Central and Eastern European District Heating Outlookold.regula.lt/lt/naujienos/districth_heating_outlook_web.pdf · 12 Defining CEE Energy Markets Summary (1990s): • The early

ENERGY AND NATURAL RESOURCES

Central and Eastern European District Heating Outlook

ADVISORY

Authors:

KPMG Energy & Utilities Centre of Excellence Team, Budapest, Hungary

3CEE District Heating Outlook

Csaba Fekete, Manager Energy & Utilities Advisory Services, KPMG in Hungary

Tel: +36-70-319 5350 E-mail: [email protected]

Dear Reader,

It is my pleasure to introduce the Central and Eastern European District Heating Outlook, which has been prepared by the KPMG in Central and Eastern Europe’s Energy & Utilities Advisory Practice located in Budapest, Hungary.

Based on the success of our previous publications covering electricity, natural gas, renewable energy and nuclear we have assembled this report with the ultimate aim of highlighting the most important opportunities in the region’s district heating sector.

On the following pages, we have turned market data into meaningful analysis, thus offering KPMG’s view on available opportunities for business organizations and institutions interested in the Central and Eastern European district heating market.

I trust that our report will provide you with valuable insights and I wish you all the best on your exciting journey through and, hopefully, participation in, the development of the CEE district heating sector, whether you are an investor, supplier or any other stakeholder on the market.

Sincerely,

© 2009 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

mailto:[email protected]

Table of Contents

5CEE District Heating Outlook

Executive Summary 7

1. Defining CEE Energy Markets 9 1.1. History of District Heating in the Region 12

2. Early Technologies 19

3. Development of Distribution 21

4. Generation Technologies 25 4.1. Industrial Boilers 25 4.2. Heat Pumps 27 4.3. Electrical Heating 28 4.4. Combined Heat and Power Generation (CHP) 29 4.5. Trigeneration 34

5. District Cooling 37

6. Competitiveness & Emissions 41

7. Legislation 45 7.1. Competition 46 7.2. Regulation 47

8. Finance and Investments 51

9. Country Specifics 54 9.1. Albania 55 9.2. Bosnia and Herzegovina 56 9.3. Bulgaria 58 9.4. Croatia 60 9.5. Czech Republic 62 9.6. Estonia 64 9.7. Hungary 66 9.8. Kosovo 68 9.9. Latvia 70 9.10. Lithuania 72 9.11. Macedonia 74 9.12. Montenegro 76 9.13. Poland 78 9.14. Romania 80 9.15. Serbia 82 9.16. Slovakia 84 9.17. Slovenia 86

10. Best Practice 89

11. Investment Opportunities 93

12. What can KPMG Firms Offer to the District Heating Sector? 99


7Executive Summary

Executive Summary

The district heating (DH) sector’s share of total heat demand is approximately 10% in the European Union, serving about 64 million people on a daily basis. At around 37%, district heating is a major component of the energy sector in Central and Eastern Europe (CEE), providing heat and hot water to more than 40 million people.

Despite all the problems perceived in connection with DH, the concept of these systems is efficient, and has many advantages compared to individual heating solutions. In this publication we have tried to determine the advantages and disadvantages as well as the barriers blocking the expansion of DH.

Given the vast size of the market and the potential to improve, district heating is, and will be, an important instrument in achieving the emissions reduction and increased renewable energy targets of the European Union.

Within CEE coal and natural gas continue to be the main fuel sources used in the district heating sector. Subject to favorable local conditions, an increase in the use of renewable energy sources is apparent in most CEE countries. As many of these markets depend on a single gas supplier, security of supply concerns are high on the agenda in the sustainable development of the region.

Consistent high-quality data are vital in assessing the current situation of district heating. However, many transition countries still have a long way to go toward improving the quality of their statistics they collect regarding heat consumption. As a result, in some cases we have had to rely on earlier data for completing this publication. Taking into account that District Heating is a very slowly changing sector by nature, we believe this fact does not decrease the value of our study.


9Defining CEE Energy Markets

1. Defining CEE Energy Markets

For the purposes of this study, the Central and Eastern European region is defined as the 17 countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, The Czech Republic, Estonia, Hungary, Kosovo, Latvia, Lithuania, Macedonia1, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia) lying east and north of the EU-15 (neighboring Germany, Austria, Italy and Greece) and west of Russia, Ukraine, Moldova and Belarus.

Ten out of 17 of the above listed CEE countries are EU member states, with Croatia being very close to receiving an accession date and Macedonia also on the path toward accession.2

Figure 1: The CEE Region in European Context

� Central and Eastern European countries

� Other countries

1 The country is often referred to as Former Yugoslav Republic of Macedonia; in the current report we refer to it as Macedonia.

2 Source: European Commission Enlargement Newsletter http://ec.europa.eu/enlargement/press_corner/newsletter/index_en.htm accessed on 29 April 2008


BG

RO

MK

KO

AL

ME

RS

HR SI

HU

SK

CZ

PL

LT

LV

EE

Economic and Population Data – Central and Eastern Europe

� EU member states

Bulgaria (BG) GDP: USD 93.78 billion • GDP growth: 6.0% • Population: 7.2 million

Czech Republic (CZ) GDP: USD 266.3 billion • GDP growth: 3.9% • Population: 10.2 million

Estonia (EE) GDP: USD 27.7 billion • GDP growth: -3.0% • Population: 1.3 million

Hungary (HU) GDP: USD 205.7 billion • GDP growth: -1.5% • Population: 9.9 million

Latvia (LV) GDP: USD 38.9 billion • GDP growth: -5.0% • Population: 2.2 million

Lithuania (LT) GDP: USD 63.2 billion • GDP growth: 3.2% • Population: 3.5 million

Poland (PL) GDP: USD 667.4 billion • GDP growth: 4.8% • Population: 38.5 million

Romania (RO) GDP: USD 271.2 billion • GDP growth: 7.6% • Population: 22.2 million

Slovakia (SK) GDP: USD 119.5 billion • GDP growth: 6.4% • Population: 5.5 million

Slovenia (SI) GDP: USD 59.14 billion • GDP growth: 4.3% • Population: 2.0 million

� Non EU member states

Albania (AL) GDP: USD 21.82 billion* • GDP growth: 6.1% • Population: 3.6 million

Bosnia & Herzegovina (BA) GDP: USD 29.9 billion* • GDP growth: 5.6% • Population: 4.6 million

Croatia (HR) GDP: USD 73.36 billion • GDP growth 2006: 4.8% • Population: 4.5 million

Kosovo (KO) GDP: USD 5 billion* • GDP growth: 5.1% • Population: 1.8 million

Macedonia (MK) GDP: USD 18.52 billion* • GDP growth: 4.6% • Population: 2.0 million

Serbia (RS) GDP: USD 80.74 billion • GDP growth: 5.6% • Population: 10.1 million

Montenegro (ME) GDP: USD 6.6 billion • GDP growth: 6.5% • Population: 0.7 million

All GDP figures are quoted in Purchasing Power Parity and are 2008 estimates.

* Albania, Bosnia & Herzegovina, Macedonia and Kosovo have large informal economies that might reach 50% on top of the official GDP.

Sources: World Factbook, US Central Inteligence Agency, 2008

All information consists of estimates.


District heating is traditionally widespread in most CEE countries. The district heating markets of the various CEE countries vary widely due to the highly differing geographical characteristics, regulations, local fuel sources and climatic conditions. Therefore it is impossible to evaluate the region as a whole; one must look at each country within the region individually. As such, this study aims to collect and analyze data, identify major trends and describe the similarities and differences between the countries in the CEE region.

Many of the CEE countries have exhibited remarkable economic development over the last decade. This development is expected to continue; many of the CEE countries are regarded as having “converging” markets rather than emerging ones, meaning that their economies are converging with those of the EU-15 countries and are thus characterized by strong economic growth while having EU-based regulations and policies. As a result, these markets offer higher returns associated with emerging markets and stable risk profiles associated with developed economies. (See major economic indicators and population data in the accompanying table.)


12 Defining CEE Energy Markets

Summary (1990s):

• The early 1990s saw the collapse of economies, which resulted in dramatic reductions in GDP, hyper inflation and high unemployment. Heat, which had been taken for granted throughout the region, was suddenly unaffordable.

• Old equipment in plants across the region operated inefficiently after years of neglect and postponed upgrades, and energy losses in systems reached levels of up to 50%.

• Aging heating plants had no resources for upgrades, neither from governments (which were short on resources) nor from end-users (who were unable to pay their bills, and whose bills often failed to cover the necessary costs of routine maintenance, much less of investment).

Source: UNDP-GEF, Heating in Transition, 2005

1.1. History of District Heating in the Region3

Everyone, regardless of income level, has a right to adequate shelter and access to heat in winter. Yet in Central and Eastern Europe as a result of the economic transition, meeting these basic needs has been difficult.

The market for district heating is complex. Some of this complexity can be attributed to the unique historical legacy of economies in Central and Eastern Europe. Many large district heating systems were built under an economic system where capital had no value in itself, hard currency constraints did not exist and an overall cost-benefit analysis was absent. In addition, in systems where prices did not necessarily reflect actual production costs and where cross-subsidies were endemic, artificially low fuel prices removed any incentives for energy efficiency.

This was particularly true at the level of the end-user, as many consumers paid a nominal fee for heating that bore no relation to its actual cost. Furthermore, collective ownership of production facilities and centralized decision-making on investments often resulted in a meshed system of industrial facilities supplying heat to residential systems and where energy savings at any point in the chain of production, distribution, and consumption would not accrue to the investor. As a result, many heating practices that were still common during the beginning of economic reforms in the 1990s were simply not financially sustainable.

However, the concurrent sharp reduction in gross domestic product across the region meant that cash-strapped governments had little capital to invest in the restructuring of the heating sector. Meanwhile, consumers, who had seen their purchasing power erode, were suddenly being asked to pay bills that they simply could not afford, and the quality of heating services was often poor and unreliable. Ironically, the centralized heating systems that had been put into place were quite efficient in their conception.

3 Source: UNDP-GEF, Heating in Transition, 2005



Figure 2: While energy losses due to poor maintenance or equipment were common,

Typical District Heating System the use of centralized heating systems made sense in densely populated urban areas, and the use of co-generation plants to provide both heat and power for residents (for example in the Russian Federation) is a design feature that is seen

He

at

dis

trib

uti

on

ne

two

rk Cogeneration

plant

Heat-only boiler

Industrial waste heat

Incenerator

Hot water

Heat for industry

Space heating

as a desirable model for Europe today.

The need for affordable and reliable heating remains huge, particularly among groups that are least able to pay for it. In lower income countries where this need is most acute, the inability to pay for the restructuring of the market – and even for basic services – is evident even within middle-income populations.

Since removal of national heat and electricity subsidies – which has happened to a greater or lesser degree in various countries – a significant portion of the population has had difficulty paying their housing and heating bills. Low-income families typically pay a higher proportion of their household income for heat than higher income groups, they are more likely to live in less energy-efficient dwellings because they cannot afford improvements in energy efficiency and may lack information about such options. In many countries in the region low-income families are paying well over 30% of their household budgets for heating. In cases where families default on payments local governments – which often own and/or operate municipal heat networks – are not in a position to cut off the heating supply (for both political and moral reasons). In extreme cases, financial difficulties on the part of the government and non-payment by individuals have actually led to the shutdown of large district heating systems in the mid-1990s.

Figure 3: Key Challenges of District Heating Systems in Transition Economies

Source: KPMG Tanácsadó Kft.

Unnecessary costs:

• heat losses

• inefficiency

• excess capacity

Tariffs below costs

Poor management

Non-payment


Lack of control and

metering equipment

Lack of

customers focus

Poorly designed heat policies

Weak legal and regulatory framework

Increasing tariffs

Uneven playing field

revenue

Decreasing

qualityPoor service

competitiveness

Decreasing

prob

lem

s

Fina

ncia

l



Many countries continued to face high inflation, which made it extremely difficult to borrow money or buy imported technologies, while other countries were reluctant to lift price controls on energy, in most cases for compelling social and political reasons, making it difficult to generate a financial return on discrete investments (despite real economic benefits) even when fuel savings were large. Project developers came to realize that even when policy makers were convinced that energy efficiency was a good investment – even from a 'market' point of view – they were not able to invest.

In the mid 1990s many different kinds of barriers blocked the development of a market for energy efficiency products and services, ranging from lack of information to the high cost of capital and lack of access to credit. At the same time, economic disparities in the region became more apparent. For example, several CEE countries launched their own, sometimes internally funded, mechanisms to promote energy efficiency and environmental protection. Several energy service companies began to operate in Central and Eastern Europe, and a private market for heat-related technologies and services was born.

Elsewhere in the region, these 'models' seemed like wishful thinking. In the Balkans, post-war reconstruction programs meant large inflows of assistance, but they favored easy-to-contract infrastructure rather than projects that would offer efficiency or environmental sustainability. Technical barriers, while omnipresent, were not the primary cause of inefficiency and underperformance in the sector. Project developers and stakeholders identified political, regulatory, institutional, social and economic barriers that held back potential markets.

