Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

Abstract: Large number of block of flats are today often connected to municipal district heating grids. Such systems became very popular in Sweden some fifty years ago. The reason for this was that cheap low-quality oil was abundant on the energy market but normal building owners could not use it in their own low-cost oil-fired boilers. They had to use better and more expensive oil for their heating purposes. In a district heating plant low-quality cheap oil could be burnt in a sophisticated, but expensive, boiler. Such a plant was also large enough to afford investments in other equipment, e.g. for sulphur reduction. Further, the municipalities saw their chance to get rid of many other sources of heat, such as coal and wood, which polluted the air for many inhabitants. It was better with one high and large chimney than thousands of small. During many years heavy oil was the dominant fuel in our district heating plants. Unfortunately, the use of oil made the trade balance of Sweden problematic and the country vulnerable to fluctuations on the energy market. The oil-crises during the 1970-ties made the situation even worse. Sweden had to get rid of the dependence of oil and district heating based on other fuels, or even electricity, where available alternatives. Environmental hazards, high prices and the obligation to reduce greenhouse gas emissions have led to modernisation of the plants and nowadays, a number of energy sources are in use, many of them with very competitive prices. Waste, garbage, worn out rubber tyres, demolished wooden buildings are used as fuels today. There are however drawbacks. Boilers and equipment for waste incineration are expensive devices and it is many times not possible to cover the total heat demand by use of garbage etc., as the only sources. The amount of waste might also be too small. Sometimes coal and oil must be used during peak conditions but taxes and emission allowances make such fuels expensive and the utilities try to do their best in order to avoid such fossil heat sources. If it was possible to reduce the demand when peak conditions emerge, fossil fuels could be avoided. Up to now, normal Swedish district heating tariffs were not thought to encourage such a behaviour, but as this study shows, the cheapest solution for a proprietor is many times to abandon district heating during the winter and use alternative solutions. The utilities of course want to sell district heat also during the winter but if the building owners want to reduce their costs as much as possible the district heating tariff tells them to use heat from the utility only during summer.

Keywords: Optimisation; Modelling

JEL-codes: C61

23 pages, July 6, 2007

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