% loans possible. The horizontal red line shows the cost of 1 MWh energy conservation when the investment cost is 12.1 DKK per 1 kWh/year saved in the technical lifetime of the investment (or 540 DKK per saved MWh). The interest rate is 2% p.a. and a 30 year annuity loan is considered. The green line shows the same for the 8.8 DKK per kWh/year saved in the technical lifetime of the investment resulting in 390 DKK per saved MWh. As seen, the case of 8.8 DKK per 1 kWh/year saved in the technical lifetime (green line) is economical in most of the district heating companies, even when maintaining the current tariff distribution on the fixed and variable parts. However, this measure of conservation only represents 1/6 of the savings needed to reach the 40% reduction in energy for heat and hot water. The red horizontal line, showing the cost of the 12.1 DKK case, indicates that positive energy conservation incentives are only present in approx. 50% of the district heating companies. This means, at the least, that a combination of 30 year loans and 100% variable tariffs is necessary. Fig. 4 illustrates that a change to 100% variable tariffs (adding the blue and orange columns) will result in the levelized costs of energy conservation being lower than the blue and orange columns combined in all the district heating companies.
7. Analysis of a new incentive structure 7.1. Incentive suggestions in the Danish case This section analyzes the effects of two policy reforms derived from the incentive analysis in Section 5 and the tariff discussion in Section 6. The reforms to be tested here are a combination of: 1. Introduction of 100% variable tariffs. 2. Public guaranty for 2% interest/30 year energy renovation loans. 3. The loan guaranty is only given if the heat conservation investments are in accordance with the recommendations in the energy report made by a certified energy consultant. Public guaranty for loans is recommended for the following reasons: In most houses the owners can easily take out loans. Others have difficulties, however, and even if as little as 10–20% of the households cannot finance heat conservation measures, a transition to low-temperature district heating systems could be hindered. Consequently, a financing system that allows everyone to invest in heat conservation measures is essential in a transition to low-temperature district heating systems. This article it limited to testing these three reforms out of the four 8
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Fig. 4. The effects of the two policy reforms.
7.3. Further specification of the policy reform consequences
conditions shown in column 4. It should be noted that the heat and hot water conservation results may be underestimated, especially in the third column, as the energy renovation codes might induce more heat conservation. This will be the case if repairs that are not required to meet these codes do not replace energy renovation. As seen from this figure, and the numbers in Table 5, the reduction of heat consumption is approx. 55% for the conditions described in column 5, or slightly more than the optimum level indicated in Table 2. It is reasonable to assume that heat conservation transaction costs may lower the heat conservation incentive for which reason the 55% heat conservation with a positive NNP might be reduced to a number closer to the optimal heat conservation rate. It should be underlined that the above calculations are based on the economic incentives built into the energy systems. They do not include savings linked to implementation of the energy renovation codes. Thus in practice the third column will be lower than shown in Fig. 5. How much lower is difficult to say, however, as there are ample opportunities for landlords to conduct cheap repairs instead of more expensive renovations, and in that way avoid having to adhere to the renovation codes.
The calculations behind Figs. 3 and 4 only deal with the two conservation investment costs of 8.8 DKK and 12.1 DKK per annual saved kWh in the technical lifetime of the energy conservation investment. Meanwhile, different cities have houses situated in different distributions of the heat conservation investment cost as the numbers show in Table 1: 8.8; 9.9; 11; 12.1; 14.5 and 16.5 DKK per saved kWh in the technical lifetime of the investment. The profitability linked to the concrete different ages of apartments and the associated energy conservation costs in different cities/district heating areas has been investigated. This is done by calculating the expected energy conservation ratio linked to the specific 8.8–16.5 DKK distribution and the specific heat tariffs in the specific city/district heating area. The cities shown in Table 5 represent an extract of the heating area in Table 1 (76%) under “savings”. Going from current heat consumption to scenario A represents a saving of 60%, or 4728 GWh in annual heat and hot water consumption. As seen in column 4 in the bottom row of the table, the total heat and hot water savings with a positive net present value are only 359,780 MWh/year. The results of Table 5 are summarized in Fig. 5. The left column shows the present heat and hot water consumption in the cities listed in Table 5. The Scenario A column is from (Kragh and Wittchen, 2010). The third column shows the heat and hot water consumption under the assumption that all conservation investments implemented have a positive net present value with a 20 year loan and a discount rate of 3% p.a. In this case it is assumed that investors ascribe the investment no value after the 20 year period (see discussion in Section 3). The fourth column shows the consumption level when assuming a 30 year loan and depreciation period and a 2% discount rate. In the last column, a 100% variable tariff reform is added to the
8. Conclusion and policy implications In a transition from fossil fuels to a 100% renewable energy based supply system, heat conservation strategies are entering a fundamental paradigmatic change. This encompasses that the value of heat conservation is increased, and that it becomes increasingly important to implement heat conservation in the right amount, in time and of the right type. The “right amount” request is a generally applicable new condition linked to a transition to 100% renewable energy, meaning that in such 9
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Table 5 Heat conservation in GWh/year in different institutional scenarios in different district heating areas. Own calculations based on the Danish Heat Atlas and (Kragh and Wittchen, 2010). Demand GWh/year
Annual savings with positive present value Scenario A
2014
Scenario A
Aalborg Aarhus Albertslund Esbjerg Fredericia Frederiksberg Gentofte Gladsaxe Helsingør Herning Høje-Taastrup Holstebro Horsens Hørsholm Hvidovre Ishøj København Køge Kolding Næstved Odense Randers Rødovre Roskilde Silkeborg Slagelse Tårnby Vallensbæk Vejle Viborg
444 772 41 192 100 652 252 152 118 108 85 69 125 45 123 52 2802 70 121 91 368 188 88 123 94 140 92 19 159 98
175 302 16 75 39 255 100 59 46 42 32 27 49 18 48 20 1106 27 48 36 144 74 34 48 37 55 36 7 63 38
Total savings (Total demand)
7783
3056
Present tariffs
100% variable tariff
3% 20 years
2% 30 years
2% 30 years
270 470 25 117 61 397 152 93 72 65 53 42 75 28 75 32 1696 43 73 56 223 114 54 75 56 86 56 12 97 59
0 0 0 0 0 0 0 0 37 0 0 10 0 7 0 0 152 38 29 0 0 55 0 0 0 0 0 0 0 27
0 198 23 51 0 68 10 10 71 18 52 42 31 26 57 32 1684 43 73 35 37 114 22 62 33 49 8 12 47 59
200 469 25 117 61 396 152 93 72 65 53 42 75 28 75 32 1696 43 73 56 162 114 54 75 56 86 56 12 97 59
4728
360
2968
4595
systems the right balance between investments in energy supply systems and demand side energy efficiency must be found via an investment optimization process. In the Danish case calculations indicate (Thellufsen and Lund, 2015) that the optimised Danish balance between investments in supply and demand measures seems to be at an average heat and hot water consumption of approx. 80 kWh/m2 for old buildings and 55 kWh/m2 for new buildings.
The “in time” request is also a generally applicable new condition linked to the increased supply side asset specificity in a transition to 100% renewable energy systems. It refers to the importance of investing in demand side efficiency measures before dimensioning and investing in new energy supply systems, in order to avoid costly supply side overcapacity. The importance of investments in demand side efficiency in time has been strongly increased due to a transition from a fossil fuel
Fig. 5. Heat consumption in 2014, and with different scenarios.