DH production decreased significantly in almost all CEE countries at the end of the 1990s after the economic transition due to the reduction of heat consumption both in industrial and residential sectors. It is important to note that the countries that make up the backbone of new EU joiners had centrally planned economies concentrating on heavy industry. When market based economies were introduced a significant number of these factories turned out to be inefficient, uncompetitive and unable to operate in the new environment and as a result they had to be shut down. Therefore industrial heat and steam demand shrank to a mere fraction of their previous levels.

High district heating prices, energy savings on the demand side especially in the residential sector, modernization and refurbishment of DH schemes, but also mainly unfair competition with individual gas heating (cross-subsidies between large and small gas customers on political interference in the tariff setting system) were the main reasons for this trend during the years that followed. However, in relative terms the DH share in the residential market maintained its level from 1999, which indicates that a certain stability was registered in the segment.4

4 Source: OPET CHP/DH, Cross National Report, 2004


Pol

and

Cze

chR

epub

lic

Rom

ania

Hun

gary

Lith

uani

a

Est

onia

Bul

garia

Lat

via

Ser

bia

Slo

vaki

a

Slo

veni

a

Cro

atia

Mac

edon

ia

Alb

ania

Bos

nia

Her

zego

vina


The position of the district heating sector has strengthened during recent years

across Europe. One of the reasons is EU enlargement. Altogether in the EU-27, the contribution of district heating to total heat demand has reached 10%. Thus more than 64 million people throughout the EU (approximately 16% of the population) benefit from the advantages of district heating systems. Having a long tradition in Central and Eastern European countries and a large share in the heating market, more than 40 million people in CEE countries are DH users and their share of the residential heat market is approximately 37%. Clearly, the DH industry represents a major component of the energy sector in the region.

Figure 4: District heat production and the market share of DH within the residential heating market in the CEE region

%90 100 80 90

70 80 7060 60

50

Twh

40 30 20 10

50 40 30 20 10 00

� Production � Market share

Source: District Heating and Cooling 2005, 2007

From the operational point of view, DH schemes in CEE countries are still characterized by considerable heat losses (in the range of 12–20%) resulting in high operational costs. Nevertheless, due to their significant share in the heat markets of these countries, the development of renewable energy sources and Combined Heat & Power units is in close correlation with the development of DH industry in the region. This means that DH contributes a great amount to the marketability of these energy sources.

As regards the Combined Heat & Power (CHP) share within the district heating supply (representing on average 62%), the gap between the old and new EU Member States has begun to narrow. A slight increase in the range of 1–2% was registered in Central and Eastern European countries as a consequence of the application of support schemes/policies especially developed for small scale (gas engines) and medium sized CHP units.


Bul

garia

C

roat

ia

Cze

ch

Esto

nia

Hun

gary

Latv

ia

Lith

uani

a Po

land

R

oman

ia

Slov

akia

Sl

oven

ia


Figure 5: CHP share in DH production

%100

90

80

70

60

50

40

30

20

10

0

� CHP share in DH production

EU average 2003 � CHP share in

DH production 2005

Source: http://www.iea.org/textbase/work/2007/district_heating/Constantinescu_chp.pdf

The lowest DH related CHP share appears in the Baltic countries, while the Czech Republic is close to the EU average. Nevertheless during recent years new production capacities developed in relation to DH schemes were CHP units in almost all CEE countries. For example, in Poland the share of heat produced from CHP plants increased from 37% to 49% in the last decade. Consequently, the increases of CHP share in DH production as well as the development of integrated supply concepts at a local level (incineration plants, use of waste heat) represent an opportunity for the district heating sector in the region.

In the CEE region coal and natural gas continue to be the main fuels used within the district heating sector. The share of renewable energy sources/energy from waste and industrial surplus heat exceeds the share of oil. From 2001–2003 new small production capacities (mainly CHP units) using natural gas have been commissioned in the CEE countries, and, subject to favorable local conditions, an increase of renewable energy sources has been registered. As many of these countries depend on one single gas supplier, the security of supply argument plays an important role.

The national energy and environmental policy and the legislative framework dealing with the CHP/DH sector are mainly driven by EU Directives, especially in the new EU Member States. Recent EU legislative initiatives are in general beneficial to the industry but national implementation varies from country to country with progress being made more or less.

DH prices have also been adjusted to reflect cost in the CEE countries and the dual component tariff structure has started to become the standard not only in the old but also in the new Member States. The two components consist of a fixed base tariff (fix charge) and an automatic adjustment mechanism (variable charge).

Needs related to the further development of the DH sector:

• Legislative/regulatory measures • Local heat planning • Conditions for connections

and disconnections • Increase the use of renewables

and waste heat • Competition among heat suppliers • Benchmarking • Implementation of small scale

CHP using gas or biomass • Heat metering • Promotional tools at DH company

level – especially management skills

Source: OPET CHP/DH, cross national report, 2004



The adjustment is provided to allow pass-through of specific uncontrollable costs including mainly change in fuel and power purchasing costs and foreign exchange rate fluctuations.5

Energy taxation is mainly used in the old EU Member States (i.e. in Finland, the Netherlands, Sweden, United Kingdom) in order to support and promote the development of CHP/DH. As this type of instrument implies the existence of relatively high GDP/capita, the new EU Member States are only starting the process of implementing such measures.

Movement towards vertical integration of the production and distribution activities in the district heating industry can be also observed in the countries surveyed, and sometimes horizontal integration with other energy related services is taking place.

5 Source: http://www.cepsi2008.org/CEPSI2008/files/oral/183/full_paper_danai_chitteraphap.pdf


19Early Technologies

2. Early Technologies6

The roots of district heating can be traced back to the hot water-heated baths, plumbing systems and greenhouses of the ancient Roman Empire. Modern District Heating systems gained prominence in Europe during the Middle Ages and the Renaissance period.

The oldest currently operating district heating system dates back to the 14th century providing warmth to a village from geothermal hot springs in Chaudes-Aigues Cantal, France. The townsfolk devised a method of distributing warm water through wooden pipes that is still in use today.

Following the early ages when fuel conservation, smoke abatement and safety were the main factors in the design of heating apparatus, the focus of the heating industry shifted to the utilization of industrial waste heat and the transport of heat. Separate boiler plants and underground pipes were used by English factories in the 1790s and by 1820 these had become fairly common. Waste heat from factories was used to warm public baths by the 1830s and solutions of re-using this energy to heat workers’ houses were being devised. Factories and institutions began to centralize their steam boilers on a large scale in the 1870s and many new boiler plants were built.

Although numerous systems have operated over the centuries, the first commercially successful district heating system was launched in Lockport, New York in 1877 by American hydraulic engineer Birdsill Holly, considered the founder of modern district heating. Holly had previously developed a successful direct pressure water supply system and applied many of the same principles to the Holly steam system. His company installed nearly 50 systems before being sold to a group of investors, who sold hundreds more throughout the world over the next 80 years.

6 Source: http://www.energy.rochester.edu/dh/histeng.htm; http://www.energy.rochester.edu/dh/


21Development of Distribution

3. Development of Distribution7

Most of the current district heating facilities are operating on the basis of early technologies, although their efficiency and the materials used have improved significantly.

The transportation of heat changed markedly during the last century. The pipes of the first modern piping networks were made of iron and insulated with cellular concrete, but this turned out to cause corrosion of the distribution pipes. In order to fight this problem, the pipes were insulated with mineral wool and hung in concrete ducts, so that they were secured against humidity.

Since this solution was expensive, which made it affordable only for major heat customers with considerable heat consumption, the development of new district heating systems in housing areas ceased partially for a time.

Pre-insulated district heating pipes, developed by a number of Danish companies, provided a breakthrough for residential areas. Iron pipes were covered with a water-resistant heat insulating layer of polyurethane encased in a dense non-corrodible plastic jacket; in addition, electrodes were built into the insulation layer of the pipes, which made it possible to discover any intrusion of water and identify a leak so that it could be repaired relatively easy.

The latest pre-insulated pipes are buried directly into the ground, carried under seawater and fitted without the use of compensators or other stress releasing methods. Their service life is calculated to a minimum of 30 years, but pipes are likely to remain in service well after this theoretical limit.

The industry supplying the components and systems to the sector has also carried out intense research and development towards their individual products. Their objective was that each component in the systems should provide more efficient operation and contribute to overall energy saving targets. In fact, the industry realized early on that if their products did not meet these objectives in a cost efficient way, they would not be able to compete as suppliers.

7 Source: http://www.dbdh.dk/artikel.asp?id=463&mid=24


22 Development of Distribution

Heat exchanger technology has followed a long developmental path over time. The plate heat exchanger (PHE) was invented by Dr Richard Seligman in 1923 and revolutionized methods of indirect heating and the cooling of fluids. Heat exchangers became plate heat exchangers which are widely used to separate circulating water into different networks. This is an example of compromising investment and operating costs, with the objective of minimizing pressure loss and simultaneously maximizing the heat transfer coefficient.

Plate heat exchangers have the additional advantages of demanding less space than other types and being built in modular form. The capacity of a plate heat exchanger can thus be increased by adding more plates, so investments in heat exchanger capacity can be scheduled to follow demand.

Variable flow and speed-controlled pumps: To deliver heat in abundant quantities 24 hours a day is a simple task, but to deliver the exact amount of heat needed at any given time to all consumers requires modern equipment and operational skills.


23Development of Distribution

The primary reason for using this concept is the large potential for saving power for pumping. Often the reduction of pump energy can be reduced to one-third over the year, and the pay-back time on the installation is often less than two years. Another reason for using this concept is the reduction of heat loss from the network due to reduced temperatures outside peak hours. Furthermore, wear and tear on the pump system is reduced, resulting in prolongation of its service life.

Heat metering: To pay for heat and other utilities like water and electricity according to consumption district heating installations are equipped with energy meters and heat allocators. The installation of heat meters does not, in itself, bring about energy savings; it is the consumer’s awareness of his own consumption that motivates the consumer to consider how energy can be saved.


25Generation Technologies

4. Generation Technologies8

4.1. Industrial Boilers

A boiler is a device for generating steam or hot water which consists of two principal parts: the furnace, which provides heat, usually by burning a fuel, and the boiler, a device in which the heat is transferred to water. In steam boilers the water evaporates and changes into steam. The steam or hot liquid is then recirculated out of the boiler for use in various processes in heating applications.

Figure 6: Industrial boiler

Stream Outlet

Water inlet

Flue Air and

fuel inlet

Combustion chamber Water tubes


The boiler receives the feed water, which consists of varying proportions of recovered return water (in steam systems, condensed water) and fresh water, which has been purified to varying degrees (makeup water). The makeup water is usually natural water treated by some process before use. Feed-water composition therefore depends on the quality of the makeup water and the amount of return water. For steam boilers the escape medium from the boiler frequently contains liquid droplets and gases. The water remaining in liquid form at the bottom of the boiler collects all the foreign matter from the water that is converted to steam. The impurities must be removed through the discharge of some of the water from the boiler into drains. The permissible percentage of blown down at a plant is strictly determined by running costs and initial outlay, therefore the tendency is to reduce this percentage to a very small figure.

8 Source: http://eny.hut.fi/library/Steam_Boilers_demo/Modern_boiler_applications/modern_boiler _types_and_applications.pdf


26 Generation Technologies

A heat-only boiler station generates thermal energy in the form of hot water for use in district heating applications. Unlike combined heat and power installations which produce thermal energy as a by-product of electricity generation, heat-only boiler stations are dedicated to generating heat. In industrial and district heating systems highly reliable (above 99%) boiler island operations are a must to ensure a steady supply of hot water or steam – and a safe work environment.

Modern Boiler Types

Grate furnace boilers: Grate firing has been the most commonly used firing method for combusting solid fuels in small and medium-sized furnaces (15 kW – 30MW) since the beginning of the industrialization. Waste and bio-fuels are usually burned in grate furnaces.

Cyclone firing: Compared with the flame of a conventional burner, the high-intensity, high-velocity cyclonic flames transfer heat more effectively to the boiler's water-filled tubes, resulting in the unusual combination of a compact boiler size and high efficiency. The worst drawbacks of cyclone firing are a narrow operating range and problems with the removal of ash.

Pulverized coal fired (PCF) boilers: Coal-fired water tube boiler systems generate approximately 38% of the electric power generation worldwide and will continue to be major contributors in the future. Pulverized coal fired boilers, which are the most popular utility boilers today, have a high efficiency but a costly SOx and NOx control. The PCF technology enables the construction of boiler unit size far over 1000 MW. New pulverized coal-fired systems routinely installed today generate power at around 37–40% net thermal cycle efficiency, while removing up to 97% of the combined, uncontrolled air pollution emissions.

Oil and gas fired boilers: Oil and natural gas have some common properties. Both contain practically no moisture or ash and both produce the same amount of flue gas when combusted. They also burn in a gaseous condition with an almost homogenous flame and therefore the construction of an oil and gas boiler is similar to a PCF-boiler.

Fluidized bed: Fluidized bed combustion was not used for energy production until the 1970's, although it had been used before in many other industrial applications. Fluidized bed combustion has become very common during recent decades. One of the reasons is that a boiler using this type of combustion allows many different types of fuels, as well as lower quality fuels, to be used in the same boiler with high combustion efficiency.

Heat recovery steam generators: CHP is often applied in gas turbine and diesel power plants. Gas turbines and diesels are nowadays commonly used in generating electricity in power plants. The temperature of the flue gases from gas turbines is usually over 400°C, which means that a lot of heat is released into the environment and the plant works at a low efficiency.



