Around the globe there is active investment, acquisition and expansion in district energy,
especially cooling as a means to support economic and environmental objectives
Rob Thornton, president of the International District Energy Association, has been working in the sector since 1987 and has never seen it so active and vibrant. He tells Diarmaid Williams why there is growing recognition of the merits and advantages of district cooling.
PEi: There is a perception that district cooling is the preserve of cities in warmer regions of the world, and often a failure to note its relevance in colder climes. Is the stereotype indeed the rule or has it evolved?
Rob Thornton (RT): The commercial district cooling industry started in the US. Hartford, Connecticut was the first downtown district cooling system initiated in 1962, and I worked at that company for five years in the late ‘80s. While we were there we doubled the size of its district energy system.
At the time the buildings we connected were mostly commercial office developments, some special events spaces, some residential and hotel space. In the buildings that we connected, the ratio of cooling BTUs to heating was 3:1 – three times as much cooling energy per building than heating.
What’s happening now even in northern climates, is that with clustered buildings, there is an aggregation opportunity where there is high density. Buildings are not unlike human bodies. Heat is generated internally by lights, computers, human bodies, even on a mild Spring or cold day, so that heat has to be either rejected and released or utilized.
Of course district cooling is growing as an industry in warmer climates. Certainly, in the Middle East we’ve seen tremendous progress. In the last decade, the UAE has been the most significant market, with Abu Dhabi and Dubai dramatically shifting to district cooling as an environmental strategy. Saudi Arabia is now coming quickly behind. District cooling as an industry has been steadily growing for 40 or 50 years and particularly where there is density. Cities like Houston, Texas or Phoenix, Arizona would simply not exist without air conditioning.
But it’s not all driven by outside temperature and climate. Of course, district cooling makes sense where there is a volumetric or even a base cooling load year-round, but It’s not just comfort air conditioning in the summer time. Buildings have a cooling load year-round involving more workplace density, computers, fixed windows and generally more heat being generated internally in buildings. Of course lighting and plug loads have been reduced, and building HVAC and control systems are definitely more efficient than 50 years ago, but the appetite for cooling has been growing.
PEi: There is a great drive over the last decade to produce smarter cities. Surely cooling should be a key ingredient in any city that wants to be described as smart?
RT: The development cycle of district cooling means you can’t cover a whole city immediately. You have to build a node and cooling plant in phases, whether that entails a segment of the central business district, a healthcare cluster, a pharma facility or data centres. District cooling often starts with an anchor load.
In Dubai, one of our (IDEA) members, Empower, has constructed 73 district cooling plants in the last 12 years and now has an aggregated cooling capacity of 1.4 million tonnes of refrigeration and they’ve done that really by effective planning, building these assets to support anchor loads.
In Dubai there are areas of the city such as the Emirates Mall, or Palm Jumeirah for instance, which have multiple district cooling plants that are interconnected, supporting virtually all of the buildings on that man-made island. That’s a reflection of effective planning and timely investment. In these places, there are demands from the extreme climate not unlike in Houston or Austin or Phoenix here in the US. Cooling is obviously more critical in these locations.
What’s driving the Investment more generally is efficiency. A district cooling plant can operate at significant efficiency advantage over traditional in-building equipment or air-cooled or terminal units, or air conditioning units you might see in a hotel. In Dubai they don’t want to have the AC load solely supported by electricity, by the wires. In that region about 70 per cent of electricity is used for AC.
By aggregating the cooling loads of a few dozen buildings you can apply technologies at scale like thermal storage, which allows you to make cooling during periods of low prices or lower demand on the grid and then displace the most expensive electricity demand during peak hours.
With scale, you can also invest in industrial-grade refrigeration equipment that is functionally more efficient. A key to district cooling is also the diversity factor among connected customers. Let’s say, for instance, you serve 12 buildings in part of the city. The cluster could include a convention centre, three hotels, five office buildings and one residential retail complex.
With that mixed use, the respective peak demands vary over different times of the day and will not all occur at the same time. Especially with event-space like a convention center, stadium or arena, the loads and uses are intermittent and occur as event occupancy happens, not as part of a regular daily or weekly schedule. This provides some additional flexibility to meet those demands and operate your plant optimally.
