Market opportunities for local renewable heating systems in the built environment

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1 Market opportunities for local renewable heating systems in the built environment DATE June 2011 W.M. VAN MEURS / TU DELFT/ Faculty of Technology, Policy and Management/ Section Energy and Industry/ MSc Systems Engineering, Policy Analysis and Management/ SPM5910 NUON/ Department of Public and Regulatory Affairs and Sustainability GRADUATION COMMITTEE Professor Prof. dr. ir. M.P.C. Weijnen 1 st supervisor Dr. ir. Z. Lukszo 2 nd supervisor Dr. T.W. Fens External supervisor Ing. J. Frijhoff MSc (NUON)

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3 Preface This master thesis is the result of eight months of work. It represents the finalization of my master studies Systems Engineering Policy Analysis and Management at Delft University of Technology. The research has been carried out in the section Energy and Industry of the faculty Technology, Policy and Management and the Public and Regulatory Affairs and Sustainability department of utility company N.V. Nuon Energy. Since my interest goes out to energy-related topics, and especially renewable energy, I really enjoyed the subject of my research: the potential of renewable energy in the built environment. Furthermore, it was a very nice and educational experience to get an insight look into a large energy company like Nuon. The process towards this master thesis was very pleasant, but at times also very difficult. I am proud of the final result, but I know I could have never done this by myself. For this reason I would like to thank all people that contributed to the fulfillment of this project. First of all, I would like to thank the advice and support of my graduation committee. Zofia Lukszo, as my first supervisor, was of very much help in setting up the structure of my research. She provided me with valuable advice and moral support at difficult times in the process. I really appreciate her personal approach and the fact that I felt always welcome. Theo Fens, as my second supervisor, helped me very much with his knowledge on the energy sector. Our conversations on my research where always very amusing but also helped me to put things in perspective. I also very much appreciate his detailed reviews of my thesis. Margot Weijnen, as chair of the committee, provided me with valuable advice during the milestone-meetings. Joel Frijhoff, as external supervisor from Nuon, helped me to find my way in the company and was very helpful during the everyday research activities. Secondly, I owe much gratitude to all Nuon employees who gave me their support and contributed to this research with their valuable knowledge. I would like to thank all employees from the PRAS department for the pleasant time. Also the people from outside Nuon who were willing to answer all my questions on the subject I am very grateful. Thirdly, Marieke deserves a special thanks for making me stop doubting and start writing. And Annelies and Niels for their contribution in making my thesis more beautiful. Lastly, I would like to thank my parents, Jeroen and my friends for their help and support during this research and for making my years of study such an enjoyable and unforgettable period! Amsterdam, 2011 Willemijn van Meurs III

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5 Executive summary Heat production accounts for the largest share of total Dutch energy demand. The largest consumer of heat is the built environment: dwellings and utility buildings. The dominant fuel for heating in the Netherlands is natural gas. The majority of Dutch buildings (96%) has a connection to the natural gas network. The remainder of buildings is connected to a district-heating network. Only a very limited amount of total heat demand comes from renewable sources, despite the fact that there are various renewable heating technologies on the market. This research provides insight in the potential of so-called local renewable heating systems. Local renewable heating systems are energy installations that make use of a renewable energy source and can supply heat, for space- and water heating, to the built environment in the direct vicinity of the installation. The main question of research that is answered in this thesis is: What are the market opportunities for local renewable heating systems in the built environment? The local renewable heating systems considered in this research have a capacity between 100 kw 10 MW. Answering this question was guided by the definition of a market opportunity: A market opportunity exists if a product or a service, based on either one technology or several, fulfills the need(s) of a market better than substitute technologies within a given business, regulatory, and social environment. In five research steps insight has been provided in the current and future market opportunities for local renewable heating systems in the built environment. The data for this research are gathered by means of desk research and field research. Heat demand of the built environment In this research the built environment is demarcated to dwellings and offices. There are currently around 7 million dwellings and offices in the Netherlands. As a result of the financial crisis the level of new construction is historically low. Dwellings have a demand for heat for space heating and tap water heating. The demand for space heating depends on a number of factors, including the degree of insulation. Since the degree of insulation of houses has been improving over time, dwellings with a more recent date of construction have a lower heat demand. An average existing dwelling has a space heating demand of GJ/year 1. A new constructed dwelling has an average heat demand of 18 GJ/year. The heat demand for tap water heating is dependent on the number of inhabitants. This is on average 7,2 GJ/year. Offices have a demand for heat for space heating and space cooling, which is affected by the size of the office (in m 2 surface area) and the degree of insulation. Offices have a very limited hot tap water demand. Although the energy performance of buildings has been improving over time a lot can still be achieved. Less than 5% of the total housing stock and an equal amount of offices deserves the label very energy efficient. Heat supply of the built environment A number of different systems are currently being applied to provide in the heat demand of the built environment. The conventional heating system in both existing buildings and in new construction projects is an individual central heating system with a natural gas fired High Efficiency (HE) boiler. The other heating system that is regularly applied is district-heating. In a district-heating network a central heat producing facility delivers heat to multiple, geographically dispersed dwellings. Furthermore, a significant number of dwellings, mainly situated in older apartment buildings, make use of a collective gas-fired boiler for space heating and hot tap water provision. HE boilers can be applied in both existing estate and in new constructed buildings. District-heating systems are only developed for large new housing construction projects, in the presence of a large residual heat source. Compared to a HE boiler, a district-heating network requires a high initial investment. The costs of heat delivery are however lower and also a significant reduction of CO 2 emissions can be achieved. 1 One GJ equals 10 9 joules or around 30 m 3 of natural gas. V

