‘The real value of District Energy is seen over a long-term basis’

Jim Lodge

Could you comment on the uptake of District Cooling in the Middle East region? Do you see an opportunity for the region to drive the growth of District Cooling to a level similar to that in Denmark?

In Denmark, District Heating is just expected. It’s something in their culture for so many years. If you’re getting electricity for your building, most people don’t think of generating it themselves. They would go to the utility supplier and get it. It’s an integral part of the infrastructure, so when people think of doing their building, the first thing they think about is whether there is a network out there. That’s just what they would do; it’s sort of a natural instinct.

I think cooling in the Middle East is getting there, too. I contrast that to the United States and District Cooling/Heating – it is a much smaller slice of that effort, it’s more surprising that there would even be a system. Many times, when people are developing a building, they’re not even thinking about District Energy development in the area; they just think there is the building and they think of putting their own cooling equipment or heating equipment in.  

Is it because of diversity of geography?

A little bit. If developers are familiar with the local area, then they’ll know about it, if it’s there. But if they’re new to the area, then they may not know, and it may not be something they consciously think about. What I do say for people that want to go on District Energy, in general, too often people want to jump into the economics of it, instead of looking at it and saying qualitatively, “What does this do for me?”

In my experience, if I talked to people about the value of using District Energy, and they understand it and they go, “I like that, those values resonated with me”, that’s more than half the battle won, because if people want it, then they look at the economics, which they always have to do, to justify it. More often, if someone hasn’t gone through the process of understanding the benefits of District Energy, and I’m not talking about true financial ones, then, they may be more apt to say, “I’m not feeling comfortable”, and when you do the finances because you’re doing something over a longer period of time, it’s really easy, if you don’t want it, to put the numbers in the spreadsheet in the right way, so the economics don’t make sense. But if you want it, then you will do more investigation to make sure you have an accurate assumption of the financial model. District Energy is very different from having your own system, and too often people want to compare it to that, but it’s like a different type of car. Yes, you drive both cars, but a Ferrari is very different from a Volkswagen, and I’m not saying we are the Ferrari, but I’m not saying we are the Volkswagen, either. The quality and reliability of District Energy is significantly better than individual building systems, and when someone talks of the total cost of the development and all the operating cost over the life of the building, District Energy is relatively small in scale, compared to that.

In the United States, we have seen many customers, where we have had contracts. If someone is looking at an investor building to resell it, we have seen District Energy is a benefit, because when you have a building that is being sold and you have liabilities associated with the central plant, where people take capital investment, that is an added cost an investor is later going to top, whereas if you have a District Energy system, as long as the contract is understood, from a market standpoint, it is competitive. The new owner picks it up, and we have had new buildings in our system exchange hands multiple times with developers.

Ultimately, it’s the utility providers’ responsibility to communicate the financial value and the soft items that are more qualitative in nature. 

What are the paybacks?

Payback is not the right metric. It’s important to talk to CFOs – those interested in capital and operating expenses – and then you have to do a lifecycle cost analysis. That’s going to look at what their ultimate cost will be, both on the capital and the operating side, for an extended period of time, which would typically be 25-30 years because of the lifespan of equipment. The challenge comes when most people can look at capital cost, because they can get estimates of that nature. It is very hard for people or buildings to have a good history of the 30-year operating and maintenance expenses for the District Energy company. District Energy should win if people have done their job every single time, and the reason they should win is, if you think about it, if the overall cost is the same in the long run, why would I want to take the risk associated with operating my own plant? Because if I have risk associated with that, that is added cost. District Energy systems remove all the risk associated with reliability of service equipment, failures and construction costs. No one is taking on that risk. If someone brings a brand new building, we are taking construction risk associated with the mechanical equipment.

How much goodwill do District Energy providers have in the United States? Has that value of District Energy been revealed to more stakeholders, or do you feel more work has to be done in that regard?

I think a lot of work has to be done. I don’t think people recognize that at all. There are some customers that do. If the District Energy company is doing a good job in communicating with them and being able to let them know some of the things they are doing, they will recognize that. The challenge is that too many of the customer representatives of those buildings don’t stay very long. It gets tough, because the real value of District Energy with that goodwill is seen over a long-term basis. When you think about it, if you buy a new car, the first few years it works perfectly fine. Like leasing, it goes back. You never experience holding on to it for 20 years, because the last 10 years, maybe the last five years, the contract is the most challenging. That’s when you have to run your own equipment, you have lots of failures, you have an issue trying to extend the life. You don’t have that with District Energy. With District Energy, you are paying someone else, you are supplying reliable cooling there every day – out of sight and out of mind.

I would say District Energy companies and their employees tend to be long-term, the customer buildings tend to have higher turnover, so it’s harder to have people recognize some of that goodwill you’re talking about.