District heating is a cornerstone of the clean energy transition, particularly for the sustainable utilization of low-temperature energy sources. However, with the shift toward low-temperature renewables, such as heat pumps, narrow investment evaluations underestimate long-term benefits, like reduced emissions, lower primary energy demand, and improved system resilience.
This article proposes a holistic, end-to-end framework for guiding stakeholders in creating the long-term foundation for the transition.
By Oddgeir Gudmundsson, Director, Danfoss A/S, Climate Solutions, and Jan Eric Thorsen, Director
Danfoss A/S, Climate Solutions
Published in Hot Cool, edition no. 6/2025 | ISSN 0904 9681 |
Introduction
Historically, district heating (DH) systems relied on fossil fuels, where downstream efficiency improvements had little effect on heat generation efficiency. As a result, traditional approaches have focused on localized gains, often overlooking the broader benefits of more efficient heat generation, distribution, and consumption practices.
As the DH system transitions from carbon-intensive fuels to long-term sustainable renewables, a paradigm shift occurs, where efficiency measures in one system element can have a substantial impact on heat generation and the primary fuel supply chain in general.
This creates an opportunity to rethink decision-making, impact evaluations, and investment strategies. To capture these benefits – such as lower energy costs, reduced emissions, and improved system resilience – decision-makers must apply a wide system boundary for investment impact evaluations.
This article compares two hypothetical systems: one with a heat pump as the baseload, and the other with a biomass boiler as the baseload. The case studies illustrate how a holistic approach can reveal major differences in energy efficiency, costs, and emissions from identical improvements.
Understanding how system setup affects the benefits of efficiency solutions allows policymakers, planners, and DH companies to make better decisions and plan long-term to maximize future returns.
The importance of system boundary selection
The perceived effectiveness of improvement measures depends on how system boundaries are defined, as these boundaries determine which system elements are included in the assessment. Traditionally, boundaries focus on individual elements—such as heat plants, pipelines, or end-user installations—because upstream impacts were minimal, especially on heat generation efficiency.
In decarbonized DH networks, a broader boundary encompassing the entire supply chain—from primary energy to end-user—provides a clearer view of benefits. This wider perspective helps reveal how localized improvements affect overall performance, reduce primary energy consumption, lower costs, and support environmental sustainability.
The thermal energy supply system can be divided into seven elements, grouped into three categories: (1) primary system, (2) thermal system, and (3) final energy demand, as shown in Figure 1. When assessing improvement measures, it is important to recognize that impacts may cascade within each group and upstream across groups. Understanding how elements interact when parameters change in neighboring elements enables estimation of system-wide effects.
For example, if the building’s technical installation is improved to achieve better cooling of the supply flow, this will reduce heat losses in the building, the energy transfer station, and the distribution network. The lower return temperature will also increase heat generation efficiencies, which in turn reduces the primary energy demand.
Finally, the reduced primary energy demand lowers losses in the primary energy distribution and reduces, and potentially alters, the mix of primary energy generation. A detailed methodology is provided in [1].
Figure 1. The three system categories and the seven elements of the thermal energy supply system.
Classification of solution improvement impacts
Many solutions can improve DH operation, but their impacts generally fall into four groups:
- Reduced oversupply – Oversupply refers to a situation where the delivered heat exceeds what is needed to fulfill comfort demands, or when a bypass maintains higher supply temperatures than necessary. Components that minimize oversupply include thermostatic radiator valves and building energy management systems.
- Reduced supply temperature – The minimum supply temperature is determined by end-user requirements or flow restrictions in the distribution network. Components affecting supply temperature include heat exchangers and heat emitters.
- Reduced return temperature – The return temperature depends on how efficiently components and control logic extract heat from the supply flow. Components such as heat exchangers, energy transfer station configuration, heat emitters, and control valves directly influence the return temperature.
- Reduced differential pressure – The Distribution of the heat transfer fluid relies on the differential pressure between the supply and return pipes. Pipe networks, heat exchangers, control components, and other factors that affect operating temperatures or heat demand influence pressure requirements.
Classifying the impact of improvement measures into these groups allows a generalized approach to assess their cascading effects across the entire heat supply system.
Reference systems
To illustrate the value of a holistic approach, two reference systems are considered, identical except for the baseload heat source, which is either based on a biomass boiler or a CO2 heat pump. These two systems can be considered as two future alternatives for an existing fossil-based system. Alternatively, it can be viewed as an existing biomass-based system, with a planned future replacement by a CO2 heat pump. The holistic assessment framework empowers decision-makers to assess long-term investment impacts and plan accordingly.
Key system data:
- Annual final heating demand: 100,000 MWh (80,000 MWh for space heating, 20,000 MWh for domestic hot water), plus 14,300 MWh losses in energy transfer stations and building heat distribution.
- Distribution network: Operates at an 80°C supply and a 40°C return. Reference operation assumes a 10% relative network heat loss (12,700 MWh/year).
- Heat sources: Base load covers 60% of peak capacity, corresponding to 96% of annual demand; peak load natural gas boilers cover the remaining 40% of peak capacity, corresponding to 4% of annual demand. The total heat generation, including final heat consumption, building and distribution losses, is 127,000 MWh/year. Figure 2 shows the system duration curve.
