Heat –The New Generation Transformation of the heat sector in Europe March 2015 Research Contact Deborah Mann, Director European Gas, Power and Renewables +44 20 3159 3333, Deborah.Mann@ihs.com Coralie Laurencin, Associate Director, European Gas, Power and Renewables +44 20 3159 3346, Coralie.Laurencin@ihs.com Commercial Contact Cristian Muresan, Commercial Director, +33 1 76 76 30 96, Cristian.Muresan@ihs.com

Why focus on heat now? New policy. Energy Union package 2015 Strategy to facilitate investment in heating and cooling to be developed; Smart financing for smart buildings initiative. Recent directives: Energy Efficiency; Building Performance; Ecodesign Europe could do a lot more to improve energy efficiency by using heat more effectively. Greater matching of heat source and heat demand is key—temperature as well as location. Mapping by end 2015 will help New technologies are emerging that use low temperature heat sources for space heating. Retrofitting is possible. Hybrid systems look particularly interesting Heat storage is being developed—short-term and seasonal—and could contribute to balancing the electricity grid, through heat demand response, as more intermittent electricity is integrated New business models emerging. More consideration of heat in policy development needed. Smart controls will be an enabler

Balancing the electricity grid Progress on heat will help the EU reach its climate and energy policy targets Energy efficiency Energy Union 2015: efficiency gains in heat will increase security of supply: Strategy to facilitate investment in heating and cooling to be developed, Smart financing for smart buildings initiative, Recent directives: Energy Efficiency; Building Performance; Ecodesign By end 2015 all EU member states to assess opportunities for combined heat and power (CHP) and district heating and cooling (DHC), including detailed mapping of potential Decarbonization European target for 80% decarbonisation by 2050 means phasing out of unabated gas from power and heat, as well as oil and coal. Balancing the electricity grid Heat storage and management can help balance the electricity grid, which will become an increasing issue because of: Increased share of intermittent renewables, Higher seasonal swings as electricity takes on more of the heating burden.

Three paths for low-carbon heat Heat technology Features Electrical heating Distributed electric heat pumps Electric storage heaters Conventional electric peak heat Central generation by nuclear, hydro, wind, large scale solar, marine Distributed solar PV maximized Coal phased out, then gas Electricity grid takes burden of transporting and storing energy Heat networks CHP heat from waste incineration, biomass, nuclear, coal, gas Waste heat from industry Solar thermal, geothermal, large scale water source heat pumps Electric cartridges use excess wind Networks provide heating and cooling Short-term and seasonal energy storage can be provided at network scale by hot water storage Suited to urban redevelopment Distributed high-efficiency gas heating High efficiency gas boiler-electric heat pump hybrids Increasing incorporation of solar thermal into hybrid heating systems Micro-CHP and gas absorption heat pump in commercial, then residential Existing gas grid continues to be used Storage capability of gas grid helps to balance electricity system Biomethane and green gas can replace some natural gas Smart controls enabler Biomass boilers can co-exist Source: IHS © 2015 IHS

Heat: potential impact Final energy is only 70% of primary energy—the rest is lost as heat About half of all primary energy is lost before it gets to the end use Heat and cooling represents 45% of all final energy—potential is large to use lost heat Lost as heat If we could convert all EU28 current gas generation into CHP we could save over 200 TWh(th) If we could increase the share of renewable heat to 29%* by 2030 from renewable heat Europe could save 600 TWh(th) of fossil fuel * Approximately in line with 27% overall renewables target for 2030

Key questions answered by the study What heat technologies are set for growth? Will smart hybrid systems provide domestic heating of the future? What will the future of CHP be? Will heating and cooling networks grow? What is the long-term future for distributed gas technologies to provide low carbon heating and power? What will be the growth of renewable heat ? What policies are needed for heat to be used effectively? What is the EU considering to support efficient use of heat? Policy success factors Funding the transformation of the heat sector How will this affect the landscape of existing players ? Which technologies will emerge as leading technologies How much gas and electricity could be displaced by more efficient use of heat? Impact on the current landscape of heat suppliers Is this an opportunity for gas and electricity suppliers?

Which technologies will emerge as the leading heat providers? Distributed heating Electric heat pumps Gas absorption heat pump Gas adsorption heat pump Hybrid systems Smart home heating Solar thermal Biomass Biogas (commercial / agriculture) Thermal storage Short-term Seasonal District heating and cooling networks CHP Heat pumps Solar thermal collectors Electric heating Cogeneration of heat and power Gas Biomass / biogas Concentrating solar thermal Geothermal Nuclear Overriding ambition is to cut emissions Confirms the /4 target set out in 2003. France wants to come to the Paris 2015 COP with an exemplary position: ambitious targets, leader in policy implementation A wide range of sectors are covered by the targets: reduction of energy consumption, with a strong focus on power and transport, increase in energy efficiency focused on households, capping role for nuclear, Renewables: increased targets, some measures for renewable heat and DH networks Increased visibility through planning: government planning, planning for regions and planning by energy incumbents (EDF), annual gvt report on state of financing The law is also used to prepare for some upcoming reforms: hydro concessions, renewable energy change of incentive support, ELV? Enablers Smart heating Other

