What's the deal with district energy?

District energy refers to a system in which a shared central
plant distributes steam, hot water, and/or chilled water to
multiple buildings via underground pipes. In this episode, Rob
Thornton of the International District Energy Association shares
about district energy’s newfound popularity and the role it could
play in the clean energy transition.


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transcript)


(Active
transcript)


Text transcript:


David Roberts


District energy is one of the oldest concepts in all of energy,
dating back at least to the ancient Romans. It simply refers to
connecting multiple buildings to a common source of heating and
cooling — a furnace, heat pump, geothermal well, or what have you
— and distributing the heat via water or steam flowing through
underground pipes. There are hundreds of district energy systems
in operation, in every country in the world. (Virtually all of
the buildings in Iceland, which I visited recently, are heated by
district energy systems running on geothermal.)


However, fossil fuel heat has been so cheap for so long that
district energy has never quite become the default — it’s just
been too easy to stick a natural gas furnace in every building.
There hasn’t been much pressure to share heat.


But with the climate crisis and the clean energy transition,
that’s changing. These days, lots of people are looking for
cleaner sources of heat and more efficient ways to share it, so
district energy is becoming sexy again. Among other things, it’s
a great way for cities to meet their carbon goals without
overburdening their electrical grids.


With all that in mind, I contacted Rob Thornton, the head of the
International District Energy Association, to chat about the
clever new sources district energy systems are drawing on
(everything from sewage to deepwater lakes), the infrastructure
they can integrate with, and the other services they can provide.


All right, then. With no further ado, Rob Thornton of the
International District Energy Association. Welcome to Volts.
Thanks so much for coming.


Rob Thornton


Thanks for having me, David. Pleasure to be here.


David Roberts


I am super into district heat, so I was delighted when you all
reached out to me. I've been meaning to do something on it, but I
think it's, at least in the US, not particularly familiar or well
understood to most people. It's relatively rare in the US, which
we will discuss later. So, let's start with a definition. What is
district heating?


Rob Thornton


So, we call it district energy because it's both heating and
cooling in cities, campuses, communities. Essentially, it's a
central plant that's providing steam, hot water, and/or chilled
water to an underground thermal piping network to provide heating
and cooling to buildings in a city central business district,
campus, airport, hospital, healthcare, et cetera. So, it really
is the aggregation of multiple users of heat or cool provided by
a central plant. So, each individual building doesn't need to
dedicate space or equipment, right, to boilers, chillers, et
cetera. So, yeah, that's the simple definition.


David Roberts


Could not be more simple. It's using one source, a single source
of heating and cooling for multiple buildings, which you think
seems like an obvious thing to do. What, in terms of existing
district energy systems in the world, what is that central
source? Typically, empirically, what's the most common current
central source?


Rob Thornton


I'd say at the moment, still natural gas.


David Roberts


Just a big boiler?


Rob Thornton


Well, often large boilers, sometimes gas turbines, recovering the
heat, making additional electricity. So, combined heat and power.
But that's shifting with the energy transition appetite for lower
carbon solutions. There's a lot of integration, optimization
happening. Industrial heat pumps, renewable heating and cooling,
a variety of sources. That's the advantage of district energy.
You change the central plant, and actually the benefits flow to
multiple, sometimes hundreds, thousands of customers by updating
the central plant.


David Roberts


Is it safe to say these days that all things being equal, natural
gas is probably the cheapest, that's why it's the most common?


Rob Thornton


Well, it's cheapest, it's cleaner than some other solutions. It's
dispatchable, available, widely available. And it wasn't always
that way. District energy started really by the Romans, but then
Thomas Edison I would really characterize as the inventor back
140 plus years ago, and he discovered he couldn't really just
sell electricity. He had to actually sell heat, too. Building
owners saying, "Oh, I'll buy your power, but what am I going to
do with the dynamo in my basement that provides the heating?" And
so Edison realized, in order to make a profit at this enterprise,
I have to sell both the heat and the power.


So, while it's not commonplace, in fact, district energy is
prevalent. 900 systems in North America, thousands all over the
world. Every major city has district energy from Paris to New
York City, obviously, Boston, San Francisco, Denver to Moscow.
And even recently, though, the shift in the United Arab Emirates,
all across the Middle East, massive investment in district
cooling. As you would expect, right. Air conditioning is the
driver there, so the industry is growing quite substantially.


David Roberts


What does it look like, just as a side thing here? Because I
think a lot of people run up on this. Their intuitions break a
little bit when they think about this. If you have a central
source of heat, how do you use that to cool buildings?


Rob Thornton


Well, I mean, heat in the form of steam can move equipment,
right? So, steam, you use the pressure to drive a compressor. And
in New York City, there's hundreds of buildings that use steam —
turbine drive chillers, so they're still making cold water, but
they're using steam instead of a motor.


David Roberts


Got it.


Rob Thornton


Right. Instead of electricity to drive the compressor, they're
using steam. You can also use heat with an absorption machine.
And that basically you use heat to kind of change the chemicals,
and you will absorb the heat from water. So, I don't want to get
all nerdy and too scientific for you, but it isn't so much heat
as much as sort of the optimization of process in a central plant
to both make heat and cool and or power.


David Roberts


Got it. And for the record, we love scientific and nerdy here.
Don't feel like you need to restrain yourself at all.


Rob Thornton


All right, noted.


David Roberts


One of the cool things about these systems, and you alluded to
this, is that as they evolve, we're discovering that there's all
kinds of things that you can use as that source beyond natural
gas, boilers and turbines. Really, you just need a big source of
heat or cool to tap into. And it turns out this is something this
podcast returns to over and over again is the sort of as the
energy transition proceeds, we're starting to think more about
heat. We're starting to think about it more than we used to
because it just was very, very cheap.


