Summary
- District Heating Networks (DHNs) are gaining renewed interest due to their role in Europe’s transition to renewable and low-carbon energy
- Significant market growth is projected for DHNs by 2030, driven by decarbonization policies and innovative renewable heat solutions
- Investment in DHNs offers attractive returns and ESG benefits, positioning investors to benefit from stable cash flows and material GHG emissions reductions
The renewed appeal of district heating systems
District heating networks (DHNs) are nothing new and have been around in Europe since the 1960s, providing affordable heat to households and reliable returns to their owners. Until recently, DHNs were developed mainly to provide lower cost heating solutions to neighborhoods and to improve energy independence. Sweden is the country where DHNs have been most developed in Europe, with a market share of 58% of the heat demand and with 69% of it being renewable heat.
So why have they become so interesting recently? The answer lies in Europe’s decarbonization journey. With significant advances in renewable electricity and the maturation of decarbonization policies for power generation, focus has now shifted toward heating, a sector that accounts for a substantial share of Europe’s carbon emissions. Germany has even coined a term for this shift: Wärmewende or “heat transition.”
In this context, DHNs are increasingly seen as “renewable- or low-carbon-ready” assets capable of delivering sustainable heating at scale. Given their inherent flexibility, DHNs can efficiently integrate various renewable and low-carbon energy sources, from biomass to geothermal energy. As a result, the strategic value of these networks has risen sharply, offering both financial and ESG benefits to forward-looking investors.
The role of district heating networks in Europe’s heat transition
While the power system is decarbonizing at record rates this year, the road to zero-carbon heating is far more complex. In dense urban areas with multi-apartment buildings, space constraints limit the feasibility of options like individual heat pumps, which require sufficient space for installation. In such cases, DHNs present a compelling alternative, allowing the delivery of renewable or low-carbon heat to hundreds of households without the need for significant building modifications.
Moreover, thanks to recent technology developments and 4th/5th generation DHNs, DHNs operate like a “Swiss Army knife” in the renewable energy toolkit, capable of integrating diverse energy sources, including:
- Waste heat recovery from industrial processes, electrolysis, sewage water and data centers, e.g., to tap into the large growth of data centers in Europe
- (Deep) geothermal energy, particularly in regions with favorable geological conditions
- Heat pumps, valorizing heat from lakes, the air or the ground and enabling sector coupling, e.g., by capturing low electricity prices which often correlate to high renewable electricity production. Heat pumps can also provide valuable flexibility/demand response services to the grid and thus increase renewable energy penetration
- Biomass and biogas, although limited in availability
- Solar thermal, which can provide heat to cover the summer hot water demand
And the good news is that the potential available supply of waste heat largely surpasses the estimated demand in DHNs.
As a result, and thanks to favorable regulation, the market is projected to double in size by 2030 in terms of annual installations of new or refurbished pipelines, providing compelling market opportunities for suppliers and Energy Service Companies (ESCOs).
The EU Green Deal was especially instrumental in pushing the market forward, via the Renewable Energy Directive III, which mandates an increase in renewable heat by 2030, and via other directives such as the Energy Efficiency Directive or the Energy Performance of Buildings Directive. Many new funding schemes have thus been created across Europe to create favourable conditions for investments in DHNs, of which many of the EU funds are also available for district heating projects. Additionally, as carbon prices in the EU emissions trading system (ETS) increase, it provides an additional business case for renewable or low-carbon DHNs.
