Increasing Investments in District Energy in Cities

Focal Areas: Climate Change
Geograpic scope:
Project Description:

Globally, heating, cooling and hot water represent 60 per cent of the energy demand in buildings. Any solution for the climate and energy transition must explicitly address urban heating and cooling, as well as their interaction with electricity consumption and production. Reducing the energy demand of heating and cooling through building and appliance efficiency improvements will be crucial to achieving decarbonisation. However, even with demand side reductions in buildings, cities will still have significant demands for heating and cooling from the buildings sector and other sectors which will need to be supplied from low-carbon and efficient sources.


Modern district energy systems (DES) can reduce energy consumption for heating and cooling by 30-50% in urban buildings[1]. DES supply heat, cooling, domestic hot water, and electricity, with the goal of optimizing energy efficiency and local resource use. DES are about local production matched to local use – not only at a building level, but also at the neighborhood and city level. It is about sharing energy between buildings to achieve optimum utilization of local heat sources. And it is about resource-efficient neighborhoods and resilient cities. Modern DES combine district heating and cooling with elements such as combined heat and power (CHP), thermal storage, heat pumps and/or decentralized energy (other locally available energy sources). They enable the use of low-quality thermal energy  to provide heat, cool and hot water services in buildings. Such infrastructure can be integrated with local electricity production and allow energy savings of up to 90 per cent in the provision of heat/cool and electricity to buildings[2]. Modern DES not only enable city level energy infrastructure to become more efficient – but also to integrate renewable energy sources, while reducing cities’ fossil fuel consumption – and therefore reduce cost. Multiple other benefits include local economic development, job creation, avoided infrastructure cost, fuel source flexibility, increased system reliability, reduced vulnerability to external events and greater resilience.   


DES are not new, and cost-effective technologies are available today. National contributions of DES are significant and growing worldwide.  For example district heating meets 12% of heat demand in Europe and 30 per cent in China. In Russia, district heating meets 50% of heat demand in buildings. The USA has the largest district cooling capacity at 16 gigawatts-thermal (GWth), followed by the United Arab Emirates (10 GWth) and Japan (4 GWth). In South Korea, district cooling more than tripled between 2009 - 2011. At least 20 countries in Europe use renewables in their district heat systems, with at least 20% of EU-wide district heat generated by renewable sources.


Although shares are expanding and several national and local governments are setting targets, still, there are long-standing barriers to greater deployment of modern DES, some of which also stem from new innovations in technology applications. These barriers include [ We can try to reduce further/refine if required – just wanted to ensure all the points are captured]:


1. Lack of awareness. There is a lack of awareness with regards to the specific opportunities and benefits of improving efficiency in the building sector through district energy, about its diverse technology applications and their multiple benefits and savings. Further, misperception associated to district energy persist, such as: it being only relevant for heating in cold climates; that it is a technology of the past suitable only to highly centralised, top-down regimes; and that district energy will not be needed in the future due to the transition to energy efficient or plus-energy buildings. The DES publication and the DES Initiative webinars are already overcoming these myths, for example a webinar in New Zealand was undertaken to demonstrate that district heating can be delivered in temperate climates. The awareness campaigns delivered through Component 3 using the results from the deep-dive cities, sixteen city fact sheets (assessments) and synthesis reports will improve awareness of DES potential and benefits.

Capacity building is crucial to raising public and investor awareness, thereby lowering perceived risk, improving the bankability of projects and facilitating effective policy implementation.