PEi: What other advantages does district cooling offer over the traditional means of cooling?
RT: Instead of every building investing in cooling equipment which is designed for their worst day or peak day, the customer can contract for what they actually need, so there is a whole capital efficiency gain that the customers capture and the district cooling provider really leverages.
When buildings don’t have access to district cooling they have to purchase equipment designed for a 25-year life, with declining performance and efficiency loss over time. Engineers will often factor those in, adding in initial capacity coverage for uncertainty. It’s like buying an oversized vehicle that you need for a two-week family vacation road trip, but having to drive that vehicle all year. In my experience connecting dozens of buildings to district cooling networks, installed chiller capacity is often twice or 2.5 times the actual requirement on a design day. District cooling corrects for over-investing and sunk capital costs.
With district cooling you not only avoid unnecessary capital investment, but you can also reclaim space in your building that isn’t dedicated to that equipment. You can now make room for something like a rooftop bar or restaurant or something that is revenue generating. In Manhattan, sub-basement space generates nearly $800 per square foot for retail or food service. Property owners are eager to maximize value by displacing cost centres like chiller plants, substations or oversized electric vaults. All of these factors contribute to the recognition that district cooling generates a lot of dividend to various parties.
While that’s driven largely by energy and capital efficiency, what also happens is the recognition among end users that district cooling provides ease of use, reliability, cleaner energy and water conservation, especially in regions where water is a scarce or restricted commodity.
Using a district cooling central plant means benefiting from scale. You may have aggregated the cooling loads 20,000–40,000 tonnes so you now can utilize treated sewage effluent rather than potable water in the plant process, thereby preserving high value sweet water for consumption or showering and so on.
PEi: Do you anticipate more growth for district energy in the coming decade?
RT: Some years ago, the International Energy Agency published a report that recognized that heat and cooling were the primary energy use in the EU, yet policy doesn’t address the heating and cooling of buildings. That is changing with growing awareness of the importance of heating, but still policies and regulation remain principally centred around fuel supply security and electricity. So, in effect, we have a disconnect on what primary energy is used for and the regulatory incentives or disincentives or restrictions.
It’s been a challenge for the industry. We deliver a lot of value, but it’s not adequately recognized in the regulatory schemes that exist.
PEi: Given the incentives for renewable energy and the volumetric gains resulting from gradual reduction of costs, why can’t a similar facility be afforded to district energy technologies?
RT: Yes, we have seen policy drivers in the US creating market momentum and helping to drive down installation costs for renewables. The challenge with district energy is: it’s not as ubiquitous and makes more sense where you have a cluster or scale or some kind of aggregated heating and cooling load. This is because, if you’re going to supply those buildings with thermal energy, you can move thermal energy many miles and not have significant distribution losses, but it’s the cost of putting in the infrastructure that really needs to be competitive. District cooling in particular requires a certain vertical density of customer per trench foot of distribution piping.
Historically, district energy has been competitive and advantageous where you have that cluster. In the US, 400–500 college and university campuses have district energy systems. Many major cities have district cooling but there is a chicken-and-egg challenge.
If you’re building a new cluster development you need to know the timescale for that footprint to be constructed, commissioned and occupied. One of the challenges for district energy is managing the lead lag on capital investment. You have to build the plant and the piping network to serve the customer in advance of when those buildings are fully occupied, and the time value of money is an important factor when estimating return on capital. You can build a district energy asset many years before the full revenue volume is available, and that has to be sequenced and managed so that investors and the district energy business have a competitive and attractive rate of tenure.
District cooling can be done at large scale, as we can see with cities like Dubai. What is required is not necessarily patient capital but an investor framework that isn’t looking for immediate return but predictable revenue streams and solid annuity-type returns over time. Many infrastructure funds are seeking to add district energy assets to their portfolio because the revenue is reliable and bankable.
PEi: Is it difficult to get the investment community to buy into that unorthodox return scenario?
