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European district heat networks – booming asset prices but a flat market. What’s going on?

district-heat-berlin https://sustainablecities.vattenfall.com/en/berlin

Heat networks have been around a very long time – group heating systems date back to the 14th century in France. However, while the sector boomed from the 1930s and again from the 1970s, Europe has seen only very modest expansion in recent years. This is not a growth market. And yet the underlying assets, the heat generation and distribution systems, continue to be highly sought after by investors.  We know this because we have helped clients seek them out.   

Can this apparent contradiction tell us something about the future of this sector? Is it fated to flat-line and fade, or can it boom again and be a core part of the transition to the new energy world?  Understanding the future of heating markets is a core part of Delta-ee’s research so this is an important question for us.

Some pointers came up in the opening panel session at the recent annual conference of Euroheat & Power, the district heating & cooling (DHC) industry body.  I participated in this panel with a brief to lay down some challenges facing the sector, including:

  • The market has been pretty stagnant for years*. It’s hard to see how this can change without very significant policy intervention.
  • DHC seems to be losing out to other, more distributed solutions in the debate on how best to decarbonise heat. Focus continues to be placed on electrification (see Delta-ee’s Electrification of Heat Service), and there’s once again growing talk of the role that hydrogen can play.
  • We see little evidence that the sector is a front-runner in efforts to effectively engage with its customers, for example through the effective use of data to design and offer new services.

But two things tell us that the industry could well have a new wave of growth if it plays its cards right:

  • It’s almost impossible to conceive of successful heat decarbonisation scenarios that don’t involve a step change expansion of DHC – alongside electrification, efficiency etc. Indeed, Delta-ee’s scenario modelling for Policy Exchange on decarbonising UK heat gives heat networks almost one-third of the total market in 2050. Other analysis tells the same story for many other countries.  Most policymakers know this, they just haven’t figured out how to make it happen.
  • I explored, with delegates at the Euroheat conference, the current very high interest of infrastructure investors in DHC assets. One reason is that continues to be a lot of cash about but not many sufficiently attractive things in which to invest. This creates a clear opportunity for financial innovation to help address the core challenge facing new DHC investment: its high capital costs.

If the DHC sector can engage effectively on these two opportunities, there should be some substantial new investment in the development of new DHC assets, reinforcing the transition that is taking place in European heating markets. 

*  One exception is the UK, based on new research from Delta-ee’s Heat Insight Service - “Status and Trends of the UK Heat Networks” touches on how the UK market is growing from its small base (<2% of the overall residential heating system stock.)

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