Combining economic and energy system modelling for assessing long-term energy transition strategies

District heating, achieved through integrating renewable and excess heat sources, can significantly contribute to emission reduction targets in the heating sector. A crucial factor is adopting low-temperature distribution, known as 4th generation district heating (4GDH), which enhances efficiency and utilization of low-carbon heat sources. This paper presents a novel methodology combining 1) a DH company-level economic model implemented in General Algebraic Modeling System with 2) an energy system model based on Backbone modelling framework, for modelling energy transition in a DH system. This approach considers both the realistic economic constraints that a DH company would have while also providing an accurate, hourly-level perspective on how the system is operated. The approach is ideal for assessing realistic transition pathways to low-temperature distribution and supports decision-making in realizing the 4GDH systems. The methodology is presented as a demonstration case for a small DH system located in Kitee, Finland. The results showcase the key features of the modeling approaches, including the development of the market share and price of DH in different competition environments, and the investment path in the transition and its impact on the long-term finances of the DH company. The market share of low temperature district heat varied between 18 and 74 % among the modelled cases. The results demonstrate that different competition cases produce considerably different outcomes on how the DH system evolves and how low-temperature DH gains market share. • Combining energy system and economic modelling of a district heating company. • The modelling approach is ideal for assessing energy transition pathways and 4GDH. • A wide set of economic and technical KPIs are obtained with the models. • Demonstration case of a Finnish district heating system. • Competition environment affects the market share and price of district heating.