30 Jun 2020

DH Networks Need the Private Sector to Deliver a Net-Zero Transition

Please note that this article was originally published by Bloomberg New Energy Finance, here.
As net-zero targets ramp up, the world is re-engineering how it stays warm – and cool. Policy makers, property developers and utilities are turning to district heat networks to provide low-carbon heating and cooling without blowing out carbon budgets. Singapore has built what it says is the largest district cooling network in the world, to handle rising cooling demand in a sustainable manner for both carbon emissions and the power grid. Meanwhile, the U.K. expects a ninefold increase in district heating by 2050 to meet its net-zero emissions target. The Netherlands sees a 17-fold increase as it moves completely away from natural gas in homes.
But, achieving this level of scale-up will require a change in how district heating projects are delivered. District heat networks are centralized systems: a distribution medium, usually water, is heated, transported through a network of pipes and sold on to consumers who extract the heat for use. To date, most district heating systems are funded and run by public sector entities. To realize the decarbonization potential of district heating, will require innovation and capital. That is, it will require private sector investment. This presents an opportunity for property developers, utilities, private equity and infrastructure funds alike.   Getting the private sector involved in district heating depends on providing solutions to manage risks and returns. Like most large infrastructure projects, the majority of risks are manifested at the start of development, and decrease in severity as the project evolves. Some risks – like construction and commercialization – are nearly universal. Others are unique to district heating, like the uncertainty of future heating or cooling demand.     Government grants or loans can spur the move to private-led district heat networks by lowering the cost of capital, decreasing risk and improving the financial returns. These types of programs are most common in markets with a low number of district heat networks, where every deal is still considered experimental or unique. Such schemes could also see a boom in the years ahead, as a mechanism for green economic stimulus during the Covid-19 recovery. But government programs should only bridge private investment, not replace it. As investor confidence builds and the market develops, subsidy schemes are expected to become scarce.   Private equity investors are the likely first-movers into district heating, and the ones to watch for clues on how quickly financing opportunities are becoming available. As confidence in the market grows and the pipeline of new projects becomes clear, it is likely that district heat networks with low and relatively stable returns, could become a key market for pension and infrastructure funds.