6 Stakeholder analysis A stakeholder analysis has been carried out to provide insight in the central actors in the built environment and their stakes and goals in relation to heating. The most important actors in relation to heat supply in the built environment are different for new construction projects than for existing buildings. For existing buildings the owner and occupier of the building are important. The most important real estate owning parties in relation to dwellings are housing corporations and private owners. The majority of houses (60%) is owner-occupied and around 30% of houses is owned by housing corporations. The majority of offices is owned by institutional investors or property funds and a small share of offices is owner-occupied. In the current built environment there is limited activity on the improvement of the energy performance of buildings. Owner-occupiers of dwellings and offices have limited energy awareness. The people and companies that do invest in energy saving measures or renewable heating systems are mainly financially, but also environmentally, motivated. Housing corporations are concerned with the living expenses of their tenants, including the energy expenditures. Their energy policy is focused on a reduction of energy demand. Currently, housing corporations have not many possibilities to recover energy-related investments because they cannot, without difficulties, increase their tenants rent. This results in so-called split incentives: the party that does the investment is not the party that has the benefits of this investment. Private property owners of offices are also confronted with split incentives. Real estate owners that are involved with the energy performance of their building follow the Trias Energetica strategy. They will first take demand reducing measures, before they start thinking about the implementation of renewable energy supply systems. In the development of a new residential area or building the central actor is a property developer. A property developer s goal is to respond to market demand against minimal risks and minimal costs. Property developers are affected by the Energy Performance of New Buildings regulation. This regulation poses requirements for the energy performance of new constructed buildings. Property developers have to include energy demand reducing measures or renewable heating systems in the design of a new building to comply with a required Energy Performance Coefficient (EPC). In practice, property developers aim to achieve the energy performance requirements against minimal costs. This currently most often leads to the implementation of conventional natural gas fired HE boilers and some additional insulation. The situation is different when the new residential area is developed in a municipality that has ambitious energyand climate targets. In this case, the municipality will pose additional requirements on the energy performance of the area or require the implementation of a specific heat supply system. An energy-aware future owner can exert the same influence in relation to a newly constructed office building. Municipalities compare different heating systems on the required investment per connection and the realized CO 2 emission reduction compared to a HE boiler. Analysis of renewable heating technologies A local renewable heating system consist of a heat producing facility, a heat distribution network and heat delivery units at the consumers. There are four different renewable heating technologies considered suitable for application in the built environment and at the predefined range of 100 kw-10 MW: solar boilers, gas absorption heat pumps, Underground Thermal Energy Storage systems and biomass-fired boilers. In general, none of these systems is applied or can be applied on a stand-alone basis. Solar boilers and gas absorption heat pumps are add-ons on a gas fired boiler. UTES systems and biomass boilers require an auxiliary heating plant to provide for peak demand and back up. This auxiliary heating plant is most often a gas-fired boiler. In the following table the applicability and financial and environmental performance of the different renewable heating technologies is summarized. VI

