It does sound to me like the head gasket has gone.
I'm amazed that Volvo are not contributing towards the cost of this on such a low mileage car.
Unfortunately the gasket alone is about £10 but it involves the head of the engine to be taken off, skimed, new gasket/head bolts/cambelt etc and reassemble, lots of hours involved
Has the car been driven hard lots from cold? How is is generally driven? Sadly the D2 isn't a Volvo engine and isn't solid like the Volvo blocks
EDIT: Have a read here
https://www.volvoforums.org.uk/showthread.php?t=276229