District heating is booming in the UK, but to pose a serious alternative to the gas network a different funding model is needed, according to Ian Manders and Tanja Groth
A PipeCo model works on the basis of splitting the investment in a new district heating scheme into the expensive heat distribution network, which lasts for 50-60 years before refurbishment, from the energy generation plant and ancillaries, which have a lifecycle of 15-20 years before replacement.
It could work like this:
- Company “A” borrows money and builds a district heating scheme. After commissioning the scheme, the overall costs are known and the income from customers “C” has been secured. At this point, A sells the pipe network to Company “B”, the PipeCo. B is backed by institutional finance which is happy with a low-risk return over several decades.
- A continues to operate the system. From its’ energy centre it supplies C over the PipeCo network, for which it pays a regular (but relatively small) use of system charge to B.
A has managed in the short term to offset its biggest cost (ie the pipe network) leaving it with the parts of the project with a higher IRR that can be financed for a shorter period at higher discount rates.
A then starts looking for another project and the whole process starts again. A and B are in a symbiotic relationship but each have the funding structure suitable for their role in the project.
Source: The PipeCo: an alternate approach to financing heat networks
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