7 Range of application New/existing buildings Solar boiler Gas absorption heat pump Individual Apartment building household (>100 kw or >10 apartment building apartments) New and existing New and existing buildings buildings UTES system 50 houses 100 houses New buildings Investment costs ( /connection) Costs of heat ( /GJ) CO 2 emissions (kg/gj) Biomass-fired boiler >400 houses New buildings Table A. Applicability, financial and environmental performance of local renewable heating systems Solar boiler systems and gas absorption heat pump are suitable for application as add-ons on collective heating systems in apartment buildings. UTES systems can only be applied in case of new building development. Local renewable heating systems require a higher initial investment than a HE boiler, but the costs of heat are lower and so are the CO 2 emissions. Institutional analysis An institutional analysis has been carried out to determine the socio-economic potential of local renewable heating systems. The implementation and operation of local renewable heating systems is possible given the current environment of formal and informal institutions, because no other arrangements need to be provided for than the ones required for the implementation and operation of High Efficiency boilers and district-heating. For the implementation and operation of local renewable heating systems as add-ons on an existing collective heating system no additional arrangements between parties need to be provided for. For the implementation of local renewable heating systems in new buildings both the arrangements that are required for HE boilers and district-heating are required. During the operational phase the same type of institutional arrangements need to be provided for as for district-heating. A number of formal institutions can stimulate the emergence of local renewable heating systems: Energy Performance of New Buildings regulation: This is an important piece of regulation that can stimulate the application of local renewable heating systems in new buildings. It poses requirements for the energy performance of newly constructed buildings. The energy performance has to comply with a required Energy Performance Coefficient (EPC). When the design of a building does not comply with the EPC requirement no building permit will be granted. Local renewable heating systems score very good in the EPC. Currently, the most cost effective way for a property developer to obtain the required EPC value is by the installation of a HE boiler and some additional insulation. The EPC norm will however be adjusted in the coming years. Subsidies: There are a number of investment subsidies available for local renewable heating systems. From 2012 also an operating subsidy will be present in the form of the SDE+. A number of formal institutions can discourage investments in local renewable heating systems: Heat Law: All systems that deliver heat to more than 10 consumers or produce more heat than gigajoules per year are subject to the Heat Law. The Heat Law is going to regulate heat supply by dictating a maximum for the retail price of heat. This maximum, the Not More Than Usual-price, is based on the price a customer pays that makes use of an individual gas-fired boiler. The legislative initiative towards a Heat Law has been put forth in 2003 and until today the Heat Law did not enter into force. Above all, the current regulatory uncertainty is detrimental for investments in new collective heating systems. Permits: When compared to HE boilers additional permits are required for the implementation and operation of local renewable heating systems. Lastly, the EU ETS, the European Emission Trading System, might in term increase the attractiveness of local renewable heating systems. As a result of the EU ETS the price of heat from large heat producing plants (>20 VII

8 MWth), that deliver heat to district-heating networks, is likely to rise in the future since the CO 2-related expenditures of the companies owning these large installations will increase. As a result, the purchasing price of heat is likely to increase, but the maximum tariff that the supplier may charge to its consumers is capped by the NMTU-principle. The use of natural gas by small consumers does not fall under the EU-ETS. This is very unfavorable for the profitability of district-heating, but could be beneficial for local renewable heating systems that fall outside the EU ETS. Competitive analysis A competitive analysis has been carried out to identify the possible impacts of the introduction of local renewable heating systems on the current market for HE boilers and the market for district-heating projects. The market for High Efficiency boilers consists of a large number of installation companies that offer highly identical products and services and compete for a limited number of contracts from building contractors. The latter is a consequence of the limited number of new housing development projects that are currently being commissioned. Local renewable heating systems are no substitute for HE boilers, neither in existing buildings, nor in new residential areas. The local renewable heating systems that are considered technically suitable for application in existing estate (gas absorption heat pumps and collective solar boiler systems) are add-ons and still require the presence of a gas-fired boiler. In new construction projects local renewable heating systems are not considered an option if there is no involvement from the municipality (or ambitious future owner, in case of an office building). On the market for district heating a limited number of heat supplying companies is active, which are mainly the large energy companies. The development of a new district heating project starts with a tendering procedure initiated by a municipality. Heat supplying companies compete for the concession following from this tendering procedure. Heat is bought from heat producing facilities, which can be owned by the heat supplier or by another company. Local renewable heating systems can be a substitute for district heating systems in new housing projects. In case of a municipality that has ambitious climate- and energy related targets the design of the residential area, including the heating systems, is not left to the project developer. An ambitious municipality will either start conversations with energy companies or specialized installation companies itself or it will formulate more ambitious targets on energy performance for the property developer than the current EPC requirement. As a result both district heating and local renewable heating systems become options. Also in areas where there is a district heating network present local renewable heating systems compete with district heating for application in new buildings. Conclusions The market opportunities for local renewable heating systems with a capacity between 100 kw and 10 MW in existing real estate are limited to the implementation of collective solar boiler systems and gas absorption heat pumps as add-ons to collective heating systems. Such collective heating systems can be found in older apartment buildings, which are most often owned by housing corporations. Technically, all four local renewable heating systems included in this research are suitable for application in new buildings. However, there are currently not many market opportunities for these systems in new construction projects. The characteristics and performance of local renewable heating systems do not comply better with the needs of property developers than the conventional heating systems. The current regulatory environment does not change this situation. Market opportunities for local renewable heating systems currently arise from the involvement of an energy aware municipality or future owner during the design phase of a residential area or building. The payback periods of local renewable heating systems differ strongly per heating system, but all exceed the systems technical life times. Gas absorption heat pumps and biomass-fired boilers have the most favorable payback periods: VIII