2. Inadequate local and institutional capacity. The integrated approach offered by district energy is the very opportunity it presents to accelerate the energy transition, but it is also the key challenge because it requires significant local capacity for planning and implementing projects and coordination at multiple levels of governance and across multiple city systems. The challenges relate to a lack of capacity for coordination, new practices, policies, institutions, business models, finance, aggregation, and cross-sectoral linkages, along with changes in professional practices, education and training. Coordination is essential from a technical standpoint to ensure systems operate effectively and from a financial standpoint so that inefficiencies in planning and development don’t increase costs and so that projects are structured to attract investment. Planning and consenting risks can represent 10-20% of project costs. Furthermore, cities are not developing holistic energy strategies, goals and targets that address the heat/cool sector as it is seen as outside their remit. The lack of capacity will be overcome by assessing local barriers through DES Rapid Assessments in Component 1, establishing a local coordination framework of multiple stakeholders in each ‘deep dive’ city in Component 2 and providing tools, training and capacity building to cities in Component 3.



3. Lack of holistic planning policies, harmonized incentives and regulations.

Cities are not considering energy demand in urban planning and not ensuring a large, densely developed customer base to ensure viable project economics and not integrating infrastructure planning and land-use planning to match heat/cool supply with demand. Further a lack of appropriate recognition of benefits by some green building certification programs (e.g. LEED), which favor building-scale energy solutions, and a lack of an agreed methodology to recognise energy saving and environmental benefits are barriers to development. Lack of appropriate regulations can mean cogeneration is not always given favourable grid access or a sufficient power price to reflect the benefits of local generation. Lack of macro-economic policies and standards that reward the public benefits of DES and level the playing field against polluting alternatives (e.g., CO2 taxes). Local and national governments not setting appropriate tariff regulations that incorporate multiple benefits, create a level playing field, provide customer protection and ensure a sustainable business model for DES.


4. Finance. In many markets where the commercial viability of modern DES has not been proven, rates on debt can be prohibitively high, reducing the viability of projects. In such markets, demonstration projects will be critical to leveraging lower cost finance to DES and measures such as soft loans, guarantees or grants, or pre-construction offtake contracts from local government or large consumers can also help support DES in the short to medium-term. Furthermore, high project development costs can stifle development in new markets and may require grants, provision of technical expertise or innovative financing mechanisms such as a revolving fund. Many local governments are not attracting finance to DES due to a lack of capacity in structuring projects, putting projects to tender that attract the investments and a lack of awareness of business model options for DES that include private sector participation. By supporting four cities in putting commercially viable modern DES demonstration projects to tender in Component 2, coupled with supportive local policies and training on business models, the DES Initiative will help lower financing costs for the demonstration and future projects.


5. Lack of data/information. Political decision makers may underestimate or simply not know the energy demand for heating (which can be mixed with hot water, power and cooking) or cooling from air conditioning and electric chillers (which is hidden in a building’s total electricity bill). Additionally, methodologies to assess heat/cool demand patterns and collect data on local heat/cool resources are not established in many cities. This leads policymakers to underestimate the potential role of district heating or cooling in achieving objectives such as energy access, affordability or reliability, and to overlook the need to regulate, research or support it. A heat and cooling assessment is key to understanding heat and cool demand and can provide important data that can aid in strategy development at both the city and national levels. The DES Initiative is developing a global methodology for collecting heat and cool data which will be verified and improved in Component 2 and promoted through Component

[1] UNEP, 2015. District Energy in Cities : Unlocking the potenial of energy efficiency and renewable energy.

[2] IEA (2011). Co-Generation and Renewables: Solutions for a Low-Carbon Energy Future.

Lead Executing Agency: Unspecified
Project Type: FSP
PPG/PDF Grant: $ 0.00
PPG Confinancing: $ 0.00
Project Grant: $ 0.00
Project Confinancing: $ 0.00

Project Status

PIF: PIF Submission Date   2015/11/03
GEF Approval Date   2015/12/01 Document
PPG: GEF Approval Date   Unspecified No Document
UNEP Approval Date   Unspecified
Completion Date   Unspecified
Project: Expected CEO Approval Date   Unspecified
Project Submission To GEF  Unspecified
CEO Approval Date  Unspecified No Document
UNEP Approval Date  Unspecified
Completion Date  Unspecified No Document