How high IRR jeopardizes city wide DH systems Morten Jordt Duedahl Business Development Manager DBDH

Promote District Energy for a Sustainable City Transformation 25-08-2019 Promote District Energy for a  Sustainable City Transformation Established in 1978 75+ members Leading actors in Denmark 2/3 Manufacturers, Consulting Engineers 1/3 Utilities Magazine HOT|COOL Seminars, training, exchanges of know-how in DK and abroad www.dbdh.dk

A few remarks Danish district heating is a complex structure developed over 100+ years “The Danish Model” is very good. In Denmark!

District Heating in Denmark Half of heat demand (50%+) 2/3 of all households (1.736.668 / 64%) All homes in Copenhagen (98%) Today ~450 networks First a bit of Danish history

An important sector New Customers 2018: 23.169 2017: 19.000, 2016: 23.000 2015: 19.000 Renewables: 61% - growing Jobs: 23.330 thereof 10.400 directly Export: 906.996.889 Euros Prices are competitive

Consistent Energy Policy Long Term planning Government at all levels decided what they wanted – and did it! Legislation 1976 – Electricity Act (CHP, Cost Eff) 1979 – Heat Supply Act + RES + WtE 1986 – Decentralized CHP 1990, 1993, 2008 – Increased biomass (new CHP and conversion) Incentives 1981 – Investment grants for biomass DH/CHP 1984, 1992 – Subsidies for CHP 1994 – Financial support to establish DH on biomass or natural gas 1991 – High energy tax and CO2 tax on fossil fuels Clear business model Non-for-profit Long term perspective Municipal guaranteed loans Plan – Coordinate – Legislate - Support

Energy Sources for DH Renewable Power & Surplus heat Waste, bio degrad Nat. Gas Coal & oil

Future Targets National Copenhagen and many other cities 2035 Carbon Neutral Heat 2035 Carbon Neutral Electricity 2050 Transport ?? Copenhagen and many other cities 2025 Carbon Neutral

IRR – a discussion

Disclaimer  This presentation does not give guidance to which business model is the best or most relevant in different countries or under different framework conditions. It demonstrates the effect on the roll out of DH in a city, depended on the accepted level of IRR. We assume that a commercial ESCO would need an IRR at 14% and a council led ESCO would need 4%

Comments to IRR Definition: “Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.” Here we only touch up-on: Depreciation time may be different Political/social aspects – fuel powerty etc Consequences of DIFFERENT owners of DHS in the same city Also very relevant discussions – but another time 

Picking apples is a complicated and complex planning process  Low hanging fruits What we really want! Picking apples is a complicated and complex planning process  Carbon Allivate Fuel Poverty Energy Efficiency We all talk about low haning fruits – but be carefull. Picking them may jeopardize the ability to pick all the apples. Jobs Local economy Import Independence

How a city ESCO would “use” the difference in IRR

How would a city lead ESCO progress with a high IRR project? 14% IRR for a commercial ESCO (assumed) ?% Create council lead ESCO Climbing the learning curve step by step Build in extra network capacity to support future expansions Improve quality to minimise operation and maintenance Build equity to support future developments Build a buffer/surplus to balance income from year to year Expand the network - adding areas with lower IRR Lower prices / Alleviate fuel poverty (assumed fair prices!) 4% IRR for a council lead DH company (common threshold in Denmark) <2% Approximate interest rate for borrowing capital Click forward step by step. Notice: Prices are assumed to be fair/OK in the 16% case. The percentages are only for demonstration. Can vary as needed. Learning Curve must be higher in early stages than later Red crosses – demonstrates that if not all this is needed it can be excluded

How high IRR jeopardizes city wide DH systems

IRR for DH in the whole city 3% 5% 4,0% 10% 14% 18% 1% 8% 15% 12% Same system, but here the IRR threshold for the City owned DH company its 4% hence the build out will be much bigger Low hanging frith does not jeopardize the 4% IRR for the whole system!!! The first system (IRR 18%) will benefit the Council DH Company – calculated IRR at 18% needed IRR at 4% will make amble surplus to future expansions, lower prices, climbing the learning curve, build equity buffer etc etc. I may even show relevant to built out areas with very low IRR as it can connect surplus heat from different sources and thereby benefit the whole system 12%

Commercial ESCO Consequences on IRR. Threshold: 14% XX-City IRR:(4%) (3,5%) (3,2%) (3,0%) (2,7%) (2,4%) 10% 818% STOP! STOP! 15% 12% 8% Click step by step The low hanging fruit is the 18% network. If built the rest of the city will consequently have an lower IRR – if you remove the best part the average will decline. You picked the lowest hanging apple and DID NOT eat it all of it yourself If the treashold for Commercial ESCO is 14% - then the City has to support all networks with IRR lower than 14%. There are normally very few networks that live up to the commercial ESCO threashold (maybe 14%) Everything below the commercial ESCO treashold needs capital or O&M support from the city to become viable – meaning the city will run out of money Political consequences must be considered – leaving everyone out side the few areas with gas and in fuel poverty!

City owned ESCO Threshold: 4%! 3% 5% 10% 15% 18% 14% 1% 12% 15% 8% 7% 12% Same system, but here the IRR threshold for the City owned DH company its 4% hence the build out will be much bigger Low hanging frith does not jeopardize the 4% IRR for the whole system!!! The first system (IRR 18%) will benefit the Council DH Company – calculated IRR at 18% needed IRR at 4% will make amble surplus to future expansions, lower prices, climbing the learning curve, build equity buffer etc etc. I may even show relevant to built out areas with very low IRR as it can connect surplus heat from different sources and thereby benefit the whole system 12%

Conclusion High IRR = less DH Consider your business model carefully Make the full use of the natural monopoly and the competitive marked – it is two different things This was NOT a comment to how things should be done in Ireland At best it was a comment to what could be considered

Thank you Morten Jordt Duedahl Business Development Manager md@dbdh.dk www.dbdh.dk