9 Payback period (yr) Gas 0,53 /m 3 Solar boiler 63 Gas absorption heat 28 pump UTES system 97 Biomass-fired boiler 27 Table B. Current payback period local renewable heating systems Changes in the regulatory environment and an increase in the price of natural gas influence the future market opportunities for local renewable heating systems in new construction projects. The tightened EPC norm value is likely to result in an increased demand for renewable heating systems, after This can be both local renewable heating systems and district heating or individual renewable heating systems. Theoretically, individual heating systems score better in the EPC norm. The Heat Law it is likely to have a negative effect on the investments in local renewable heating systems. The cap on the heat price makes it impossible to recover the high initial investment, that comes with the choice for a local renewable heating system, via the price of heat. A natural gas price rise will affect the performance of local renewable heating systems compared to HE boilers. In first instance this does not increase the systems attractiveness from the perspective of property developers, but it could increase the willingness-to-invest of housing corporations and owner-occupiers of dwellings and offices that are also involved in the exploitation phase of the heating systems. The demand for local renewable heating systems in existing buildings is not expected to change in the near future. Enforcement of the labeling policy, which is required from 2013 following European regulation, might increase the energy awareness of owners and occupiers of buildings. An increase in the price of natural gas is likely to have the same result. Due to the Trias Energetica - strategy this will in first instance not lead to an increased demand for renewable heating systems, but in energy demand reducing measures like insulation. An increase in the price of natural gas and a possible future inclusion of the costs of CO 2 in the price of heat will both increase the attractiveness of local renewable heating systems in comparison with HE boilers by reducing the payback period. This is under the assumption that the NMTU-price cap will increase proportionally with the natural gas price or CO 2 price. Systems that rely the least on natural gas (biomass boilers, UTES systems) respond best to both changes. The future adjustments to the EPC norm will deteriorate the attractiveness of local renewable heating systems in new constructed buildings. New buildings will have a significantly lower heat demand for space heating. More buildings should be connected to the same system to sell the same amount of heat. Since the largest costs result from the construction of the network a larger investment needs to be made per GJ of delivered heat. Recommendations for N.V. Nuon Energy Nuon should offer an alternative heating system next to large scale district heating, because the demand for alternative heating systems in new constructed buildings will also increase in areas that are not in the proximity of a large residual heat source. Gas absorption heat pumps and biomass-fired boilers are considered the most suitable local renewable heating systems and deserve further research. Systems that can supply heat to new construction projects and existing buildings are preferable, because the level of new construction is currently historically low and because connecting existing buildings can improve the business case of network-based heating systems in the light of the decreasing heat demand of new buildings. Good relationships with municipalities are essential. Municipalities have a central, if not decisive role, in the realization of renewable heating systems. IX

10 Collaboration with housing corporations should be realized. Housing corporations own a significant share of the built environment, including most apartment buildings with collective heating systems, which are a potential market for local renewable heating systems. Lobby for national policy targets on the application of renewable heat in the current built environment. National policy targets can contribute to an increasing number of market opportunities for local renewable heating systems in existing real estate. Recommendations for policy makers National policy targets should be provided for in relation to the heat demand and the application of renewable energy in existing buildings. National targets can provide guidance for local policy targets and take away large differences between municipal policies. Incentives should be provided for to increase the amount of energy performance improving activities in existing buildings. In fact, a mindset change under real estate owners should be effectuated, but incentives to increase the energy awareness or change investment behavior are a good start. The height of available investment and operating subsidies for renewable heating systems should be related to their environmental performance. This is currently not the case. Furthermore, the degree to which different heating systems are regulated is also not related to the financial and environmental performance of these systems. The Heat Law should be used to stimulate the emergence of renewable heating systems. The unelaborated subsidy articles of the Heat Law can be applied for this purpose. Recommendations for further research This research has provided insight in the general applicability and potential for local renewable heating systems. The choice for a heating system in a concrete situation is very much dependent on local circumstances. For this reason further research on the applicability of the different renewable heating systems in a number of regions of focus, taking into account local circumstances and local actors. Further research should investigate the market opportunities for individual renewable heating systems and assess whether local renewable heating systems are or will be in competition with these systems. X

