Risk assessment of new pricing strategies in the district heating market: A case study at Sundsvall Energi AB

The price structure of district heating has been no major scientific issue for the last decades in energy-related research. However, today trends in district heating pricing tend to move towards a more customer-oriented approach with predetermined prices under a longer periods, leading to a more complex price structure. If a district heating supplier offers district heating with predetermined prices in order to compete with similar electricity offers, the financial risk of the new price structure is significantly higher than the risk of an ordinary variable cost offer based on short-run marginal cost. In contrary to an electricity seller, the district heating company cannot transfer all of the risk of predetermined prices to the financial market, instead the company is thrown upon its own ability to handle the risk by, e.g., hedging its own energy purchase. However, all uncertainties cannot be coped with in this manner. Thus, there is a need for a methodology that can be used to estimate the financial risk of different price structures and to value different opportunities to reduce the risk. In this article, we propose a methodology, implemented in prototype software, to evaluate the risk associated with new price structures in district heating.