RT: For utility companies, or utility holding companies, district energy assets have to generate a return on investment that meets or exceeds what they might achieve with traditional pipes and wire assets.
If they go to the commission and say “We built this distribution line and major substation and it cost us $200 million”, if it’s allowed and considered prudent, they might make up to an 11 per cent rate of return, and it’s almost guaranteed. But it’s not the same for district energy. It is a competitive market where people aren’t required to connect.
It is not so much that district energy isn’t a good investment; history proves that it is. It definitely produces a dramatic advantage in the community. What we’ve seen historically is that once it gets started they tend to connect customers and grow very quickly. But it can be the initial chicken and egg that can be the challenge. In places like Dubai you have proof of concept and district cooling is now clearly the default.
PEi: Is there anything else that can be done from a policy or regulatory perspective that could improve prospects for district cooling?
RT: One of the things happening at a federal level in the US, although frankly not a lot of cohesive policy has come out of Washington for some time, is a desire for greater resiliency, and that’s largely aimed at the electric grid facing greater frequency of severe storms. There’s a lot of dialogue around how to achieve that resiliency.
It’s a conversation happening at the US Federal Energy Regulatory Commission and the IDEA are making the case that if you want resiliency at a community level then you really should be enabling investment in district energy, combined heat and power and microgrids.
Mayors really want more resilient, reliable dispatchable generation. They want local generation, not power plants hundreds of miles away.
In terms of cooling, the world is getting warmer and population density or urbanization is really happening in warmer climates. We’ve been working with the United Nations Environment Programme District Energy in Cities initiative and they’ve been doing a great job of capacity building, educating and supporting and working with various state municipal and federal actors and NGOs.
PEi: Are there any initiatives on the horizon that can provide greater awareness of the value of district cooling technology?
RT: Our ninth district cooling conference takes place in Dubai in December and it will be a robust conversation on technology, best practices, policy and capital.
There’s no shortage of capital. People are looking to fund investments for some of our major companies. Engie is really deploying capital, along with the likes of Empower, Tabreed and others. There are innovations among the equipment suppliers and consulting community so new approaches are reaching the market regularly. The investment community has been taking notice and I frequently get calls from investment banks looking to understand the district energy industry. There seems to be no shortage of capital, but perhaps a shallow pool of available assets. I think the industry has a lot of headroom for growth. We just need more actors engaged in the practice of designing, building, owning and operating.
A few years ago the IDEA issued the Community Energy Development Guide in partnership with Michael King of London. The primary audience was planners, sustainable directors and resiliency directors in cities.
Another area of increasing awareness is facilitating urban planners and mayors in how to partner with our industry.
This can clearly be seen, for example in British Columbia. It’s bursting at the seams there and that’s in a low electricity cost, clean energy region driven largely by robust carbon price. Provincial policy drivers are properly recognizing the advantages of cleaner, more efficient district energy.
PEi: Is it fair to say district energy technologies have never been more relevant?
RT: What makes district energy unique is that it is so adaptable to local opportunities and can optimize around both the needs of the community and the resources available. In Dubai, conserving water and optimizing electricity are primary drivers.
In St. Paul, Minnesota, urban wood waste supports combined heat and power and a large district cooling system, enabling local energy to re-circulate in the economy while reducing emissions and enhancing reliability. In Toronto, cold lake water supplies district cooling to the central business district, also cutting GHG emissions for power production.
Another area of growing importance is the importance of business continuity and resiliency of supply. It used to be the case that if the power went out for a period of time, you lit some candles, played monopoly and built a fire in the fireplace. It was just an inconvenience.
Now in so much of our economy, power interruption has massive economic and personal consequence. That’s coupled with growing frequency of severe, unpredictable weather patterns. In 2017, insurance companies experienced weather-related insured losses of $306 billion in the US.
People in government with responsibility for community safety are looking for technologies that are prudent and proven, and district energy is just that.
It’s reliable, resilient, competitive and along with those qualities, you also get carbon reduction of those factors are converging with district energy, and making for a pretty interesting time.
Diarmaid Williams is International Digital Editor of PEi magazine