Open district heating
network in Greater
Stockholm
Stockholm, June 2009
Foreword
This report is the result of an initiative by the Stockholm Property Association
(Fastighetsägarna). It has been produced on behalf of a joint venture involving the Stockholm
Property Association, E.ON Värme Sverige AB, and Vattenfall AB Heat Nordic. The parties'
common desire is for this work to contribute to improved competition on the district heating
market in the Stockholm area. This report is an attempt to describe how such improved
competition conditions could be realised.
At present, over 90 per cent of Stockholm's apartment buildings are heated by district heating.
District heating offers significant advantages, as it has a record of good environmental
performance and excellent availability. District heating is an effective and convenient form of
heating in urban areas. District heating as a market is currently characterised by local
monopolies, with biased pricing and very limited scope for negotiations between customer and
supplier, which has resulted in falling confidence in the district heating industry.
From the customer's perspective, the good technical and environmental benefits offered by
district heating contrast sharply with its current shortcomings from a market perspective. By
developing market functions and retaining the good technical properties of district heating,
conditions are created for a long-term sustainable form of heating, with bolstered confidence
among customers and suppliers. With a view to developing district heating and rebuilding
customer confidence, E.ON Värme Sverige AB, Vattenfall AB Heat Nordic and the Stockholm
Property Association believe that district heating customers should eventually be given the
opportunity to choose their own supplier.
Method
This report has largely been produced by an external consultant, supported by an active
working group whose members include representatives of the aforementioned parties. It is
important to point out that participating district heating companies have not in any way
discussed mutual price-fixing, each company's market strategies, or similar issues in connection
with the implementation of this venture.
This report has been written by consultant Björn Dahlroth. Björn has unrivalled knowledge of
district heating in the Stockholm area from his previous employment. His knowledge and
commitment have proven invaluable during this project. The report itself should be regarded as
a consulting assignment where the consultant is responsible for the factual content, assessments,
and any statement of principles.
Stockholm, June 2009
Christer Jansson, CEO,
Stockholm Property Association
Per Forsling, Energy Specialist,
Stockholm Property Association
Kurosh Beradari, Head of Business
Development, Vattenfall AB Heat
Nordic
Stig Andersson, Senior Business
Developer, Vattenfall AB Heat Nordic
Peter Engström, Head of Business
Development, E.ON Värme Sverige
AB
Maria Lindroth, Head of
Strategy,
E.ON
Värme
Sverige AB
OPEN DISTRICT HEATING NETWORK IN GREATER
STOCKHOLM
Björn Dahlroth, April 2009
Summary
The Greater Stockholm area is the area in Sweden with some of the best possible conditions for
opening up district heating systems and creating competition between players. There are already
five major district heating producers – Fortum1, E.on2, Norrenergi, Söderenergi and Vattenfall3.
Söderenergi supplies district heating to two distributors, Tälje Nät and Södertörns Fjärrvärme
AB. The district heating company Sollentuna Energi is quite a large distributor with little own
production, so it purchases the majority of its district heating energy from Fortum. The district
heating systems in Greater Stockholm are already partially interconnected. These
interconnections were originally established to encourage joint ventures with the aim of
reducing production costs. However, lower production costs are no longer a guarantee of
long-term reduced selling prices for district heating.
District heating has encountered some competition within this field from other forms of heating
for which there are new areas and new customers for connection. Once connected, however, a
customer is often essentially locked in with their chosen supplier because of the high costs
sometimes associated with switching to another form of heating. Opening up district heating
distribution systems to competition could potentially lead to the limitation of price trends and
bring about greater variation in properties and agreement structures for district heating as a
product.
The report discusses the issue of natural monopolies and the peculiar properties of district
heating, which account for the differences between a district heating market and those for
electricity and natural gas, for example. There are also descriptions of the production structure
in Greater Stockholm and the scope for regional transmission between different district heating
areas. Simple illustrative calculations have been included which show that there are quite major
differences in marginal variable production costs (NB not prices) for heat energy between
different areas, even if we assume that costs for raw materials for production, fuel and
electricity, are similar. These calculations are based on current district heating systems, but
assume that Söderenergi's, Fortum's and Vattenfall's biomass power and heating projects have
been completed.
Taking into account the assumed fuel and electricity costs it appears that the differences
between the simultaneous highest and lowest variable marginal cost among producers varies
throughout the year, and that the range of variation is as much as 20 to 40 öre/kWh, excluding
VAT. It is not always the same company that is highest or lowest. If you look at a complete
heating season and factor in the variable production cost for the marginal customer, the
difference between the highest and lowest company is in the region of 30 öre/kWh. These
differences are explained by existing disparities in production, which in turn can be explained
by producers' facilities having been built while different energy policies were in effect. The
difference in variable costs is also reflected in district heating prices, but not to the same extent.
1
Actually AB Fortum Värme co-owned with City of Stockholm. Referred to in this document as "Fortum".
2
Actually E.ON Värme Sverige AB. Referred to in this document as "E.on".
3
Actually Vattenfall AB Heat Nordic. Referred to in this document as "Vattenfall".