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based energy supply system with relatively low asset specificity to a renewable energy based supply system with high asset specificity. The “right type” request is generally applicable in a transition to 100% renewable energy based heat supply systems. It means that heat conservation activities must be coordinated with a systematic transition to low-temperature district heating systems. In order to establish incentives for heat conservation activities, the following specific reforms in the Danish system are suggested: A change of tariff policy from energy sector-based to energy-systembased tariffs. This is substantiated by costs and benefits of energy conservation that are not only present within the heat supply/heat consumption sector; rather, they can be found throughout the entire energy system. A first step towards energy system tariffs can be a combination of establishing 100% variable heat tariffs in district heating systems, and providing a guaranty for 30 year, 2% loans, and an energy consultancy scheme linked to these reforms in order to ensure that all house owners have the opportunity to invest in heat conservation measures. Access to the loan guaranty should only be given if an energy consultant has made a heat conservation report showing the amount and type of needed energy renovation measures. It should be underlined that despite being described by means of the Danish case, the conclusions regarding the requests for right amount, in time and of the right type are generally applicable. The policy measures regarding 100% variable tariffs and public financial guaranty also seem generally applicable for district heating systems. 100% variable tariffs are even more relevant in a new district heating system when optimizing supply side investment measures against investments in demand energy efficiency. Public loan guaranty may also be a generally applicable policy suggestion furthering that all house owners can participate in energy conservation activities that make low-temperature district heating systems possible. Our cost and benefit calculations indicate that by means of these rather simple and, in terms of state budget, cheap reforms, the door to “positive net present value” has been opened for achieving the desired level of energy conservation before 2050 in the right amount, in time and of the right type. Meanwhile, it should be underlined that micro heat conservation management will still be needed, especially with regard to the development of concrete technical and tariff solutions that further a synchronization of heat conservation with the development of the right types of low-temperature district heating systems.
district heating with heat savings to decarbonise the EU energy system. Energy Policy 65, 475–489. https://doi.org/10.1016/j.enpol.2013.10.035. Danish Energy Agency, 2017. Energy Statistics. Danish Energy Agency, Copenhagen. Danish Ministry of Transport and Buildings, 2016. Bekendtgørelse Om Offentliggørelse Af Bygningsreglementet 2015 (BR 15) [Act Regarding the Danish Building Code 2015]. pp. 28 Copenhagen. Danish Ministry of Transport Building and Housing, 2015. Bekendtgørelse Af Lov Om Leje, Nr. 809, 2014 [The Rent Act, Nr. 809, 2014]. Danish Transport and Construction Agency, 2016. Ofte Rentable Konstruktioner Vejledning [Often Profitable Constructions - Guidelines]. (Copenhagen). Hansen, K., Connolly, D., Drysdale, D., Thellufsen, J.Z., 2016a. Heat Roadmap Europe: identifying the balance between saving heat and supplying heat. Energy 115, 1663–1671. https://doi.org/10.1016/J.ENERGY.2016.06.033. Hansen, K., Connolly, D., Drysdale, D., Thellufsen, J.Z., 2016b. Heat Roadmap Europe: identifying the balance between saving heat and supplying heat. Energy 115, 1663–1671. https://doi.org/10.1016/j.energy.2016.06.033. Hvelplund, F., 2001. Electricity reforms,Democracy and Technological Change. Department of Development and Planning,Aalborg University. Hvelplund, F., Möller, B., Sperling, K., 2013. Local ownership, smart energy systems and better wind power economy. Energy Strateg. Rev. 1, 164–170. https://doi.org/10. 1016/j.esr.2013.02.001. Hvelplund, F., Østergaard, P.A., Meyer, N.I., 2017. Incentives and barriers for wind power expansion and system integration in Denmark. Energy Policy 107, 573–584. https:// doi.org/10.1016/j.enpol.2017.05.009. Kragh, J., Wittchen, K.B., 2010. Danske Bygningers Energibehov I 2050 [Danish Buildings Energy Demand in 2050]. Danish Building Research Institute and Aalborg University, Copenhagen. Lund, H., 2014. Renewable Energy Systems: A Smart Energy Systems Approach to the Choice and Modeling of 100% Renewable Solutions. Renewable Energy Systems: A Smart Energy Systems Approach to the Choice and Modeling of 100% Renewable Solutions: second ed. second ed. Elsevier Inc. Lund, H., Hvelplund, F., Mathiesen, B.V., Østergaard, P.A., Christensen, P., Connolly, D., 2011. Coherent Energy and Environmental System Analysis. Department of Development and Planning, Aalborg. Lund, H., Mathiesen, B.V., Connolly, D., Østergaard, P.A., 2014a. Renewable energy systems - a smart energy systems approach to the choice and modelling of 100 % renewable solutions. Chem. Eng. Trans. 39, 1–6. https://doi.org/10.3303/ CET1439001. Lund, H., Østergaard, P.A., Chang, M., Werner, S., Svendsen, S., Sorknæs, P., Thorsen, J.E., Hvelplund, F., Mortensen, B.O.G., Mathiesen, Brian Vad Bojesen, C., Duic, N., Zhang, X., Möller, B., 2018. The status of 4th generation district heating: research and results. Energy. https://doi.org/10.1016/j.energy.2018.08.206. Lund, H., Thellufsen, J.Z., Aggerholm, S., Wichtten, K.B., Nielsen, S., Mathiesen, B.V., Möller, B., 2014b. Heat saving strategies in sustainable smart energy systems. Int. J. Sustain. Energy Plan. Manag. 04, 3–16. https://doi.org/10.5278/ijsepm.2014.4.2. Mathiesen, B.V., Lund, H., Connolly, D., Wenzel, H., Ostergaard, P.A., Möller, B., Nielsen, S., Ridjan, I., KarnOe, P., Sperling, K., Hvelplund, F.K., 2015a. Smart Energy Systems for coherent 100% renewable energy and transport solutions. Appl. Energy. https:// doi.org/10.1016/j.apenergy.2015.01.075. Mathiesen, B.V., Lund, H., Hansen, K., Ridjan, I., Djørup, S.R., Nielsen, S., Sorknæs, P., Thellufsen, J.Z., Grundahl, L., Lund, R.S., Drysdale, D.W., Connolly, D., Østergaard, P.A., 2015b. IDA's Energy Vision 2050: A Smart Energy System Strategy for 100% Renewable Denmark [WWW Document]. Dep. Dev. Planning, Aalborg Un. 978-8791404-78-8. Möller, B., Nielsen, S., 2014. High resolution heat atlases for demand and supply mapping. Int. J. Sustain. Energy Plan. Manag. 1, 41–58. https://doi.org/10.5278/ijsepm. 2014.1.4. Østergaard, P.A., Andersen, A.N., 2018. Economic feasibility of booster heat pumps in heat pump-based district heating systems. Energy 155, 921–929. https://doi.org/10. 1016/J.ENERGY.2018.05.076. Østergaard, P.A., Andersen, A.N., 2016. Booster heat pumps and central heat pumps in district heating. Appl. Energy 184. https://doi.org/10.1016/j.apenergy.2016.02.144. Persson, U., Möller, B., Werner, S., 2014. Heat Roadmap Europe: identifying strategic heat synergy regions. Energy Policy 74, 663–681. https://doi.org/10.1016/j.enpol. 