District Energy in US Climate Change Strategy

4. Quantitative Analysis

4.1 Overview of Methodology

In 1994 a detailed analysis of energy savings, greenhouse gas reductions and economics of district energy systems was performed.¹³ The analysis was structured around a fundamental question:

"What are the energy, environmental and economic benefits of deploying capital to build district energy/cogeneration systems for a portion of the power plant capacity projected to be required by the year 2010?"

This focus is the most productive approach to a preliminary analysis because the upcoming investments in generating capacity have enormous economic and environmental implications, and by focusing on facilities yet to be built we avoid the complexities of, for example, retrofit of existing power plants to provide cogenerated thermal energy for distribution through district energy systems.

The analysis quantified the energy efficiency, emissions and costs of two model cogenerated district energy systems (DES): one fueled entirely with natural gas and the other fueled primarily with coal. The characteristics of the DES technologies were then compared to two models of conventional technologies for providing the same combination of end-use energy (heating, cooling and electricity to the grid). The model gas-fired and coal-fired DES were used as the basic building blocks for the analysis.

Each model DES provides or avoids the need for a calculated amount of power plant capacity. In the analysis it was assumed that DES provided 6% of projected 1995-2000 new capacity, and 28% of 2000-2010 new capacity, for a weighted percentage of 22% of total 1995-2010 new capacity. (The Energy Information Administration's 1993 power plant projections were used in this analysis. The model should be re-run based on the projections in "Annual Energy Outlook 1996," which extend out to 2015 and include more gas-fired capacity and less coal-fired capacity.)

The amount of nationwide DES development assumed in the analysis is consistent with an estimate of potential in New York State. The potential for cogenerated district heating in New York is over 20,100 Million Btu per hour (MBtu/hour), which is 8.4% of the 240,100 MBtu/hour U.S. potential identified in this analysis. The population of the state of New York is less than 8.0% of the U.S. population.

4.2 Carbon Emission Reductions

Annual carbon emission reductions were estimated to be 9.6 million metric tons of carbon equivalent (MMTCE) by the year 2010. (See Figure 12.) The analysis conservatively assumed no further district energy system development, and thus no additional annual greenhouse gas reductions, after 2010.

Figure 12. Annual greenhouse gas reductions through the year 2010

4.3 Cumulative Investments

Capital investments in DES will be partially offset by investments which would otherwise be required for new power plant capacity and investments in building heating and cooling equipment. Cumulative net capital investments in DES to achieve the estimated greenhouse gas reductions were projected to be $25.1 billion (1992 $) by 2010. In the calculations it is assumed that no additional capital investments are made after 2010.

4.4 Energy Savings

Reductions in annual and cumulative primary energy consumption, in quads and dollars, are summarized in Table 1. The economic value of fuel savings is calculated using "source" energy costs, i.e., wellhead gas, minemouth coal and crude oil, as provided in 1994 by the Department of Energy for the Interagency Analysis Team. Again, it is important to note that the simplifying assumption was made that no new DES capacity would be installed after 2010.

Table 1. Cumulative value of energy savings in the years 2010 and 2030
	2010	2030
Annual energy saved (quads)	0.52	0.52
Cumulative energy saved (quads)	3.01	13.39
Annual value of source fuel saved (billions of 1992 $)	3.8	6.5
Cumulative value of source fuel saved (billions of 1992 $)	20	121

4.5 Annual Costs

Total debt service costs of cogenerated district energy are about one third higher than conventional technologies. At current prices, the overall costs of district energy, per unit of total energy output, are only 6% lower than conventional technologies.¹³ (Figure 13) In essence, district energy/cogeneration systems substitute capital for the continuing costs of fossil fuel consumption and the environmental impacts associated with that consumption.

Figure 13. Comparison of district energy and conventional technologies -- cost per unit of total energy output¹³

Most significantly, as energy prices rise, the economic benefit of district energy grows substantially, overshadowing the capital cost disadvantage. In the annual cost projections, capital investments in DES were "front-loaded," i.e. unit costs were increased in early years to account for the nature of investments in DES, in which early-year investments are significantly higher than long-run capital costs per unit of capacity.

The net annual costs of district energy, compared to the conventional technology scenario, were calculated using the IAT "source" energy price projections discussed above in Section 4.4.

The results show higher annual costs between 1996 and 2006, but annual costs are thereafter negative. (See Figure 14.) The significant negative costs result because DES substitute capital for energy consumption. With the projections provided by the IAT for higher future fuel costs, the cost reductions with district energy become increasingly dramatic after 2010.

By the year 2030, district energy provides net present value savings of $185 and $60 per ton of carbon reduced, at discount rates of 3% and 7%, respectively.

Table 2. Net present value of cumulative net costs at 3% and 7% discount rates
	NPV in millions of $		NPV in $ per ton carbon
Year	3%	7%	3%	7%
2010	4,481	4,831	80	86
2020	-21,271	-7,045	-140	-46
2030	-46,047	-14,854	-185	-60