Figure 2. Duration curve of the system heat demand.
Table 1 shows assumptions related to the primary energy (PE) supply.
| Fuel source | PE harvesting, mining and processing efficiency | PE conversion efficiency | Distribution efficiency | Total efficiency | Fuel cost [EUR/MWh] |
|---|---|---|---|---|---|
| Grid electricity | N/A | N/A | 98% | 72.2% | 100 |
| – Renewable electricity | 100% | N/A | N/A | 100% | N/A |
| – Gas-based electricity | 88.6% (nGas) | 50% | N/A | 44.3% | N/A |
| Biomass | 95% | N/A | 98% | 93.1% | 40 |
| Natural gas | 90% | N/A | 98.5% | 88.6% | 41 |
Table 1. Efficiencies, see [2], and the cost of primary energy (PE) sources.
Considered improvement measures and their impact on heat generation
To demonstrate the importance of wide system boundaries when evaluating the impact of efficiency improvements, two complementary solutions are considered:
- Temperature optimization of the distribution network, achieving a 5 °C reduction in supply temperature.
- Heat exchanger replacement in energy transfer stations (substations), achieving a 5 °C reduction in return temperature.
Both solutions have a proven track record, yet have substantial implementation potential remaining.
Table 2 illustrates the approximate effects of changes in the system operating temperatures on the heat generation plants.
| Heat source | Reference efficiency [3] | Tsupply impact / Efficiency | Treturn impact / Efficiency |
|---|---|---|---|
| CO2 heat pump [4] | 350% | 1°C ↓ / ~2% ↑ | 1°C ↓ / ~3% ↑ |
| Biomass boiler | 115% | 1°C ↓ / ~0% | 1°C ↓ / ~0.2% ↑ |
| Natural gas boiler | 103% | 1°C ↓ / ~0% | 1°C ↓ / ~0.16% ↑ |
Expected impact of improvement measures
Traditionally, the impact of these solutions is evaluated only within the distribution network (double-outlined in Figure 1), as lowering operating temperatures in high-temperature, fossil-based systems primarily affects distribution losses. Table 3 illustrates the potential impact of this narrow system boundary on both temperature optimization and return-temperature reduction through an improved heat exchanger.
| Base load source | Reference system efficiency | System efficiency after improvements | Heat savings [MWh/year] | CO2eq reduction [ton CO2eq/year] | Cost savings [EUR/year] |
|---|---|---|---|---|---|
| Either supply or return temperature is reduced by 5°C | |||||
| Biomass boiler | 90% | 90.5% | 715 | 32.7 | 25,000 |
| Heat pump | 90% | 90.5% | 715 | 162.7 | 20,700 |
Table 3 suggests that the cost savings potential is limited, making it challenging to justify investment-heavy improvements, such as upgrading heat exchangers in energy transfer stations. In contrast, system solutions, like software-based temperature optimization, appear more attractive.
Extending the system boundary to the full thermal supply system shown in Figure 1 reveals higher-order benefits, which include impacts from upstream and downstream efficiency improvements, as well as changes in the fuel mix.
Table 4 shows results for both improvements across the two reference systems. With a wider system boundary, the higher-order benefits may justify solutions that seem unjustifiable under a narrow boundary, such as an improved heat exchanger in heat interface units of heat pump-supplied systems.
| Base load source | Reference system efficiency | System efficiency after improvements | Primary energy savings [MWh/year] | CO2eq reduction [ton CO2eq/year] | Cost savings [EUR/year] |
|---|---|---|---|---|---|
| Distribution system temperature optimization – 5°C reduction in supply temperature | |||||
| Biomass boiler | 83.6% | 84.2% | Biomass: 670 nGas: 710 | 450 | 29,200 |
| CO2 heat pump | 189.7% | 216.1% | Green power: 0 nGas: 9,380 | 5,770 | 368,500 |
| Improved heat exchanger at energy transfer stations – 5°C reduction in return temperature | |||||
| Biomass boiler | 83.6% | 84.9% | Biomass: 1,430 nGas: 960 | 620 | 67,400 |
| CO2 heat pump | 189.7% | 229.4% | Green power: 0 nGas: 12,930 | 7,950 | 517,700 |
Comparing Table 3 and Table 4 reveals that for sources sensitive to operating temperatures, such as heat pumps, a narrow system boundary can significantly underestimate the benefits of efficiency improvements, including cost, emissions, and primary energy savings.
For high-temperature sources, such as fuel boilers, a narrow boundary may suffice for supply temperature reductions. However, when solutions lower the return temperature, the boundary should at least include the heat source to capture potential efficiency gains from flue gas condensation.
System efficiency first: Framework for future proofing district heating
DH is a cornerstone of the clean energy transition, particularly for the sustainable utilization of low-temperature energy sources. However, with the transition toward low-temperature renewables, such as heat pumps, narrow investment evaluations underestimate long-term benefits, like reduced emissions, lower primary energy demand, and improved system resilience. A holistic, end-to-end framework is therefore recommended for guiding stakeholders in creating the long-term foundation for the transition.