The efficiency of the power plant can be improved significantly by connecting a heat recovery boiler (HRSG) to it, which uses the heat in the flue gases to generate hot water or steam. This type of combination power generation process is called cogeneration, or if a steam turbine is applied, combined cycle.

4.2. Heat Pumps9

A heat pump is a device for transferring energy in the form of useful heat from one place to another. It cannot store, make or destroy heat energy – it simply transports it. Heat pumps can be effective solutions for heating and cooling applications for buildings, domestic, commercial and retail premises or on an industrial scale for district heating systems. Heat pumps use electrical energy to move available energy as heat from the heat source to the heat sink.

This well-proven technology has been in use for decades and heat pumps are at work all over the world providing safe, reliable heating and cooling. It is considered a low carbon technology especially if the necessary electricity input is provided from a renewable source. In such cases heat pumps can significantly reduce carbon dioxide emissions.

Figure 7: Heat Pump

Engine

Compressor

Electricity

Heat in

Evaporator Expansion Valve (a)

� Compression

� Expansion

� Evaporation � Condensation

Heat out

Condenser


Energy Efficient: Efficiency or, more specifically, the conversion coefficient of heat pumps very much depends on the temperature difference between the heat source and the heat sink. The bigger the difference is, the lower the coefficient. In optimal cases they consume approximately one-fourth of the output heat as input energy (usually as electricity). If the temperature of the heat sink is lower (e.g. atmospheric air compared to land) or the heating system requires higher temperature water (e.g. 70°C instead of 40°C), the conversion coefficient drops significantly.

9 Source: http://www.acrux.hu/en/heat_pump/heat_pump.html; http://www.heatpumps.org.uk/GlossaryOfTechnicalTerms.htm



Environmental: If heat pumps access renewable or waste energy they displace consumption of conventional fossil fuels (gas, oil, coal). As electricity generation technologies improve, the emissions performance from the combustion of fossil fuels and renewable electricity generating capacity increases, so the greenhouse gas emissions associated with electricity consumption are reduced – making heat pumps even more environmentally beneficial.

Economics: Heat pumps as a heat source for individual buildings or for district heating systems can be competitive if electricity is available at a relatively low price (typically where nuclear or hydro generation is dominant), especially if there is only a limited number of alternative energy sources on site (oil, LPG). The initial capital cost is higher than other conventional heating systems. The whole-life cost, combining the capital and running costs, might be favorable for heat pumps compared to fossil fuelled systems and especially compared with other forms of electric heating.

4.3. Electrical Heating10

Electric heating converts nearly 100% of the energy in electricity to heat with very simple and cheap equipment. However, most electricity is produced from oil, gas, or coal generators that convert only about 35% of those fuels’ energy into electricity. Because of electricity generation and transmission losses, electric heat is often more expensive than heat produced in the home or business using combustion appliances, such as natural gas, propane, and oil furnaces. If electricity is the only choice, heat pumps are preferable in most climates, as they easily cut electricity use by 50% when compared with electric heating.

Electric heat can be supplied via centralized forced-air electric furnaces or by heaters in single rooms. Room heaters can consist of electric baseboard heaters, electric wall heaters, electric radiant heat, or electric space heaters.

Advantages and Disadvantages: Electrical heating is clean, compared with forms of heating which involve combustion. There are no fumes or flues associated with it. It is usually cheaper and easier to install than other forms, either in a new build, or in an existing house. It can conveniently be used as 'top up' heating, where gas or other central heating is used as the main form of heating. If heat can be stored for a longer period (typically in district heating systems with heat storage tanks) resistant heating can be applied in off peak periods as an effective tool for system balancing.

Many (but not all) domestic electrical heaters are portable and respond quickly. On the other hand they are generally more expensive to run, although the relative costs compared with, for example, gas depend on local conditions and costs at any particular time.

10 Source: http://ezinearticles.com/?Electrical-Heating-in-the-Home&id=731771 http://apps1.eere.energy.gov/consumer/your_home/space_heating_cooling/index.cfm/mytopic=12520



Cogeneration efficiency is calculated by the following formula (El Wakil 1984):

n= E + H

Qa

E= electric energy generated, H s = heat energy (enthalpy of steam

entering the process less the enthalpy of the process condensate returning to the plant),

Qa = heat added to the plant (in coal, etc.),

n= cogeneration plant efficiency

Source: EDUCOGEN A Guide for Cogeneration (2001)

4.4. Combined Heat and Power Generation (CHP)11

Definition: The principle behind cogeneration is simple. Conventional power generation, on average, is only 35% efficient – up to 65% of the energy potential is released as waste heat. More recent combined cycle generation can improve this to 55–58%, excluding losses for the transmission and distribution of electricity. Cogeneration reduces this loss by using the heat for industry, commerce and home heating/cooling.

Cogeneration is the simultaneous generation of heat and power, both of which are used. It encompasses a range of technologies, but will always include an electricity generator and a heat recovery system. Cogeneration is also known as ‘combined heat and power’ (CHP).

Through the utilization of the heat, the efficiency of a cogeneration plant can reach 90% or more. Cogeneration therefore offers energy savings ranging between 15–40% when compared against the supply of electricity and heat from conventional power stations and boilers.

Because transporting electricity over long distances is easier and cheaper than transporting heat, cogeneration installations are usually sited as near as possible to the place where the heat is consumed and, ideally, are built to a size to meet the heat demand. This is the central and most fundamental principle of cogeneration.

Technology: Cogeneration uses a single process to generate both electricity and usable heat or cooling. The proportions of heat and power needed (heat: power ratio) vary from site to site, so the type of plant must be selected carefully and an appropriate operating regime must be established to match demands as closely as possible. The plant may therefore be set up to supply part or all of the site heat and electricity loads, or an excess of either may be exported if a suitable customer is available.

Figure 8: Comparison of a Conventional and a cogeneration plant

Conventional plant

Flue and other losses 15%

Heat rejected to environment 50% Electricity 35%

Cogeneration plant

Heat rejected to environment 7%

Flue and other

losses 15%

Heat supplied to users 50% Electricity 28%

Source: http://www.energy.rochester.edu/pl/krakow/object.htm

11 Source: EDUCOGEN A Guide for Cogeneration (2001)



Cogeneration plant consists of four basic elements: • a prime mover (engine) • an electricity generator • a heat recovery system • a control system.

Depending on site requirements, the prime mover may be a steam turbine, reciprocating engine or gas turbine. In the future new technology options will include micro-turbines, Stirling engines and fuel cells. The prime mover drives the electricity generator and usable heat is recovered. In case of combined cycle cogeneration hot gas exiting the gas turbine (or in very exceptional cases the gas engine) is introduced into a heat recovery steam generator producing superheated steam from the feedwater. The steam drives a steam turbine, while expands it decreases its temperature and pressure. Depending on the end pressure of the expansion the steam can be utilized in an industrial process or via an heat exchanger (heating condenser) the remaining useable heat can be delivered to the primer water flow of the district heating system and the steam is condensed to water. The basic elements of CHP applications are all well established items of equipment, of proven performance and reliability.

Developments over the past two decades have produced a wide variety of equipment, enabling cogeneration packages to be matched accurately to site requirements. Furthermore, legislation over this period has made it easier to install and operate cogeneration systems.



Prime Movers

Advantages Disadvantages

Ste

am

Tu

rbin

es • High overall efficiency

• Any type of fuel may be used

• Heat to power ratios can be varied through flexible operation

• Ability to meet more than one site heat grade requirement

• Wide range of sizes available

• Long working life

• High heat to power ratios

• High cost

• Slow start-up

Ga

s T

urb

ine

s

• High reliability enables long-term unattended operation

• High grade heat available

• Constant high speed enabling close frequency control

of electrical output

• High power to weight ratio

• Relatively low investment cost/kWe

• Wide fuel range capability (diesel, LPG, naphtha,

associated gas, landfill sewage)

• Low emissions

• Limited number of unit sizes

• Lower mechanical efficiency than Reciprocating engines

• If gas fired, requires high-pressure supply or in-house

boosters

• High noise levels

• Poor efficiency at low loading

• Output falls as ambient temperature rises

• May need long overhaul periods

Re

cip

roc

ati

ng

En

gin

es • High power efficiency, achievable over a wide load range

• Relatively low investment cost/kWe

• Wide range of unit sizes

• Part-load operation flexibility from 30% to 100%

with high efficiency

• Fast start-up time of 2–5 minutes to full load

(gas turbine needs 20–30 minutes)

• Real multi-fuel capability

• Can operate with low-pressure gas

• Must be cooled, even if the heat recovered is not reusable

• Low power to weight ratio and

out-of balance forces requiring substantial foundations;

• High levels of low frequency noise

• High maintenance costs

Sti

rlin

g E

ng

ine

s

• Less moving parts with low friction

• No internal burner chamber

• High theoretical efficiency

• Suitable for mass production

• No extra thermal-boiler necessary

• Electricity production independent from heat production

• Very low emissions

• Easy to control

• Little experience in low power range

• Poor shaft efficiency by the existing machines

(350-800 Watt shaft power) better efficiency from

3,000 Watt shaft power

• First machines very expensive

Mic

ro T

urb

ine

s

• High reliability due to small number of moving parts

• Simplified installation

• Low maintenance requirement

• Compact size

• Light weight

• Acceptable noise levels

• Fuelled by domestic natural gas resource with expanded

fuel flexibility

• High temperature exhaust for heat recovery

• Acceptable power quality

• High costs

• Low efficiency

Source: EDUCOGEN A Guide for Cogeneration (2001)


250

50


District heating (DH) is a wide spread application of cogeneration. The heat provided by cogeneration is ideal for providing space heating and hot water for domestic, commercial or industrial use.

Figure 9: How a combined cycle plant works

Air intake

Fuel

Gas turbine

GT Generator

Electricity

Electricity

Condenser

HRSG

Stack

Steam Steam turbine ST Generator

Cooling Water

Water

Pump

G

G


A feature of cogeneration driven district heat is the ability for choosing fuel to suit environmental, economic or strategic priorities. For example, DH systems are sometimes based on the incineration of municipal waste, and with adequate emission controls are a better environmental solution than disposing of waste in a landfill. DH systems are also able to use biomass.

The use of natural gas as a fuel gives added flexibility to district heating systems. Engines or turbines, providing electricity and heat, in combination with boilers, can introduce more cogeneration into existing DH networks.

Figure 10: CHP vs. conventional heat and power generation

Figure 1 In figure 1 the hotel takes its electricity from one source and its heat from another resulting in an efficiency of about 50%. The hotel in figure two uses cogeneration to achieve nearer to 80% efficiency. Of course these are simplified energy models for the purpose of illustration but the savings are real and demonstrable.

Figure 2

Usefull Energy Usefull Energy energy input energy input

A.N Ho e

Electric

100

Thermal

150

500

Energy used = 250 units

A.N Ho e

Energy used = 250 units

Electric

100 CHP

Thermal 300

150

Energy wasted = 250 units Energy wasted = 50 units

Total energy = 500 units Total energy = 300 units

Source: http://www.energ.co.uk/The_Process

© 2009 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network


Overall economics of cogeneration projects:12 Under favorable circumstances cogeneration projects can result in simple payback periods of three to five years, or sometimes even less. The economics of cogeneration projects are much more sensitive to changes in electricity price than to changes in fuel price; for example a 10% increase in electricity prices might reduce the payback period by 15%, whereas a 10% reduction in fuel price would reduce the payback period by only 6%. Such a sensitivity analysis should be part of the feasibility study whichever method of economic analysis is employed.

It is reasonable to assume that most new cogeneration will be gas-fired at least in the next 10 years. For example, a gas turbine with waste-heat-boiler is used here to demonstrate the savings: • Gas turbine with waste heat boiler • Heat to power ratio 1.6 • Efficiency 80% • Emissions of CO2 per unit of fuel 225 g/kWh • Emissions of CO2 per kWh of electricity 581 g/kWh

If it is assumed that cogeneration displaces electricity from a mix of fuels and heat from a boiler with a mixed type of fuels, the savings per kWh will be 615 g/kWh.

Benefits of CHP

Benefits for the installer: Benefits for the CHP user: Benefits for the environment:

Proven and reliable technology with

thousands of units in operation

Significant primary energy cost savings with

Climate Change Levy exemption to further

reduce costs

Lower CO2 emissions

Widely accepted low carbon technology

providing strong planning compliance

Tax efficient investment with claimable

Enhanced Capital Allowances

Lower SO2 emissions

Discreet installation with negligible site

impact easing concerns over site integration

and planning approval

Range of financing options negating need

for capital investment No transmission losses increasing efficiency

Reduces potential cost impact of impending

Carbon Reduction Commitment legislation

Easily applied to existing buildings to boost

their environmental performance

Proven and reliable technology offering

total peace of mind Best use of existing natural gas resource

Flexible solutions that include steam raising

and cooling capabilities to extend low carbon

CHP solutions to more and more buildings

Can help reduce investment in further plant

and services

Enhances a building’s energy performance and

improves both its asset and operational ratings Integrates with other

initiatives promoting

environmental responsibility

Can be easily integrated into district heating

systems and broader energy services

solutions provided by an ESCO

On-site generation providing more power

and increased security of supply

Flexible solution offering both steam raising

and cooling capability for a broader range of

applications

Discrete installation

Source: http://www.northeastchp.org/nac/CHP/benefits.htm

12 Source: http://www.energ.co.uk/cogeneration_application



4.5. Trigeneration13

Trigeneration can be defined as the conversion of a single fuel source into three energy products: electricity, steam or hot water and chilled water, with lower pollution and greater efficiency than producing the three products separately.