2014.07.015. Sperling, K., Hvelplund, F., Mathiesen, B.V., 2010. Evaluation of wind power planning in Denmark – towards an integrated perspective. Energy 35, 5443–5454. https://doi. org/10.1016/j.energy.2010.06.039. The Danish Tariff Committee, 2009. Tarifudvalgets Analyse Af Mulighederne for Energibesparelser Ved Forskellige Modeller for Tarifpraksis I El-, Naturgas Og Varmeforsyningen [The Tariff Committee's Analysis of the Possibilities for Energy Savings by Different Models of Tariffs in Electrici. Thellufsen, J.Z., Lund, H., 2016. Roles of local and national energy systems in the integration of renewable energy. Appl. Energy 183, 419–429. https://doi.org/10.1016/ j.apenergy.2016.09.005. Thellufsen, J.Z., Lund, H., 2015. Energy saving synergies in national energy systems. Energy Convers. Manag. 103, 259–265. https://doi.org/10.1016/j.enconman.2015. 06.052. Wittchen, K.B., Kragh, J., 2013. Varmebesparelse Ved Løbende Bygningsrenovering Frem Til 2050 [Heat Saving by Continuous Building Renovation until 2050]. (Copenhagen). Zvingilaite, E., Balyk, O., 2014. Heat savings in buildings in a 100% renewable heat and power system in Denmark with different shares of district heating. 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Acknowledgments This study has been financed by both the EU Horizon 2020 RentalCal project http://www.rentalcal.eu/and the 4th Generation District Heating project http://www.4dh.eu/. Appendix A. Supplementary data Supplementary data to this article can be found online at https:// doi.org/10.1016/j.enpol.2019.110944. References Aagaard, N.-J., Brandt, E., Aggerholm, S., Haugbølle, K., 2013. Levetider Af Bygningsdele Ved Vurdering Af Bæredygtighed Og Totaløkonomi, vol. 1. Brounen, D., Behr, I., Enseling, A., Hvelplund, F., Lützkendorf, T., Mörmann, K., Rajkiewicz, A., 2018. Policy Implication Report. Connolly, D., 2017. Heat Roadmap Europe: quantitative comparison between the electricity, heating, and cooling sectors for different European countries. Energy. https:// doi.org/10.1016/j.energy.2017.07.037. Connolly, D., Lund, H., Mathiesen, B.V., Werner, S., Möller, B., Persson, U., Boermans, T., Trier, D., Østergaard, P.A., Nielsen, S., 2014a. Heat Roadmap Europe: combining district heating with heat savings to decarbonise the EU energy system. Energy Policy 65, 475–489. https://doi.org/10.1016/j.enpol.2013.10.035. Connolly, D., Lund, H., Mathiesen, B.V., Werner, S., Möller, B., Persson, U., Boermans, T., Trier, D., Østergaard, P.A., Nielsen, S., 2014b. Heat Roadmap Europe: combining
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Policy paradigms for optimal residential heat savings in a transition to 100% renewable energy systems
T
Frede Hvelplunda, , Louise Kroga, Steffen Nielsena, Elsebeth Terkelsenb, Kristian Brun Madsena ⁎
a b
Department of Planning, Aalborg University, Rendsburggade 14, 9000, Aalborg C, Denmark European Green Cities, Norsgade 17, 8000, Aarhus C, Denmark
ARTICLE INFO
Heat conservation Incentives Smart energy systems Policy suggestions Renewable energy
ABSTRACT
In a transition to 100% renewable energy (RE) systems we move from a sector-based to an energy system-based heat conservation paradigm. This implies both liberation from the institutional path dependencies of the present heat sector approach and the creation of the new institutional conditions for heat conservation in integrated (RE) systems. In these systems it is much more important than in fossil fuel systems to synchronize the right amount, in time and of the right types of investments in heat conservation with investments in the energy supply system. The key findings firstly are that this synchronization is not happening in the Danish case due to institutional path dependencies in the shape of high fixed tariffs, low subsidies, split incentives and renovation codes that can be evaded. Secondly that this synchronization can be implemented by means of tariffs that reflect levelized costs of future supply systems in combination with a public guaranty for long-term low-interest loans when following the advice of certified energy consultants. Thirdly tariff philosophy should change to include the long term energy system benefits of heat conservation. The principles behind these findings are of generic interest for heat supply and heat conservation planning in the EU.
1. Introduction In several European countries, district heating is a core technology for a transition to low carbon energy supply. It currently covers 60% of the Danish heat market, and 12% of the EU28 heat market which has a district heating potential of around 50% (Hansen et al., 2016a,b). A discussion of the role of district heating in relation to energy conservation is relevant both for the Danish case analyzed, for existing EU28 district heating systems, and even more in relation to EU28 if the large EU28 district heating potential is being implemented (Connolly et al., 2014a,b)(Hansen et al., 2016a,b). Another report on district heating in the EU examines the future prospects of district heating in EU27 for residential buildings and services, and it foresees an economically efficient threefold district heating increase during 2010–2030 and a fourfold increase by 2050 (Connolly, 2017). This conclusion is supported by (Persson et al., 2014), concluding that district heating can expand cost-efficiently more than threefold in the large EU cities. In a transition to 100% renewable energy it is necessary to increase the cross-sectoral linkages between heat, power and transportation in a smart energy system (Lund et al., 2014a) in order to handle the fluctuating character of wind power, photovoltaics and low-temperature ⁎
heat sources. The type, costs and benefits of heat conservation is thus changed from the effects within a heat sector system to being derived from the effects in an integrated smart energy system. This system approach can be described as the smart energy system paradigm of heat conservation. One of the main purposes of this article is to describe both the present incentives and the needed incentive changes in the transition from a sector-based to a smart energy system-based heat conservation paradigm with a focus on energy conservation incentives in apartments in rental buildings. Meanwhile it is hampered by both the difficulties of abolishing the old institutional conditions of the heat system and the hindrances for new heat conservation policies in a smart energy system. In addition to the optimization question above, this article focuses on heat conservation incentives in rental buildings, and since around 80% of rental buildings are situated in district heating areas, the incentive analysis is also linked to the heat tariffs in these areas (Mathiesen et al., 2015b). 2. The new role of energy conservation in a smart energy system In a future smart energy system based on 100% renewable energy, economic (and socio-political) optimization between investments in the
Corresponding author. E-mail address: [email protected] (F. Hvelplund).
https://doi.org/10.1016/j.enpol.2019.110944 Received 2 May 2018; Received in revised form 14 April 2019; Accepted 18 August 2019 0301-4215/ © 2019 Elsevier Ltd. All rights reserved.
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Table 1 Requirements for heat conservation in a smart energy system. 1. Heat conservation should: a. Be implemented in the right amount.
b. Be implemented in time (before possible overinvestment in the very asset specific investments in the supply side)
c. The right type Support low temperature systems.