The objectives of the guidelines should be to:
- Promote system-wide efficiency gains rather than localized optimizations.
- Align investment decisions with long-term decarbonization strategies.
- Promote modernization that prepares infrastructure for low-temperature operation at both supply and demand sides.
- Promote urban energy planning that supports integration of renewable and waste heat sources.
Existing EU policies such as the EED, RED, and EPBD provide a solid foundation for supporting DH. However, they could be further strengthened to unlock the sector’s full decarbonization potential. Recognizing the importance of holistic, system-wide evaluation for future investments, the following recommendations are proposed as supplements to existing EU policies.
For national governments
- Mandate holistic evaluation frameworks
a) Require DH investment proposals to assess impacts on conversion efficiency, distribution, and end-use, while acknowledging that upstream fuel supply impacts may fall outside the operator’s control.
b) Incorporate multiple future scenarios (e.g., biomass vs. heat pump baseload) into cost-benefit and socio-economic analyses. - Incentivize low-temperature building installations, design, and retrofits
a) Provide subsidies, tax incentives, or mandatory building codes for low-temperature-ready heating systems (efficient energy transfer stations, emitters, insulation).
b) Tie renovation supports schemes to compatibility with DH efficiency goals. - Support flexible generation and integration of renewables
a) Create frameworks that reward utilities for lowering operating temperatures to enhance system efficiency.
b) Promote integration of renewables and surplus renewable electricity through tariff structures or grid-balancing mechanisms.
For municipalities and urban planners
- Introduce zoning for sustainable heat use
a) Direct new urban development to low-temperature-capable, DH-ready buildings.
b) Prioritize low-temperature building zones near renewable or waste heat sources.
c) Designate high-temperature zones for buildings and industries that require elevated supply temperatures - Integrate district heating into broader urban sustainability strategies
a) Align DH expansion with climate neutrality roadmaps, air quality targets, and resilience planning.
b) Encourage partnerships between municipalities, utilities, and industries to utilize excess low-grade heat.
For district heating utilities
- Adopt wide-boundary assessment tools
a) Shift internal investment criteria from localized payback time to system-wide efficiency, fuel substitution, and emission reductions.
b) Standardize evaluation of improvements under multiple heat generation scenarios. - Prioritize long-term equipment standards
a) Require building installations, energy transfer stations, and control systems to be compatible with future low-temperature operation.
b) Phase in temperature optimization software and predictive control systems across networks.
Expected outcomes
- Energy savings: Significant reductions in primary energy use, up to 2% per degree reduction in operating temperatures.
- Carbon reduction: Accelerated decarbonization by unlocking upstream efficiency benefits and better usage of low-carbon energy vectors.
- Economic benefits: Lower lifecycle system costs and greater resilience against volatile fuel prices.
- Future-proofing: Ensuring infrastructure and building stock remain compatible with long-term renewable-based heat supply.
Conclusion
Decarbonizing DH offers a key opportunity to rethink how energy efficiency improvements are evaluated. A holistic, end-to-end assessment framework enables decision-makers to capture benefits that are often overlooked, as demonstrated by the presented cases, ensuring investments are not only cost-effective locally but also support the long-term vision of the system.
Efficiency improvements can generally be assessed using four impact groups: reduced oversupply, lower supply temperature, lower return temperature, and reduced differential pressure. Expanding the assessment to include more system elements reveals the true effects on efficiency, fuel mix, energy costs, and emissions. A holistic approach for evaluating investment alternatives leads to smarter investments, greater energy savings, lower costs, and faster progress toward a sustainable, low-carbon energy system.
The transition to sustainable DH requires a mindset shift, from local efficiency to system efficiency. By mandating holistic evaluations, incentivizing low-temperature readiness, and embedding DH into urban planning, politicians can create conditions that enable utilities and cities to make smarter, future-proof investments. This approach not only delivers near-term cost savings but also maximizes the integration of renewable energy, supporting national decarbonization targets.
REFERENCES
[1] O. Gudmundsson and J.E. Thorsen. The importance of system boundaries when evaluating the energy efficiency of district heating systems. Danfoss A/S, 2025. https://www.danfoss.com/en/about-danfoss/articles/dhs/the-importance-of-system-boundaries-when-evaluating-the-energy-efficiency-of-district-heating-systems/
[2] O. Gudmundsson and J.E. Thorsen. “Source-to-sink efficiency of blue and green district heating and hydrogen-based heat supply systems,” Smart Energy, vol. 6, May 2022. https://doi.org/10.1016/j.segy.2022.100071
[3] Danish Energy Agency. Technology Data Catalogue for Electricity and District Heating Production – Updated May 2025. Danish Energy Agency, 2025. https://ens.dk/en/analyses-and-statistics/technology-data-generation-electricity-and-district-heating
[4] I. Rangelov, M. Karampour, and T. Lund. ”CO2 Heat Pumps: System Solutions and Applications Mapping,” IIAR Natural Refrigeration Conference & Heavy Equipment Expo, March 2025.
For further information, please contact: Oddgeir Gudmundsson at og@danfoss.com