A report from economics consultancy Compass Lexecon, commissioned by Wärtsilä, Flexible solutions to advance low-carbon district heating & power generation, looks at the potential role a modernised European district heating sector could play in decarbonising both heat and power.
A striking feature of the EU’s district heating sector, noted by the report, is its continuing use of large amounts of coal.
The importance of district heating varies significantly across Europe, the report notes – with Sweden and Denmark reaching 50+% of comfort heating demand met by district heating in 2022. There is also significant variation across Europe regarding the number of district heating (DH) systems per head (<1 to 43 systems per 100 000 inhabitants) and their average size (3 to 130 MWt per system).
However, in the majority of European countries, district heating is still largely fossil based – with coal or lignite playing an important role (>10% share in heat generation in 10 countries).
According to the report, public data suggests that there are several hundred district heating systems in Europe that still rely on coal in their heat generation mix.
But EU-level policies aim to drive district heating decarbonisation – with the EU emission trading system (ETS) and the Energy Efficiency Directive (EED), with its specification of “efficient district heating”, currently exerting the most pressure, the report’s authors contend.
Among the thermal generation options investigated (piston based gas engines and various gas turbine configurations), gas engines tend to be the most flexible technology, the report finds (which will be good news for the report’s sponsor).
Already running on natural gas, ICE (internal combustion engine)-CHPs of course produce significantly lower emissions than even best in class coal fired CHPs; by (partly) substituting for biomethane (or biogas) emissions can be further reduced.
By 2027 all natural gas fired CHPs will either fall under the EU-ETS or under EU-ETS2 (depending on their size).
The report notes that gas-engine based CHPs can tap into various markets to generate revenues (“revenue stacking”), eg: electricity wholesale market (incl. the monetisation of longer-term flexibility); ancillary services – including mFRR (manual frequency restoration reserve, “tertiary reserve”) and aFRR (automatic frequency restoration reserve, “secondary reserve”); capacity remuneration mechanisms; congestion management revenues; and various subsidies.
The report points out that ICE-CHPs can complement electricity generation portfolios, enabling a dynamic reaction to power prices. Even when running on natural gas they can support keeping the “efficient district heating designation” at least until 2034 and, by blending-in decarbonised gases, until 2044 and beyond.
ICE-CHPs compete with various other low-/no-carbon technologies, the report observes – but technologies can also complement each other.
The concept of complementarity of technologies is illustrated in the report by two case studies:
At the Skagen site (Denmark) the portfolio, which comprises heat pumps, electrical boilers and ICE-CHPs, enables heat production during periods of high power prices. Conversely, electrical heat sources can be used during periods of low power prices.
For the CHP plant in Grudziądz (Poland), Wärtsilä’s modelling illustrates how a currently static, coal-dominated system could be transformed into a flexible portfolio of generation assets.
Beyond heating, gas engines can access a number other revenue streams in the power market, including wholesale electricity markets and the provision of longer-term flexibility.
Deployment of solar and wind generating capacities drives the need for power sector flexibility across all time-scales – this is illustrated by projected developments in the Czech Republic, Romania, Poland, Finland, Germany and Spain.
Also, as exemplified by Finland, increased renewable generation will change the structure of wholesale power market prices – thereby changing revenues capturable by technologies able to provide long-term flexibility.
The report looks at the Skagen CHP’s ability to provide intraday and longer-term flexibility by operating its existing gas-engine CHP units in a country with an already high renewables penetration.
Balancing services markets remunerate market participants for reacting quickly to TSO signals in order to ensure system stability.
The need for aFRR is driven by unplanned outages and small frequency variations
The need for mFRR is driven mostly by outages of large generation or interconnection assets; for mFRR, ICE-CHPs compete currently against hydropower and other thermal assets.
The ability to generate synergies from the co-location of gas engines and batteries is illustrated by the Hungarian ancillary services market, where gas engines and batteries sometimes even share the grid connection and batteries are charged independently of grid electricity, directly from the gas engine’s production.
Gas engines also have a role to play in capacity remuneration mechanisms (CRMs), which are established in many European countries to ensure security of supply amid increasing intermittent generation.
With grid congestion costs expected to increase significantly, congestion management is another potential source of remuneration for gas engines, with sources of revenue deriving from energy redispatching, reserve provision. and countertrading. Gas engines can be remunerated for all these services if they are located behind grid bottlenecks and upward activation is needed.
Gas engine CHPs can also access support schemes if they are efficient enough, says the report, including investment support, subsidies and exemptions.
Support schemes for CHPs in Europe take various forms – with availability usually depending on fuel type and installation size.
It is worth noting that ICE-CHPs running on natural gas are within the regulatory emission limits of the EU Taxonomy.