Fossil fuel heat was just very, very cheap. And we didn't value
it, think about it much, or optimize it much, or worry about it
that much. But now we're trying to phase out fossil fuels. So,
we're thinking a lot more about where is heat, how can we use it,
reuse it, where can we find it? So, talk about some of the other
clever ways that district energy systems are — where they're
finding that heat? Like, for instance, sewage.


Rob Thornton


Yeah, so one of our members, CenTrio, they own systems in
multiple communities across North America. They're recovering
heat out of the wastewater treatment, as you mentioned, the sewer
system. So, Vancouver has a very similar system. I forget the
year of the Olympics, but basically, the district heating system
that was built to support the Olympics in Vancouver, British
Columbia, was constructed to provide low carbon, reliable heat
from the sewer main to the Olympic community, like the housing
campus, which has become Falls Creek. And it's really been a
whole economic development success. So, yeah, you're right. We
were talking earlier offline about the oil embargoes, right, the
first and second oil crisis that really hit Scandinavia.


And they were highly dependent on imported oil. And basically,
the valve closed and the price quadrupled overnight. And some of
these countries, Norway, Finland, Denmark, they said, "Well, if
you're going to make electricity here, you got to recover the
heat." And so they required cities to do heat planning and to
develop municipal heat plans. And so they recognized the value of
heat, not so much for heat itself, but as a byproduct of making
electricity — let's not throw it away, let's use it. And so now,
today, Copenhagen, for instance, 98% of the buildings in
Copenhagen are on district heat.


They don't have their own boiler. And it is both like an
environmental as well as an economic strategy. So, I'll come back
on that, but I'm not sure if I answered your question.


David Roberts


What does Copenhagen use as their source? It's just all the
different kinds of things you can use as a source that I'm
interested in.


Rob Thornton


So, primarily waste heat recovered from electricity generation
and waste to energy plants. In Copenhagen, there's this new asset
called Copenhill, I guess, and it's basically a waste
incineration plant. They recover all the trash and they use it
for heat instead of pushing it to landfill. And now, this asset
actually also has a public ski hill on it, right?


David Roberts


Oh, yes. I'm familiar with this.


Rob Thornton


It's brilliant. And so I think they've really understood the
scarcity and the value of using the full kind of hydrocarbon
value of energy instead of throwing 60% of it away, like we have
historically done with power plants in the US. They're remote,
they're dumping heat into the river, the bay. In Europe, that
heat is heating Paris and Copenhagen and Oslo and Stockholm. So,
it's an infrastructure opportunity and challenge.


David Roberts


This raises another question, which is electricity. You can
transmit very long distances with relatively low losses. Heat,
not so. Heat is much more difficult to transport over long
distances. How close does the source need to be to the users to
make this work? How far out could a power plant be that you're
recovering heat from and still get the heat, say, to your
village? Is there an outer limit?


Rob Thornton


Well, you can move hot water more than 10 miles. In Beijing,
they're doing that now. They've moved a lot of the power plants
outside of the inner ring, 8 miles — they're moving the heat.
Now, that requires very large piping networks underground, but it
is technically conceivable. We have typically had district energy
in cities, central business districts, because that was where
both power and heat were generated at the time. Then in the 40s,
50s power plants got larger, they went from 200 MW to 2000 MW,
they moved outside the cities. Probably the range for steam,
because steam requires — it's a gas and it has to maintain under
pressure.


It's probably a couple of miles where after that, it begins to
condense. Hot water you can push and pump tens of miles, but
there is always, like an economic real estate question. Yeah, but
there is an aggregation — we see district energy, there are 900
systems plus in North America and mostly clustered around
vertically dense or urban requirements or college and university
campuses where — they were formed at the time that the power
plant was being built, like University of Colorado Boulder, the
power plant was the initial building for the whole campus, and it
grew from there.


David Roberts


One other source I wanted to touch on before we leave, the
question of sources is, I'm very fascinated by this one that uses
deep lake water, which is super cold, presumably. How does that
work, the physics? What are they doing there?


Rob Thornton


Yeah. So, think of cold like gravity. There's no such thing as
cold. It's like the absence of heat.


David Roberts


Right.


Rob Thornton


So, just like you put ice cubes in a glass, they absorb the heat
around them. They don't bring cold, they take heat.


David Roberts


Right.


Rob Thornton


So, what happens in Toronto or at Cornell University, these very
deep lakes, the water — as you know, heat rises, right, so the
surface waters are hot, but the bottom of the lake is generally
always cold. In the case of Lake Ontario, 34 degrees F virtually
year round. Right?


David Roberts


Yeah.


Rob Thornton


So, what they do is they pull the water off the bottom of the
lake and the pipeline goes out like a straw, and they pull it in.
And that is actually the drinking water source. There's three
straws that go out into Lake Ontario. That's the drinking water
for the city, for the municipality. But before they use it at 34
degrees, they put that water through heat exchangers. So, the
primary water is on one side of a heat exchanger. The other heat
exchangers are connected to a network of underground pipes,
supply and return cold water. And they basically — I need a graph
to do this.


So, you bring cold into a building. The cold flow is in a coil,
like a radiator in your car. And the hot air in the building is
breathed over that coil, and the water warms up, and the other
side of the coil is colder. Right? It's like the radiator in your
car. So, what we're basically doing is taking the heat out of the
buildings, putting into a return network, and then that's a
closed loop on the district cooling side, on the city side, what
they do is they pump around like 40 degree water F, and the
buildings heat it up to 54, 55 degrees, sometimes warmer.


