Why DHC companies are key enablers of the smart energy transition

As Europe transitions toward a more sustainable and resilient energy infrastructure, District Heating and Cooling (DHC) companies play a critical double role. They decarbonise heating and cooling production for millions of inhabitants, while at the same time balancing national power grids through electricity production and consumption.

Given that heating accounts for nearly half of the world’s total energy use, this dual mandate positions DHC companies at the core of the current energy transformation, requiring strategic leadership to navigate growing complexities.

Which challenges do DHC companies face today and how can they successfully navigate this increasingly complex landscape?

Unlocking flexibility opportunities with district heating

Participation of DHC companies in the E-markets could unlock even greater flexibility opportunities. The International Energy Agency believes that this is essential as the global need for flexible assets is expected to grow tenfold by 2030, driven by Europe's rapid expansion of over 500GW of PV and wind energy.

However, flexibilisation adds a new layer of complexity given that maintaining reliable and predictable heat delivery to citizens remains a crucial obligation.

A major component in DHC flexible portfolios are currently large co-generation plants they have already been operating for decades. Combined Heat and Power (CHP) plants are particularly efficient, producing electricity for the grid while simultaneously delivering heat to district heating networks. And the role of these traditional co-generation plants is evolving.

For example, in the city of Łódź in Poland, power plants have a combined capacity of 400 MWe for power production and 1600 MWth for heat production, supplying around 400,000 residents with heat.

Building flexibility with a diversified energy mix

Beyond operating CHP plants, DHC companies are diversifying their supply portfolios to enhance operational flexibility and operate based on increasingly volatile electricity markets.

Many are incorporating (decentralised) renewable heat sources, such as heat pumps and E-boilers, to further expand their flexibility potential. While these assets offer great value, unlocking their flexibility is a challenge companies must resolve to fully realize the benefits.

In parallel, DHC companies are adding thermal energy storage capabilities and E-boilers to create more flexibility. This transition is complex, requiring operators to extract maximum value from existing systems while adapting to new, distributed energy setups.

For example, the Finnish energy company Helen is replacing coal-based heat supply with large-scale heat pumps at newly integrated locations within their network, while simultaneously adding storage systems and E-boilers to bolster flexible capacity.

Similarly, Envafors in Denmark is integrating electricity-consuming heat pumps and thermal energy storage capacity in their systems next to co-generation assets. With the added responsibility of purchasing electricity at favourable times, making operational decisions that ensure profitability has become increasingly complex.

Effective utilisation of a co-generation asset is tricky

Effectively utilising a co-generation asset – the most common asset for DH companies to produce both electricity and heat,  is an opportunity and risk at the same time.

It is an opportunity since heat can be produced at a more affordable price when compared to a heat-only boiler. But it also presents a risk given that volatile power prices on the day-ahead market make it difficult to precisely understand the expected profits.

Another risk comes from the fact that the amount of electricity a co-generation plant can produce is heavily influenced by the heat that must be generated to meet citizens’ demand. This is why the heat load can also be a limiting factor for the amount of electricity a co-generation owner needs to produce. If the heat load forecasts turn out to be incorrect, the resulting electricity quantities must be corrected by trading based on hard-to-predict intraday prices.

Using the right asset at the right time is a challenge

DHC companies, particularly those managing decarbonised systems, often rely on multiple assets. Next to co-generation, they use heat pumps, E-boilers, and energy storage to run their operations.

When electricity prices are high, co-generation assets are prioritised over heat pumps and E-boilers. And the other way around, low prices favour these electrical-consuming assets, saving the fuel combustion engines would burn.

Some DHC companies also commit in electricity capacity markets, securing valuable revenue streams. However, when the electricity grid operator activates their co-generation commitment, the operator must act within minutes to ensure the corresponding heat production is efficiently managed, either by utilising storage or reducing output from other heat sources.

An operator of a DHC system needs to make difficult hourly decisions to balance heat load requirements, electricity prices, and asset efficiency. Ensuring the right asset is used at the right time is critical to maintaining both economic performance and reliable heating and cooling supply.

Beyond selecting which assets to use, companies must ensure their network can support this strategy. Decentralised sources, thermal storage, and diverse demand profiles add complexity, making it essential for production schedules to be not only profitable, but also hydraulically validated, feasible and reliable.

What companies need is a deep understanding of real-time network conditions

A deep understanding of real-time network conditions, capacity constraints, and evolving market dynamics has shifted from a ‘nice-to-have’ to an absolute necessity.

One example of a company that operates well in this complex landscape is Veolia, a European leader in flexible power management. It generates 2 GW of flexible power across 10,000 industrial sites, an output comparable to the power consumption of two million people.

With such an expansive asset base, companies can, for example, respond swiftly to price fluctuations on day-ahead and intraday markets while supporting grid stability through ancillary services as more intermittent renewable sources are integrated.

Conclusion

District Heating and Cooling (DHC) companies are pivotal to Europe's smart energy transition, as they decarbonise heating and cooling systems while also contributing to grid stability through electricity production and consumption.

However, balancing these assets amid volatile electricity markets and ensuring reliable heat delivery presents challenges. Successful navigation requires strategic leadership, real-time network understanding, and innovative adaptation to market dynamics.

In the second part of this series, we’ll explore why mastering heat propagation – the hidden complexity behind reliable heat delivery, is key to unlocking true operational flexibility.

This three-part series is a part of our Flexibility Whitepaper.