Nordic district heating and energy system flexibility : challenges and opportunities

Abstract

This thesis presents framework conditions for Nordic district heating and barriers and opportunities for flexibility in the district heating – electricity interface. District heating has advantages and disadvantages. Security of supply, flexibility in the energy system and increasing the renewable energy share are arguments that have qualified for an investment support scheme for district heating in Norway. The district heating markets have several characteristics of market failure, such as natural monopoly, externalities and asymmetric information. The Nordic countries have different measures to correct for these market failures. In contrast to the homogeneous electricity market, the framework conditions for district heating vary greatly between the Nordic countries, and the tax systems are complicated and have many exceptions. The district heating sectors are also largely affected by framework conditions aimed at other targets. Among disputed areas of great relevance for the district heating sector are sustainable use of biomass and waste. Norwegian district heating is limited compared to Danish, Finnish and Swedish district heating. The main reason is not the economic and political framework conditions, but rather of historical reasons. Electricity has gained a unique position in Norway, where electricity is relatively cheap; the infrastructure is built around hydro power and electricity has become a natural source of heating. The district heating sector can contribute to decarbonizing the energy sector and can potentially be a significant provider of energy system flexibility. District heating can be produced by heat pumps or electric boilers when there is excess power supply in the system and use other fuels than electricity when there is a power shortage. When the power prices are high, combined heat and power plants can produce electricity. Excess heat can be stored in tanks. In this way it might be profitable for the district heating producers to contribute to increasing the uptake of renewable power. Results show that thermal storage is a no-regret investment. This is, however, mostly due to the fact that it enables increased utilization of the base load technology. Allowing thermal plants to run on partial load reduces the relative competitiveness of heat storages, suggesting that flexible thermal power plants are important providers of flexibility. The Balmorel model results show that investments in heat storage are largest in Denmark, where the need for flexibility is greater. Investments in electric boilers and heat storage correlate, suggesting an efficient interaction between these technologies. The results, however, further suggest that, under the current economic framework conditions and spot market prices, electric boilers are not competitive in the market for heat and that CHP plants are not profitable without a subsidy. Less flexible technologies, such as heat-only biomass boilers and heat pumps, are more competitive and are used as base load. The flexibility potential of the district heating sector is thus largely unutilized. A fixed load demand component of the electricity grid tariff is one example of a barrier for energy system flexibility in the district heating – electricity interface, because it makes flexible electric boilers less competitive. A tax exemption for biomass-based fuels weakens the competitiveness of CHP in relation to biomass boilers.