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This study provides an analysis of the potential for a sub‐energy system to provide an electricity balancing service to, in this case, a national energy system with a large share of variable renewable electricity generation. By comparing electricity balancing capacity, CO2, eq‐emissions, and costs, three different local residential energy system setups are assessed. The setups contain different combinations of district heating, combined heat and power, thermal energy storage, electric battery storage, heat pumps, and electric boilers. The analysis focuses on system‐level integration, heat and electricity cross‐sectoral operations, and unconventional production strategies for district heating production. The results show that local sub‐energy systems with heat pumps, combined heat and power, and thermal energy storage has the potential to reduce national electricity balancing demand in an economically feasible way, and with modest CO2, eq‐emissions. It was also shown that electricity‐based heat production without district heating is economically unfavourable, even in the most optimistic scenario; it is not likely to be feasible within a 30‐year period.

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Studies have shown that surplus power from variable renewable electricity generation can be consumed in electric boilers or compressor heat pumps, i.e., Power-to-Heat (P2H), for heat production. This potentially provides power balancing for the electric grid and can also decarbonise and/or reduce biofuel demand in the district heating (DH) sector. This sector-coupling of thermal and electrical systems is, however, limited by production planning complexity, grid fees, tariffs, and risk-averse actors. The conditions for P2H production varies between DH-systems due to non-homogeneity in the configuration of production units in different systems. This study investigates the economic feasibility of placing bids for P2H electricity consumption on the reserve capacity market in three different DH systems. It is assumed that P2H electricity consumption is controlled by a hypothetical balance operator. To increase production flexibility, the DH systems are equipped with heat storages where P2H-produced heat is stored. The results show that P2H on the reserve capacity market can increase revenue for DH operators, but DH systems with co-generation of heat and electricity risk reducing income from power production. Furthermore, stored heat needs to compete with cost-efficient base-load production to avoid large required storage sizes. The power balancing potential of P2H in DH systems is generally limited by the installed P2H capacity, as well as the rest of the constituents and the production strategy of the DH system. To overcome these limitations policies are needed that reward power balancing services and provide investment support for P2H capacities and heat storages.

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