There are different methods for coupling a conventional cogeneration system with a chiller either through compression (cogeneration to drive refrigeration compressors) or via absorption (using heat to create cooling). Trigeneration can be applied to all the applications of cogeneration.

Absorption chillers provide an economic and environmental alternative to conventional refrigeration. Combining high efficiency, low emission power generation equipment with absorption chillers allows for maximum total fuel efficiency, elimination of HCFC/CFC (chlorofluorocarbon) refrigerants and reduced overall air emissions.

Figure 11: Trigeneration

Peak boiler

Heat consumer

Electrical energy

Fuel gas

Exhaust gas

Cooling tower

Refrigeration consumer

Buffer

Heat exchanger

Absorption chiler

Gas engine

Source: www.gepower.com

Combining a cogeneration plant with an absorption refrigeration system allows utilization of seasonal excess heat for cooling. The hot water from the cooling circuit of the cogeneration plant serves as drive energy for the absorption chiller. The hot exhaust gas from the gas engine can also be used as an energy source for steam generation or hot water production, which can then be utilized as an energy source for a highly efficient, double-effect steam/hot water chiller. Up to 80% of the thermal output of the cogeneration plant is thereby converted to chilled water. In this way, the year-round capacity utilization and the overall efficiency of the cogeneration plant can be increased significantly.

13 Source: EDUCOGEN A Guide for Cogeneration (2001) http://www.brunel.ac.uk/about/acad/sed/sedres/ee/ebee/tg http://www.gepower.com/prod_serv/products/recip_engines/en/cogen_systems/refrigeration.htm



District cooling systems using absorption chillers often complement district heating systems, when both use heat supplied from a cogeneration plant. The heat demand in summer is lower than in winter and heat-driven district cooling, which requires the heat mainly in summer, can help to balance the seasonal demands for cogenerated heat. This increases the overall efficiency of the cogeneration system and therefore increases the environmental and other benefits that the system could bring.

Compression & Absorption Chillers14

A chiller can be generally classified as a refrigeration system that cools water. Similar to an air conditioner, a chiller uses either a vapor-compression or an absorption cycle to cool. A cooling device that uses mechanical energy to produce chilled water is called a compression chiller.

Figure 12: Schematic overview of absorption cooling and electrical cooling

Absorption cooling system

Heat Cooling

Electricity

Grid power plant Primary energy

Electricity grid

Primary energy CHP plant

Absorption chiller

Electrical compression cooling system

Source: http://www.heatpumpcentre.org/Projects/Annex_24_Article_Newsletter_18_4.pdf

Absorption chillers differ from the more prevalent compression chillers in that the cooling effect is driven by heat energy, rather than mechanical energy. The simplest absorption machines are residential refrigerators, with a gas flame at the bottom, ice cubes at the top and no electricity involved. An absorption chiller is larger and more complicated, but the basic principle is the same.

The evaporator allows the refrigerant to evaporate and to be absorbed by the absorbent, a process that extracts heat from the building. The combined fluids then go to the generator, which is heated by the gas or steam, driving the refrigerant back out of the absorbent. The refrigerant then goes to the condenser to be cooled back down to a liquid, while the absorbent is pumped back to the absorber. The cooled refrigerant is released through an expansion valve into the evaporator, and the cycle repeats.

Cooling Grid power plant

Primary energy

Electricity grid

Compression cooler

14 Source: IEA Heat Pump Centre Newsletter Vol.18-No. 4/2000 Absorption Chillers Gudeline.pdf http://www1.eere.energy.gov/femp/operations_maintenance/om_chillers.html


37District Cooling

© 2009 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG networkof independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

District cooling has been considered in many locations as a method for meetingthe space cooling requirements of buildings in the residential, commercial andindustrial sectors in recent years. It is particularly suitable in urban areas with ahigh density of offices and residential dwellings requiring air conditioning.

In this application absorption chillers are often favored because they don’t usechlorofluorocarbons and they can be used in conjunction with cogeneration systemsfor thermal and electrical energy. The chilling equipment can be based centrally, withchilled water piped to users, or can be located on the premises of the user. Themost economic choice will depend on the application and geographical distribution.

District cooling is a recent concept, but is already relatively widely used in the USand Japan. In Europe, there is awareness of the technology, but there is certainlyless experience – with the possible exception of Sweden. An additional barrierthat these systems face in Europe, apart of the fact that installing cooling increasesthe initial cost of the system are considerable, is that the most suitable applicationsare found in the south of Europe, which means, in countries where there is lessexperience of district heating (and where networks would have to be built), andhence less history among consumers or suppliers of the provision of this type ofcentral energy. The barriers facing the growth of CHP combined with cooling, canbe even more severe than the barriers for CHP growth. For the time being, itincreases the costs of the system considerably. Nevertheless there is an expectationthat this type of application will increase substantially in the next few years.

5. District Cooling15

15 Source: http://www.opet-chp.net/download/wp1/wp1crossnationalreport.pdf

Figure 13: District cooling in Europe

� in operation*� in planning

*Both Luxemburg and Monaco has an operating district cooling system

38 District Cooling

However, presently, district cooling is almost nonexistent in CEE countries. Still, initiatives and new projects are starting to consider district cooling as an option (Hungary, Czech Republic) especially in connection with the development of the service sector (shopping centers, administrative buildings, offices etc.). This sector bears high potential, as about 40–50% of the cooling energy implies process cooling in commercial and institutional buildings, computer cooling, etc. In addition, most CEE countries have a continental climate (hot summers) and lately a large number of individual electrical air-conditioning systems have been installed in large urban areas within the residential sector. Usually the average temperature is raised with 1–4 degrees in city areas due to rejected condenser heat from local air condition. A significant potential can be associated with the development of district cooling in the residential sector.

EU member states – especially Sweden, Italy and Netherlands – have registered in recent years a large expansion in district cooling mainly in relation to commercial and institutional buildings. Depending on the local conditions, a variety of technologies are used − absorption chillers, compressors and seawater.

Critical success factors:16 In 2009 and forward there is a great opportunity to establish and position district cooling on the EU market, since owners of business premises especially must decide on new cooling solutions to handle the phase-out of HCFC.

Establishing a new infrastructure business will require big investments. These will be taken care of by the market – but will require basic conditions in order that: • national and local policies on energy and the environment do not delay or

prevent the development of district supply solutions, and • permission processes are supported by the authorities.

These basic conditions are crucial. As always when it comes to infrastructure, the right conditions will have to be created through interaction between the actors in the market and relevant authorities.

Relevant EU policy background:17

• Building Directive: new developments over 1000 m2 should consider DH, CHP, renewables

• CHP Directive • Energy Services Directive

16 Source: http://www.europeanenergyforum.eu

17 Source: www.munee.org/files/IEA%20District%20Heating%20&%20Cooling_Wiltshire_July1_2005.ppt


39District Cooling

Benefits:18

Environmental benefits/Kyoto Protocol Centralizing Cooling production is energy efficient: • Use of sustainable sources (i.e. free cooling) • Use of process-optimization (combining efficient technologies) • Savings approximately 1–2% of the electricity consumption

Local benefits: • Enhanced aesthetics • Abandoning noise from rooftop chillers • No local temperature rise • Security of supply

Figure 14: Security of supply

Per

cent

age

of c

apac

ity

used

%100 90 80 70 60 50 40 30 20 10 0

Cooling season

– Electricity demand with DC

– Original electricity demand without DC

Source: http://www.europeanenergyforum.eu

Free energy Market/Competition DC is an innovative solution, which competes freely with alternatives and is established without subsidies. Customers choose their own tailored solution. It is a new energy service in a competing market.

18 Source: http://www.europeanenergyforum.eu


41Competitiveness & Emissions

6. Competitiveness & Emissions

The operation of a DH network faces a unique set of challenges. Modern distribution pipes have made it more economic to transport heat over considerable distances but the cost is still high. New networks require extensive civil works projects, and the appropriate permissions for planning and access. Historically the costs of building networks have been subsidized by local or national government but this type of funding is no longer as readily available as it has been in the past.19

Benefits of District Heating and Cooling

Social benefits

• Managing heat-producing equipment as one prevents pollution and contributes to reductions in carbon dioxide emissions

• By effectively making use of energy such as waste heat that would otherwise be unused, DH provides considerable energy savings

• DC concentrates equipment in one place and eliminates external and rooftop cooling towers, improving the urban landscape

Benefits for customers

• With no need for rooms storing heating equipment customers can plan effective use of space

• No units on the roof or outside rooms means fewer restrictions on construction design, more attractive buildings and effective use of space

• Customers receive a stable 24-hours a day, 365-days a year energy supply • With decreased need for qualified maintenance staff, companies can

look at administration cuts

Benefits for business

• Since businesses can standardize heat load in comparison to individual air-conditioning or heating units, they can plan efficient equipment use with reduced investment and improved operation rates

• Subsidies might be available for businesses planning to effectively use unutilized energy

Source: www.gasandpower.co.jp

19 Source: http://www.cogeneurope.eu/Downloadables/Projects/EDUCOGEN_Cogen_Guide.pdf


42 Competitiveness & Emissions

Decentralized Heat Production vs. District Heating20

DHC systems, owing to the fact that they are usually connected to a diverse group of customers with varying load requirements, must typically accommodate a relatively large total heating load with potentially wide variations from season to season. Since individual customers often experience their peak loads at different times of the day, the central production plant's daily characteristic load curve tends to be smoothed out, with the peak demand reduced, compared to the sum of all the individual peak loads. Thus, the installed total capacity of a DH system can be less than that of conventional decentralized systems – a distinct advantage of a district system.

At conventional or non-district heating facilities energy production differs from DH plants in several respects. With the exception of some large boiler plants, most conventional facilities are usually too small to permit staged energy production (through use of multiple units or different energy sources). For systems having multiple boiler units, staged energy production can be utilized to meet base, intermediate and peak loads, allowing the energy production equipment to operate at or near maximum efficiency. Such capability is of course typical of DH systems. Conventional systems that utilize a single piece of equipment (which must be rated for peak loads) operate most of the time at partial loads. Depending on the class of equipment used, this may result in dramatic reductions in operating efficiency.

Conventional systems are faced with high costs if pollution control equipment is utilized or required, due to a general lack of suitable low cost pollution control technologies being available for smaller applications. This creates disincentives to incorporate such equipment. Indeed, in the case of households and small commercial establishments, it is completely impractical to incorporate pollution control equipment that could achieve the low emission levels experienced by DH systems. After all, it is easier to install a filter in a big plant than in every single house or flat

Other environmental benefits: The noise associated with the operation of heating and cooling equipment is concentrated at a single source with a centralized facility. Sophisticated noise control measures to minimize noise impacts on the surrounding neighborhood can be applied more practically and cost effectively at a central facility than at numerous individual buildings.

With the concentration of fuel oil storage at central facilities, the potential risks associated with leakage are reduced since centralization implies elimination of multiple smaller oil storage vessels which deteriorate with time and lack of supervisory care. Storage vessels at centralized facilities are more likely to be regularly inspected for leaks or deterioration. For liquid and solid fuels associated with DH systems, the reductions in fuel use identified above will indirectly

20 Source: http://www.energy.rochester.edu/iea/1992/p1/3.htm


43Competitiveness & Emissions

reduce vehicle emissions associated with fuel shipment as the requirement for delivering such fuels will also be reduced.

Where local air quality is a significant problem, the type of fuel burned can be upgraded in many DH applications, with significant environmental benefits. For example, a plant burning coal or even relatively clean burning fuel oil can reduce its emissions simply by converting the operation to natural gas firing. Without DH, alternative fuel options are impractical in most communities.

Finally, considering cooling systems, with DH, the conversion from CFCs is simplified and a practical option. Also, the use of cooling water from local rivers or lakes in lieu of cooling towers is a realistic alternative with DH systems. The flexibility, offered by DH systems, to pursue such environmentally beneficial alternatives is virtually non-existent with decentralized systems, with their multitude of small units and owners.

Emission Considerations21

A wide variety of fuels are used at DH plants including various grades of oil and coal, natural gas, refuse and other biofuels such as wood chips, peat and straw. The combustion of these fuels may produce environmentally hazardous products of combustion, thus flue gas cleaning devices and other emission reduction measures are often incorporated. Such measures are usually required under increasingly strict legislation, before approval to operate a facility is granted. Examples of pollution control equipment used at DH plants include acid gas scrubbers. These systems typically utilize hydrated lime to react with the moisture, SOx, and other acid gases in the flue gases discharged from the combustion system. With such systems, the lime-acid gas-water vapor reaction products are efficiently collected by electrostatic precipitators as particulate matter. Bag filters are also utilized in many applications to capture the particulate matter as well as the acid gas scrubbing reaction products.

Conventional oil/gas fired boilers utilizing low NOx burners to dramatically reduce NOx emissions are also becoming more common. Flue gas recirculation to reduce NOx emissions has also been proven to be effective. Other emission control or reduction techniques can be introduced with DH systems, including optimization of combustion efficiency (i.e., reducing CO and hydrocarbon emissions) through the use of modern computerized combustion control systems, and utilization of higher quality, lower emission producing fuels.

