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The profitability and role of district heating in the energy system is closely linked to developments in the power market, the cost of new generation and grids, and the value of flexibility in the energy system.
Heat demand can be met by several energy solutions, of which district heating is one of the alternatives to electricity. District heating can therefore relieve the energy system by supplying energy for space and water heating, by reducing the need for peak-load capacity and thus also the need for grid capacity on the coldest days when demand for heat is highest. District heating can be produced in several ways and often has a flexible production apparatus, which can contribute to better utilisation and cost efficiency in the energy system.
Efficient development and utilisation of district heating requires effective regulation
Like electricity supply, the costs of district heating are characterized by significant infrastructure investments. For district heating to be a cost-effective alternative to electricity or local heating solutions and be established on a sufficient scale, a system and area perspective on development is required. The challenge lies in designing regulations that consider both system benefits and costs and the fair distribution of costs among district heating customers. This is one of the reasons why district heating is subject to licensing processes and is regulated through connection obligations and price regulation.
The green transition is changing the value of district heating in the energy system
The green transition, with rapidly increasing electricity demand and reduced costs for local heating solutions, is affecting the role of district heating in the energy system. On the one hand, increased use of district heating can help to make room for more customers in the grid. On the other hand, the spread of local solutions, such as heat pumps and solar systems, can be cheaper for individual customers, but at the same time undermine the overall value of district heating and result in higher total energy system costs.
In an evolving energy system, questions will therefore continue to arise regarding the regulation of district heating, the incentives for district heating companies to provide flexibility, and whether the customer perspective is adequately addressed. These questions require a holistic socio-economic approach and in-depth insight into the characteristics of different energy solutions.
Framework conditions for the waste sector and CO2 emissions are important for the economics of district heating
District heating production is to a significant extent based on waste incineration and results in emissions of both fossil and biogenic CO2. Emission reductions from waste incineration are therefore closely linked to district heating production, and carbon capture from waste incineration is seen as necessary to achieve climate targets.
Many district heating companies therefore have plans for carbon capture and utilisation. This is also an area where framework conditions and policy instruments are developing, both at EU and national level, and where there is a need to regard the various parts of the energy system and climate policies in the overall context.
Like district heating and electricity, carbon capture and storage are systems that depend on the efficient development and operation of infrastructure.