Dealing with external costs of district heating plants

Researchers have evaluated how well Swedish policy instruments deal with external environmental costs associated with district heating (DH) plants. They found they have improved environmental performance, but for some plants, the costs of internalising external costs, in terms of taxes, emission permits and environmental fees, are higher than the environmental costs of pollution they produce.
Economic assessments of district heating (DH) plants typically only consider direct costs and benefits and do not include environmental externalities, such as air pollution, which affect wider society. Various policy measures can be introduced to cover the external environmental costs of DH plants in a way that benefits the whole of society.

The study, partly-funded by the EU NEEDS project¹, looked at the impact of environmental costs of DH plants in Gothenburg and related policy instruments. Environmental costs considered in the study included the impact of emissions of classical air pollutants, heavy metals, dioxin and greenhouse gases. Economic policy instruments were based on those in effect in the year 2007 and included tradable emission permits and Swedish tradable green certificates, whose prices are determined on the market.
The tradable green certificate system requires that a certain proportion of consumed electricity is generated from renewable energy sources. Other policy instruments were based on: Swedish energy, carbon dioxide and sulphur taxes for fossil fuels; and a refunded emission payment system for nitrogen oxides (NOx) emissions.

Overall, the results demonstrated that heat generation costs of different types of DH plants are significantly affected by current policy instruments and external environmental costs.
For some technologies, such as fossil fuel-based heat-only boilers and electricity-based heat pumps, the costs of complying with current policy instruments are higher than the assumed estimated environmental costs to society. This is due to the high Swedish energy and carbon dioxide taxes, tradable green certificates for electricity use, and the costs of tradable emission permits. However, some policy instruments have additional aims, e.g. reducing energy consumption through energy taxes.

The study also looked at the impact of environmental costs and policy instruments on heat generation from the plant. Modelling results suggest annual heat generation from the different plants varied, depending on the type of plant and whether external environmental costs were reflected in the overall costs. For example, compared to when the plants were operated to minimise operation costs (including current policy costs), more heat is generated in natural gas-based combined heat and power plants, while less heat is generated in biomass-based heat-only boilers when the plants were operated to minimise both operation costs and external costs of emissions (i.e. reflecting social costs).

The social cost (the sum of a system's private costs and external environmental costs) of operating the DH system was estimated to be EUR0.1-1.3 per MWh (megawatt hour) lower when external costs were included in the optimisation of the plants' operation. This value is noticeable when compared with the average variable heat generation cost but relatively small when compared with the average district heat tariff of around EUR56 per MWh in the year 2007. However, all estimates of environmental costs are naturally associated with large uncertainties in statistics, models and assumptions.

1. NEEDS (New Energy Externalities for Development for Sustainability) was supported by the European Commission under the Sixth Framework Programme. See: www.needs-project.org
   

Source: Fahlén, E., Ahlgren, E.O. (2010). Accounting for external costs in a study of a Swedish district-heating system - An assessment of environmental policies. Energy Policy. 38: 4909-4920.
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