11 List of acronyms CCGT Combined Cycle Gas Turbine EA Ministry of Economic Affairs EMG Energy Measures on Area level (Dutch: Energie Maatregelen op Gebiedsniveau) EPBD European Energy Performance of Buildings Directive EPC Energy Performance Coefficient EPG Energy Performance of Buildings (Dutch: Energie Prestatie Gebouwen) EPN Energy Performance of New Buildings (Dutch: Energie Prestatie Nieuwbouw). EU ETS European Emission Trading System GJ gigajoule unity of energy, equals 10 9 joule HE High Efficiency I&E Ministry of Infrastructure and the Environment kw kilowatt unity of power, equals 10 3 watt kwth kilowatt thermal power MW megawatt unity of power, equals 10 6 watt MWth megawatt thermal power NEPROM Sector organization of housing corporations NMTU Not More Than Usual PJ Peta Joule - unity of energy, equals joule UTES Underground Thermal Energy Storage (Dutch: Warmte Koude Opslag) XI

12 List of figures Figure 1.1: Flow diagram of research steps... 5 Figure 2.1: Layered institutional model from (Groenewegen and Lemstra 2007)... 8 Figure 2.2 The five forces that shape industry competition (Porter 2008)... 9 Figure 3.1: Housing stock according to type and age of dwelling. Based on (Ministerie van VROM 2006) Figure 3.2: Heat demand of a dwelling in relation to housing type Figure 3.3: Degree of insulation per building component in relation to the date of construction Figure 3.4: Hot tap water demand of household in relation to the number of family members Figure 3.5: Composition of total housing stock by energy label (Ministerie van VROM 2006) Figure 3.6: Relation between energy label and degree of insulation Figure 3.7: Housing stock by type of house and ownership. After: (Ministerie van VROM 2006) Figure 3.8: Offices according to period of construction. After: (Prendergast and Jeths 2010) Figure 3.9: Development of insulation of offices After: (Agentschap NL 2011) Figure 3.10: Number of energy labels provided to offices end After: (Agentschap NL 2011) Figure 3.11: Thermal energy demand offices per function in MJ/m2 values for Figure 4.1: Application of the various heating systems in relation to construction period Figure 4.2: Type of heating systems applied in offices in 2009 (Agentschap NL 2011) Figure 4.3: Central heating System (PracticalDIY 2011) Figure 4.4: Coverage of total heat demand for each capacity (Annex I; Van der Wielen) Figure 5.1: Phases in construction of new residential area or building. Based on (Van Eck 2010) Figure 5.2: Actor involvement unambitious municipality Figure 5.3: Actor involvement ambitious municipality Figure 5.4: Formal relations between the actors Figure 6.1: The main elements of a local renewable heating system Figure 6.2: A basic solar boiler system (PT Gas 2011) Figure 6.3: Gas absorption heat pump (Remeha 2011) Figure 6.4: Underground Thermal Energy Storage (Oyster 2010) Figure 6.5: Electrical compression heat pump (REUK 2011) Figure 6.6: Moving grate biomass plant (the Carbon Trust 2009) Figure 7.1: Layered institutional model as applied in this research Figure 8.1: The five forces that shape industry competition (Porter 2008) Figure 8.2: The five forces applied on the market for HE boilers Figure 8.3: The five forces applied on the market for district heating Figure 8.4: Results of the five forces analysis XII

13 List of tables Table 4.1 Characteristics of an average HR 107 boiler (capacity 24 kw) Table 4.2: Characteristics of an average district heating network Table 6.1 Overview of the currently in the Netherlands available renewable energy sources and conversion technologies. Based on: (Buck, Keulen et al. 2010) Table 6.2: Financial and environmental performance of local renewable heating systems Table 7.1: Characteristics different heating options Table 10.1: Influence of developments on different heating systems Table 10.2: Current payback period local renewable heating systems Table 10.3: Effect of natural gas price increase on the payback period of local renewable heating systems Table 10.4: Effect of CO2 price inclusion on the payback period of local renewable heating systems Table 10.5: Effect of SDE+ subsidy on payback period of local renewable heating systems Table 11.1: Range of application of local renewable heating system Table 11.2: Financial and environmental performance of heating systems Table 11.3: Current payback period local renewable heating systems XIII