Trends shaping the district heating market
Several emerging trends highlight the growth of DHNs in Europe. As the decarbonization pressure intensifies, new DHN projects will become increasingly complex and sophisticated, especially as they incorporate diverse energy sources at a much larger scale. A few lighthouse projects have recently emerged with a massive decarbonization potential above 100 ktCO2 per year. To start, the upcoming E.ON Tegel airport project combines many different energy sources together with a 40°C DHN serving up to 10,000 inhabitants and 20,000 people working in offices. Europe’s largest heat-pump project was recently announced by RheinEnergie for a DHN in Cologne to supply 50,000 households, with a capacity of 150 MW and an operating temperature of 110 °C. In Aarhus Denmark, EU’s largest geothermal plant serving a DHN will be finalized by 2030, replacing a fossil-fuel based energy source serving 35,000 households. One of Meta’s new data centers in Europe in Odense Denmark included the distribution of waste heat to 18,000 households. Finally, Hamburg Energiewerke and Aurubis recently inaugurated one of Europe’s largest industrial waste heat recovery projects for a DHN, which will serve up to 20,000 households.
DHN project developers and operators thus need to revise their operating model, while smaller operators such as municipalities are likely to turn to external support. This transformation includes a need for:
- Project development and techno-economic expertise relating to the evaluation and integration of various renewable and waste heat sources cost-effectively with 4th/5th generation DHNs – this also holds true for existing network refurbishments
- Digital and data expertise for advanced monitoring, forecasting, predictive demand management and network operations (e.g., billing, predictive maintenance and efficiency improvements)
- Financing, as DHNs are capital intensive in the build phase of the project
In response, utilities and municipalities are increasingly structuring their investments through AssetCo models, allowing for co-investment and shared risk. This model aligns with investor demand for stable, asset-backed investments that offer long-term cash flows and manageable exposure to interest rate fluctuations. High initial capital outlays and inflation-sensitive revenue streams make DHNs an ideal candidate for these models, attracting institutional investors interested in infrastructure that combines stable returns with sustainable impact.
Conclusion
District heating networks are evolving from a niche utility service into a cornerstone of Europe’s heat transition, offering a rare combination of attractive financial returns and measurable ESG impact. With growing regulatory support, technical innovation, and demand for sustainable infrastructure, DHNs are set to play a central role in Europe’s decarbonization agenda. For investors, this presents a timely and compelling opportunity to enter a high-growth market with a proven track record and promising future. Our team of cleantech advisors stands ready to guide you through each phase of the investment process, providing the expertise and insights you need to capitalize on this critical phase of the energy transition.
How we can help you
Apricum’s expertise as a cleantech advisory firm uniquely positions us to assist investors in navigating the evolving DHN landscape. With extensive experience in renewable energy and clean heat investments, including advisory roles in multiple AssetCo structures, we offer a comprehensive suite of services tailored to the district heating sector:
- Opportunity mapping: We conduct in-depth analyses to identify promising DHN investment opportunities aligned with current trends and regulatory incentives. This service includes market assessments, project assessments, and identification of partners
- Commercial Due Diligence: Our due diligence framework goes beyond standard financial/valuation assessments to include market, technology and company evaluations. This ensures that your investments align with sustainability goals while providing attractive returns
- Sell-side or Buy-side M&A: For investors seeking entry or expansion within the district heating market, or for utilities or municipalities seeking external investments, our M&A services provide end-to-end support. From preliminary assessments to deal structuring, our advisors bring extensive experience in structuring co-investment opportunities and securing stakeholder alignment.
Whether you are a utility looking to partner with private investors, or an institutional investor exploring infrastructure opportunities in the heating sector, our advisory services are designed to facilitate your strategic goals in this transformative era for district heating. Investing in DHNs not only promises stable, long-term returns but also contributes to Europe’s ambitious decarbonization objectives, offering investors the unique ability to drive both financial and environmental outcomes.
Ready to explore investment opportunities in district heating networks? Contact Apricum Managing Partner Nikolai Dobrott to discuss how we can support your investment journey in the heating sector.
Sources
Euroheat & Power, DHC Market Outlook 2024
Aalborg University, Heat Matters: The Missing Link in REPowerEU, November 2023
Der Beitrag District heating, the hidden champion of the energy transition? erschien zuerst auf Apricum - The Cleantech Advisory.