I. Current heat market landscape and future potential Study scope I. Current heat market landscape and future potential II. How can policy unlock the potential III. Impact of a transformation of the heat sector, opportunities and threats

Study Part 1: Current heat market landscape and future potential Key analysis Deliverables Overview of heat market, Current competitive landscape of heat providers, assessment of current business models, Mapping heat production, distribution, storage and management technologies, Potential of new heat technologies Workshop #1 Table mapping technical characteristics of heat technologies Dataset of maximum potential technology capacity Economic evaluation of heating technologies Methodology Current heat market landscape 1 2 3 Maximum potential for each technology Supply and demand fundamentals Competitive landscape Available technologies

Study Part 2: How can policy unlock the potential? Key analysis Deliverables Workshop #1 Mapping barriers to change Review of existing EU and national policy Identification of best practice Identification of signposts for transformational policy Evaluation of the evolution of heat regulation: what has been done, what has worked, where, what has failed? Where is the change coming from? Specific barriers to heat technology pick-up EU policy outlook: where is EU policy headed and how will it support a transformation of the heat sector? Assessment of national policy best practices: which countries are leading on heat policy or are likely lead on heat policy, Transformational policy drivers Mapping barriers and resolution opportunities. Case studies Mapping policy approaches 3 Identification and outlook for transformational policy EU Policy Second energy package 2020 energy and climate policy package First energy package Third energy package Methodology 2 1 Barriers 1996 2003 2007 2009 2013 Solar PV boom Financial crisis National policy Case studies Best practice

Competitive landscape Study Part 3: Impact of transformation of the heat sector, opportunities and threats Key analysis Methodology Technologies Demand outlook Policy What is the impact of the transformation of the heat sector? Outlook for the heat market under two scenarios: Rivalry and Autonomy Heat demand out to 2040, Which technologies will provide heat in 2040, how different is that from today ? Does the change in heat supply and demand impact sales of power and gas to provide heat? What are the new business opportunities linked to the transformation of the heat sector and which companies are best placed to take advantage of them? Deliverables Workshop #2 Supply and demand data sets, by country and by technology in each of the two scenarios Outlook for competitive landscape under two scenarios. Key results of market analysis for existing suppliers of heat and new opportunities Supply and demand Competitive landscape

Case studies—a deep dive into selected countries Historical policy Current focus for heat Geographical and resources Gas grid structure Economic activities (industry/agriculture) Heat demand picture Lessons learned Country Features Denmark Advanced penetration of district heating and renewables France High share of electrical heating, focus on district cooling, heat pumps, solar thermal Netherlands High share of industrial CHP, well developed gas grid, focus on biogas Poland Old district heating network, high share of coal United Kingdom Well developed gas grid, new focus on heat policy, high population growth

Details of deliverables Study Part 1 and 2 Workshop slides Maximum potential will include economic analysis by technology at a regional level for 4 regions New technologies considered will include: District heating CHP Renewables: Biomass, biogas, solar thermal, geothermal Heat pumps (electric, gas absorption, adsorption) Hybrid heating systems MicroCHP Electric heating Thermal storage (short term, seasonal) Smart controls Case studies for 5 countries: United Kingdom, Netherlands, Poland, Denmark, France Technology and barriers mapping tables Study Part 3 Workshop slides Overall study executive summary written report Excel spreadsheet energy balances for 35 countries for two scenarios Gas, coal, oil, electricity, renewables and heat Additional excel spreadsheet detail with historical data and outlook to 2040 for the following heat sources: Gas (standard gas boilers, condensing gas boilers, and gas heat pumps) Electricity (standard electric heaters and heat pumps) Renewables (biomass , solar thermal, geothermal, and renewable produced from heat pumps) Centrally generated heat supplied commercially by fuel (including CHP) broken down by: Gas, coal, oil, electricity, combustible renewables and other renewables

Timeline of workshop and deliverables Study kick-off and 1st workshop 2nd workshop July 2015 November 2015 Setting the scene Maximum capacity Policy capability Supply and demand outlook Opportunity and threat

IHS team members Core Project Team Expert Advisory Team Project Sponsor Catherine Robinson Senior Director IHS Energy Insight, Europe Project Manager Deborah Mann Director Policy lead Coralie Laurencin Associate Director Heat modelling lead Michael Chettrit Associate II Renewable heat lead Marianne Boust New business models lead Susanne Hounsell Scenarios modelling Paul Roulleaux Dugage Associate I Expert Advisory Team Shankari Srinivasan Vice President, EMEA, Power, Gas, Coal, Renewables Simon Blakey Senior Advisor, Global Energy Michael Stoppard Vice President, Global Gas & European Energy Policy