Conversion from gas

EU and all member states have clear carbon reduction targets and have lately seen the effect of being very dependent on natural gas from one source/provider. With no wish to use natural gas for heating and hot water in the future due to it being fossil and imported from politically difficult areas – Europe must set a new direction. This direction is district heating in cities, towns, and villages.

By Søren Magnussen, Senior Consultant, the Danish District Heating Association and Sigrid Friis Frederiksen, Lead Candidate for Radikale Venstre for the EP 2024

Published in Hot Cool, edition no. 2/2024 | ISSN 0904 9681 |

The natural gas and energy crisis made Europe stand together and take the proper steps away from Russian gas. The EU stood together, and countries contributed with energy savings and investment in alternatives. The crisis has been averted, but the natural gas that used to come from Russia has largely been replaced by LNG, liquid natural gas whose origin can also be problematic and should be seen only as a temporary measure.

Establishing district heating on a large scale could reduce the import demand for gas in Europe.

Establishing district heating (DH) across Europe will ensure heat supply in the most economically optimal way for the benefit of citizens and the entire energy system. DH, together with good regulation, can guarantee that European households can look into a future where the heating of householding costs less, could protect against energy poverty, and ensure the local economy.

DH properly connected in dense urban areas can be delivered at very low prices. Investments are substantial, or the prize can be very low over the long term.

Biogas production is continuously expanding, but the green gas must be used in industry and production, not for heating households. Biogas should not take over significantly and will be taken up by other users willing to pay the most.

Multi-sourced DH is the right heating option when people live close together, and heat pumps should cover the rest – this article argues why gas is not an option.

The Russian gas adventure in the EU

In the years before the Russian invasion of Ukraine, the share of Russian natural gas in the European gas system had significantly increased over a decade. Primarily driven by Germany, which pushed the idea, made agreements, and established an investment in new gas pipelines.

That included the now-famous and long-gone pipelines “Nordstream 1” and Nordstream 2“in the Baltic Sea, which ended up being sabotaged. However, sharp warnings about dependence on Russian gas started to be heard.

Rounded up very sharply, one could say that the fundamental explanation for increasing gas trading with Russia was that it was an important diplomatic move in the belief that economic ties on both sides would ensure a future without aggression.

However, it was also about the fact that the Germans were in the process of retiring significant nuclear power resources and, to replace this electricity production, natural gas-generated electricity would reach new levels of demand.

A step further to the East, Poland was in the process of retiring coal as an energy source for electricity production. It made them 100% dependent on Gazprom’s deliveries without an alternative. Poland, therefore, took steps to establish a new natural gas pipeline from Norway through Denmark.

Initially, the pipeline should have been functioning as a substitution alternative in a future with significant European dependence on Russian natural gas supplies through the North Sea. A gas connection that initially seemed like a very expensive insurance policy, however, ended up being a crucial piece in solving the natural gas crisis.

Russia’s prominent natural gas exports to Europe appeared peaceful. They culminated with Gazprom as the primary sponsor of the top football tournament, the Champions League, with flashy advertisements displayed at all European stadiums. The sponsorship of the Champions League was the symbolic pinnacle of how Russian natural gas deliveries equated to an advancing power position in European energy supply.

However, we should remember that several prominent figures on the political stage, especially in Germany, continuously issued sharp warnings about the critical levels of dependence on Russian natural gas.

The end of the story and aftermath

With the Russian invasion of Ukraine, energy security quickly became a top political priority. When late summer 2022 arrived and other sources of electricity production in Europe faced challenges, the natural gas market panicked! Suddenly, natural gas became a cornerstone of electricity production, and prices soared to unreasonable levels.

A natural gas market with an immediate shortage of imports and declining electricity production had transformed into an all-encompassing energy crisis as electricity prices rose in proportion to natural gas prices. The price mechanisms in European natural gas and electricity markets are based on the principle that the most expensive electricity produced sets the bar for the day’s spot market. With the soaring natural gas prices, electricity produced on natural gas hit the roof of electricity and set the prices.

During the winter of 2022-23, all households, businesses, industries, and public local and state authorities felt the impact on their annual budgets. Inflation started to surge shortly after as the dependency on energy prices in other markets influenced pricing.

European consumers felt the decrease in purchasing power, and a crisis loomed that could have profound and transformative effects on EU cohesion. The Kremlin may have factored in the potential consequences of missing natural gas deliveries, but they were mistaken.

Putin may have anticipated the possibility of the EU being engulfed in protests against energy poverty, breakdowns in the power grid, conflicts between countries over resources, and the shutting of interconnection. In the autumn of 2022, some member states briefly had a political demand for price differentiation and suggestions of protectionist decisions regarding interruptions in energy connections between nations within the common market.

