Guidelines on community-led heating and cooling

Your CH&Cs first business model

The establishment of solid own financial resources and a strong business case are an absolute necessity for the development of citizen-owned heating and cooling projects, this is especially important if part of the project funding is coming from banks (be it traditional or cooperative ones).

Financial resources come from capital contributions (e.g. shares) from members/shareholders who are involved in the projects, these are usually local authorities, citizens, key partners or supporters. Many energy community projects are based on direct citizen financing, or through national federations of energy communities.

In addition to long-term financing, energy communities have significant short-term cash requirements to cover the cost of waiting for subsidies, payment on accounts for the project’s works, and the generation of renewable heating and cooling.

In general the business models for CH&C are all very similar, with the equity from members mostly combined with bank loans and subsidies. The energy community calculates all the costs, including the depreciation, and reflects this in the tariffs for the customer. The main risk comes in the development of the project, but overall the income of district heating and cooling is very stable (since we all need thermal comfort). Combined with the controlled ownership that can regulate the tariffs if necessary, there is little financial risk once the project is operating.

Every CH&C business model will need to analyse cost, revenue, risk, heat losses, and discount rates:

1. Costs

The costs can be divided into two sorts. The CAPEX, or the initial total investment for the installation (i.e. the pipes, central heat pump, smart meters…), and the OPEX, the operational cost to keep the district heating and cooling network functional.

The costs of the CAPEX are often calculated by different parts of the total installation. There are the main pipes (from the source to the neighbourhood), the primary pipes (into different streets), and the secondary pipes (from the street to the houses).

Next to those costs your energy community needs to include the cost of the central heat source or industrial heat pumps. Finally the costs for the connection into the houses. If there are different types of houses you will need to separate them. For example the cost to connect an apartment building with a central pump is different than the cost to connect individual houses, or individual apartments on higher floors.

In other costs you should include the costs of the early stage development, the permits, energy storage, and if needed the cost of the feasibility study.

In the OPEX you can use the same costs as the above mentioned posts. All this infrastructure need some kind of maintenance. These maintenance cost need to be taken into account. Next maintenance, if your energy community does the supply of H&C directly, you should also include in the OPEX costs the yearly cost of personnel, helpdesk, and invoicing.

2. Revenues

Under revenue you can distinguish three different kinds: Subsidies, one-time costs, and tariffs. Do however keep in mind that while your energy community should have revenue, it should never have profits.

Regarding subsidies, when setting up your business case you need to research what kind of subsidies can contribute to your project. These can include tax breaks for investment subsidies, which can be considered as an upfront revenue.

Another revenue are one-time costs. These are for example one time payments by customers for the installation or connection to the district heating and cooling network. It is very important to determine what exactly is included in the tariffs for the installation, and what are the one-time costs for the customer. For example, homes changing from fossil to renewable H&C will have to transfer to electric cooking – are the costs for a new stove included?

Tariffs are the monthly cost that people pay for the H&C. Within the tariffs you can make different variables. It can be based mostly on the consumption, which is a risk for your business case when people use less than the district heating costs, or you use fixed costs to cover the initial investment and a small part based on variable cost related to use.

Do keep in mind that the energy prices should be affordable, considering with the environmental and social improvement mission of energy communities.

3. Risk

In your energy community’s business case you need to take some risks into account. You do this to give the risk a percentage that influences the revenue stream.

During the development phase of the project you have what is called the loading risk. Your revenue stream will only come in as fast as you can connect homes. If people don’t accept the offer, or the placement of the smart meters and connections are more difficult than expected, your loading of customers goes slower than expected, which entails risk to your energy community’s business model.

During the exploitation stage of Community-led Heating and Cooling (CH&C) there is a risk of empty homes. You can calculate this by looking at the turnover of houses in the area and assume the time the house has no inhabitants in the meantime. Cooperating with social housing providers in the area could be an interesting option, as they will have these numbers on record for their housing portfolio.

Finally there is the debtor risk. This is the percentage of customers that do not pay energy bills.

4. Heat Losses

What also needs to be taken into account are the heat losses in a district heating and cooling networks. These depend, among other things, on the length of the pipes, the flow and return temperature (low temperature installations have correspondingly lower losses), and the degree of insulation (insulation class) of the pipes.

5. Discount Rates

When building the business case of your Community-led Heating and Cooling you need to determine the discount rate. This is the return on capital you want to achieve in the project. This is needed to cover the risk of the project. In a community energy project you aim to make no profit, this however does not mean that you should not use a discount rate. Not including it would open your project to too much risk.

6. Templates

In the Netherlands the government contracted TNO (an independent not-for-profit research organisation) to create a template business case for district heating and cooling projects. The template also gave civil servants and new initiatives insight in the business case of district heating. You can use the template to start building your business case, but your business case should always be developed by financial experts to make it project specific.

Please note that the template is in Dutch, and might require translation.

Does your energy community use a business model, or technical analysis that you would like to share in these Digital Guidelines? Send an email to info@energycommunityplatform.eu.