District Energy: Cost-conscious Decarbonization

Guest contribution: Matthew Kerner

There is no easy way to put it. Affordability around the world has not been great.

Despite significant improvements in the rate of inflation in 2023, the International Monetary Fund (IMF) still forecasts global headline inflation to sit above 5% through 2024. One prevalent theme in the cost of living that has seen its problems grow due to recent economic turmoil is a lack of affordable housing. The IMF reported that in most countries, housing prices grew faster than incomes between 2015 and 2021.

Although the factors affecting this relationship are varied and diverse, a pattern that has emerged in some regions is the severe escalation in the cost of construction. For example, in Canada, RBC has reported the cost of construction for residential buildings has risen 51% since the beginning of 2020, compared to a 13% rise in the Consumer Price Index (CPI).

Source: RBC Thought Leadership

And, as we enter the low-carbon era, homes present us with another issue on a different front. According to the International Energy Agency (IEA), buildings (and their construction) are responsible for more than a third of the planet’s energy-related emissions.

Although technologies and standards are being leveraged at an accelerated pace around the world to advance the decarbonization of our built environment, studies have shown that “green” and high-performance buildings on average can cost more than 5% to construct and 30% to design, although significant variation in costs arise depending on the level of energy and emission performance achieved.

Considering the current state of real estate development, how do we meet our sustainability goals in the decades to come without further impacting the price of buying or renting a home?

(Re)Introducing District Energy

Within our built environment, heating and cooling are significant contributors to annual building emissions. According to the US Environmental Protection Agency, it’s estimated about 80% of direct emissions from the residential and commercial sector can be attributed to the burning of fossil fuels for heating (and for cooking). For countries with warmer climates, this ratio is likely to decrease, but can cause cooling (normally an electrical process) demand to increase. Global trends show that most nations with warm climates maintain electrical grids with high emission factors and, at the same time, cooling demand is a significant portion of total electrical demand. For example in the UAE, cooling makes up 70% of all energy consumption in the country during peak periods.

Source: Our World In Data

It’s clear heating and cooling make up a significant amount of the emissions and energy produced and consumed by buildings around the world, and being able to improve efficiency and sustainability without affecting affordability will be a challenge. Thankfully, there is a strategy that has been leveraging economies of scale for more than 100 years that can deliver thermal energy as efficiently and economically as possible, while also providing opportunities to decarbonize entire neighbourhoods at once: District Energy

District energy, which encompasses both district heating and cooling, is a strategy that centralizes the generation of thermal energy for a group of buildings, and can serve areas as small as neighbourhoods and campuses, to as large as whole cities. In certain applications, district energy systems are also capable of providing power via microgrids, but this article will focus primarily on the thermal side of the industry.

Although the fuels and technologies used in district energy systems have evolved over the last century, the major components have remained relatively unchanged. District energy systems provide heating and cooling by replacing individual building-scale mechanical plants with a centralized thermal generation plant, a distribution piping system that delivers thermal energy from the plant to each building using water or steam, and energy transfer stations, typically a group of heat exchangers that are located in each building to connect it to the larger district energy system.

Source: Creative Energy

This results in the same heating and/or cooling load being served with less overall mechanical equipment and more efficient operations, due to the consolidation of distributed thermal assets and the creation of a diversified load across the system. Centralization also opens the door for energy sharing within the network, allowing for waste-heat (from industrial processes or from large cooling loads like data centres) to be used elsewhere for heating purposes, increasing overall energy efficiency.

Another key feature of district systems is their ability to grow and evolve over time. By extending distribution piping, new customers can be connected to the plant and grow the economy of scale while additional capacity can be added via the installation of new equipment to the central plant or the addition of new nodal plants elsewhere in the network. This flexibility also allows district systems to future proof, as new sources of heat can easily be added to the generation mix, providing a hedge against the ever-changing energy landscape.

Early forms of district energy have been around since the Roman Empire, who used hypocausts and ancient plumbing techniques to heat and distribute hot water around large bath house complexes called thermae. The first true district heating system is considered to be the hot-spring heating system in Chaudes-Aigues, France, which was developed in the 14th century using wooden pipes to bring naturally heated water to the base of 30 homes, providing both a source of heating and hot water.

The modern age of district energy started in North America and Europe around the turn of the 20th century, where coal-fired steam heating systems would be developed within large campuses (e.g. MIT’s Central Utility Plant) and urban centres like New York and Paris. These systems would define what is now referred to as the “first-generation” of district energy. Despite the benefits realized by centralization, these early fossil fuel systems would be inefficient compared to today’s standards, and district energy would evolve over the next century to improve performance and flexibility.

Source: Science Direct

Through the 1900s and into the 2000s, second and third generation systems began to move away from coal and towards the relatively cleaner fuels of oil and natural gas. With the introduction of combined heat and power (CHP) plants (which utilize excess waste heat from power production), the integration of thermal energy from other high-grade waste-heat sources (e.g. industrial waste heat), and the use of hot water for distribution, the energy efficiency and sustainability of district energy gradually improved. Shortly after the beginning of the third generation in the 1990s, the first large-scale district cooling systems would begin to appear in North America, Europe, and the Middle East.

