Financing heating networks correctly

07.06.2024

Source: Energy & Management Powernews

The expansion of heating networks is politically desirable and also eligible for financial support. However, the financing for the necessary expansion is a challenge. 

District heating is not having an easy time at the moment. The industry is shaken by bad news. Skyrocketing district heating costs are leading to complaints, keeping courts busy and calling the Federal Cartel Office into action. Investigations show that heating suppliers calculate their costs with rarely achieved peak prices, even though the actual procurement costs have fallen.

Federal Minister of Economics Robert Habeck (Greens) also speaks out against cross-subsidization of local public transport through district heating. His Green colleague, Federal Consumer Protection Minister Steffi Lemke, is calling for more transparency in district heating prices. She is proposing an abuse supervisory body and an arbitration board for consumer complaints.

And there are plenty of examples of abuse. For example, high district heating prices in Pfaffenhofen (Bavaria) and Hanau (Hesse) made the media rounds. In fact, district heating is currently the second most expensive form of heating. This is also due to the fact that the pricing of district heating often takes place with a time lag to other energy prices and therefore the current falling prices have a delayed effect, just as the price increase only had a delayed effect. These are only the variable costs; for natural gas and electricity, the grid and system costs (boiler, maintenance, etc.) are added.

Heating cost comparison in Germany, March 2023 

* based on 3,000 liters of heating oil equivalent, national average including VAT.
Source: Fuels Lubes Energy, 04/2024, p. 88

VKU boss Ingbert Liebing, however, points out that the pricing of district heating is regulated and controllable by law and warns against false accusations against district heating. The VKU is also hopeful that tariffs will fall as procurement costs are declining. At the same time, Liebing warns against new requirements that could jeopardize the expansion.

And there are already plenty of them. Several municipal utilities, such as the municipal utility in Teterow, are looking for a strong partner to overcome these challenges, especially financial ones. In Teterow, the course has even been set for the sale of shares.

This is not surprising. The costs of converting the heating networks in Germany are estimated at 100 billion euros, according to the German Association of Cities (DST). The federal government has pledged to contribute 3 billion euros. That's not exactly a lot. For Leipzig alone, the cost of converting and expanding the district heating system to achieve climate neutrality is estimated at around 1 billion euros, explains Helmut Dedy, Managing Director of the DST. However, it should be noted that alternative climate-neutral heat supply solutions would often incur significantly higher costs, especially in densely built-up multi-storey areas.

Technical parameters

Money is one thing, technology is another. In Germany, the district heating market is dominated by high-temperature networks with flow temperatures of 100 degrees Celsius and above. There are few alternatives to fossil fuels, such as biomass from wood. Hydrogen will probably only be able to replace some of the natural gas in the distant future.

The high flow temperatures must correlate with another parameter, heat density. This indicates the heat consumption per square meter of enclosed space. For Stadtwerke Leipzig's supply company, around 75 kWh per square meter is decisive here. Above this limit, a district heating supply makes technical sense, according to the supplier.

The current maximum flow temperature of 120 degrees Celsius and a safety-related design temperature of 140 degrees Celsius apply to the district heating network in Leipzig. However, reducing the flow temperatures to below 100 degrees Celsius is Leipzig's strategic goal. The return temperature is around 60 degrees Celsius. According to the supplier, these temperature differences are required in order to be able to supply all buildings - including those at the end points of the district heating pipes - with heat permanently in winter.

The technical situation in the buildings is decisive for the necessary temperatures. A conversion of the heating systems would be necessary, particularly in the critical buildings (historic listed apartment buildings in the city centre), in order to achieve lower temperatures in the district heating networks. In Leipzig, the influence of lowering the flow and return temperatures on the economic and flexible use of renewable energy sources in the district heating network is currently being investigated.

However, the Leipzig utility only identified initial expansion areas for district heating above 100 degrees Celsius as part of its municipal heating planning. In the further development of the heating plan, variants for decentralized networks with other temperatures are also to be found. The heat planning is geared towards street blocks.

Funding with BEW and KWKG

The federal government is trying to cushion the financial challenges in particular. Federal funding for efficient heating networks (BEW) has been possible again since January 22, 2024 following the lifting of the budget freeze, but remains dependent on available budget funds. The program supports both the conversion to renewable energies and new construction projects with a systemic approach and offers operating cost subsidies for solar thermal energy and heat pumps. Companies, municipalities, municipal companies and cooperatives are among those eligible to apply. 

The funding is divided into four modules: 

1) Transformation plans and feasibility studies
2) Systemic funding for new builds and existing networks
3) Individual measures for existing networks
4) Operating cost funding for renewable energy sources

Non-repayable grants and investment subsidies are part of the funding with the aim of improving the economic efficiency and sustainability of the heat supply. In addition, the Combined Heat and Power Act (KWKG) - albeit only to a limited extent - can be considered as a funding option for grids, provided they are operated with CHP systems.

There is still the option of accessing the capital market. The Leipzig-based L Group, for example, is currently ruling this out for itself. Grid expansion in existing grids is always technically connected to the overall grid. According to the suppliers, it is therefore generally not possible to separate it as a separate asset with its own financing plan. However, other municipal energy companies also need this pillar of financing.

Another option for financing is the participation of citizens, for example via energy cooperatives or land companies, some of which are financed by the municipalities, but some of which are also owned by private investors. This is an option for local heating networks in particular.

In general, detailed planning of investment and operating costs and the inclusion of funding opportunities are crucial for financing. The cash flow forecast must take into account interest, depreciation and seasonal fluctuations in order to ensure the economic viability of the network. Funding programs from the KfW Bank or the Federal Office of Economics and Export Control (Bafa) offer partial financial support at best.

Author: Frank Urbansky