Ideas emerged because system analyses revealed that individual countries’ electricity production costs were much lower than the market prices. The situation didn’t improve when the profits of energy traders became public knowledge, and it was clear that trading companies in the electricity market were getting unreasonable profits due to the volatile nature of the electricity market.

The European Union demonstrated its strength during this period, and remarkably, this strength went somewhat unnoticed by the public eye. The absence of chaos diverted media attention as the EU made rapid and decisive decisions to win the “battle of energy.”

By sticking to the existing framework and only implementing new measures collectively designed to navigate the energy crisis, the EU countries stood together and found true “renewed energy in unity.” As Ursala Von der Leyern said, it was repeated by statesmen and women around the member countries.

So, do we have a plan?

The RePowerEU plan sets the direction towards energy independence in the EU. The measures in the REPowerEU Plan respond to this ambition through energy savings, diversification of energy supplies, and accelerated roll-out of renewable energy to replace fossil fuels in homes, industry, and power generation. One of the goals is to integrate geothermal and solar thermal energy in the modernised district and communal heating systems.

DH systems proved to be a significant mitigating factor against inflation during the energy crisis in countries like Denmark and Sweden. DH consumers fared better through the energy crisis and inflation because DH prices remained stable throughout the winter of 2022-23.

DH’s energy production is composed of various energy sources, and with long-term delivery agreements, smaller price increases only began to take effect in the winter of 2023-24.

DH demonstrated its resilience and, most importantly, its energy security. DH consumers and their households acted as a direct counterbalance to inflation. The extent of DH adoption in individual member countries became a crucial factor in determining the level of inflation.

Gas is important but should not be used in households.

The natural gas sector has historically been very influential and has significant economic interests in maintaining natural gas demand in the EU. However, overall natural gas consumption is declining, so the share of biogas is expected to increase.

Nevertheless, reaching a 10% biogas share in European gas networks is a long journey. Natural gas consumption must continue to decrease significantly, which the recently adopted gas and hydrogen package also aims to achieve by allowing the removal of supply obligations and thus dissolving decades-long consumer protection. Production must also increase significantly.

Therefore, governments and gas companies may announce the closure of natural gas supply in areas where alternative sources are available within a reasonable period, typically 8 to 10 years. Closing the natural gas network in areas where collective heating, such as DH, is established would be the most secure way to develop a stable, affordable replacement.

Failing to plan for the closure of the natural gas network due to a lack of political will and good energy planning could result in a triple heating supply through DH, gas, and electricity (heat pumps), which would be suboptimal and the most expensive economic outcome.

What’s next?

The problem has been solved for right now, but only temporarily. In the long term, the gas market and prizes would depend on countries outside the EU, and the prizes will be vulnerable to political decisions far away. World market prices for liquefied natural gas (LNG) will continue to determine the price of gas in Europe for many years, regardless of the quantities produced internally in the EU and the use of biogas.

The gas market operates similarly to the electricity market, where the most expensive production sets the daily price, incentivizing energy efficiency and ensuring that those who produce most efficiently gain the greatest profit.

In general, there will be significantly fewer customers to finance the maintenance of the European natural gas network. In both Denmark and Germany, DH is becoming increasingly popular and replacing natural gas heating.

In Denmark, the state-owned gas company Evida is changing its tariff system so that, in the future, it will consist of a much larger fixed payment for all gas customers (as there are fewer consumers to cover the gas companies’ fixed costs) rather than being solely based on consumption.

This new approach underscores the gas network’s challenges with a shrinking customer base. It may be the first of many steps toward a significantly more expensive user economy for households using natural gas as their heating source. In 2023, EU member states and the EU Parliament adopted a large climate package where petrol and diesel vehicles, gas boilers, and oil boilers face rising expenses. This is due to the expansion of the EU’s CO2 quota system in 2027.

For gas boilers, the price is expected to increase by 440 euros per year for an average house. This will also help and inspire households’ incentive to replace natural gas with alternatives. In areas where DH is established, natural gas is replaced as home heating in up to 80% of the buildings.

Summary

The new ambition for all cities with over 40,000 inhabitants to have heating planning is a good start. Areas must be investigated for their potential for DH. Organization, ownership, regulation, and legislation must provide the right framework for DH to be established and supplied with good, cheap, and green heat for a long time.

The heating plans cannot, therefore, stand alone. The heating supply must continue to be on the local political agenda, and companies, associations, and citizens must be mobilized so that the green transformation of the heating sector can be successful.

Regardless of ownership, DH is a community, and good communities require unity and direction. The energy crisis has shown us that we can, and this spirit should live on for the next several years if we are to succeed in establishing green, safe, and cheap heating DH.

For further information please contact: Søren Magnussen, sma@danskfjernvarme.dk