21 Source: http://www.energy.rochester.edu/iea/1992/p1/3.htm Source: http://www.cogeneurope.eu/Downloadables/Projects/EDUCOGEN_Cogen_Guide.pdf


45Legislation

7. Legislation22

In all CEE countries the legislative framework mainly focuses on:

• Organization of the energy markets and formulation of rules

• Defining business activities in the energy sector

• Energy sector restructuring • Reorganization and privatization • Increased used of energy

efficiency


A choice between two paths must be made to better balance supply and demand for heat and thus address many of the key challenges of district heating: better regulation or competition. While policy makers should clearly select which approach to use to balance supply and demand: heat source competition, or tariff regulation and energy planning. This does not mean that either approach is completely devoid of regulation or competition. A competitive regime will include environmental and safety regulation, for example, and a regulated regime may use wholesale competition to lower costs.

Getting the balance of supply and demand right is particularly important because so many other policies and challenges hinge on this decision. The right balance will go a long way in solving the problems of poor customer focus, inefficient supply and inadequate investment. The private sector will have much more incentive to invest when the sector is structured so that it can be profitable. Encouraging additional investments in cogeneration and energy efficiency will also be easier.

Markets can do an excellent job of balancing supply and demand when competition is fair and there are no major impediments to free trade in the heat market. Natural competition forces efficiency improvements and provides incentives for companies to improve service quality. Yet when markets are not balanced, for example, because of subsidies or lack of effective product choice, allowing the market to balance supply and demand alone can create major distortions in prices and investments not to mention the fact that district heating is a natural monopoly by nature. Thus, regulation can be a good policy choice in many situations, as long as the decision is made deliberately and with adequate consideration of the choices and alternatives.

22 Source: OECD/IEA, Coming in From the Cold, 2004


46 Legislation

Policy sequencing

Essential Initial Steps

1. Establish independent regulator.

2. Set up social support programmes and eliminate direct heat production subsidies.

3. Insist on good payment discipline through legislation and enforcement.

4. Require meters at interface with all buildings and large consumers.

5. Develop policies to promote demand-side energy efficiency.

6. Establish conditions that allow for full cost recovery.

7. Remove barriers to unregulated wholesale competition.

8. Involve private sector through privatisation or public-private partnership.

Steps for Better Regulation Steps for Introducing Competition

1. Prepare realistic demand assessments and least-cost plans for 1. Remove barriers like subsidies for competing heat sources.

high service quality. 2. Establish more market-based tariffs.

2. Establish least-cost supply requirements and use competitive 3. Assess market conditions.

licensing to get least-cost new supply options. 4. Establish a body that can review and act on complaints about

3. Move toward more market-based tariff regulation (benchmarking, abuse of market power.

price caps with efficiency indexes or substitution tariffs). 5. Ensure that consumers can disconnect and require district

4. In larger cities, require more extensive wholesale competition heating companies to process such request quickly.

for long and medium-term heat contracts by unbundling 6. Eliminate tariff regulation.

production from transmission/ distribution and establishing 7. Monitor market annually and establish a clear process for

non-discriminatory transit tariffs. reviewing and acting on this information, when necessary.

Source: OECD/IEA, Coming in From the Cold, 2004

7.1. Competition

Competition can take on various forms. District heating is unlike most other commodities, particularly other energy commodities, in that it is very much a local product. Given the current state of technology, it is not cost-effective to transport heat hundreds or thousands of kilometers.

Most district heating systems limit transmission to 10 to 15 kilometers. A few systems, such as Copenhagen’s, have been able to cost-effectively transport heat further because of very efficient transmission and distribution lines, but never beyond 50 kilometers.

District heating systems are also more integrated than most other energy networks in order to optimize efficiency and performance: the water or steam used to carry the heat returns to its source for reheating. This means that competition in the district heating sector will have to be different from that in electricity, gas or oil markets, which creates a challenge because it limits the number of possible benchmarks. It also makes it easier to ignore the issue of competition because it seems technically improbable for DH as it is a natural monopoly. However, just because district heating cannot be liberalized in the same way as electricity, for example, does not mean that competition is impossible. Rather the opposite. Competition in heating is the norm in IEA (International Energy Agency) countries.


47Legislation

It is an essential element of market economies in general because it brings efficiency and better products, both of which could benefit the district heating sector in transition economies. The issue is how to ensure fair competition, since in most cities with district heating there is only one heating company. In addition, competition cannot work well when there are across-the-board subsidies for district heating or a competing heat source.

Competition between sources of heat – Often gas, electricity and district heating are by far the most common type of competition for the district heating sector. Competition here means that consumers have a choice between different types of heat for their homes and offices. Large switching costs between gas and district heating solutions present a serious setback for competition; however, if gas subsidies were to be removed completely the market would correct the problem by automation. This problem exists in most countries in transition and is most prevalent in the new EU states.

Wholesale competition between heat generators in an otherwise regulated system is less common, but it has important implications for expanding the use of cogeneration and waste heat. This typically takes place through long and medium-term contracts between the district heating company and, say, an incineration plant. Wholesale competition tends to happen naturally in systems with heat source competition.

Competition for assets – In this case there is little motivation to compete since DH is a natural monopoly, however there is a third option when competition enters into play during the bidding process to own or operate a large citywide district heating system with numerous customers. Government officials can review the plans and qualifications of the bidders and select the one that seems best qualified at the lowest price. Privatization and license sales do not increase competition once the assets are sold. In fact, the cost of purchasing the assets will drive heat costs up in the short term, although presumably the assets are being sold because private owners will have greater experience in lowering costs and increasing service quality.

7.2. Regulation23

Regulation itself is not the reason why district heating in transition economies tends to be so much less efficient than elsewhere in the world. Poorly designed regulation, though, makes a significant contribution. Cost-plus tariffs, which are common in transition economies, allow district heating companies to profit more when costs rise. At the same time, current tariffs do not always allow district heating companies to fully recover the costs of their services, which damage the sector’s economic sustainability. In countries with municipal ownership or subsidies for district heating, this creates a drain on municipal budgets. In some cases, tariffs also inadvertently favor individual natural gas heating over district heating with price subsidies.

23 Source: OECD/IEA, Coming in From the Cold, 2004 http://www.opet-chp.net/download/wp1/wp1crossnationalreport.pdf


48 Legislation

Comparison of Different Approaches toTariff Regulation

Priorities Regulatory Options

Cost-plus Substitution Price-cap Benchmarking

Covering operational costs + ? + +

Covering capital costs + ? + +

Improving competitiveness - + + +

Encouraging cost reduction - + + + (but not necessarily price reduction)

Encouraging energy efficiency - + + +

Simplicity of implementation + ? -

Notes: + Tariff meets the priority. - Tariff does not meet the priority. ? It depends on the implementation details or the situation. For example, cost plus tariffs

usually favour investment, but only if return on capital is included in the tariff structure.


Comparison of Four Tariff Models for Five Consumer Categories

Type of Customer (Consumption, Compared to that of Household that Makes no Effort to Save)

Amount that the Household has to Pay Compared with the Non-saving Households

Fixed Charge Only

Consumption -based

Charges Only

Fixed Charge of $30/Month, with Consumption-based Balance

Minimum Charge of $30/Month,

Otherwise Consumption-based

$ or % $ or % $ or % $ or %

Non-saver (100%) 100 100 100 100

Average customer (70%) 100 70 more than 79 70

Aggressive saver (40%) 100 40 more that 58 40

Weekender (15%) 100 15 40.50 30

Empty apartment (0%) 100 0 30 30

Notes: For ease of comparison, the baseline cost of heating an apartment is assumed to be 100$, so $1 and 1% can be used interchangeably; Source: Mark Velody, district heating expert working in Romania. Unpublished paper, 2004.


Better regulation can entail a market-oriented version of energy planning. Market-oriented energy plans take the private sector’s role into account and try to ensure that district heating would be competitive with a high quality and low cost. An energy planning process allows policy makers and other stakeholders to decide proactively on how to provide this heat at least cost, even if in some cases this means installing local boilers in remote areas. Policy makers should be open to several approaches to tariff regulation. Some types of tariff regulation are better at promoting efficiency than others. For example, price capping requires reasonable efficiency improvements over time.

Benchmarking is another technique that regulators can use. It involves setting tariffs based on costs and prices of peer companies. If the benchmarks are well chosen, they can help boost company efficiency without the need to estimate potential efficiency gains.


49Legislation

Well-designed regulatory approaches and heat tariffs should:

• Cover the full current costs of the heat supply company

• Include replacement costs and return on investment

• Allow sound operation and management of the district heating system

• Be competitive with prices for other heat sources

• Give the district heating company incentives to reduce costs

• Give heat suppliers and customers incentives to save energy

• Be transparent and easily understandable: customers should clearly see from the tariff what they are responsible for and how they can influence the heat bill

• Protect consumers from unjustifiably high prices.


Finally, substitution tariffs allow regulators to set tariffs at the cost of competing fuel sources, which means that regulated companies cannot charge excessive prices, but still bear the main financial risk of investment decisions.

Tariffs: Governments should carefully consider how they can improve regulations to better promote efficiency, fairness, least-cost supply, full cost recovery and transparency, and then act diligently to make these improvements.

First, regulatory independence is important as it helps ensure that tariffs are based on the long-term economic health of the district heating system, rather than short-term political agendas. Second, cost recovery should include provisions for necessary investment, depreciation, bad debt and other costs of operating a sustainable business, as well as a reasonable rate of return.

Third, regulators should avoid cost-plus tariffs because they are a major disincentive against energy efficiency investments (in other words, investments that can lower costs and hence tariffs). Fourth, regulators should make sure that cost allocation at cogeneration plants does not discriminate against either heat or electricity. The complexity of regulation can be reduced gradually as the economic situation stabilizes and the market becomes more balanced.

EU policy24

The energy-saving potential of cogeneration is currently under-utilized in the European Union. The aim of the EU is to facilitate the installation and operation of electrical cogeneration plants in order to save energy and combat climate change.

The objective of Directive 2004/8/EC on the promotion of cogeneration based on useful heat demand in the internal energy market is to establish a transparent common framework to promote and facilitate the installation of cogeneration plants where demand for useful heat exists or is anticipated.

This overall objective translates into two specific aims: • in the short term, the Directive should make it possible to consolidate existing

cogeneration installations and promote new plants; • in the medium to long term, the Directive should serve as a means to create

the necessary framework for high efficiency cogeneration, aimed at reducing emissions of CO2 and other substances, to contribute to sustainable development.

There are already examples of regulatory developments in some Member States, such as Belgium (green certificates and cogeneration quotas), Spain (a decree on the sale of cogeneration electricity) or Germany (a law on cogeneration).

In line with the legislation member states are obliged to prepare analyses of their prospects for national enforcement of combined cycle energy generation, and they provide the EU with yearly statistical data on the level of electricity and heat generated by combined cycle technology.

24 Source: http://europa.eu/scadplus/leg/en/lvb/l27021.htm


51Finance and Investments

8. Finance and Investments25

District heating companies in many transition economies have faced difficulties in attracting sufficient financing for new technology. Underinvestment leads DH systems to deterioration, which undermines their competitiveness. Access to financing is therefore a crucial prerequisite for the sustainability of district heating.

In the past, investments were centrally planned with financing from the state or regional budget; this was true in all sectors, including district heating. In the region’s transition to a market economy, district heating utilities in many countries faced severe financing shortfalls. Today companies in many transition economies do not have strong enough balance sheets to finance major modernization projects because of the below-cost tariff structure, nonpayment and other related problems. Investment requirements for district heating differ between countries. They are generally higher in the former Soviet Union and Southeast Europe than in Central Europe and the Baltics.

There are several options for financing district heating improvements, not all of which are optimal from a policy perspective: • Equity investments • Commercial bank loans • Loans or guarantees from development banks, or local,

regional or International funds • Third-party financing • Municipal or corporate bonds • Targeted budget financing • Grants or subsidies • National and International Public Financing Schemes.



52 Finance and Investments

Some of the major multilateral and bilateral organizations that provide financing or technical assistance for district heating projects in the CEE region include: • The World Bank • The Global Environment Facility (GEF) • The United Nations Development Program (UNDP) • The European Bank for Reconstruction and Development (EBRD) • The European Investment Bank (EIB) • The European Union TACIS, PHARE and Obnova programs • The Nordic Environmental Finance Corporation (NEFCO) • The Nordic Investment Bank (NIB) • The U.S. Agency for International Development (USAID).

Energy Service Companies (ESCOs)

Given the easier access to credit that private companies usually enjoy, many public district heating companies seek to attract the private sector to help finance investments. One mechanism for doing so is involving an energy service company (ESCO), as described below.

Energy service companies can play an important role in district heating finance. ESCO contracts can be an effective way of financing energy efficiency improvements.

ESCOs first appeared in North America and are increasingly used in other parts of the world, including transition economies, to implement energy efficiency projects in industrial, public and commercial buildings and the housing sector. In brief, an ESCO can be defined as a company that provides integrated solutions for achieving energy cost reductions, and whose payments are linked to the performance of the implemented solutions. Under the ESCO model, the client deals with a single entity for all the project components throughout all stages of the project cycle, rather than with several institutions.

