Production investment portfolio management in a district heating company

Abstract

Climate crisis drives renewable investments in energy sector and energy companies have pressure to invest fast, environmentally friendly, and economically. These aspects raise the need for production investment portfolio optimization and management. Capital intensive nature of investments in energy production leads to long payback times and consequently multiple other investments within life cycle are probable. Objective of the study was to develop investment framework that highlights scenario approach and takes into account cross-case profitabilites in profitability analysis of investment, which is key to managing investment portfolio in the long-term.

To meet research objectives, a new investment framework was proposed based on literature review, and the proposed investment framework was tested on case study. The key stages in the proposed investment framework are identifying all district heating production investment technologies and projects, analyzing profitability, and portfolio selection. Corporate strategy and investment strategy set the basis for the first stage along with situation in the energy market and status of the current production portfolio. Once collection of investment possibilities is formed, are individual profitability analysis and cross-case profitability assessment performed. As key objective in the study was to develop method to cross-case investment profitability assessment, profitability matrix was introduced which describes how investing to one case affects profitability of other investment cases on yearly basis in the future according to price forecasts. Since prices fluctuate in the long term, sensitivity analysis for all scenarios in the matrix was concluded the profitability analysis providing information on how profitability between investment developed in different market scenarios. Project resource allocation and technical evaluation affect the portfolio selection, which is the last phase in the proposed framework. Portfolio management, however, is continuous work, and the process starts over, when new technologies are discovered or energy market situation changes.

Four real-world cases were picked to implement the proposed framework. Investment profitabilities of electric boiler, district heating storage, heat pump and waste heat utilization were evaluated according to investment scenario matrix. Yearly profit for investment was calculated by comparing total costs in scenarios with and without the investment. Cross-case profitability impacts from different investments were analyzed according to scenario matrix. Surprisingly high cross-case profitability results were found between district heating storage and electric boiler. Negative cross-case profitability impacts were discovered with between electric boiler, heat pump and waste heat. All scenarios underwent sensitivity analysis where correspondence with electricity-based production profits and electricity price was found. Biomass sensitivity analysis highlighted the high biomass dependency of the current portfolio, which highlighted the profitability of the electric boiler.

This study contributes to investment strategy and investment profitability analysis process by providing proposition for district heating investment process. A systematic method for investment cross-case analysis was developed in this study. The key findings from implementation of the proposed framework were cross-case profitability analysis and improved risk scenario acknowledgement. The case study proved that priority order of the investment changed when cross-case impacts were considered.