And that's a continuous circulation of cold water. And then on
the lake side, that warm water, that's warming up the water
before it goes into the drinking water supply of Toronto. This
would be more effective if I were showing you the diagram.


David Roberts


It's very visual.


Rob Thornton


I'm probably confusing people more than clarifying.


David Roberts


No. It's so clever how heat is fungible in some sense, right? You
can just sort of trade it from one bit of water to another and
move it around that way.


Rob Thornton


And water is the most brilliant because it has a specific heat of
one. So, every BTU you put in, you can get out. Water really is a
remarkable — but you have to keep the water clean. You have to
keep zebra mussels, et cetera, et cetera. It's not just simple
standing water, but that's a chemistry story for another day.


David Roberts


So, if I'm looking at a neighborhood and I'm contemplating
whether it is suitable for district heat, are there
characteristics? Is it just about density? Is that the beginning
and the end of the story? Or what is it that makes an area or a
neighborhood or a campus suitable for this?


Rob Thornton


There is an economy of scale that — you want to minimize your
capital investment and optimize the number of customers that are
using it. Right? So, I think that's self-evident. There are some
rules of thumb, but what we're finding now, particularly in
cities that are working towards reducing carbon emissions, etc.,
and they're really striving. They're seeing that there are these
heat sources or cool sources that are really nearby that have
been under-recognized, undervalued, underappreciated. So, there
is a chicken and egg, right? Cornell — getting back to lake water
— Cornell 22 years ago: It took them ten years of engineering,
policy, education to permit the Lake Cayuga, the deep lake water
cooling.


But what they did was they traded an electricity bill going out
to buy electricity to make chill water at their campus for a bond
payment. So, they made an investment because they actually had,
at the time, five or six million sqft of buildings that could be
connected to a district cooling network. There was a district
cooling system there, but that today, I think is like 20 million
sqft, right? The campus has grown and just recently they
connected this massive science building where they have the
Synchrotron, where it's like the flux capacitor, right? It's
really an energy dense — so your original question was what's the
scale, what are the rules of thumb?


You can draw a radius. Part of the question is, well, what's the
source of the heat or cool? How ubiquitous is it? How frequent is
it? Is it 8760 hours a year? Is it intermittent? Does it vary?
And you have to value that. And then you look at who the
potential customers are in a radius and what type of customers
are they? Is it residential? Is it commercial office? Is it an
event space like a baseball park or something that has 80 games a
year? So, you have to kind of understand what the market is.


So, there's a lot of, I think, iteration to it, but generally if
you have about a million square feet within a reasonable
proximity and either a low cost or low carbon sort of source, it
could be a fungible opportunity.


David Roberts


Is there a smallest scale, like four buildings? I mean, logically
there's no reason four buildings couldn't share a common heat
source, but I assume it just becomes uneconomic at some point if
you're getting down that small.


Rob Thornton


Well, if you're Amazon, and you own four buildings in downtown
Seattle, and you have a data center in one of them —


David Roberts


Yes, I wrote about this once. So clever. I love that.


Rob Thornton


There it is, right? That data center is making so much heat
year-round, 8760, that it's sufficient to supply the heating for
the other three buildings collectively. So, if you have a common
ownership, which is what we see on college and university
campuses, whether public or private, there's economies of scale.
The aggregation really does provide immediate economic value. But
over the term what we're also seeing in cities, we just did an
interview with our Chicago district cooling system, the old post
office. This is a massive building right in the Loop downtown.
Instead of having their rooftop dedicated to condensers and
cooling towers, they have a green roof, an urban garden.


The building is 90% occupied because the tenants want to be
there. I mean, it's also proximate to the rail. But what happens
with district tenders is it creates many other value drivers in
the real estate other than just the expense of heating or
cooling.


David Roberts


Right? Well, you're just getting rid of all the heating and
cooling infrastructure, and then you have all that space.


Rob Thornton


Simplifying, right? And then it's like subscribing to a fleet
where 50 weeks of the year you'd rather have a Prius, but man,
those two weeks, you want an SUV. A district energy plant has a
segment of capacity that can be responsive to the energy
requirements of the community over that full annual cycle and
meet their needs and not be overinvested.


David Roberts


Logically, this is the exact same benefit you get interconnecting
grids, right? It's just the same. It's the less individual
infrastructure you have — you don't have to build your own peak,
right. Because you have to build to your own peak load —


Rob Thornton


Right.


David Roberts


and so everybody's being inefficient by building more than they
need. And if you share, you share, and then you don't have that
excess capacity.


Rob Thornton


Exactly. And not only that, you don't really need an SUV. If you
have a pickup truck, maybe you need to move furniture, etc., etc.
It's great to have it in your fleet, but really you don't want to
make it your day to day vehicle. So, you have to tease out those
advantages and they vary. But that's one of the principal value
drivers we're seeing, particularly as cities are dealing with
carbon and densification.


David Roberts


It makes total sense to me the case if you are building something
new, a new neighborhood or a new campus, the case for putting
district energy beneath it seems self-evident, right? Impeccably
self-evident to me. Obvious. Like, obviously you would want to
have a shared heat source rather than everyone building their own
peak load infrastructure in your tiny little area. But where my
mind bumps up is so much is already built. So, how big of a
challenge is it to go to a place that's already built up, say,
using they've all got nat gas boilers and you want to shift it
over to district heating.