The concept of ESCO is often associated with the principle of third-party financing (TPF). Under TPF, an external party implements a project to improve energy efficiency in a user’s facility. This external party arranges or provides the bulk of the financing needed to implement a project, either by borrowing from a financial institution or investing its own money. The guarantee expected by the financial institution is either based on the project value, on the balance sheet of the company that implements the project (for example an ESCO) or on the client’s balance sheet. For example, the municipal district heating company in the Hungarian city of Nyiregyhaza has refurbished its secondary distribution system.


53Finance and Investments

It should be noted, though, that an ESCO’s responsibilities do not always include financing because sometimes the client finances the project entirely. On the other hand, the ESCO’s responsibilities are broader: • Energy analysis and auditing • Project design and development • Engineering and installation • Facilitation or provision of financing • Management and operation • Monitoring of energy savings • Performance guarantees.

Figure 15: Different approaches to business relations

Traditional Approach to Utility ESCO Approach to Utility V.S. Business Relations Business Relations

Financial institutions Design office

Customers

Utility

Energy suppliers Regulators

Equipment manufacturers

Customers

Regulators

Financial institutions

Energy suppliers

Equipment manufacturers

Design office

Utility ESCO



9. Country Specifics

41%

22%

37%

AL

0.06 TWh**

n.a.***

9.1 Albania

� Coal � Oil � Natural gas � Renewables and waste � Other sources

*

Note: * Country code ** Supplied heat energy *** Market share

Climate Conditions: Like other Mediterranean countries, Albania has characteristically warm, dry summers and mild, wet winters. Local climatic variation can occur, however, from one region to another. The western part of the country has more moderate temperatures than the rest of Albania.

For example, Sarandë, on the southern coast, has average daily temperatures of about 24°C in July and about 9°C in January. The eastern part of the country, on the other hand is characterized by mild summers and cold winters. Peshkopi, in the eastern mountains, has temperatures that average 21°C in July and about −1°C in January.

Market: Although Albania is situated in a warm climate zone, there are in fact regions with a very cold climate and high building density, which is a natural market for DH and CHP. There are more than 20 DH and seven CHP systems in Albania and according to preliminary investigations there is a market for a further development. The above stated examples are far from being real district heating systems, they are in fact small applications that heat only large individual public buildings, or a couple of flats, but definitely not an entire city district. There have been two DH projects of a significant size, namely: Student City and ”Mother Teresa“ University Hospital Centre, both located in Tirana. These projects represent the first experience in DH and CHP schemes’ design and implementation. In general it is evident that heating in Albania is done by electrical space heating, via firewood, and on a small scale, solar water heating. Out of the total heat production, which was 226 TJ, the residential sector consumed 42 TJ in 2006.26

26 Source: http://www.eec.org.al/newsletter%2015.pdf http://www.eec.org.al/newsletter%2030.pdf http://www.iea.org/textbase/stats/electricitydata.asp?COUNTRY_CODE=AL


9.2 Bosnia and Herzegovina27

56 Country Specifics

Main heating indicators of Bosnia and Herzegovina

Built in thermal capacity

~1,000 MW

Supplied heat energy (2003)

1,064 GWh

Length of distribution network (2006)

579 km

Average temperature during the heating season (2005)

-1.5 °C

Number of district heating companies (2005)

22

Percentage of households connected to a DH network (2004)

40%

Source: District Heating and Cooling 2007 http://www.rec.org/REEEP/energy_country _profiles/bosnia_and_herzegovina.pdf Energy Sector Study in BIH, 2008

Climate Conditions:The northwest of the country spans over three climatic zones: moderate continental climate, sub mountain climate and mountain climate. The highest annual temperature in the area is 35°C and the warmest month is July. The lowest temperature level is -18°C, and the mean annual temperature 13°C. The northeast of the country also belongs to a continental climate zone with significant temperature variation and precipitation. Central parts of Bosnia and Herzegovina typically have continental climate.

Sarajevo also has a continental climate, warm summers and cold winters. Elevated areas have short and cool summers and long and sharp winters. Mean summer temperatures range from 30°C to 35°C in the cities and river valleys, while summer temperatures in mountain areas generally do not exceed 25°C. Winter temperatures range from 0°C to 20°C in valleys, while in mountain areas the temperature can be as low as -28°C.

Market: In the Federation of Bosnia and Herzegovina, district heating systems are still in place in some major cities. Before the Bosnian war (1992–1995) most of the urban population was connected to district heating systems as a source of heating. Today most of these systems are in bad condition, they are poorly maintained and obsolete, and need considerable modernization.

According to previously made studies that are publicly available,28 district heating installations in Bosnia and Herzegovina are in bad condition due to inadequate maintenance, and by 1996 the functioning heat networks were reduced to one-third of their previous number. In the meantime, some of these systems were renovated under reconstruction programs, but out of about 22 systems in the whole of Bosnia and Herzegovina only those in the Sarajevo region have undergone major renovations. It can be assumed that in most other systems only necessary and provisional renovations have been made, so it is clear that most systems, with the exception of Sarajevo, are suffering serious technical losses amounting to as much as 60%.

According to the most recent data from the municipal Network for Energy Efficiency (MUNEE), financed by USAID, district heating companies face the problem of debt collection for delivered heating energy.

27 Source: Energy Sector Study in Bosnia and Herzegovina, 2008

28 Source: http://siteresources.worldbank.org/BOSNIAHERZEXTN/Resources/publications/blubebookexecsummary.pdf; Looking Ahead Towards Sustainable Economic Development, The World Bank



16 %

42%

42%

BA

1.06 TWh

40%

The collection of debts from natural persons is difficult, public and economic entities are the main source of economic support for the district heating sector, both of which present obstacles to the satisfactory maintenance of the systems, and especially prevent investments in system upgrades. Moreover, a recently adopted Law on Consumer Protection stipulates that energy supplied to customers should be metered, and not allocated on the basis of occupied floor area, as is presently the case.

Consumption metering has only been carried out on an experimental basis in some district heating systems and is being taken into account in medium term plans; household hot water preparation is also in consideration. Introduction of these principles would significantly increase the use of heat energy, enable expansion of the district heating market and improve commercial terms by making district heating a competitive choice.

Being the only gas user in the Federation of Bosnia and Herzegovina, only in Sarajevo is there district heating which has local boiler units and separate heat network systems. Also, this is where the largest investments in system modernization have been undertaken with implementation of plans for further upgrades. Despite facing the general problem of debt collection and a relatively high price for a primary energy source – which is a setback for a business operation and a good case for introducing available energy efficiency measures – the district heating system of Sarajevo is the only one that has approached the actual conditions of the market. It is also important to note that it is a characteristic of all district heating systems in Bosnia and Herzegovina that heat is used almost exclusively for space heating but not for hot water preparation (with only a few exceptions for industrial heat consumers).


9.3 Bulgaria


Main heating indicators of Bulgaria

Built in thermal capacity (2003)

8,548 MW


6,973 GWh


150 km


-4–2°C


19

Households connected to the network (2003)

534,000

Source: District Heating and cooling 2005

Fuel used for DH 1999 2003

Coal 28% 33%

Oil 8% 15%

Natural gas 63% 51%

Renewables 1% 1%


Climate Conditions: Most of Bulgaria has a moderate continental climate, which is tempered by Mediterranean influences in the south. The average annual temperature is 10.5°C, but this conceals a wide variation; temperatures as low as −38°C and as high as 45°C have been recorded. The lowlands receive snowfall from mid-October to mid-May, with an annual average of 25–30 days of snow cover.29

The average duration of the heating season is about 3,500–4,500 hours in the southern and northern parts of the country, respectively. Sofia, the capital, is characterized by 3,500 heating degree days30 while the cities located to the south are characterized by 2,600.31

Market: District heating in Bulgaria has been developed for more than 45 years and is in need of urgent reform, as decades of underinvestment and poor maintenance have resulted in persistent energy losses. Tariffs in district heating were previously too low to reflect production costs, but a sequence of tariff increases in 2001–2004 has raised prices to cost-covering levels.32

There are 19 district heating companies in Bulgaria with 534,000 connected residential customers, which represent 18% of the total population of the country. The largest district heating system on the Balkan Peninsula is located in Sofia. It is owned by the Sofia municipality, while others are still owned by the state and directly controlled by the Ministry of Energy and Energy Resources. It is expected that they will also be transferred to municipalities. The removal of the production subsidies and the relative financial stability of the DH companies have brought an increased share of private participation in the sector; as a result seven companies have been privatized.

Further investment and modernization of the district heating system are expected, but high bills will also make it much more attractive to shift to gas as a source of domestic heating, despite the increase in the price of gas under the provisions of the supply contract agreed with Gazprom at the end of 2006.

29 Source: http://www.britannica.com

30 Heating degree day: measure of how cold a location was over a period of time relative to a base temperature over a period of one year. The base temperature is set by countries individualy in a range of 18–21Cº. The number of heating degree-days is the same of the daily heating degree-days for one year.

31 Source: Euroheat & Power: District Heating and Cooling 2007



15 %

33%

51%

1%

BG

6.97 TWh

18%


The current investment in building the infrastructure for household gas supply will lead to a significant increase in gas demand.33

The development of district heating systems, and co-generation in particular, will be of utmost significance and will occupy an important position in the future of the Bulgarian economy, because if used efficiently they can represent powerful means for reducing both the costs of primary energy resources and CO2 emissions.

The recent modernization of the district heating networks and substations, the introduction of heat metering and financial discipline have mitigated the effects of high prices for households. During recent heating seasons more than 20,000 households reconnected to the district heating system, so the above mentioned trend of customer cancellation will likely decrease in the future.

District heating in Bulgaria has the following key features:

• Absence of market conditions (e.g. cost-reflective prices) • Obsolete and worn-out equipment and facilities, which makes it

impossible to adjust heat generation to weather conditions • Insufficient solvency of demand (especially among consumers from the

residential sector and organizations funded from the central or local budgets) • Canceling of service by many consumers, which results in decreased heat

load, increased losses and undue burden on generators, district heating end-users and tax payers

• Inadequate legal and regulatory framework, which hinders and discourages the development of energy efficiency improvements on the market

• Absence of efforts on the part of companies (except for a few cases) to bring their management to up-to-date standards, to improve reporting structures and assume a proactive role in relations with customers

• The crisis in the economy has led to a low collection rate that further aggravates the financial situation of District Heating suppliers.

Source: The Regional Environmental Center: Potential assessment in district heating, 2005

33 Source: http://www.viewswire.com/index.asp?layout=ib3Article&article_id=163120001&pubtypeid= 1142462499&country_id=1870000187&category_id=775133077


9.4 Croatia


Main heating indicators of Croatia


2,417 MW


2,575 GWh


473 km


4–5°C


9

Customers connected to the network (2006)

151,201

Source: Energy in Croatia 2006 District Heating and cooling 2007

Fuel used for DH

2001 2003 2005

Coal 2% 1% 0%

Oil 37% 37% 41%

Natural gas 53% 54% 58%

Renewables 0% 0% 0%

Waste 7% 5% 0%

LPG 1% 1% 1%

Refinery gas 0% 2% 0%


Climate Conditions: Croatia has a mixture of climates. In the north and east it is continental, Mediterranean along the coast and a semi-highland and highland climate in the south-central region. The coastal areas have hot, dry summers and rainy winters, while the inland areas are cold in winter and warm in summer. Winter temperatures range from -1 to 30°C in the continental region, -5 to 0 °C in the mountain region and 5 to 10 °C in the coastal region. Summer temperatures range from 22 to 26 °C in the continental region, 15 to 20 °C in the mountain region and 26 to 30 °C in the coastal region.

The heating season usually lasts from October to April with an average of 193 heating days. The average temperature during the heating season is around 4–5°C, which results in 2,800 heating degree-days (calculated with 20°C indoor temperature).34

Market: In the continental region of Croatia all major cities have district heating systems while in the costal area only Rijeka has such a system.

There are nine DH companies in Croatia providing heat and steam for 151,201 customers. The distribution network is 473 km long connecting almost 10% of all households to the system. In 2006 the total installed thermal capacity was around 2.4 GW and the heat energy supplied was about 2.6 TWh.35

HEP-Toplinarstvo d.o.o. (HEP District Heating) is the largest company in the Croatian district heating business, with an 80% market share in the sector providing heat and steam in the cities of Zagreb, Osijek and Sisak.36

The use of natural gas dominates the domestic heat supply, with electrical heating widely found only in the southern costal area, as there is no gas network or DH system. The share of natural gas is also significant in the production of district heat and steam. During 2005 it has grown by 4% to reach 58% compared to 2003. At the same time the use of heating oil in district heat production has also been increasing year after year to around 41%.

34 Source: District Heating and Cooling 2007

35 Source: Ministry of Economy: Energy in Croatia 2006

36 Source: HEP annual report 2007


Zagr

eb

Osi

jek

Zapr

elic

Sam

obor

Vel

ika

Gor

ica

Sis

ak

Kar

lova

c

Spl

it

Rije

ka

Sla

vom

-sk

i Bro

d

Var

azdi

n

Vin

kovc

i

Vuk

ovar

Viro

vitic

a

RH

/ C

roat

ia


41%

59%

HR

2.6 TWh

11%

Most District Heating companies have lower (sometimes significantly lower) selling prices than their production costs. The reasons can be the regulated heat prices by the local community, high input and fuel prices. These providers calculate and charge for consumed energy on the basis of heated area, heated volume or the type of the consumer (households or commercial), and heat energy prices are regulated either by local administration or HERA (Croatia Energy Regulatory Agency). Energy is taxed as any other product with 22% VAT. 37

The development of the district heating business will follow the urban development plans of the major cities. The expected growth in heat consumption is 2–3% a year but in most cities DH systems need improvement and rehabilitation. Installing new pipelines will result in less distribution loss and new CHP plants will provide for the increasing demand.