2. Why these requirements? Optimizing investments in supply and demand systems is replacing minimization of fossil fuel use. - In a transition to renewable energy supply side technologies, investments are increased and replacing annual fuel use. - In this transition the task has changed from minimizing the supply side use of fossil fuels to optimizing the balance between investments in the supply- and demand side technologies. Renewable energy systems have a higher asset specificity share than fossil fuel heat supply systems. It is necessary and possible to make this “in time” optimization of investments in both the supply and demand sides: - Necessary because overcapacity in smart energy supply systems, such as solar heating systems, heat pumps, heat storage, district heating pipes etc. cannot be removed and used elsewhere. In the fossil fuel supply system, saved fossil fuels can be used at another location. - Possible because investors in energy supply such as solar heating, heat pumps and heat storage systems are often the same or very close to the investors in heat conservation. This may give a strong organizational ability to keep transaction costs low when synchronizing investments in supply systems with heat conservation activities. Heat demand reductions in combination with low-temperature district heating has a higher efficiency improvement value in a renewable energy based system than in a fossil fuel based system, because: - Heat demand reductions make it possible to meet heat demand in low-temperature systems without new investments in district heating pipes. - Heat pump efficiency (COP factor) is high in low-temperature district heating systems. Therefore, the competitiveness of wind power for heat is increased in a low-temperature heat pump based district heating system. - Higher heat pump efficiency reduces the wind power supply side capacity needs for a given heat market. - Low-temperature heat increased the efficiency of solar- and geothermal heat and the use of industrial low-temperature waste heat. - -etc.
energy supply system and energy conservation determines the optimal level of annual heat consumption per m2 to be reduced from the present 132 kWh/m2 per year (Mathiesen et al., 2015b) average heat and hot water use to around 80 kWh/m2 for existing buildings and 55 kWh/m2 per year for new houses (Lund et al., 2014b). If this reduction is implemented, it will release a substantial fraction (30–40%) of the district heating network capacity, making a change to low-temperature district heating possible without new investments in the district heating capacity. Furthermore, the supply side asset specificity is increased from around 30–40% in fossil fuel systems to 80–90% in renewable energy systems. Asset specificity measures to which degree potential overinvestments on the supply side can be transferred to other purposes elsewhere. In a fossil fuel supply system saved fuel can be used elsewhere, whereas in a renewable energy based district heating system overinvestments in heat pumps, distribution pipes, heat storage systems, etc. cannot be removed and used elsewhere. In Denmark, the main heat supply system will consist of wind power used in combination with district heating, heat pumps and heat storage. It is all based on smart energy system sector integration that benefits from low-temperature district heating systems. In this change of the supply side, the heat market will also serve as an important means to integrate the large amount of varying renewable energy sources. Therefore, the right type and amount of energy conservation consequently has to be determined and implemented with reference to both the need for heat and the integration of fluctuating energy sources in the total energy system. A remarkable result from the system calculations in (Lund et al., 2014b) (Hansen et al., 2016b) is that the heat supply costs per kWh may decrease when reducing the consumption per m2 from 132 kWh to 60–80 kWh. The reasons behind this surprising conclusion are found in the sum of several of the following external system benefits of heat conservation in a smart energy system.
b.
c.
d. e.
f.
a. Reduced heat losses in houses make it possible to satisfy heat demand with a lower water temperature without investments in new 2
heat distribution network capacity. In some cases it furthermore supplies spare capacity for expansion in new district heating markets. Heat conservation can result in reduced needs for wind power capacity and heat pump capacity for a given heat market because heat conservation and the resulting lower heat supply temperature result in a higher heat pump coefficient of performance, or COP factor, and thus a lower consumption of kWh electricity for a given amount of heat (Østergaard and Andersen, 2018, 2016). The exact change in the COP factor depends on the heat source and the heat pump type and size, but 1 kWh electricity supplied to a heat pump could typically have a COP factor of 3, and thus deliver 3 kWh heat at 80° Celsius. If we imagine that heat conservation makes it possible to lower the required heat supply temperature to 50° Celsius, the COP factor would increase by around 40% and supply around 4.2 kWh heat per kWh electricity. In this example, reduced district heating temperature would reduce the needed wind turbine and heat pump capacity by almost 30%. A reduction in the heat supply temperature will increase both the efficiency of solar and geothermal heating (Hvelplund et al., 2017; Lund et al., 2018), and the efficiency of using waste heat from industry. The reduced heat supply temperature reduces losses in the district heating network. Integrating heat and power expands the market for wind power and counterbalances the ongoing merit order induced decrease in wind power prices (Hvelplund et al., 2013). The value of wind power is increased because heat conservation facilitates low-temperature systems resulting in higher heat pump efficiency (COP factors). The integration of heat and electricity requires integrative planning Sperling et al., 2010and evens out the fluctuating character of wind power by storing heat from windy periods for later use in heat storages linked to the district heating system. This added value, resulting from energy conservation that facilitates the integration of the heat and electricity markets, can be shared by heat users and wind power producers, both making heat cheaper and wind power
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more profitable (Lund et al., 2014b).
The analysis of heat conservation incentives is structured as shown in items 1–4 below. Based on this analysis new policy measures are designed and evaluated as mentioned in item 5.
The above energy system benefits are included in the EnergyPLAN calculations in (Lund et al., 2011), and are amongst the reasons why the cost per supplied kWh may decrease concurrently with a reduction in the amount of supplied kWh per m2 heating (Thellufsen and Lund, 2016). The benefits a-f are external effects of heat conservation that are generally not included in the tariffs and therefore not paid for in the present heat conservation incentive system. In order to internalize these benefits in the price system, among other reasons, a new incentive system should be established that ensures investments in heat conservation in the right amount, in time and of the right type as substantiated in Table 1. Table 1 lists the requirements for heat conservation in the context of a transition to an integrated smart energy system. These requirements represent a paradigmatic shift compared with the requirements of energy conservation in a fossil fuel based system. Investments in integrated smart energy systems (Mathiesen et al., 2015a) replace those made in fossil fuel systems. Investments in heat pumps, district heating, heat storage, etc. are asset specific and cannot be transferred to other areas. It is thus important to avoid supply side overinvestments. The situation is new, and coordination between investment in heat supply and heat conservation is economically more important than in a fossil fuel system.
1. Do existing tariffs provide sufficient incentives for heat conservation? The levelized heat conservation costs for different levels of heat conservation are compared with the heat tariffs, and it is analyzed to which extent existing economic incentives are sufficient to support investments that reduce heat and hot water consumption to an optimal level of around 80 kWh/m2 per year. 2. Are there subsidies that make optimal energy conservation economical, and thus compensate for possible deficiencies in the economic incentives in item 1? 3. Does public regulation based on energy renovation codes compensate for possible lack of economic incentives in items 1 and 2? Does this work in practice, or is it possible to circumvent the renovation code regulation? 4. To which extent is it economical for owners of rental apartments to implement the needed conservation measures? It is the combination of incentives in these four areas that constitutes Denmark's existing energy conservation incentives in rental residential buildings. 5. Once having concluded on the incentive structures in items 1–4, new policy measures that cover potential incentive deficiencies in items 1–4 are suggested, and the heat conservation consequences of these are estimated.
3. Research question and methodology Due to institutional lock-in mechanismsHvelplund, 2001 such as high fixed tariffs, weak landowner incentives, etc., there is a risk that heat conservation investments will neither achieve the right amount (an optimal balance between heat supply and demand), be implemented in time, nor develop the right type of heat conservation. This is a serious problem, as it may result in a transition to sustainable energy systems which is too expensive and which could lead to a loss of political support and consequently hamper the needed momentum for the energy transition process. The research questions dealing with these problems are:
In addition to the incentive analysis in items 1–4, a discussion of heat tariffs in district heating systems is undertaken in section 6. This is done in order to start a discussion of the paradigmatic change in tariff philosophy caused by the combination of the ongoing change from heat sector tariffing to tariffs reflecting the costs in an integrated energy system. The focus of this article is the heat and hot water conservation incentives in the residential housing sector that constitutes more than 70% of the heat consumption in the district heating companies (Danish Energy Agency, 2017). If policies for the residential sector are in place and low-temperature district heating made possible for this part of the market, a decisive part of the supply/demand synchronization has been dealt with.
a. To which extent does the present heat conservation incentive system for rental buildings further heat conservation in the right amount, in time and of the right type. b. Which types of policy measures may improve the incentive system where it is deficient, and which economic consequences do these improved heat conservation incentives imply.
