Pertti Salminen, Director, EU Affairs and Antti Kohopää, Adviser of District heating at Finnish Energy highlights the benefits of district heating…

Heat consumption of residential, commercial and public buildings is about 30% of all energy use in the EU. Heat demand is mainly satisfied by individual fossil gas, oil and coal boilers, with total market share of 64%, in addition the share of biomass is 11%. Heating is the key sector concerning emissions reduction, together with traffic.

Some 25% of heating is based on electric and district heating which are in the EU emissions trading scheme (EU ETS). However, the rest of residential, commercial and public buildings heating has slipped outside of it, the most effective policy instrument to reduce CO2 emissions. Today, these individual heating appliances in buildings emit more than 600 million tons of CO2 annually, whereas the total emissions from the ETS sector are now some 1880 million tons of CO2.

So far, actions at the EU level to limit the emissions of the non-ETS sector have been weak. Introduction of a binding cap and financial instruments to limit these emissions have not been a real topic in the EU. For many reasons, now would be the right time to start a debate on what kind of policy instruments EU should have to reduce the emissions of the non–ETS sector. For example, could the extension of the EU ETS to cover the heating sector deliver cost-efficient CO2 reductions?

All heating should be incorporated into to the emissions trading system

In the heating market different solutions should compete with each other. This means that customers should have the option to choose their heating solution. Therefore it is crucial that EU-wide energy policy does not distort the competition in heating.

Unfortunately, existing policies are distortive. The EU emissions trading system is a good example of distortion between different heating solutions. District and electric heating are covered by EU ETS and these products have the cost burden of the ETS. At the same time and in the same market gas, oil and smaller amounts of coal used in individual boilers are not covered by the EU ETS. These products have no cost burden and therefore they have a competitive advantage.

In some cases this may cause carbon leakage from the ETS sector to non-ETS sectors. Direction should be opposite. Customers should replace individual boilers to use less carbon intensive solutions like district heating, as well as electricity where that is feasible. Biomass is also a heating option in many member states, too.

The share of emissions covered by the EU ETS was 42% in 2013. After sectoral expansion of the ETS to cover all space heating, the share of the EU ETS would be 56-58% of the total GHG emissions.

Renewable energy and CO2-reductions could be done on behalf of the customers

The widespread use of district heating in urban areas in some EU member states, like Denmark, Netherland and Finland, is a concrete and a good example on how to change or at least how to create an opportunity to change large parts of the buildings from house-specific fossil heating to a carbon neutral future. During the past four years, the share of renewables in district heating has increased from 18% to 35% in Finland. Finnish Energy has estimated that the share could be above 50% in 2030.

Furthermore, over 70% of all district heat in Finland is produced in combined heat and power plants. CHP reduces one third of the CO2-emissions compared to the dominant technology producing the same amount of heat and electricity in separate utilities.

Existing or new customers do not need to invest in renewable energy sources in heating because district heating companies do it for them. The EU heating and cooling communication is a very welcome strategy. It emphasises the need for this kind of consumer based holistic and systemic approach.

The national effort sharing of emissions is a major political, technological and funding challenge

Almost all EU member states will have huge difficulties to achieve targeted emissions reduction in the non-ETS sector while emissions of the ETS sector will be reduced as agreed, for sure. In the future the problem is growing larger year, by year. Expanding the ETS to cover house-specific oil, gas and coal heating would make reaching the greenhouse targets much more cost-efficient and confident.

On the other hand extension of the EU ETS would improve the functioning of the emissions trading market. There would be more actors, more tradable allowances and more subjects for emissions reduction.

More incomes for member states

Possible extension of the emissions trading scheme would bring more emissions under the scheme and it would change the amount of auctioned emission allowances, and increase the price of allowances. This would increase the revenue of the auctioning and incomes to the member states.

In the long run, state economy should not be based on emission pricing because the target is to reduce emissions and therefore, base of incomes will dry up, but in the short term this could and will have a positive impact.

Need for further information and actions

Today, EU and all member states have economic instruments like taxes, building regulations, regulated energy prices, as well as, capacity and support mechanisms which all are incentives for heavy renewable investments without market based thinking or the overall advantage of the society. This is weakening the competitiveness of district heating, as well as electricity towards alternative solutions. Before any new legislative proposals, these policies should be analysed in the perspective of the heating market. Europe should make an analysis at the EU level.

On the other hand, our knowledge about the heating sector is still incomplete, even thinking about the statistics, which should be one of the key bases for all political decisions. We would need thorough analysis from where and how much emissions are caused by the non-ETS heating sector and what kind of emissions reduction policies exits. It would be important to know the price of emissions reduction in the heating sector, and why existing policies are not delivering emissions reduction.

Pertti Salminen

Director, EU Affairs

Antti Kohopää

Adviser, District heating

Finnish Energy

00358 9 530 5200

Please note: this is a commercial profile


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