A report examining the potential and costs of district heating networks was released on 5 May at the Local Authority Community Heating Summit as part of the Department of Energy and Climate Change's ongoing work into the need for, and reform of, policy options to support district heating schemes.

Entitled "Potential and Costs of District Heating Networks" the report, undertaken by Pöyry Energy Consulting and Faber Maunsell, identifies the potential costs and benefits of district heating, assesses the technical potential in the UK and investigates the economic and non-economic barriers to further investment and deployment.

Key issues

Heat for homes, businesses and industrial processes accounts for around 49% of total energy demand and 47% of carbon emissions. The UK has challenging carbon reduction targets and, if the UK is to deliver on its climate change targets, there will need to be a substantive change in the efficiency of heat consumption.

A district heating network (DHN) comprises of centrally produced heat, with hot water piped to nearby buildings. Such schemes have the potential to contribute to the achievement of the carbon reduction targets by improving the efficiency of energy use, especially where heat production involves exploiting combined heat and power or waste heat from existing power stations. District heating also has the flexibility to accommodate heat from a variety of sources, including biomass.

Although district heating schemes have been operational in the UK since the 1950's, they have only achieved a low market penetration and currently provide only 2% of the UK's heat demand. This is in contrast to other European countries; in Finland and Denmark, for example, district heating is the dominant heat source, accounting for 49% and 60% of total heat supply respectively.

Findings of the report

The Pöyry report assesses the economic potential for DHNs in the UK. Under the high potential scenario, the report states that up to 14% of the UK's building heat demand could be supplied by DHNs. However, to achieve this, the main economic barriers facing new projects would need to be overcome.


The report has indicated that unless there is a shift in the present market or regulatory environment, the take up of DHNs in existing building stock is likely to be limited, particularly in the domestic sector.

The main explanation for the low penetration of DHNs to date, is the relatively high costs of providing heat through district heating in comparison with conventional gas or electric based heating systems. The main element of the higher costs of district heating is the network of hot water pipes. For example, under current cost assumptions, a heat network to supply 270,000 households would cost in the region of £1.5bn.

There are some combinations of fuel sources and building types that can reduce the relative costs, for example, where the DHN:

  • uses waste heat from conveniently sited power stations (where heat is essentially produced at a very low marginal costs)
  • replaces electric heating systems; and
  • supplies to commercial premises and high-rise flats in high heat density areas.

However, in order to make DHNs competitive, Pöyry indicate that the following issues must be addressed:

  • project risk: including lack of industry experience, revenue variability, long term viability (i.e. risk of redundancy if alterative technologies become more competitive) and access to loan capital;
  • project costs: including schemes with mixed housing stock, lack of established supply chain, lack of standardisation in contract structures, inability to access full revenues from CHP-based schemes (due to the current incentives in distribution charging methodologies to pursue the 'private wires' approach), uncertainties over revenue risks and marketing costs;
  • institutional issues: lack of public sector leadership (potential private sector investors will be looking for underwriting of the identified project risks by the public sector); and
  • carbon price: the main benefit (i.e. carbon savings) of moving to such schemes must be fully rewarded.

DHN potential

The Pöyry modelling indicates that, where DHNs can achieve high penetration in built up urban areas (in the region of 80%), the carbon abatement costs of various district heating options (including waste heat from fossil power stations) can be more cost effective than stand alone renewable technologies. In fact, the Pöyry report says that waste heat from power plants is the most economic heat sources for district heating schemes as long as there is a load of 200MW (equivalent of 50,000 domestic households) within 15km of a power station.


Pöyry's analysis suggests that, under the current market and regulatory conditions, district heating could feasibly provide up to 14% of the UK's non-domestic building heat demand and displace electric heating in around 70,000 dwellings.

If the project development were both de-risked and subject to a higher carbon price through policy interventions aimed at reducing risk, increased local authority responsibility, reduced capital costs and increased potential revenue streams, Pöyry's scenario analysis indicates that it could also be economic to develop DHNs serving up to 1.4 million dwellings in social housing and up to 16.7 million square metres of floor-space in public buildings.

Pöyry advocates taking positive action to develop DHNs and states that "there is no advantage in delaying initiatives to develop DHN, indeed the reverse".

Click here to access the report.