These differences indicate that freer trade could have an equalising effect on costs and possibly
also, in some way, on heating prices.
Greater consideration of operating in line with variable costs in a fully interconnected system
could significantly reduce the mentioned range of variation.
Increased trade in heat energy between producers leads to a levelling out of the variable costs
and, probably also, to some levelling out of district heating prices, but if competition for
customers develops at the same time, this is likely to lead to stronger price equalisation. In order
to be able to guarantee in the long term that competition will have an impact on prices, it is
necessary for the buyer to have considerable freedom of choice when it comes to choosing and
signing agreements with the various producers or sellers on the district heating market. Freedom
of choice for buyers, particularly where this is an end user, also provides scope for a certain
amount of diversification in district heating as a product. The opportunity to diversify can bring
about other important values for freedom of choice and competition, but what these could be is
for the future and customers to decide. However, the report mentions confidence, payment
terms, service, and environmental aspects. Deciding not to choose something can be just as
important.
The report looks at four different methods of organising heat energy trading - market models A,
B, C and D.
Block trade
System optimisation
Combined offers.
Optimisation by
suppliers
One buyer
Multiple
buyers
A
B
D
C
Two of these models are "multiple producers/one buyer" and two are "multiple
producers/multiple buyers". The last of these, D, involves a heat exchange market on which
players can deal in heat energy. It should be possible to open up the market gradually, switching
to the preferred model for one customer category after the other in turn and at an acceptable
pace for the technical and administrative changes that will be necessary. Once one model is in
use, it should be possible, using a similar method, to switch to another one gradually. The
models are related to one another to a certain degree but in different ways. If, for example, D
were to be regarded as the ultimate and most desirable model, you could achieve this starting
out from either A or C. The models with "one buyer" are price focused, while the other two are
intended to afford some product differentiation as an element of competition.
All these models include a proposal that the right of disposition over the natural monopoly, i.e.
the transmission and distribution systems, be transferred to a single common systems operator
for the entire region. Ownership of the systems operator is an essential issue, as is the need for
transparency in its activities. One possibility is making it a legal entity where the current
network owners become part-owners, contributing their networks in payment. Other
part-owners might, for example, be municipalities and customer organisations. Instead of
contributing networks in payment, right of disposition could be ensured by assigning networks
to individual network companies and by means of long-term rental agreements between these
and the systems operator. The systems operator must be run as a profitable operation in order to
ensure a return on major investments in conduits and pumping stations, and to enable continued
expansion of district heating. Relatively low risk within the operation should provide a
reasonable required return. However, there are other heating options, particularly in urban areas
where heating is sparse, so there is a slightly greater risk than is the case for electricity network
operations, for instance.
The four models have different advantages and disadvantages as mentioned in the report, but no
overall preference is expressed for one or the other of them.
Should the networks be opened up with the aim of creating scope for competition and
equalising production costs, system integration should be increased with two brand new
regional interconnections. If not immediately, then certainly within a few years. Traffic through
any bottlenecks can be arranged by commercial means. The methods for this can be the same as
those discussed and used for the electricity market, but the report also briefly describes another
method which involves auctioning off utilisation of capacity in bottlenecks.
If in the longer term there is a desire to maintain trade that can run virtually unhindered by a
lack of capacity in bottlenecks, the transmission systems must be strengthened. Two new regional interconnections, plus increased capacity in the existing regional transmission network, is
estimated to cost between SEK 2 and 3 billion. The cost is comparable with those for
construction of additional new biofuel-fired electricity and heating plants, which, suitably
located, could reduce the pressure on heat transmission through bottlenecks. SEK 2.5 billion
spent on the entire district heating load over 25 years, with a return in proportion to the low
commercial risk for pipe systems, which will always be a natural monopoly, is less than 2
öre/kWh for distributed district heating. This cost is insignificant compared with the reduction
in the range of variation in variable costs that could be achieved, and hopefully less than the
lowering or dampening effect on prices which increased competition might lead to. It can also
be supposed to be moderate in relation to other less-calculable benefits which could be achieved
in the future thanks to increased integration and trade. Examples of such benefits might be a
possible network for future waste heat from energy combines and a positive effect on possible
sites for new installations.
Greater Stockholm is a region with a growing population. The limit for growth cannot be predicted only studied based on suppositions. What we do know for certain is that new production
facilities for district heating will be required, and that we will have to deal with much greater
quantities of greenhouse gas-neutral fuels for district heating production. Ports and railways are
needed for fuel logistics, power lines for electricity production. Energy plants, other
developments, and conservation concerns are competing for land in those areas of the region
where the population is increasing and new developments are being planned. If increased
system integration is able to address these problems in some way, this would be a significant
step towards the improved supply of district heating in the Greater Stockholm area. At present,
it is not only the district heating network that can be described as a natural monopoly. The
benefits of being able to utilise sites with good logistics for the ever increasing volume of fuels
required and with good potential connections to the district heating system and to power lines
are also characteristic of a natural monopoly. Without exception, a good site is essential for the
competitiveness of future new facilities. An open district heating market therefore places greater
demands on the overall approach taken by the municipalities involved when applying their
planning monopoly, so that competition conditions are not distorted.