By the 21st century, standard operating temperatures for district heating had dropped to below 100 degrees Celsius, and systems were incorporating thermal energy from non-fossil fuel combustion, such as waste incinerators and biomass CHP plants. Many of these efficiency improvements arose out of Scandinavia during the oil crisis of the 70s, which had countries like Denmark and Sweden, who were very reliant on foreign oil, vowing to leverage district energy to use their imported fuel as efficiently as possible, and to capture as much useful waste-heat as possible to reduce their reliance on fossil-fuels.

Source: CIBSE

Old Strategy, New Solutions

In 2023, we currently find ourselves in the middle of the fourth generation of district energy which is characterized by lower operating temperatures and the use of large centralized heat-pumps. Both of these features have allowed district energy systems to begin utilizing a larger variety of renewable thermal energy sources including geothermal energy, heat recovery from wastewater in sewage lines, solar thermal energy, and (for systems providing both heating and cooling) the waste heat captured from electrical cooling processes that would otherwise be rejected to the surroundings.

With these new tools at district energy’s disposal, the fourth generation brought about a renaissance for the industry. No longer were district systems considered champions of energy efficiency, but now also as community-scale decarbonization solutions. Projects like the Drake Landing Solar Community in Alberta, which uses solar thermal collectors in combination with a geothermal battery to heat residential homes, and Vancouver’s Neighbourhood Energy Utility, which was originally built for the 2010 Olympics and captures the thermal energy from wastewater to provide space heating, are great examples of fourth generation systems with positive emission impacts on both small and large scales.

Today, the combination of district energy’s legacy in urban centres, its ability to expand and connect new loads throughout a community, and its flexibility in accommodating a variety of energy sources position it to be an important tool in decarbonizing both existing and new buildings as cost-effectively as possible.

For legacy systems that have connections to older buildings, district energy allows cities and communities to leverage the economy of scale and decarbonize the entire network at once. Instead of dealing with multiple retrofits on a building by building basis, district energy allows for mass decarbonization through an addition of low-carbon capacity to the central plant or by fuel-switching from conventional fuels like natural gas to cleaner alternatives, like biomass, or hydrogen. Alternatively, by expanding the existing system to a source of low-carbon thermal energy, like a data centre (which produces large amounts of waste-heat) or a geo-field (a geothermal energy source), the entire network will experience an addition of low-carbon capacity. As the network continues to expand, targeting new avenues of sustainable heat, all connected buildings will see improvements in their carbon performance. As an example, Creative Energy in Vancouver is currently going through a massive electrification and decarbonization of their district heating system (opened in 1968), which will reduce emissions across more than 200 connected buildings.

When considering new developments, implementing district energy has additional benefits that can assist in mitigating the high costs of developing new real estate. For larger projects that contain multiple buildings (which are unlikely to peak simultaneously), centralization increases the diversity of the heating and cooling load and lowers the overall peak demand on the system. This improves overall efficiency, while also reducing the total amount of thermal equipment required for the project, and decreases the upfront capital costs required to complete the development. This effect is compounded when installing (at a premium) the high-efficiency equipment or low-carbon technologies that are necessary to meet progressive energy and emission standards. Furthermore, by removing mechanical plants, shafts for boiler flues or cooling towers, and any roof-top mechanical equipment from all the connected buildings, and replacing them all with a single central plant (and relatively small energy transfer stations), developers are able to reclaim this surplus mechanical space as additional salable area.

These symptoms of using district energy lower upfront costs and improve the overall economics of the project, which in turn lowers the barrier for developers to adopt more sustainable technologies and aim for higher levels of environmental performance, helping projects align with corporate values and comply with local policies and standards. In some regions, meeting these higher standards can lead to additional benefits. At the local level, Toronto is an example of a city that has adopted green development standards and rewards compliance beyond the baseline requirements for energy use and emissions by offering refunds to development charges. Adopting certain technologies can also lead to further economic benefits from federal programs, such as the Canadian Government’s Clean Technology Investment Tax Credit (ITC) and the American ITC’s included in the Inflation Reduction Act for renewable energy, which are both applicable to a range of low-carbon heating solutions.

Source: IDEA

Decarbonizing the heating and cooling of our built environment will not be a small task but with a near 10x increase in investments into clean heating and cooling technologies in 2022, the road ahead is promising. For district energy, one does not need to look too far ahead to see the future of the industry, as the fifth generation of district energy systems is already starting. These are characterized by ambient temperature operation (i.e. close to ground temperatures), which enable the use of distributed bi-directional heat pumps at connected buildings to provide both heating and cooling from a single set of pipes, while further increasing district energy’s ability to incorporate a variety of renewable and waste-heat sources, as well as improving energy sharing potential across the network. District energy’s flexibility also positions itself to incorporate emerging renewable technologies (SMRs, hydrogen etc.) as they continue to be sophisticated.

I hope this exploration into district energy and its origins helped showcase how this strategy of the past can make a significant impact in our sustainability efforts of the present, and highlights why district energy is commonly listed as one of the top 100 solutions to address climate change, and how it can be complementary to many other leading solutions as well. By using our renewable resources as efficiently as possible, and leveraging economies of scale, district energy has the potential to create communities that are sustainable for both its residents and the planet at-large, while also minimizing the impacts of environmental standards on home affordability.