How much bigger of a deal is retrofitting versus new build in
this? And relatedly, for things that are already built, are there
forms of infrastructure in place that could be shanghaied for use
in the district energy system? For instance, like, say you're a
city or you're a neighborhood and you've electrified everything,
so you don't need natural gas distribution to your individual
boilers anymore. You've got all that piping, all that natural gas
piping underground. Can you use that for district energy? So,
just in general, retrofitting, how big of a deal is it?


Rob Thornton


In most cities, there's a new build opportunity. And as you
mentioned, the pivot point is when people are facing like a
replacement or a renewal or a reinvestment or a shift in the use
of the space, right. The chillers are 25, 30 years old and need
renewal or the boilers. What we're seeing a lot of times heat is
driven by carbon accounting now. So, cities are imposing
measurement, etc. So, there's that. I want to disabuse you of the
notion that you can use the existing natural gas pipe for heating
and cooling because they're very different pressures and
temperatures.


And to move heat, because the temperature differential for heat
is probably — there's a 50 or 70 degree shift, you need a larger
volume. So, it's probably a larger diameter pipe or two than
would be an existing natural gas line. Now, however, when we
built a district cooling system in downtown Cleveland, we found a
right of way that used to be occupied by the trolley. So, it
isn't so much the pipe itself as the space now available to
replace with another asset. Our friends in Chicago, they just did
a really brilliant webinar with us yesterday. They showed how
they put district cooling pipes to serve the old post office.


So, it's not for the faint of heart, really. I'm not recommending
you go out and get a backhoe and start putting treads, but it can
be done. In fact, our cities, I would say most of the growth has
been existing buildings connecting and converting over.


David Roberts


Interesting. So, to do that, to add a building to an existing
district heat, you just have to lay pipe to that building,
basically.


Rob Thornton


Assuming that the main trunks are nearby, a block or two, or even
right on the doorstep on the sidewalk, then it's a service
lateral, and the size of the pipe is sized to provide the cooling
or heating capacity required for either that existing building or
what could potentially be built there. Right. It's like the
footprint. There's actually more to it than that. But back to
your original premise. So, in a city like Dubai or Abu Dhabi,
right, which has basically built Manhattan in a decade, it's
virtually all new build. And all of that new build is on a
district cooling network because they didn't want to burden the
electric grid with having to make air conditioning with electric
compressors in all these buildings.


70% of the electricity produced in that region is used for air
conditioning and growing. Obviously, air conditioning is mission
critical, life safety, very important. But district cooling
reduces the peak demand by 50% or more and the annual electricity
requirement by 30, 40, 50 or more percent. And so there's like a
double win if you're responsible for building the electric grid
to have a district cooling network there. It really reduces the
infrastructure, the vault, the transformers, all of the wires.
The infrastructure is very challenging underground for
electricity.


David Roberts


It occurs to me that as the clean energy transition proceeds,
most of it is electrification. So, there's going to be a lot more
burden on the grid, especially for these cities that are trying
to decarbonize. So, this is the sort of rare piece of
decarbonization that can ease pressure on the grid rather than
adding more to it.


Rob Thornton


Right. Well, I don't know if you saw the IEA report that came out
last week. They're saying that it's going to be like 50 million
miles of transmission line, and that's like a $5 trillion
requirement. So, I wish it were as simple as electrify
everything. I wish it were that simple. Some cities are looking
at doubling, tripling, quadrupling in order to electrify the
buildings that exist in those cities. That's how much
infrastructure would need to be put underground. The space is not
that readily available. I don't know if you've ever seen
underground Manhattan. It's a nightmare. Five stories down.


David Roberts


Right. So, this is like at least easing some of that pressure.


Rob Thornton


Exactly. So, one of our members in Boston, they operate the
system in Boston and Cambridge. They're electrifying the steam
supply so that the buildings that are currently serviced, 250
life science hospitals on district energy right now. They're
putting an industrial heat pump and electric boilers not to
continuously make the heat with power, but certainly when the
power is greener and cleaner to optimize that. Our campuses right
now, David, one of the signals that they've often used, whether
like a CHP on a Princeton or a Harvard, right now they can make
or buy power from the grid.


And they do that right now. But they're getting not only a price
signal, but now they're getting a carbon signal. A 15-minute
interval: What is the forecast carbon intensity. And here's
another myth. It's like, well, what's the average mileage of my
car? Well, 30 miles a gallon. You don't always get 30 miles a
gallon. I drive my car, I'm in the city, I'm alone. So, it's
miles per gallon per person drive. So, what campuses are now
doing is they're looking to see the marginal, it's not the
average carbon intensity, it's the marginal intensity of the
grid. Right?


David Roberts


Yeah.


Rob Thornton


So, in the summer months or even the winter months, the carbon
intensity of the grid can be two or three times what it is on an
average basis. And averages are not always acceptable when you're
making economic and environmental decisions.


David Roberts


We've discussed this extensively in regard to big industrials
looking for 24/7 clean power. It's like, it's not the average.
It's what is the intensity this hour?


Rob Thornton


Right.


David Roberts


And also, you raise the possibility here that if you've got a
bunch of buildings on a district energy system using warm water
that is circulating out from a central source, that central
source doesn't have to be running all the time. It can heat water
and then go off. Heat water and then go off. So, you can heat the
water when the electricity is green and might otherwise be
curtailed. So, effectively, you have a giant energy storage
system. So, say a little bit more about that. Are people starting
to use these things like batteries?


Rob Thornton


Yes. In fact, our friends in Denmark have installed an electric
boiler. I probably saw it physically 15 years ago. And as you
know, there are times where all the wind power in that grid
exceeds the demand, right. So, they either have to fluff it or
lose it. And so what they decided is, well, let's get paid to
take that electricity and we'll convert it into heat and use it
the next day. As opposed to trying to store electricity in
batteries, which we all love batteries, and we couldn't live
without them, but at an urban scale and at that level of
magnitude, by converting it into its use, you can then harvest it
when needed or as the demand.


