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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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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