4. The numeral settings of costs of energy renovation in multi floor buildings
The focus will be on the right amount in time, as success within these two parameters is a precondition for measures that support the right type of heat conservation and thus the development of low-temperature district heating systems. The methodology in this paper is to systematically envisage the costs of energy conservation in the residential sector and compare these with the present heat conservation incentives. To determine the conservation potential of end-use heat savings within each district heating area, the Danish Heat Atlas is used (Möller and Nielsen, 2014). The Danish Heat Atlas is a GIS database that includes building level estimates of annual heat demands, savings potential and costs for various savings scenarios. The input data for the heat atlas is the Danish Building Register combined with a heat demand model made by the Danish Building Research Institute (Kragh and Wittchen, 2010). The heat demand model estimates heat demands based on the building floor area, age, type and use. As the heat atlas is a GIS database, the total potential within different district heating areas can be assessed. In combination with heat prices from the district heating areas, the economic feasibility of the investments in heat conservation can be estimated.
Table 2 shows the costs of energy renovation in Danish multi floor buildings. This offers a good approximation of the energy conservation costs of rental buildings. Cost data are increased by 10% compared to the 2010 cost data. This is done in accordance with the 10% increase in the building cost index during the period 2010–2014. Row 7 in Table 2, the dark grey, shows the most interesting numbers; “Marginal investment cost in DKK per kWh for saving 1/kWh/year in the investment lifetime”, which is calculated by dividing the marginal investment costs in row 5 by kWh heat conservation (row 2 minus row 3). These numbers for instance indicate that in buildings dating from the period 1850–1930 it costs 14.3 DKK on average to make an energy conservation investment that lowers the consumption from 3390 GWh/year (row 2) to 1326 GWh/year (row 3). These are marginal costs related to added investments in energy renovation measures in addition to other costs linked to renovating a building. In Fig. 1 the investment costs per saved kWh in the lifetime of the investment seen in Table 2 are converted into costs per kWh. Fig. 1 shows a large group of buildings from 1961 to 1972, with conservation potential of approx. 1 TWh, which “only” have an average 3
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Table 2 Cost of energy renovation to reach the level of scenario A (60% reduction of heat losses). (based on the Danish heat atlas and SBI 2010:56, Danske Bygningers Energibehov I 2050 (Kragh and Wittchen, 2010).
marginal investment cost per annually saved kWh of 8.8 DKK (Table 2 row 7), or, at a 2% discount rate and 30 year discount period, a cost of around 0.39 DKK/kWh (Fig. 1). At an annual discount rate of 4%, the cost per kWh in Fig. 1 would increase by around 25%. The most expensive 2 TWh from Table 2 and Fig. 1, going from 4 to 6 TWh heat conservation potential, have an investment cost of 14.3 DKK/kWh (Table 2, row 7), or, at a 2% discount rate and 30 year discount period, a cost of around 0.64 DKK/kWh (around 0.83 DKK/ kWh at a 4% discount rate). We know from calculations in (Mathiesen et al., 2015b) that the marginal heat supply costs are 0.5–0.6 DKK/kWh on average at a heat and hot water conservation rate of 10–40% of the present consumption. Fig. 1 shows that at a conservation level of approx. 4 TWh the heat conservation costs are in the range of 0.54–0.64 DKK/kWh. In Figs. 1 and 4 TWh heat conservation therefore represents an approximation of the optimal balance between investment in heat
conservation and heat supply. However, will this level be achieved under the present business economic conditions? Fig. 2 shows the marginal business economic costs per saved kWh under the assumption that an average landlord can take out a 20 year loan at an interest rate of 3% p.a. (nominal interest rate). This is the relevant discount rate, as landlords are not permitted to increase rent linked to housing investments with the inflation rate if the apartment was built prior to 1991. Moreover, apartments built prior to 1991 represent around 75% of the heat and hot water conservation potential. Therefore, rent increases caused by inflation can, in general, be excluded from the calculations. Regarding the loan period, banks typically give loans of up to 20 years, and some credit institutions up to 30 years. As a crude estimate, it seems reasonable to use a 3% discount rate and a 20 year loan period as a way of simulating the average actual business economic financial conditions.
Fig. 1. Marginal socio-economic costs per kWh saved.
4
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Fig. 2. Marginal house owner economic costs per saved kWh.
levelized costs of heat conservation are higher than the heat tariffs. The green horizontal line in Fig. 4 shows the lowest heat conservation costs per MWh within the 1 TWh conservation range between 0 and 1 TWh heat conservation, as reflected in Fig. 2 (3% discount rate, 20 year loan, investment cost 8.8 DKK for a 1 kWh/year reduction of heat consumption). As seen in Fig. 4, the levelized costs of 1 MWh energy conservation is higher than the blue pillars, or variable tariffs in approx. 2/3 of the 40 district heating systems. This means that even the cheapest 10% of the energy renovation is only economical in a minor portion of the 40 district heating companies. This is not far from the results in another analysis made with other methods (Zvingilaite and Balyk, 2014). If the discount rate is lowered to 2%, the levelized costs of energy renovation would be lower than heat tariffs in approx. 50% of the district heating companies. The purple dotted horizontal line in Fig. 3 shows the costs of making an energy renovation before it is technically necessary to renovate a building. Here, the investment costs in a building dating from 1999 to 2006 are 24.2 DKK to save 1 kWh annually in the technical lifetime of the investment, and the saved heat costs far from cover the renovation costs. The problem is that these buildings from a technical point of view do not need renovation before 2030–2040, despite the fact that their low energy efficiency standards make low-temperature heat supply difficult in a time when low-temperature systems are needed. In summary, it can be concluded that in the two cases in which the costs for saving 1 kWh per year in the technical lifetime of the investment are 8.8 DKK and 12.1 DKK, respectively, levelized costs of heat conservation are only lower than variable heat tariffs in a minor part of the socio-economically profitable energy conservation activities. The following sections examine whether there are other incentives that might compensate for the indicated lack of positive economy for potential investors in heat conservation.