One of our members, Princeton University, is in the process of
putting geo-exchange: They've drilled 850 boreholes already on
campus, right. And Ted Bohr, whom you should get as a guest
because he's brilliant, he's the energy manager, a lot of
brilliant people. But he likens it to having seven Rockefeller
centers underground underneath their campus. So, in the
summertime, they're going to put the heat into these seven
Rockefeller centers and then in the wintertime, they're going to
take them out. So, that's not the same diurnal calendar as you're
talking about, right? Like converting electricity to heat —


David Roberts


That's the much discussed, rarely witnessed seasonal energy
storage.


Rob Thornton


Right. And they're not done, and they've really just started
commissioning it and they actually have more work to do. But they
actually have some data from that plant that's showing really
promising performance, etc.


David Roberts


Well, this is a huge issue up in the north, it is northeast or
anybody with a high peak winter load, right, where cooling is
sort of the peak load throughout the year, has this seasonal
storage problem. But if you can store heat in this endless acres
of water beneath every one of your dense urban centers, that's a
lot of energy to store way out of scale with what you could
probably get out of batteries, at least currently.


Rob Thornton


Right. I started my career in 1987 with the Hartford Steam
Company, and that was the first downtown district cooling system
commercially built in the — you know, 1962 began operating. We
used the Connecticut River as our condenser, right. So, all the
heat was rejected in the river and we invested in a plate and
frame heat exchanger because once the river temperature reached
45 degrees, it usually happened around Thanksgiving. It's a
little later now, but around Thanksgiving then we would basically
just turn on a pump and use that to provide instead of 25,000
tons at peak in the summer, like 5000 ton peak, there's a winter
load, but constant for the data centers, insurance.


And that had like a seven-month simple payback, that investment.
This was 25 years ago, David. But I guess my point is that these
sources now, the Seine River in Paris is the source of cooling
for the Louvre and a lot of downtown Paris, right. So, when we
start to think about energy, it's important that we think about
not just electricity, but thermal energy. And when you start to
really kind of understand heating and cooling is 50% or more of
the energy appetite of a city, then you think, "wow, there's more
protein here."


David Roberts


Yeah. And the really cool thing, the really new thing to me,
which is opening up all sorts of fascinating frontiers, which is
keeping this podcast busy and keeping energy people busy, is the
growing overlap, the interplay between the electricity system and
thermal system. Right. They were largely separate up till now,
but they're starting to interact in super fascinating ways. And
like I said, a lot of this just people didn't have occasion to
worry about it much up until now. But all of a sudden all our
cheap fossil fuel option is going away and all of a sudden people
are thinking about economizing between electricity and heat and
there's just clever ways to do it all over the place.


Rob Thornton


Right. I don't know if you recall, Ernie Moniz from MIT was the
Energy Secretary.


David Roberts


Oh, yeah.


Rob Thornton


I was chatting with him one time and he goes, "oh, district
energy, back to the future." So, it is kind of like this "oh",
when we kind of go back to where we were, which is an integration
of heat and power or cool and power and heat. You know, these
opportunities, they kind of reappear. And the other thing, in
addition to carbon and environmental objectives, David, one of
the things we're really seeing is resilience. As you well know
the frequency and severity of extreme weather events, storms,
hurricanes, et cetera, is rocking cities and campuses. It's a
public safety as well as an economic and environmental.


And one of the things about district energy is we actually have
an outstanding track record for reliability. Some of our systems
have been operating for 50, 60 years and literally have recorded
like a couple of hours of unscheduled outage.


David Roberts


Isn't there one in Boise that's been around for — that was like
the early 1900s, right?


Rob Thornton


Yeah. It might be Klamath Falls, Oregon. Or Boise, Idaho. Right?
Yeah, I think it's a geothermal system. Our system in Minneapolis
began operating in like 1972. The asset was owned by the gas
company, then was sold to an investor and then it was IDs. And
these things have changed hands and there's really been a lot of
growth. But when the investment banks look at these assets,
that's one of the tests. How reliable is it? Is there a renewal
cost here? What's the capital? And that system over 35 years,
literally had 35 years, like 2 hours of unscheduled outage.


It wasn't their problem. It was the gas supply was interrupted by
a backhoe. But the beauty of district energy is we don't rely on
a single source. Most plants have multiple feeds of electric and
sometimes multiple sources on, not always, but multiple sources.
Right. So, when the price of gas gets too high, they can ship to
something else. So, there's a lot of permutations, a lot of
different categories of distribution. It's like ice cream. It's
like way many flavors, high fat content, low fat content —


David Roberts


But they're all underground, basically sheltered from the
weather, which is the big thing.


Rob Thornton


Yeah, most of the asset is and I meant to talk about like storm
Uri. Right. You recall that was a couple of winters ago, hit
Texas —systems that stayed online. Texas Medical Center, six
hospitals bigger than the city of Houston. UT Austin 20 million
sqft stayed online. UT Austin and they have district Energy is
CHP, right. Gas-fire generation and power and heat. And they
maintained operations. In fact, the Texas Medical Center not only
was supplying all the needs for the campus, that largest
healthcare campus in the world, they were actually able to
capture and truck water to some of the municipalities whose water
systems were frozen and not operating.


So, they were an area of refuge beyond really the capability of
their own — it's not their own lifeboat. Right. They were really
a highly valued asset for the larger community.