Percentage of households connected to district heating (DH) systems in Croatia

100 90 80 70 60

% 50 40 30 20 10 0

� Other types of heating � Households connected to DH networks

Source: Ministry of Economy: Energy in Croatia 2006

37 Source: Ministry of Economy: Energy in Croatia 2006


9.5 Czech Republic


Main heating indicators of Czech Republic


58,338 GWh


2–4°C

Percentage of households connected to the network (2004)

41%

Source: District Heating and cooling 2007 http://www.czso.cz/csu/2008edicniplan.nsf/ engpubl/8106-08-2004,_2005,_2006

Fuel used for DH

2001 2003 2005

Coal 75% 63% 63%

Oil 2% 6% 0%


Renewables 1% 9% 0%

Source: District Heating and cooling 2005, 2007

Climate Conditions:The Czech Republic has a temperate-continental climate with relatively hot summers and cold, cloudy winters, usually with snow. Most rains are during the summer. The temperature difference between summers and winters is relatively high due to its landlocked geographical position. The average annual temperature ranges from 5.5°C to 10°C, but temperatures are lower in the mountains. The average temperature in the summer varies between 23°C and 29°C, and the average temperature in the winter varies between -11°C and 0°C.

The heating season usually has around 220 days from September to April. The start and end of the season depend on the outdoor temperature (below or above 13°C during a three day period). The average temperature through the heating season is approximately 2–4°C.

Market:38 District heating companies provide service to one-third of households in the Czech Republic. There is a significant difference between the urban and rural regions of the country; in rural areas only 9.7% of households are connected to the system, while in urban regions more than half of the dwellings (56.8%) are supplied by district heating. Of residential energy consumption, which is 25% of the total energy consumption of the country, heating and hot water preparation represent 80%. The average annual heat consumption is nearly 40 GJ/flat including heating and hot water preparation.

Most district heating companies have been privatized and are owned by municipalities or in private ownership with foreign capital. The biggest company in the sector is Dalkia CR, operating in 14 towns and supplying district heat to more than 220,000 households.

In the 1990s investments made by the DH companies focused on renovating outdated production assets rather than on the service improvements that customers wanted. Most of the district heating plants were renovated and equipped with more efficient technologies which generated higher heating costs.

38 Source: Euroheat & Power: District heating and cooling 2007



63%

37%

CZ

58.3 TWh

41%

Combined heat and power has a tradition in the Czech Republic. Around 39% of total heat consumption is produced with CHP technologies because of the former socialist era support given by the state then and presently. The rest of the heat is produced in heating plants (16%) and local boilers (45%).

Over recent decades, the district heating sector has had to face several more strict laws and standards, whereas alternative heating options like the natural gas network to households were promoted by the state creating strong competition for centralized heating systems. Almost two-thirds of households with district heating are supplied by natural gas, and in some areas less centralized heating options have been considered and established as an alternative heating for block buildings. This has resulted in system optimization; in smaller towns individual local boilers have been installed.

The most extensive heating plant project in the Czech Republic is running in the capital. In Prague’s system the principal energy source is CHP produced by the Melnik I power plant. The newly built district heating plants are based mainly on natural gas.

Air Conditioning and district cooling was not typical until the 90s in households in the Czech Republic. Nowadays 15% of new residential and 75% of new public buildings are equipped with AC systems. The estimated district cooling capacity is around 30 MW based on data from district heating companies and other public or industrial producers. This capacity is much higher than the cooling production of the existing district heating systems.


9.6 Estonia


Main heating indicators of Estonia


5,439 MW


7,638 GWh


2,500 km


-4–5°C

Source: District Heating and cooling 2007 http://www.epha.ee

Fuel used for DH

2001 2003 2005

Coal 1% 0% 0%

Oil 9% 23% 23%


Renewables 16% 31.4% 31%

Other fuels 38% 0.6% 0%


Climate Conditions: Estonia lies in the northern part of the temperate climate zone and in the transition zone between a maritime and continental climate. The country has a milder climate despite its northern latitude as it is warmed continuously by the Gulf Stream. The Baltic Sea creates differences between the climate of coastal and inland areas. The eastern and southeastern regions tend to have a continental climate while northern and western areas have a milder oceanic climate.

The average annual temperature in Estonia is 5°C. The mean temperature in the summer months (June–September) is between 15–18°C, while in winter it is around -4 – -5°C.

Market:39 In Estonia heat production has been relatively constant over the past couple of years. However some positive changes have taken place: for instance network losses have decreased significantly since 2001 due to the continuous improvement of pipeline conditions.

The largest heat consumer is the residential sector which accounts for 49% of total heat generation in Estonia, followed by the industrial and service sectors accounting for 32% and 19% respectively. Most of the heat produced in boiler houses came from gas and firewood, followed by shale oil.

Fortum Termest AS is the leading DH supplier in Estonia. The company profile consists of heat production, supply and delivery in addition to natural gas distribution and boiler house construction.

The largest district heating scheme in the country is located in the city of Tallin with approximately 440 km of DH pipeline and 775 MW of calculated heat load followed byTartu and Kohtla-Järve in terms of size.

Competition between DH and natural gas based decentralized heating is an ever present issue because there are places where natural gas is available for all residences. The competitive aspects of electrical heating are negligible, because the increase in the price of electricity has decreased the number of electrical boilers significantly in the last few years.

39 Source: Euroheat and Power: District heating and cooling 2007



23%

46 %

31% EE

7.6 TWh

53%

The cost of district heat depends on multiple factors like the fuel used and its price, the state of production and distribution equipment and the level of heating utilities’ loans. From the governmental side it’s important to note that Estonia was one of the first Eastern European countries that gave up subsidies on fuels and energy. The average price for heat in 2005 was around EUR 23.5. By comparison, the average price for DH in Finland was EUR 41 for the same period. According to these numbers it could be said that Estonian heat prices are quite low.

In heat production the share of CHP was 30.3% in 2005. This indicator should increase to 35–40% by the year 2010. There are three different types of CHP plants – backpressure, steam condensing, internal combustion – in Estonia with a total number of 31 turbines.

The potential of CHP is very high in the country, based on economical and technical actualities like: existing DH networks, local manufacturing, well functioning gas lines, the possibility to use bio fuels and the increasing demands to the environment.40

40 Source: www.esprojects.net


9.7 Hungary


Main heating indicators of Hungary


10,282 MW


14,289 GWh


3,417km


3.8°C


98


655,517 (15.6%)

Source: Association of Hungarian District Heating Enterprises (MATÁSZSZ)

Fuel used for DH

2000 2003 2005

Coal 27.2% 14.1% 9.2%

Oil 7% 4.6% 1.4%

Natural gas 63.6% 75.1% 82.8%

Renewables 1.3% 4.8% 6.6%

Other fuels 0.9% 0.4% 0%


Climate Conditions: Due to where it’s situated within the Carpathian Basin, Hungary has a moderately dry continental climate. The mean annual temperature is about 10°C. Average temperatures range from -4 to 0°C in January to 18 to 23°C in July. Recorded temperature extremes are 43°C in summer and -34°C in winter. In the lowlands, precipitation generally ranges from 500 to 600 mm, rising to 600 to 800 mm at higher elevations.

The number of heating degree days is 3,000–3,300 in most cities; however they reach up to 3500 in the northeastern region.41

Market:42 After the transition of the Hungarian economy the majority of apartment buildings were sold to their tenants, but without being modernized beforehand; the new owners typically never had the money for this either. Municipalities became independent, and after 1992, they obtained the DH properties, with the exception of the heating power plants. The industrial and enterprise sectors have been transformed, many DH customers ceased operations or separated, industrial DH demand decreased and the supply of steam shrank to a tiny bit of its earlier value. After 1992, all DH subventions were cancelled and DH became too expensive for the customers. Settlement construction stopped; new dwelling connections to DH have consequently stagnated.

In Hungary DH heated buildings use 2–3 times more heat than in developed countries. This is partially a building construction problem, partially because the lack of individual metering and control devices. It results in social problems, too, because people pay 10–20% of their salaries for energy. After some previous local efforts, government programs have been launched for improving insulation and modernizing heating systems. Unfortunately, sometimes they also support separation from DH. After modernization has taken place, heating demand may be reduced up to 40% with applied technologies.

After the privatizing of power plants, more heating power plants were updated with large combined cycle CHP units. However, the DH suppliers don’t gain from the benefits of cogeneration, because the power plants have a heat supply monopoly


42 Source: Association of Hungarian District Heating Enterprises (MATÁSZSZ)



1%

9%

8 3 %

7%

HU

14.3 TWh

16%

as the single supplier in each DH system. After 2000, a new government rule has been established for the support of medium scale cogeneration for DH goals up to 20 MW at the beginning, and later up to 50 MW. There is mandatory purchasing for CHP electricity at attractive prices from those power plants. The majority of heat only plants installed new CHP units – typically gas engines – but also some heating gas turbines and smaller combined cycles.

DH is produced up to 75% by cogeneration and the share of cogenerated electricity production is more than 20% of the national total. Of the latter, 85% is DH related cogeneration. DH related cogeneration has been the most effective method of energy saving and reducing carbon emission in Hungary for the last decade and a half.

The actual residential heat market is saturated at 16%. There are no new residential connections because of the lack of competitiveness of DH versus gas heating, with few exceptions. On the commercial and office investment market DH has a better competitive position; there is a significant increase fielding this sector. There are also some new residential parks with local district heating and cooling from tri-generation units.

Natural gas companies have expanded very quickly: nowadays more than 70% of dwellings are connected to the gas network. Additionally, power plants and heating plants have changed over from oil firing to natural gas firing. The natural gas price has remained the official price, and residential gas heating has been supported by cross financing and also by direct subvention up to now. It is establishing a strong market competitor for district heating.

District cooling has begun in the last two years; in some cities it has a good market position in the commercial and office investment market.


9.8 Kosovo


Built in capacity

Prishtina – Termokos 159 MW

Gjakova – DHC 38 MW

Mitrovica – Termomit 9.3 MW

Total 206.3 MW


Climate Conditions:43 Based on the climate conditions, Kosovo can be separated into three climatic areas: • Climatic Area of Kosovo (Rrafshi i Kosovës) • Climatic Area of Dukagjini (Rrafshi i Dukagjinit) and • Climatic Area of mountains and forest parts.

Market:44 District heating systems only exist in Prishtina, Gjakova and Mitrovica. They currently provide for only about 5% of the heat demand in Kosovo. The installed capacities are shown in the table below. Boilers are mostly mazout fired with some using light fuel oil. District heating systems were re-started on 15 October 2000.

DH in Pristina: Pristina’s DH system presently supplies some 12,000 consumers, from both commercial and residential sectors, with a heating surface totaling about 945,000 m2. Heat energy is distributed through 220 heat-exchangers & secondary net pump substations and 40 secondary net pump only substations.

DH Gjakova: The district heating system in Gjakova supplies 1,100 consumers, with a heating surface totaling about 130,000 m2. Heat energy is distributed through 40 heat-exchanger & secondary net pumps substations.

DH Mitrovica: The district heating system “Termomit” in Mitrovica supplies only 160 consumers, with a heating surface totaling about 8,500 m2. Heat energy is distributed through 10 heat-exchanger & secondary net pumps substations.

Overall objectives for The Republic of Kosovo, 2003 – 2008 • To increase efficiency of operation of existing district heating plants

and distribution networks • To improve bill payment rates • To gradually introduce a meter-based billing system • To increase the number of users connected to district heating where possible.

43 Source: http://www.kosovo-mining.org/kosovoweb/en/kosovo/climate.html

44 Source: http://www.esiweb.org/pdf/bridges/kosovo/10/3.pdf


Objectives for 2009 and beyond: • When gas is introduced to Kosovo, consider switching from heavy fuel oil to gas • To consider construction of new gas fired combined heat and power (CHP) plants

to expand district heating systems where feasible.

Through the district heating law, the Government defines the responsibilities of municipalities in the operation and development of district heating systems. The Government regulates district heating plants adherence to environmental standards through the Environmental Protection Law.

Two notable projects in the country are being undertaken by the European Agency for Reconstruction: namely, the Annual Program 2000 which aims at refurbishment of district heating plants in Pristina, Gjakova and Mitrovica at a cost of EUR 2–4 million; and the Annual Program 2004 for economic reconstruction, regeneration & reform to rehabilitate the Mitrovica district heating system for EUR 2 million.45

45 Source: http://www.ear.eu.int


9.9 Latvia


Main heating indicators of Latvia


8,651 MW


6,950 GWh


2,000 km


-1; +2 °C


40


70%


Fuel used for DH

2000 2003 2005

Coal 3.9% 0% 1%

Oil 15.7% 8% 5%

Natural gas 69.1% 69% 70%

Renewables 11.3% 20% 24%

Other fuels 0% 3% 0%


Climate Conditions:46The country's climate, which ranges between maritime and continental, is influenced by the prevailing southwesterly winds coming from the Atlantic. Humidity is high, and the skies are usually cloudy; there are only about 30 to 40 days of sunshine per year. The frost-free season lasts about 125 to 155 days. Summers are often cool and rainy.