The relevant information regarding costs per kWh of energy conservation in the building stock dealt with is now available. The next step in the analysis is to evaluate to what extent the present incentive system is able to optimize investments in heat supply and heat conservation by use of a 4 TWh reduction in the annual heat consumption. In the next section, it is analyzed whether the present institutional and market systems provide sufficient economic incentives to reach the 40% energy conservation goal in rental apartment buildings. 5. Incentives for heat conservation compared with conservation costs in the Danish district heating system 5.1. Does the optimal amount of heat conservation have a positive economy? Around 80% of rental buildings in Denmark are located in district heating systems. The question is now: To what extent are the levelized energy conservation costs per MWh lower than the tariff per MWh of purchased heat and hot water. In Fig. 3 below, heat prices in some Danish district heating companies are shown and compared with the costs of heat and hot water conservation (the red and the green horizontal lines, respectively). Heat and hot water costs per MWh: As seen in Fig. 3, the tariff structure can be divided into a fixed and a variable part, where the blue variable part gives the present incentive for heat conservation. The question is now: Do these “market prices” provide sufficient incentive for investments in energy conservation when considering the costs as described in Table 2. Energy conservation costs per MWh: The levelized heat and hot water conservation costs are represented by the horizontal lines in Fig. 3. They are calculated with a discount rate of 3% p.a. and a discount period of 20 years. An investment of 8.8 DKK per saved kWh/year gives a heat and hot water conservation price of 590 DKK/MWh (green line). An investment of 12.1 DKK per saved kWh/year equates to a heat and hot water conservation cost of 810 DKK/MWh (red line). The red horizontal line shows the levelized heat and hot water conservation costs per MWh within the 1 TWh conservation range between 3 and 4 TWh, as reflected in Fig. 3 (3% discount rate, 20 year loan, investment cost 12.1 DKK for a 1 kWh/year reduction of heat and hot water consumption). As seen in Fig. 4, the red line is higher than the blue pillars, or the marginal part of the heat tariff in all district heating companies. The levelized costs of investing 12.1 DKK in energy conservation is thus higher than the tariffs in all district heating areas. In a sensitivity analysis, even with a discount rate lowered to 2%, the
5.2. Do heat conservation subsidies compensate for the negative economy? It is possible to sell energy conservation to large energy companies for a price of approx. 0.3–0.6 DKK/kWh saved annually in the technical lifetime of the investment. As seen in Section 4, the investment costs are between 8.8 DKK and 16.4 DKK per kWh annually saved in the technical lifetime of the investment. Therefore, the 0.3–0.6 DKK/kWh range represents a subsidy of 2–5% of the energy conservation investment costs. Furthermore, the state gives 50 million DKK annually for energy conservation subsidies for rental buildings. This is approx. 150 DKK/ 100 m2 apartment per year, or 1–2% of an apartment's annual heat 5
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Fig. 3. Heat supply tariffs in some district heating areas divided into fixed and variable tariff shares in DKK/MWh. (75 m2 apartment with an annual heat and hot water consumption of 10 MWh). Based on 2014 data from the district heating companies. The green and red horizontal lines represents the levelized costs of heat conservation for 20 years loans and a discount rate of 3%. The costs are based on numbers in Fig. 2 and Table 2. (For interpretation of the references to colour in this figure legend, the reader is referred to the Web version of this article.)
energy bill. The above subsidies are close to insignificant and do not change the general conclusion in Section 5.1 and Fig. 3 regarding the lack of incentives for energy conservation in rental buildings.
In houses built prior to 1991, it is optional to increase the rent in accordance with “levels of rent in the specific part of town”. This means that if an investment in energy conservation increases the value of the apartment in the area where it is situated, the landlord has the right to increase the rent in accordance with a typical rent for apartments of that quality in that part of town. What this means in practice is difficult to say, but probably this will not generally be a better option for the landlord than the “total economy estimation” described in option a.
5.3. Does it pay for the landlord to invest in heat conservation? This section examines whether the landlord incentive system can compensate for that levelized costs of energy renovation which are higher than the incentives discussed in 5.1. and 5.2. The landlord can increase the rent according to a set of rules regarding inclusion of heat conservation costs in the rent Danish Ministry of Transport Building and Housing, 2015().
Hence, situations a, b and c do not seem to add any extra incentives for heat conservation, compared to those described in Section 4. However, if a situation occurs, in which the levelized costs of heat and hot water conservation are lower than the heat tariff, the landlord will in all three cases, a, b and c, have a clear economic incentive to invest in energy renovation.
The “Total economy neutrality” principle: Any landlord has the right to increase the rent in any rented apartment equivalent to the reduction in the energy bill caused by a given investment in energy conservation. It is thus only economical for the landlord to invest in energy renovation if the cost of saving 1 MWh is lower than the tariffs in Fig. 3. In houses built after 1991, which represent around 25% of the heat conservation potential (see Table 2), rent is set in a free process between landlord and tenant. If energy conservation measures are uneconomical, the landlord has the right to freely increase the rent to cover the heat conservation investment costs plus a profit. Whether energy conservation is implemented thus depends on the competitive situation on the rental housing market.
5.4. Will building renovation codes ensure the optimal heat conservation in time? It could be claimed that the economic incentives at the level of house owners and tenants are unimportant, as ambitious energy renovation codes could ensure that, over time, all parts of a house will be replaced with high energy quality alternatives. This is the subject of this section. When a building in Denmark is renovated, no matter the reason, it is required to be done in an energy optimised way, following the current 6
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building code (BR15) as long as it is economically feasible (Danish Ministry of Transport and Buildings, 2016). This means, theoretically, that energy renovations should be done continually in line with necessary building renovations, such as a new roof, facade, windows, etc. (Wittchen, K.B., Kragh, 2013). When looking into reconstruction or renovation of the building stock, there are three possible situations in the Danish building code; repair, replacement or reconstruction. In the first case, energy repair does not have to meet the renovation codes. In the second case, if part of the building is replaced, the construction must meet the current building code requirements. However, if the case is a reconstruction of a building or parts of a building, calculations are required to ensure that energy saving initiatives are feasible. Only if such initiatives are economically feasible is the owner obligated to implement the energy saving initiatives (Danish Transport and Construction Agency, 2016). In a renovation situation where a new roof is needed, or new windows are technically necessary, the renovation building codes will be implemented and may result in a 30% reduction in heat consumption (Wittchen, K.B., Kragh, 2013). This is based on the assumption that 80% of replacements and renovations will meet the building codes’ standards, and 20% will not. Meanwhile, the major issue is whether the renovation building codes can ensure this relatively high reduction in heat consumption against a headwind of very weak and/or even nonexistent heat conservation incentives. It would be too risky to assume that an 80% success rate in building code implementation will happen before 2050. The “before 2050” is essential, as a lot of supply side new investments in pipes, heat pumps, heat storages, wind turbines, biomass plants and geothermal energy has to be made before 2050. Reliance on the building code as a driving force for heat conservation has weaknesses within the following areas: First of all, if the economic incentives for replacing e.g. roofs and windows are not in place, it is often economically profitable and technically possible to prolong the lifetime of the building parts by means of repairs, which are not subject to any building code requirements. Thus, if a building's roof was built according to the 1979 building code, it can be expected to have an energy consumption of 180 kWh/m2, or more than double the optimal standard of 75 kWh/m2. A typical roof is made of tile, concrete etc. and has a technical lifetime of 50–70 years, similar to the lifetime of wall insulation (Aagaard et al., 2013). If the relatively high technical lifetime variability of roofs, wall insulation and windows is combined with a lack of any incentive for heat conservation at the landlord level (See Section 5.3), many landlords would tend to repair, rather than replace, windows, roofs, walls, etc. Therefore, there are strong indications that heat conservation resulting from renovation and implementation of the building code may be much lower than 30% within a 2050 time horizon. Summary of the heat conservation incentives. From chapters 5.1–5.4 it can be concluded that the economic incentives for energy conservation in rental houses are very weak, as summarized in Table 3. Table 3 summarizes the answers to the research question; Will energy conservation measures be implemented in the right amount, in time and in the right way. A rough conclusion is that the needed incentives regarding right amount, in time and right type of heat conservation are not in place. This conclusion is caused by levelized costs of energy renovation which are higher than heat tariffs in combination with energy renovation codes that can be circumvented by landowners with almost no economic incentives for energy renovation. Analysis of incentives in the RentalCal project (Brounen et al., 2018) clearly indicates that a similar lack of incentives for energy conservation are prevalent in an array of EU countries. In the following sections, it is analyzed how to improve the present deficient incentive system. Before that it is analyzed whether a change to 100% variable tariffs would represent a justifiable and efficient change of the incentive system.