David Roberts


Obviously, the main service provided by these things is heating
and cooling. But as we discussed, there's also energy storage,
which helps with the grid. That's another service. There is
resilience against weather. That's kind of another service. When
you're pitching a district energy system to someone who's
contemplating building one, are there other sort of services and
benefits aside from the heating and cooling that you cite?


Rob Thornton


Good question. Some of our systems create really a wonderful
circular economy opportunity. In the case of St. Paul, district
energy St. Paul. They began operating 1988 and then added
cooling. But they built a biomass CHP plant. It's literally
recovering waste wood from the Twin Cities region that would
otherwise go to landfill. It gets processed into fuel and
displaces 250,000 tons of coal. So, you get the double benefit.
The carbon emissions are cut in half. Instead of going to
landfill and essentially becoming an environmental problem, it's
now an economic opportunity for people to make a living
converting wastewood into a low carbon green fuel.


So, in University of Missouri Columbia, corn stover. Right? A
byproduct of making corn is like, you know, it's the stalks
that's actually a fuel — supply gets mixed in. University of
Iowa, there was a cereal, the General Mills cereal plant. So,
turns out when you crack an oat hole like a pistachio, there's
the part you eat, and then there's the whole shell. Well, that
shell can actually be used as a fuel input in a power plant. And
so, interesting, that happened at University of Iowa probably 25
years ago, and it enabled that cereal factory, instead of paying
to dispense of that waste product, they actually got paid to
provide it.


Right. So, there's really a lot of, I think, interesting,
innovative economic, environmental opportunities that come from
having a district energy system in your community. So, there's a
lot of success stories out there. Time prevents me from covering
them all.


David Roberts


Is it relatively straightforward? I mean, I guess this will
obviously depend on the system, but if you have source X and you
want to switch it out for source Y, you already have all the
infrastructure going to the houses and everything. Is it
relatively straightforward to switch sources on these things once
they're built? Or how customized is the network to the source, if
that makes sense?


Rob Thornton


So, all across Scandinavia, houses are connected. Entire
communities have district energy. They're often municipally
owned. Right. So, the people that are using the energy are the
shareholders. Right. So, in Sweden, in Denmark, often it's a
nonprofit like a municipal enterprise. So, it's a very different
market, drivers, et cetera, than our investor model here. But no,
at Princeton University, I hate to pump the tires on them, but
they really are tremendous. And Google them if you would, but
they did a test because they use natural gas in their jet engine.
So, it's basically like the jet engine that would be on the wing
of a fighter plane, F-35, right.


That's now stationary, and they use natural gas. They did a test
burn 20 years ago with using biodiesel, and it turns out that the
engine, the jet, liked biodiesel better. It burned cleaner,
cooler, and it was happy. But of course, the price of biodiesel
is eight times or more. Right. So, there are opportunities to
kind of just switch. It's not as simple as switching the fuel
like valving one and opening the other. Although that can and
does happen. Right. I don't mean to overly simplify it, but one
of the big advantages of district energy is with the scale of
serving 500 to 200 buildings, you can then integrate what are
lower carbon or renewable technologies.


And you don't have to go all in. Like it doesn't have to be 100%.
Right. You can feather it in. And if you look at a city like
Gothenburg in Sweden, 30 years ago, 80% of the fuel input was
fossil. Today it's like 8%.


David Roberts


And they've just been nudging it that way over time.


Rob Thornton


Exactly. Now the markets are entirely different. There's carbon
price driver, there's taxes. There's a whole different set of
circumstances that really need disclosure when you look at the
difference between Denmark, Sweden, and the US. But on a
technology basis, it's not a technology — it takes smart people,
don't get me wrong. And we're gifted in district energy, our
industry, we have some really talented, dedicated people running
our systems in cities and on campuses. Really just remarkable.


David Roberts


But people can and do switch out sources.


Rob Thornton


Exactly. It isn't necessarily I mean, you have to solve for the
economics, the reliability, efficiency. It's really kind of a
four-level chessboard now. Right.


David Roberts


Relatedly, and you touched on this briefly, and this is something
I wanted to get at. In the US, we're talking about the increasing
interplay between heat systems and electricity systems, which
from a physics point of view is awesome. And from a carbon point
of view, I think is awesome. But from an institutional point of
view, it is problematic since we have gas utilities and then we
have electric utilities, and they're not necessarily eager to
play nicely with one another. So, in a US city, who owns this? Is
it the gas utility? Because that's sort of kind of related to
their business.


Can an electric utility own this? Is it co-owned? How does it
work with the US utility system, which screws everything up some
way or another?


Rob Thornton


The answer is yes and yes. So, the first eleven downtown district
cooling systems built in cities in the US were built by natural
gas utilities, LDCs, local distribution companies, because they
had all this summertime gas capacity available. It was really
before the grid was primarily natural gas driven. So, the gas
utility, they really were the initial, I would say, principal
investors in the district cooling industry in North America.
Since 1990 we've built like 60 systems in cities across North
America.


David Roberts


I said they're rare in North America, but apparently that's just
my abject ignorance. Apparently they're all over the place.


Rob Thornton


Depending on where you went to college, you probably lived in a
dorm that was on district heat. I would make that bet.


David Roberts


This is a classic invisible infrastructure here.


Rob Thornton


No, it really is out of sight, out of mind. We're not wind
turbines. We're not blue panels, not self-evident, quietly,
silently, effectively doing our work. The electric utility
industry, I think they're kind of coming back around to district
energy. Now, currently a lot of the downtown systems are actually
owned by pension funds or investor groups and operated by very
talented third-party companies: Vicinity energy, Cordia energy,
CenTrio. And then in Canada, Enwave, Corex. So, there are people
that own and operate systems in multiple cities. Right. So,
there's been a kind of a scaling up.