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15 Table of contents Preface... III Executive summary... V List of acronyms... XI List of figures... XII List of tables... XIII 1 Introduction Background Problem statement Research objective and research questions Research approach Outline of thesis Theoretical framework for research Research approach Institutional analysis Competitive analysis Conclusions Heat demand of the built environment Dwellings Heat demand of dwellings Ownership of dwellings Utility sector Heat demand of offices Ownership of offices Conclusions Heat supply of the built environment Heating systems in the built environment Dominant heating systems in the built environment Individual central-heating system District heating Conclusions Stakeholder- and network analysis The development of a residential area or building Actor analysis Formal relations Conclusions Local renewable heating systems A local renewable heating system Demarcation of technological alternatives Renewable heating technologies XV

16 6.3.1 Solar boiler Gas absorption heat pump Underground Thermal Energy Storage Biomass boilers Performance of local renewable heating technologies Main assumptions of the model Results of the model Conclusions Institutional analysis The layered institutional model Technology Informal institutions - Dutch values, norms and culture Formal institutions - Relationships between politics, bureaucracy and business Formal institutions: European, national and regional laws and regulation Institutional arrangements Actors Institutional arrangements local renewable heating systems Conclusions Competitive analysis Porter s framework on competitive forces Analysis of the market for individual central heating systems Analysis of market for district heating Conclusions Market opportunities Identification of market opportunities Current market opportunities Future market opportunities Conclusions Discussion Comparison of heating systems Development of attractiveness for system s owner and operator Developments from a policy maker s perspective Conclusions Conclusions and recommendations Conclusions Current market opportunities Future market opportunities Recommendations Recommendations for energy companies Recommendations for policy makers Recommendations for further research XVI

17 Recommendations for N.V. Nuon Energy Reflection References Annex I Interviews Annex II Characteristics of HE boilers Annex III Characteristics of district heating Annex IV Local renewable heating systems Annex V Subsidy arrangements for renewable heat XVII

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19 1 Introduction This research will provide insight in the potential of renewable heating systems, and more specifically in the potential of so-called local renewable heating systems. Local renewable heating systems are energy installations that make use of a renewable energy source and can supply heat, for space- and water heating, to the built environment in the direct vicinity of the installation. The research is carried out in the section Energy and Industry of the faculty of Technology, Policy and Management of Delft University of Technology. It is commissioned by the Public and Regulatory Affairs and Sustainability department of energy utility N.V. Nuon Energy. This first chapter has the intention to clarify the problem under study. It is structured as follows: in the first section the background of the problem is presented. Section two covers the problem statement. The third section states the objective of this research and the questions to be answered to reach this objective. The research methods are elaborated on in section four. The last section, section five, presents the outline of this thesis. 1.1 Background In the Netherlands the annual primary energy demand is currently around 3300 PJ. This energy is used for the production of electricity and heat, as a transportation fuel and as a feedstock. Heat production currently accounts for the largest part of total energy demand, almost 40% (Menkveld and Beurskens 2009). The built environment, which is the collective term for dwellings and utility buildings, is the largest consumer of heat, followed by industry and the agricultural sector. Dwellings and utility buildings have a demand for low temperature heat (<100 C) for space and water heating purposes. For the provision of this heat two different heating systems are currently applied in buildings: an individual central heating system on natural gas or a connection to a district heating network (Agentschap NL 2010). Natural gas is the dominant fuel for heating purposes. The Netherlands has a very finely meshed gas network and the majority of Dutch buildings, around 96%, has a connection to this network. Around 4% of Dutch consumers has no connection to the natural gas infrastructure, but is connected to a district heating network (EnergieNed and Netbeheer Nederland 2009). Large district heating networks can be found in Rotterdam, Utrecht, Almere, Amsterdam, Purmerend and Tilburg (Van Eck 2007). Only a very limited amount of total heat demand, less than 2%, originates from renewable sources (Agentschap NL 2010). Various renewable heating technologies are available on the market though. In the past years a number of local renewable heating technologies have been introduced as a result of a combination of technological and social developments. From a technological perspective scientific developments increased the possibilities for local renewable heat generation. From a social perspective an increase of energy sustainability awareness and an increasing desire for self-sufficiency have been important drivers for the introduction of local renewable heating systems (UC-Partners Team 2010) (Annex I; Kusse). Local renewable heating systems make use of renewable energy sources and operate on a local scale. Heat is produced locally for consumers that are located in the direct vicinity of the installation. This phenomenon is called local-for-local (UC-Partners Team 2010). The working principle and performance (technical, financial, environmental) of these renewable heating technologies differ from the conventional heating technologies. Renewable heating technologies that are currently available include solar boilers, heat pumps and biomass fired boilers. As appears from the limited share of renewable heat, the availability of these various technologies has so far not resulted in widespread application. Renewable heating systems are only sporadically applied, often in collaboration between a local government and a private party like a housing corporation. In many cases also an energy company is involved (Agentschap NL 2010). N.V. Nuon Energy is one of the energy companies that have developed a couple of local renewable heating projects in the previous years. These projects were independent initiatives of various business units and not part of an overarching strategy. Last year Nuon received an increasing number of questions from large business customers on renewable heat provision. These customers have a demand for decentral applications that can provide heat, for space and water heating, that make use of a renewable source. This development of customer demand made Nuon s Public and Regulatory Affairs and Sustainability department identify the need for a strategy on local renewable heating systems. 2

