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Decentralising the centralised – why district heating must change

District heating is a superb invention. Even so, it will not be competitive in the next decade without major changes in its operating model.

Aki Pesola / December 11, 2018

Its monopoly-like market position is slowly receding, and emissions are hard to push down. Deep geothermal heat and small modular nuclear reactors are unlikely to reach commercial status soon enough to offer a silver bullet for climate battle or improve short-term competitiveness of district heating.

Large-scale excess heat sources are scarce, and biofuels won’t secure sustainable heat production in the long run, either. This means it is time to stop the ongoing adversarial dialogue between camps of district heating and distributed heat production. 

District heating has been a great way to warm buildings in densely populated areas in the Nordics. This is because of economies of scale and a highly developed and efficient operating model. That is why district heating demand has grown steadily in the Nordics – with a market share in Finland and Sweden around 50%. During the last ten years, though, the average price of district heating in apartment buildings has gone up roughly 30% in Finland and 20% in Sweden in real terms. Fuel costs, emission allowances and other regulatory costs are rising, and without a significant decline in district heating companies’ margins, prices will continue to go up and dig into customers’ wallets. Customers will be enticed to seek ways to lower their heating costs.

At the same time, competing technologies, mainly heat pumps, have developed fast. Today, the levelized cost of heat produced with ground source heat pumps and air-to-water heat pumps is of the same magnitude as the district heating tariffs in the large cities of Finland and Sweden. Increasing variable electricity production in the Nordic area further improves the competitiveness of heat pumps by lowering the electricity market price.

Why decentralise?

To optimise the whole district heating value chain, companies need to be able also to have access beyond the building’s heat exchanger. District heating companies can and will update their production capacity on the primary side as well, but value-adding services will be introduced on the secondary side, in buildings. There is lots of recent research on large-scale heat pumps in district heating systems, but from a more systemic perspective of the subject, multiple benefits arising from the decentralised model can be identified:

  • Low-temperature heat produced by heat pumps do not impact the balance of district heating network’s operating values, as heat pumps are operated on the secondary side
  • Heat losses are smaller in decentralised applications
  • It offers district heating companies access to the demand side, which enables system optimisation, extensive energy market participation and customer engagement
  • It helps position the district heating company to meet the future demand of open, bidirectional and sustainable energy system

Decentralisation is inevitable. It will happen regardless of the decisions district heating companies make. The only uncertainty is how the decentralised assets are operated in the future. Who is taking the driver’s seat? What role should the district heating company take? How are the costs and benefits divided between stakeholders? These are just a few questions company executives should be asking today.

Towards virtual heating plants?

Utilities have large customer bases, generating valuable data that can be used to create new services. To minimise the combustion of fuels, future-proof the production fleet and commit customers, district heating companies should consider asset decentralisation as a strategic decision.

From a district heating company’s point of view, the change could mean decentralisation of assets or devolution of both assets and control. Economies of scale could be applied if decentralised heating assets are controlled in a centralised manner. Together with larger heat production units, these assets form a virtual heating plant, which is the heating sector counterpart to a virtual power plant.

In addition to cutting down emissions and having control of the whole heat value chain from production to consumption, there are also other benefits in a virtual heating plant. Decentralised assets, such as heat pumps, enable district heating companies to participate in various energy marketplaces and offer flexibility to the market, thus improving return on heat pump investment. Also, spot market optimisation can be profitable, primarily when heat pumps are used against marginal heat production capacity in a district heating system.

We understand the scope of the challenge

This is a perfect time for district heating companies to start positioning themselves in the heating market that is about to experience a significant change during the next decade. It is easier to start building tomorrow’s systems when companies are still performing well in the market.

Tieto supports district heating companies by providing tools and expertise to manage a decentralised and data-driven future. We understand that as the complexity of the energy system increases, the more partnerships need to be formed because no one solution alone can change the game. We know this from experience: we are already piloting distributed energy solutions in the electricity sector. Best practices from there can be used in future-proofing the heating sector as well.

We believe in open innovation, so let’s co-create new services and business models together – there are lots of opportunities for both new and existing players in the district heating value network.

Characteristics of a future-proof district heating system:

  • It is low-emission, that is, able to utilise sustainable energy, such as excess heat and non-fossil energy sources
  • It delivers a reasonable return on investment by taking advantage of existing district heating network
  • It provides a platform to enable an ecosystem of value-adding services
  • It is integrated with the electricity market to allow real-time valuation of heat and offer flexibility to the energy system
  • It ensures that the end-user gets right indoor conditions at an affordable price

Where is the Nordic energy market heading?

Tieto conducted energy market research among 80 energy retail and distribution company decision makers in the Nordics. Download the report

Aki Pesola
Tieto alumni

Aki is driven by constant development and outside-in thinking. He has a decade of experience in energy business and management consulting, working with both private and public sector stakeholders. He is intrigued by sustainable business models and digitalization driving the transformation of value chains in all industries. Aki is currently leading energy industry domain in Tieto Business Consulting and contributing in strengthening Tieto’s position and offering in energy sector.


Aki Pesola

Tieto alumni

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