David Roberts


The model there, is that an energy as a service kind of thing,
where they own the infrastructure and they just sell the heat?


Rob Thornton


Well, it's more like we will contract with you to provide the
heating and cooling that you require. It's almost like leasing
space in an office building. You're purchasing a share of the
capacity, and then you're going to pay for the metered
consumption. So, there's really two components to the sort of the
rate structure. Generally there's a capacity and then a
consumption of metered, and that's generally billed monthly.
Oftentimes it's on a multi-year contract, like a lease, 10 to 20
years. Many of the district cooling systems, when they were
initially built, were like — the gas utilities built them, and
then they were sometimes sold off.


Right. Because there was huge value in selling them off, and then
when private enterprise kind of came in to own them, the
contracts, the service agreements, were, in effect, the
collateral to fund the capital. Right. Time probably prevents me
from kind of getting into all the perturbations. But to your
question, many of the systems today are privately owned and
operated. They own the pipes, they own the plant. They own the
pipes or they have the right of way. Most systems are integrated
where the production plant and the networks are owned by the same
people. Right. It's rare where the pipes are owned by a third
party or the municipality, and then you're paying like right of
way, et cetera.


So, in 60s, 70s, the gas utilities built like this first group of
district cooling systems. And then in the 90s, right when
Montreal Protocol and CFC phase out was happening, the electric
utility is like, "wow, we should get in the district cooling
business." So, they were investors either as a principal or as a
partner in district cooling systems. Like the system in Chicago
was a joint venture.


David Roberts


Did any of them get rate-based or like our ratepayers on the — ?


Generally not; typically they had their own balance sheet,
P&L. Oftentimes it was equity downstream. But when I grew the
business in Hartford, I was a non-regulated subsidiary. The
allowed rate of return for the gas utility was in the
neighborhood of 10%. It was like eight to eleven. Right. If I
needed the capital to expand the network, I had to provide the
shareholders a 15% to 25% return on equity.


Good God.


Rob Thornton


And at the time we doubled the size of the system in Hartford, we
were producing almost 25% of the earnings per share with less
than 10% of the revenue.


David Roberts


Wild.


Rob Thornton


So, there's a lot to uncover here, unpack here. Let me just say
that district energy is a highly valuable, highly valued asset
and becoming more so.


David Roberts


Do you see as these things get more popular and just in general,
as heat in general becomes more important, prized and important,
do you see heat sources, like for instance, data centers making
sighting decisions based on proximity to these things, based on
their ability to sell heat to these things? Like, is this
starting to be a force in where big industrial things locate?


Rob Thornton


I think it's a factor and is sort of rising in the valuation.
It's gone from maybe a rounding error to maybe top ten tier like
row. We have seen a demonstrable growth in data centers,
certainly in northern Europe. Right. And what's happened with the
data center operators is they're realizing "I need to reject heat
all the time." These servers are making heat all the time.


David Roberts


Yeah. Well, typically the way is to site out in the middle of
nowhere where renewable, where electricity is super cheap. So,
you can just run your coolers for super cheap. But this seems
like this seems better. To use the heat. Right?


Rob Thornton


Yeah. It turns out there's actually some margin in it. Right.
Instead of paying to dump it right. Or exhaust it right. Now you
can actually have a value stream. Now, I wouldn't say that it's a
prime driver. It may be the case where a data center would have
been like 30 miles away is now closer to a load center.


David Roberts


Right, right.


Rob Thornton


And then the heat can be harvested on an economic basis: Data
center heat, industrial heat. You mentioned earlier, sewage heat.
Turns out, man, there's a lot of heat pumping underground. And
you think about you take a shower in the morning, then you run
your dishwasher and then your washing machine, et cetera. You're
putting a lot of BTUs into the waste stream. This is low value,
but with a heat pump, you can up the value of that heat three,
four, five, six to one. And you know what? Municipalities,
especially water systems, they're always looking for a new
revenue stream. It really is a symbiotic opportunity.


David Roberts


Yeah, this is kind of what I got into. I've done a couple of pods
on industrial heat, storage heat, batteries. I don't know quite
what the distinction is. It's technological, but not
technological in the way we're accustomed to in the 21st century.
When we think technology, we just think chips and obscure stuff
going on that is opaque to us, that we can't understand. It's
like a black box magic. This is like an earlier form of
technology where it's very tangible, it's very physical, it's
very engineering based. There's nothing conceptually here that's
hard to understand. Right.


It's just moving the pieces around to make them work better. It's
delightful in a way I have not quite been able to capture. It's
like an older form of engineering.


Rob Thornton


I mean, we'd all like to think it's simple and straightforward,
and generally, it is. But let's say I'm in an elevator and
someone says, "So, what do you do?" And I take the 20 floors to
tell them. Most people go, "Oh, man, that makes sense. Don't dump
the heat in the ocean. Yeah, use it for cities. Right?"


David Roberts


Exactly.


Rob Thornton


"Why aren't we doing that?" Right. So, that's generally the
reaction I get. It's like, "Wow, that's common sense. Don't waste
it."


David Roberts


The more you start thinking about it, you're like, "Well, where
is the heat?" And you start looking around, you're like, "Oh,
it's everywhere. It's all over the place. How can I get it from
there to there? How can I get it from there to there?" It's very
clever. Okay, we're running out of time, but I want to get
briefly to the policy question. So, first is, is there stuff in
the IRA for district energy, or are there existing subsidies or
supports in U.S. Policy for district energy?