20 1.2 Problem statement Energy companies like Nuon are traditionally involved in the two ways of heat supply that are currently applied most in the built environment. With respect to central heating boilers Nuon is not only involved in the sales, installation and maintenance of the boiler, but also in the supply of natural gas. In the field of district heating Nuon is in most cases both owner of the network and responsible for the production, transport and supply of heat to the consumer (Feenstra 2010; Nuon 2010). The increased customer interest in renewable heating, as identified, might lead to the emergence of local renewable heating systems at the expense of the conventional ways of heating. For this reason it is interesting for energy companies, including Nuon, to obtain insight in the potential of local renewable heating systems and the impact this may have on their current business. The potential of local renewable heating depends firstly on the applicability of the various renewable heating systems in the built environment. Local renewable heating technologies are substantially different from gas fired boilers and district heating. Their working principle differs and different conditions must be met for application to be possible. Not all renewable heating technologies are applicable anywhere in the built environment. Secondly, local renewable heating systems have different technical, environmental and financial characteristics compared with gas fired boilers and district heating systems. In general, their environmental performance in terms of CO 2 emissions is better, their investment costs are higher but operating costs are lower (Annex I; Bek). The potential of renewable heat depends on whether the characteristics of the heating systems correspond with the objectives of the stakeholders that are involved with or have influence on the development of heat supply in the Netherlands. Real estate owners, including housing corporations, are important with respect to existing estate and project developers for new housing development. Furthermore, different layers of government are important. The emergence of renewable heating systems fits the national energy objectives. By 2020 a 20% CO 2 emission reduction needs to be achieved and 14% of energy demand should come from renewable sources (Rutte and Verhagen 2010). Various local governments on a municipality and province level also have ambitious energy- and climate targets to which an extension of the share of renewable heat in the built environment could contribute substantially. Furthermore, the potential of local renewable heating options depends on whether these systems fit the institutional environment, consisting of the rules of behavior that are present in relation to heating in the built environment. The institutional environment consists of informal institutions - in the form of norms, values and culture and formal institutions - the laws and regulation (Groenewegen and Lemstra 2007). An important informal rule of behavior is the so-called Trias Energetica. This Trias Energetica is a strategy consisting of three steps, which should be taken sequentially, to move towards a more sustainable energy system. Firstly, energy demand should be limited as much as possible through energy savings. Secondly, renewable energy sources should be used to meet the remaining energy demand. Lastly, if fossil fuels have to be applied these should be used as efficiently and cleanly as possible. There is general agreement amongst the Dutch government, consumers and many companies on the Trias Energetica strategy (Senternovem 2009; Nuon 2010; Van Eck 2010). The implementation of local renewable heating systems is a second step measure. As a result of the Trias Energetica the potential of local renewable heating systems depends also on whether the first step, energy saving, is already taken. A significant formal institution is the Heat Law, which will probably enter into force early Local renewable heating systems will be subject to the Heat Law (Minister van Economische Zaken 2008). The Heat Law regulates heat supply by dictating a maximum for the retail price of heat. This maximum is based on the price a customer pays for heat that makes use of an individual gas-fired boiler (RvB NMa 2010). This will influence the financial viability of local renewable heating projects and therefore their potential (Annex I; Van der Wielen, Van Eck, Van Egmond). Applicability, stakeholder engagement and institutional fit are important determinants for the potential of local renewable heating systems. Insight is missing in these different determinants. For this reason it is unclear whether and to what extent local renewable heating systems will be able to replace the traditional ways of heating that are currently applied most in the built environment. This hampers energy companies in the formulation of a strategy. 3