6. From heat sector tariffs based on short-term marginal costs to smart energy system tariffs based on long-term marginal costs and benefits A typical heat bill for a 75 m2 apartment with an annual heat consumption of 10 MWh would in the city of Herning be 8450 DKK (1126 €)1 divided into 3588 DKK (478 €) as fixed payment and 4862 DKK (648 €) as variable payment. The philosophy behind this existing tariff structure illustrated in Fig. 3 is described in an official Tariff report from 2009 (The Danish Tariff Committee, 2009), which argues that the present tariff structure reflects the cost structure of the existing district heating supply sector. This tariff philosophy can be named the 3rd generation district heating tariff philosophy where the tariffs are derived from the cost structure in an established heat sector-based energy system. In this system, the variable part of the heat bill is the short-term marginal costs of the heat deliverance from a heat plant, and the fixed part of the heat bill reflects the investment costs in the heat plant, district heating networks, etc. This 3rd generation district heating tariff philosophy assumes that (a) the variable costs in existing heat supply systems are a valid representation of the long-term marginal costs of the heat supply system 10–20 years from now, and (b) all benefits of energy conservation can be found within the existing basically unchanged heat supply sector. This 3rd generation tariff philosophy is problematic due to an array of reasons: 1. It results in short-term supply side marginal costs that compete with the long-term marginal costs of new energy conservation measures, and thus tend to generate overinvestment in supply side technologies. 2. Overinvestment in the supply side may be especially economically harmful in the ongoing transition due to the increased asset specificity in a 100% renewable energy based heat supply system. Possible overinvestments in a renewable energy based smart energy supply system with heat pumps, heat storage systems and district heating networks cannot be removed and used elsewhere. Due to the high asset specificity of this heat supply system, the green energy transition enhances the need for in time heat conservation in order to avoid getting trapped in supply side overinvestments. 3. From sector-to energy system based benefits of heat conservation. Society is heading towards replacement of the present heat supply system with a smart energy system (Lund, 2014) where heat, power, transportation, etc. will be increasingly interrelated. This district heating system is called a 4th generation district heating system (Lund et al., 2018), and the 3rd generation tariff philosophy described above is no longer applicable in a smart energy system with heat conservation benefits being distributed between the different actors in an integrated energy system. Efficient energy conservation can make low-temperature heat supply possible without new investments in district heating pipes which increases the efficiency of wind power driven heat pumps, and increases the competitiveness of wind power for heat, the use of industrial waste heat as well as geothermal and solar energy. 4. Because of this period of energy system transition where very large parts of the supply system have to be replaced by new investments. In the long run all costs are variable. When dealing with strategical optimization between supply and demand sides, tariffs based on long-term variable costs thus give the right price signal, and 100% variable tariffs that encompass these long-term variable costs therefore seem well substantiated. The needed changes in tariff policy are summarized in Table 4. The above arguments are lines of reasoning against the present heat 1
7
1 € is 7.5 DKK.
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Table 3 Incentives for heat conservation in Danish rental houses. I. Incentive type
II. Incentive effect
III. The reason behind incentive deficiency
1. Does the optimal amount of heat conservation yield a positive economy?
No, only a small amount of the optimal heat conservation investments have levelized costs that are lower than heat tariffs.
2. Do the heat conservation subsidies compensate for the negative economy? 3. Does it pay for the landlord to invest in heat conservation?
No, the subsidies are only 2–5% of the heat conservation investment. In general no, as the economy is mostly negative, and landlords mostly cannot increase the rent more than the induced reduction of the energy bill. Not to a sufficient extent, as many energy renovation measures do not yield a positive economy, and therefore will be postponed as much as possible. The incentives are far too weak to generate the right amount and type of heat conservation in time.
One important reason for this incentive deficiency is the fixed tariff share which on average is approx. 30% of the heat price. Another is the general lack of long-term low-interest loans for energy conservation that do not have a positive Net Present Value. The subsides are too small to compensate for the negative NPV.
4. Will building renovation codes ensure the optimal heat conservation level in time? 5. Summarized incentive effects.
In 75% of the cases the landlord can only increase the rent by the reduction in the energy bill. It is possible to avoid meeting the legislative renovation codes by extending the technical lifetime of building parts by means of repairing instead of renovating. The incentive deficiency is strong and interwoven. A key to the deficiency is the lack of positive economy for heat conservation with present tariffs. This problem under (1) enhances the incentive problems under (2), (3) and (4).
Table 4 From tariffs based on heat sector cost structure to tariffs based on system cost structure and long-term marginal costs. Range of investment horizon
3rd generation district heating
4th generation district heating
Time range: Time horizon and supply system change Space range of investment Resulting tariff system
Fossil fuel sector based
Strategic transition to renewable energy based supply system
Sector based heat supply 3rd generation tariff system based on the short-term marginal cost structure in existing supply systems
Integrated smart energy system 4th generation tariff system based on long-term marginal costs in a smart energy system structure
analyzed incentive areas in Sections 5.1.-5.4. This is based on the conclusion in Table 4 that the root of all four incentive problems is the combination of high fixed tariffs, low-interest long-term borrowing difficulties resulting in levelized costs that are above variable tariffs for most investments in heat conservation. If the energy conservation investments have a positive net present value, renovation in accordance with the building codes will thus become economical, and the landowner will profit from investing in renovation instead of trying to postpone this with repairs, etc.
supply tariffs philosophy reflecting the cost structure of the existing heat supply system. Following the arguments below, we recommend 100% variable tariffs as a first step in a tariff reform. Changing to 100% variable heat tariffs is an approximation, mainly based on the argument above that the present situation is a system transition where all costs are variable. In addition to this argument, external energy system heat conservation benefits, discussed above and in Section 2 points a-f, indicate that a change to 100% variable tariffs might even underestimate the energy system value of heat conservation. Furthermore, the conclusion in Fig. 4 will show that a 100% variable tariffs scheme is part of an incentive structure leading closer to an optimal level of heat conservation.
7.2. Effects of the three policy suggestions Fig. 4 shows the calculated energy conservation consequences of a reform that includes the above recommendations for 100% variable tariffs in combination with a public guaranty that makes 30 year, 2% loans possible. The horizontal red line shows the cost of 1 MWh energy conservation when the investment cost is 12.1 DKK per 1 kWh/year saved in the technical lifetime of the investment (or 540 DKK per saved MWh). The interest rate is 2% p.a. and a 30 year annuity loan is considered. The green line shows the same for the 8.8 DKK per kWh/year saved in the technical lifetime of the investment resulting in 390 DKK per saved MWh. As seen, the case of 8.8 DKK per 1 kWh/year saved in the technical lifetime (green line) is economical in most of the district heating companies, even when maintaining the current tariff distribution on the fixed and variable parts. However, this measure of conservation only represents 1/6 of the savings needed to reach the 40% reduction in energy for heat and hot water. The red horizontal line, showing the cost of the 12.1 DKK case, indicates that positive energy conservation incentives are only present in approx. 50% of the district heating companies. This means, at the least, that a combination of 30 year loans and 100% variable tariffs is necessary. Fig. 4 illustrates that a change to 100% variable tariffs (adding the blue and orange columns) will result in the levelized costs of energy conservation being lower than the blue and orange columns combined in all the district heating companies.
7. Analysis of a new incentive structure 7.1. Incentive suggestions in the Danish case This section analyzes the effects of two policy reforms derived from the incentive analysis in Section 5 and the tariff discussion in Section 6. The reforms to be tested here are a combination of: 1. Introduction of 100% variable tariffs. 2. Public guaranty for 2% interest/30 year energy renovation loans. 3. The loan guaranty is only given if the heat conservation investments are in accordance with the recommendations in the energy report made by a certified energy consultant. Public guaranty for loans is recommended for the following reasons: In most houses the owners can easily take out loans. Others have difficulties, however, and even if as little as 10–20% of the households cannot finance heat conservation measures, a transition to low-temperature district heating systems could be hindered. Consequently, a financing system that allows everyone to invest in heat conservation measures is essential in a transition to low-temperature district heating systems. This article it limited to testing these three reforms out of the four 8
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Fig. 4. The effects of the two policy reforms.