Rob Thornton


There are some. It's not a straight line. There isn't a call out
for district energy or CHP. There are a number of initiatives
where our members can participate and compete and win and win
funding. Often it's driven at the Congressional District level
right now. Here's a project, there's a public entity, it's an
infrastructure investment. So, it requires sort of a packaging
and explanation, but that is happening. I would also say that
district energy has survived and thrived without relying on
incentive. Right. Or tax policy or credits. Now, obviously IRA,
the fungible, the transferable tax credit, that's going to create
opportunity where like a public institution, non tax requiring
entity previously would have had to partner with a third party
investor with a tax appetite.


Right. And that wasn't always a kindred spirit, wasn't always so
revising. That will create even more opportunity for funding,
opportunities for infrastructure investments, which these tend to
be. So, I'm not really giving a clear answer other than, yes,
there are some, but it's not a clearly delineated —


David Roberts


Indirect, you might say,


Rob Thornton


Kind of set aside, yeah.


David Roberts


Well then, final question. Are there obvious policy reforms that
would help district energy and at what level are those? Is this
mostly going to be a municipal thing or is this where states can
help or is there some national policy that could help? If you
were pulling a policy lever, where would you look for the lever?


Rob Thornton


Yeah, I think it's all three layers. At a federal level, if there
were a carbon tax, not that I'm a proponent of tax, but if there
were carbon tax that really did, I think, appropriately evaluate
emissions that would really then unleash investment in
efficiency, et cetera, I mean, that would unleash "oh my God, we
can get there faster with district energy at scale doing this 20
MW a time or more." At a state level, we are seeing some states,
Washington, New York and others that like New York has the
climate law and at a local level right, municipal New York City
local law 97, which is requiring large building owners to itemize
their carbon emissions, right, et cetera, right.


Now, you may know recently they provided a two year reprieve on
the compliance with local law 97 because the carrot and stick,
the stick was coming out next year to impose fines on buildings
that weren't in compliance. And some buildings, not for lack of
trying, really were in a rat in a maze they couldn't solve to get
to low carbon. Right. So, again, I'm not advocating a carbon tax,
but if the right to emit had — so many of our members, right,
when they're doing an evaluation on a utility plan or a master
plan or a renewal, they have a shadow price for carbon.


But it's not necessarily a revenue stream that's going to
amortize the debt. But it is something to consider because I
don't know if it's likely. I've been at this for 45 years. We've
had starts and stops. The Clean Power Plan, I thought, was a move
in the right direction. Right. It kind of said "states do this,
but we all got to get on this." That came and went. Right. So,
the uncertainty of policy immediacy, I think, can be both a
crutch and an advantage. And I think our industry, we've managed
to make sense based on efficiency, resilience, and economies of
scale, not to say that we wouldn't benefit from more informed
policy like is in place with our colleagues in the EU.


Right. Certainly in Scandinavia. But I'm not here to advocate
that a $140 carbon price is the answer today.


David Roberts


I'll advocate for that on your behalf. If someone here needs to
advocate for that, I'll take that bullet. Some of it is about
subsidies and policy help, but a lot of it and this is a theme I
come back to again and again and again and again, which is just
this is another area of clean energy that involves more planning
and spending upfront for huge savings over time. You run into
that situation over and over and over again. Especially in the
US, planning is not our forte, not really something we're great
at doing. So, a lot of it is just about like, let's sit down
together and think through this thing in advance and come up with
a plan.


I don't know if it's policy that helps that happen. It's just
more of a culture of planning, it seems, almost we need.


Rob Thornton


Well, there's the challenge of weighted average cost of capital,
return on private capital. Right. Those are real. Where we are
seeing, I think, an acceleration of investment is on our college
campuses because, as you might recognize, they have an investment
horizon. Cornell has been in the same location 150 years,
Princeton, 300 years. It'll be 300 years soon. So, they have an
assurance of not only provision, but supply and use, et cetera.
Right. So, you can have a six-year return on investment and
anticipate 20 years of benefit.


David Roberts


Right.


Rob Thornton


And that's actually the case with the Cornell deep lake water
cooling. Turns out when they stroked the $56 million putt in
1990, it's actually worked out better than they predicted
economically, better environmentally. And today they're able to
add load with a very low marginal cost. And so it isn't as simple
as "if you build it, they will come." But we are seeing where the
risk appetite — I think private enterprise in the US has the
double burden of shareholder intensity next quarter, next month,
next day, right. Versus what's beneficial for employment growth,
labor, continuity,


David Roberts


The time horizon of capital. I come back to this again and again
and again. We got so much fast, impatient capital, and so much of
what we want to do requires slow, patient capital.


Rob Thornton


Yes. And we're seeing that district energy renewals are really
having significant economic value. Then it also comes back to,
well, how many customers? What is the predictable use of that
asset over this life? Right. And so you have to do some
sensitivities around that. Well, what can we bank on? What can we
predict? What can we expect? But I think our industry is actually
enjoying a renewed recognition, really. I'd say an appreciation.
I don't want to call it a renaissance because we've always been
there and very good at it, but I do feel like we're becoming the
cool kids table in the high school cafeteria.


David Roberts


At last.


Rob Thornton


Leave it there.


David Roberts


Back to the future. All right, Rob. Well, thank you so much. I've
been fascinated by district energy for many years. It's great to
really dig through it with you. Thanks for coming on.


Rob Thornton


Thanks so much for the opportunity and really keep up the good
work. Really applaud all the work you're doing to help people
understand and get their heads around all these opportunities and
challenges. Thank you.


David Roberts


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