21 The focus of this research will be on local renewable heating systems with a capacity between 100 kw and 10 MW. A specific interpretation of this range will be provided in chapter 6. The most important consequence of this demarcation is that systems that supply heat to an individual household will not be taken into consideration. In this research only the possibilities for local renewable heating systems in the Netherlands will be analyzed. Four different renewable heating technologies are included in this research: solar collectors, gas absorption heat pumps, underground thermal energy storage and biomass fired boilers. This means that deep geothermal energy plants and biomass fired Combined Heat and Power installations are out of the scope of research. These systems are either difficult to implement in the built environment or not suitable for implementation within the predefined range. A more extensive justification for this demarcation can be found in section Research objective and research questions The objective of this research is to assist incumbent energy companies in the formulation of a strategy on local renewable heating systems. To achieve this objective the research question to be answered in this thesis is the following: What are the market opportunities for local renewable heating systems in the built environment? To assist in answering the main research question, the following sub-questions are formulated: 1. What is the heat demand of the built environment? 2. What is the performance of the heat supply systems that are currently applied in the built environment? 3. What are the most important stakeholders in relation to local renewable heating systems and what are their goals, stakes and positions? 4. Which technological alternatives for small scale renewable heat supply are suitable for application in the built environment and what are their characteristics? 5. Which institutional arrangements should be provided for by which actors to facilitate local renewable heating systems? Can these be provided for given the current institutional environment? 6. What are the possible impacts of the introduction of local renewable heating systems on the current market for heating systems? 7. How to decide on the market opportunities for local renewable heating systems? 1.4 Research approach In this research the concept of local renewable heating is analyzed from multiple perspectives. The procedure followed in this thesis is shown in figure 1.1. Each block in the figure represents a separate research step. Each research step answers one of the research questions listed above. Each analysis has one or multiple expected results, that leave the analysis-blocks from below. By means of the arrows it is shown which results from an analysis are used in a subsequent step. As can be seen the complete research consists of five different analyses. The approach used in this research is a combination of desk research and field research. In first instance desk research is executed to gain general insight on the subject. Subsequently, interviews are held with experts on the topic from both inside and outside the energy company Nuon. The first analysis, the analysis of the built environment, aims to provide insight in the composition of the built environment, the heat demand, the ownership and the current ways of heating. The information on the ownership of the built environment is the starting point for the second analysis: the stakeholder analysis. The stakeholder analysis leads to the identification of the stakes, goals and positions of the important stakeholders and their interdependencies. Furthermore, the criteria these stakeholders follow with respect to heating are identified. These criteria are used in the analysis of renewable heating technologies. The fourth analysis is the institutional analysis. For the institutional analysis the layered institutional model of Groenewegen and Van der Steen is used 4

22 (Groenewegen and Lemstra 2007). This model is based on the four layer framework of the economics of institutions of Oliver Williamson (Williamson 1998). The aim of the institutional analysis is on the one hand to provide insight in the current institutions that are in place to structure the functioning of the existing heat supply systems. But more important the institutional analysis has the aim to determine whether it is possible, given the current institutional environment, to realize well-functioning local renewable heating systems, and if not which adaptions have to be made to existing institutions and by which stakeholders. The fifth and final analysis is the competitive analysis. For this analysis Michael Porter s framework of competitive forces is applied (Porter 2008). The aim of the Porter analysis is to determine whether the emergence of the local renewable energy systems has impact on the current market for heating and therefore on incumbent energy companies. The theories applied in this research are further explained in chapter 2. Figure 1.1: Flow diagram of research steps 1.5 Outline of thesis The outline of this thesis is as follows. The second chapter of this thesis contains an explanation of the theoretical framework for the research carried out. It is explained which theories are important and which models that follow from these theories are applied. Chapter 3 is called the heat demand of the built environment and it provides a high level description of the composition, heat demand and ownership of the built environment. In chapter 4 insight is provided in the heating systems that are currently applied most in the built environment. The results of the stakeholder analysis are presented in chapter 5. Chapter 6 is dedicated to the analysis of the various renewable heating technologies that are included in this research. Firstly, it is explained which technologies are excluded from this research and why. Secondly, an overview is provided of the working principles and characteristics of the four renewable heating technologies that are part of this research. This makes it possible to compare them mutually and also to compare them with the systems for heating that are currently applied in the built environment. In chapter 7 the institutional analysis is presented. Subsequently, chapter 8 deals with the competitive analysis. The market opportunities for local renewable heating systems are identified in chapter 9. In chapter 10 contains a discussion of the developments in the (regulatory) environment. Chapter 11 presents the conclusions and recommendations that result from this research. This thesis ends with chapter 12, the reflection, in which a reflection is provided on both the approach and results of this research. 5