7.3. Further specification of the policy reform consequences
conditions shown in column 4. It should be noted that the heat and hot water conservation results may be underestimated, especially in the third column, as the energy renovation codes might induce more heat conservation. This will be the case if repairs that are not required to meet these codes do not replace energy renovation. As seen from this figure, and the numbers in Table 5, the reduction of heat consumption is approx. 55% for the conditions described in column 5, or slightly more than the optimum level indicated in Table 2. It is reasonable to assume that heat conservation transaction costs may lower the heat conservation incentive for which reason the 55% heat conservation with a positive NNP might be reduced to a number closer to the optimal heat conservation rate. It should be underlined that the above calculations are based on the economic incentives built into the energy systems. They do not include savings linked to implementation of the energy renovation codes. Thus in practice the third column will be lower than shown in Fig. 5. How much lower is difficult to say, however, as there are ample opportunities for landlords to conduct cheap repairs instead of more expensive renovations, and in that way avoid having to adhere to the renovation codes.
The calculations behind Figs. 3 and 4 only deal with the two conservation investment costs of 8.8 DKK and 12.1 DKK per annual saved kWh in the technical lifetime of the energy conservation investment. Meanwhile, different cities have houses situated in different distributions of the heat conservation investment cost as the numbers show in Table 1: 8.8; 9.9; 11; 12.1; 14.5 and 16.5 DKK per saved kWh in the technical lifetime of the investment. The profitability linked to the concrete different ages of apartments and the associated energy conservation costs in different cities/district heating areas has been investigated. This is done by calculating the expected energy conservation ratio linked to the specific 8.8–16.5 DKK distribution and the specific heat tariffs in the specific city/district heating area. The cities shown in Table 5 represent an extract of the heating area in Table 1 (76%) under “savings”. Going from current heat consumption to scenario A represents a saving of 60%, or 4728 GWh in annual heat and hot water consumption. As seen in column 4 in the bottom row of the table, the total heat and hot water savings with a positive net present value are only 359,780 MWh/year. The results of Table 5 are summarized in Fig. 5. The left column shows the present heat and hot water consumption in the cities listed in Table 5. The Scenario A column is from (Kragh and Wittchen, 2010). The third column shows the heat and hot water consumption under the assumption that all conservation investments implemented have a positive net present value with a 20 year loan and a discount rate of 3% p.a. In this case it is assumed that investors ascribe the investment no value after the 20 year period (see discussion in Section 3). The fourth column shows the consumption level when assuming a 30 year loan and depreciation period and a 2% discount rate. In the last column, a 100% variable tariff reform is added to the
8. Conclusion and policy implications In a transition from fossil fuels to a 100% renewable energy based supply system, heat conservation strategies are entering a fundamental paradigmatic change. This encompasses that the value of heat conservation is increased, and that it becomes increasingly important to implement heat conservation in the right amount, in time and of the right type. The “right amount” request is a generally applicable new condition linked to a transition to 100% renewable energy, meaning that in such 9
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Table 5 Heat conservation in GWh/year in different institutional scenarios in different district heating areas. Own calculations based on the Danish Heat Atlas and (Kragh and Wittchen, 2010). Demand GWh/year
Annual savings with positive present value Scenario A
2014
Scenario A
Aalborg Aarhus Albertslund Esbjerg Fredericia Frederiksberg Gentofte Gladsaxe Helsingør Herning Høje-Taastrup Holstebro Horsens Hørsholm Hvidovre Ishøj København Køge Kolding Næstved Odense Randers Rødovre Roskilde Silkeborg Slagelse Tårnby Vallensbæk Vejle Viborg
444 772 41 192 100 652 252 152 118 108 85 69 125 45 123 52 2802 70 121 91 368 188 88 123 94 140 92 19 159 98
175 302 16 75 39 255 100 59 46 42 32 27 49 18 48 20 1106 27 48 36 144 74 34 48 37 55 36 7 63 38
Total savings (Total demand)
7783
3056
Present tariffs
100% variable tariff
3% 20 years
2% 30 years
2% 30 years
270 470 25 117 61 397 152 93 72 65 53 42 75 28 75 32 1696 43 73 56 223 114 54 75 56 86 56 12 97 59
0 0 0 0 0 0 0 0 37 0 0 10 0 7 0 0 152 38 29 0 0 55 0 0 0 0 0 0 0 27
0 198 23 51 0 68 10 10 71 18 52 42 31 26 57 32 1684 43 73 35 37 114 22 62 33 49 8 12 47 59
200 469 25 117 61 396 152 93 72 65 53 42 75 28 75 32 1696 43 73 56 162 114 54 75 56 86 56 12 97 59
4728
360
2968
4595
systems the right balance between investments in energy supply systems and demand side energy efficiency must be found via an investment optimization process. In the Danish case calculations indicate (Thellufsen and Lund, 2015) that the optimised Danish balance between investments in supply and demand measures seems to be at an average heat and hot water consumption of approx. 80 kWh/m2 for old buildings and 55 kWh/m2 for new buildings.
The “in time” request is also a generally applicable new condition linked to the increased supply side asset specificity in a transition to 100% renewable energy systems. It refers to the importance of investing in demand side efficiency measures before dimensioning and investing in new energy supply systems, in order to avoid costly supply side overcapacity. The importance of investments in demand side efficiency in time has been strongly increased due to a transition from a fossil fuel
Fig. 5. Heat consumption in 2014, and with different scenarios.
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based energy supply system with relatively low asset specificity to a renewable energy based supply system with high asset specificity. The “right type” request is generally applicable in a transition to 100% renewable energy based heat supply systems. It means that heat conservation activities must be coordinated with a systematic transition to low-temperature district heating systems. In order to establish incentives for heat conservation activities, the following specific reforms in the Danish system are suggested: A change of tariff policy from energy sector-based to energy-systembased tariffs. This is substantiated by costs and benefits of energy conservation that are not only present within the heat supply/heat consumption sector; rather, they can be found throughout the entire energy system. A first step towards energy system tariffs can be a combination of establishing 100% variable heat tariffs in district heating systems, and providing a guaranty for 30 year, 2% loans, and an energy consultancy scheme linked to these reforms in order to ensure that all house owners have the opportunity to invest in heat conservation measures. Access to the loan guaranty should only be given if an energy consultant has made a heat conservation report showing the amount and type of needed energy renovation measures. It should be underlined that despite being described by means of the Danish case, the conclusions regarding the requests for right amount, in time and of the right type are generally applicable. The policy measures regarding 100% variable tariffs and public financial guaranty also seem generally applicable for district heating systems. 100% variable tariffs are even more relevant in a new district heating system when optimizing supply side investment measures against investments in demand energy efficiency. Public loan guaranty may also be a generally applicable policy suggestion furthering that all house owners can participate in energy conservation activities that make low-temperature district heating systems possible. Our cost and benefit calculations indicate that by means of these rather simple and, in terms of state budget, cheap reforms, the door to “positive net present value” has been opened for achieving the desired level of energy conservation before 2050 in the right amount, in time and of the right type. Meanwhile, it should be underlined that micro heat conservation management will still be needed, especially with regard to the development of concrete technical and tariff solutions that further a synchronization of heat conservation with the development of the right types of low-temperature district heating systems.
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