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

3. Promote District Energy for a Sustainable City Transformation
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
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Seminars, training, exchanges of know-how in DK and abroad

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

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

6. An important sector
New Customers 2018: : , 2016: :
Renewables: 61% - growing
Jobs: thereof directly
Export: Euros
Prices are competitive

7. 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

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

9. 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

10. IRR – a discussion

11. 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%

12. 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 

13. 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

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

15. 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

16. How high IRR jeopardizes city wide DH systems

17. IRR for DH in the whole city3% 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%

18. 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!

19. 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%

20. 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

21. Thank you
Morten Jordt Duedahl Business Development Manager