The mean temperature in June is about 17 °C, with occasional jumps into 34 °C. Winter sets in slowly and lasts from the middle of December to the middle of March. The mean January temperature ranges from near -2°C on the coast to about -7°C in the east. There are occasional extreme temperature drops down to -40°C.

The average length of the heating season is up to 200–210 days in the year with an average of 4,243 heating degree days.

Market:47 District heating in Latvia forms the backbone of the heat market, with 70% of households connected to the heating grid, consuming 39% of the state’s primary energy. The consumption structure of the centralized heat supply has been constant in recent years with the share of space heating and hot water supply 65–70% and 30–35% respectively. Of the total amount of sold heat energy 73.4% was sold to households, 2.5% to industry and 24.1% to other consumers. Heat demand showed a slight decline until 2005 when a construction and development boom evened things out. Heat demand for the coming years, especially in Riga, will continue to increase by 8–10% according to estimates.

Regarding ownership of district heating companies in the country, municipalities make up the main shareholders. Privately owned or leased companies produce approximately 8% of the total heat in Latvia. Usually companies work vertically-integrated, producing, transmitting and selling heat to end-users; oftentimes they offer maintenance services should the demand arise.

The largest district heating scheme in Latvia is situated in Riga. Riga Siltums JSC has 1,080 MW of total installed capacity. It supplies 74% of the total residential area of the city, approximately 5,200 residential houses. The length of the distribution network is 645 km and it operates with an annual transmission loss of 14.6%.

46 Source: District Heating and Cooling 2007 http://www.britannica.com

47 Source: District heating and cooling 2007 http://www.energyagency.at/enercee/lv/energymarketactors.htm



24

% 5%

70 %

1%

LV

6.9 TWh

70%

JSC “Rigas siltums”

Own heat production – 1,069 GWh

Purchased heat from CHP – 2,470 GWh

Source: //www.lsta.lt/files/seminarai/ 080911_Budapestas/Latviai.pdf

Considering the high costs of district heating installations, mainly existing DH systems are being utilized and renovated. The connection of new customers has been relative infrequent until recently as growth has been experienced in Riga, indicating a trend which might continue outside the capital in the next few years.

Because Latvia is heavily dependent on primary energy imports mainly from Russia, there is a strong case for the further development of CHP to reduce dependence. However there is no defined support mechanism for cogeneration plants with electrical capacity exceeding 4 MW. Unsupported plants are obliged to sell their products at a price defined by the market. In November 2006 new rules were adopted on cogeneration that relate electricity and heat tariffs to fuel price, which sent a clear signal to stimulate CHP.

The insufficient capacity of existing natural gas networks limits the competition between individual and centralized heating solutions. However district heating is facing pressure from the public as more and more consumers switch to local gas-fired heating to avoid paying for the inefficiencies of centralized heat distribution. This trend is being publicly discussed and it is likely that more and more municipalities will form separate natural gas and district heating zones.

DH consumer structure

10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

GW

h

� Commercial,

construction

� Industry

� Residential

� Energy sector

� Losses

2000 2002 2003 2004 2005 2006

Source: Euroheat and Power, 2008


9.10 Lithuania


Main heating indicators of Lithuania


9,621 MW


8,550 GWh


2,507 km


2–4 °C


58

Customers connected to the network (2005)

584,000

Source: District Heating and cooling 2007, Lithuanian District Heating Association

Fuel used for DH

2000 2003 2005

Coal 0.6% 0.1% 0.2%

Oil 25.2% 9.7% 4.3%

Natural gas 68.2% 82.3% 81.6%

Renewables 4.6% 7.2% 12%

Other fuels 1.4% 0.7% 1.9%


Climate Conditions:48The climate of Lithuania is transitional between the maritime type of Western Europe and the continental type found farther east. Winters are generally mild and summers are cooler along the coast with temperature extremes increasing inland. Baltic Sea influences dominate a comparatively narrow coastal zone.

The mean temperature for January, the coldest month, is about -5°C, while July, the warmest month, has an average temperature of 17°C. The heating season lasts for 6–7 months per year in Lithuania with the maximum number of heating degree-days at 4,081 and the minimum 3,445

Market:49 In Lithuania all cities and most settlements receive heat via district heating. Individual and district heating account for approximately 50% of total heat production (for space heating and hot water preparation) each. District heat in the amount of 8,126 GWh was delivered to consumers out of which 71% went to households and 29% to industry. Heat delivered for space heating purposes accounted for 67.4% while 32.6% went to hot water preparation. Due to the economic state followed by the transition – which caused bankruptcies, disconnection of industrial companies and a decline in the standard of living to a point where it was necessary to switch to individual natural gas heating – production and sales decreased rapidly in the district heating sector. Recently DH supply has stabilized and distribution heat loss decreased from 32.3% (1999) to 19.6% (2005). By implementing residential and public building renovations energy demand can be reduced by two times thus it is supposed that total DH demand in 2025 will be less than in 2008.

Currently there are about 58 district heating suppliers in the country operating 94 systems and serving 584,000 customers, 27,000 buildings (17,000 apartment houses) and 2 million people. More than the half, 57%, of district heating companies are owned by municipalities, while the other 47% is leased to foreign investors. The largest investor in the country is the French owned Dalkia Group, which is in charge of nine utilities.

There is a large number of outdated prefabricated block houses located in the country, built before 1992, and most of them are in desperate need of renovation. The average heat consumption of newly erected houses is 108 KWh/m2 compared to the 165 KWh/m2 consumption of these houses. The pipelines of existing DH systems are also in bad condition because 79% were laid before 1991.


49 Source: heating and cooling 2007 http://www.lsta.lt/files/Leidiniai/LSTA10metu_anglu.pdf



12%

4%

82 %

2%

LT

8.55 TWh

43%

Number of consumers, %

� Residents

71.1%

13.6%

5.79.6%

%

� Budgetary organisatons

� Business/ industrial enterprises

� Other consumers

Source: Lithuanian District Heating Association, 2008

An estimated EUR 910 million investment is required for reconstruction of which EUR 72 million is to be allocated from EU structural funds. For increasing heat efficiency, DH utilities gradually eliminated group boiler houses and installed heat substations inside separate apartment buildings and to gain public acceptance they began to pay more attention to customer service.

In 2005 public heating CHP plants produced 1,764 GWh of electricity, which makes 16.5% of total electricity delivered to the national power grid. Analyses of national legal acts show that the separate schemes for supporting and promoting CHP are valid with no artificially created administrative barriers. All CHP plants in the country are fueled by natural gas; only newly constructed plants use renewable or waste resources.

Share of renewable energy resources in the total fuel balance fot heat production, % 1414

12

10

8

6

4

2

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1.2 2 2 2

4 5

7.2

10

12

Source: Lithuanian District Heating Association, 2008

The energy efficiency of the above mentioned apartment houses is one of the main market barriers to the development of the Lithuanian district heating sector. Another problem is the vulnerability of state energy supply which utilizes 83% natural gas, mainly imported from Russia. As a goal of the Lithuania National Strategy, DH companies are trying to counter this threat by using gradually increasing shares of local, renewable and waste fuels for heat production. The share of renewables was 17% in 2007 compared to the initial 2% in 2007.

There is no district cooling in Lithuania.


9.11 Macedonia


Main heating indicators of Macedonia


9,621 MW


8,550 GWh


2,507 km


2–4 °C


58


584,000

Source: Macedonian Center for Energy Efficiency: A Survey-Energy Sector-in the Republic of Macedonia, 2007

Climate Conditions:50 Macedonia stands at the junction of two main climatic zones, the Mediterranean and the continental. Periodically, air breaks through mountain barriers to the north and south, bringing dramatically contrasting weather patterns. Overall, there is a moderate continental climate: temperatures average 0°C in January and rise to 20–25°C in July. Because of various terrain conditions, there may be considerable variation in the climate, with the eastern areas tending to have milder winters and hotter, drier summers and the western (more mountainous) regions having more severe winters.

Market: Currently, five district heating systems are operational in the country whose total capacity is 600 MW, powered by heavy oil, natural gas and lignite. About 50,000 households are connected to district heating systems.

There are five autonomous regional district heating systems in the Republic of Macedonia that are largely confined to Skopje:51

• Wider metropolitan area of Skopje – AD “Toplifikacija” – Skopje The district heating system of Skopje currently has 487 MW of hot water generation capacity and 26 MW of steam capacity. Annual heat production is around 685 GWh, predominantly for residential and commercial consumers. Total consumers capacity is approximately 550 MW. System losses of around 14% are not unduly high by regional standards, although there may be scope for economically viable loss reduction projects.

• Northern portion of Skopje – AD “Skopje – Sever” This facility has been in operation since 2001. Its maximum consumer capacity is estimated at approximately 60–65 MW. The heating plant Sever is the first energy plant in the country to have been built according to international environmental regulations. The energy produced during the heating season totaled 49 MWh/year (2001).

• Industrial zone of Skopje – “Sektor za energetika – ESM” This system consists of three G-32 steam boilers (25 MW each). These boilers are planned for the production of steam for the two turbine units that are installed in this energy plant. At this moment, the two turbine units, with a total electrical capacity of 27 MW, are not functioning, but they might be activated in the upcoming period to cover all neighboring settlements with heating energy, up to a capacity of 60 MW.


51 Source: http://www.narucpartnerships.org/Documents/Pricereg_gasanddistrictheatingsectors.pdf



20%

4%

75 %

1%

MK

1.58 TWh

9%

• Heating utility of the town of Makedonska Kamenica – ”Doming” The installed hot water capacity of the plant is 12 MW, with a 5 km long distribution grid. The plant has consumer coverage capacity of up to 6.5 MW. In the forthcoming period, the system is expected to deliver 5,900 – 6,100 MWh of heating energy annually.

• The residential area of the town of Bitola – “Toplifikacija– Bitola” DOO The seven boiler plants that belong to the Municipality, and have been given to Toplifikacija Bitola under concession, have a total installed capacity of approximately 26 MW (capable of providing heating services to 220,000 m2

of residential or commercial area).

There are no indigenous oil reserves in Macedonia. All crude oil is imported and transported from Thessalonica (Greece) to a refinery in Skopje which supplies the majority of demand for oil in the country. The total annual consumption of oil derivatives is approximately 800,000 tons. Macedonia has basically no natural gas infrastructure, apart from the gas pipeline which is connected to the transit pipeline that emanates from Russia. It is a 30 km long pipeline distribution system supplying 13 enterprises in Skopje and four in other cities. Given the current economic situation in Macedonia, the gas pipeline capacity is used very little, and mainly by industrial consumers.52

52 Source: Macedonian Center for Energy Efficiency: A Survey-Energy Sector in the Republic of Macedonia, 2007,http://toplif.com.mk/districtHeating.htm


9.12 Montenegro


Heating sources in Montenegro, 2003

Electricity 48.1%

Stone coal 5.3%

Brown coal 1.3%

Wood 42.4%

Other 2.9%

Source: http://www.energyagency.at/ nercee/mn/supplybycarrier.htm

Climate Conditions: Montenegro’s lower areas have a Mediterranean climate, with dry summers and mild, rainy winters. Temperatures vary greatly with elevation.

Podgorica, lying near sea level, is noted for having the warmest July temperatures in the country, averaging 27°C. Cetinje, in the Karst region and at an elevation of 670 m, has an average temperature of 22°C. Average January temperatures range from 8°C at Bar on the southern coast to -3°C in the northern mountains. Montenegro’s mountainous regions receive some of the highest amounts of rainfall in Europe. Annual precipitation at Crkvice, in the Karst above the Gulf of Kotor, is 5,100 mm. Snow cover is rare along the Montenegrin coast, averaging 10 days in karstic polje depressions and increasing to 120 days in the higher mountains.

Market:53There is no district heating system in Montenegro as it was considered to be unnecessary to invest in such major projects due to the mild winters. Most dwellings are heated through electric radiator system, electric thermal accumulator or individual heating system. One of the most popular heating sources in Montenegro is wood. Approximately 150,000–200,000 m3 forest wood is used for heating per year.

There are significant regional variations in fuel used for heating. This is determined by the climate conditions, the characteristics of apartments, financial considerations and the availability of resources.

Wood:The North part of Montenegro is relatively rich in wood, therefore 42.4% of the households use wood for heating. Most of the low-income households use wood, while only half of the high-income households use wood for heating. 20% of households do not use wood because they are unable to do so while 13% due to its price and their bad financial situation. Additionally, few households use wood because they own their own forest.

Electricity: 48.1% of the households in Montenegro has electrical heating facility. Electricity is mainly used in the central and Southern part and by households with higher-income. 29% of households do not use electricity due to its high price while 17% are unable to do so.

53 Source: http://www.energyagency.at/enercee/mn/supplybycarrier.htm


Coal: 5.3% of the households use stone coal while 1.3% use brown coal for heating. As coal is relatively expensive, therefore half of the households do not use coal for heating purposes.

In Montenegro, heating and cooling of buildings adds up to 40% of the country’s energy consumption (mostly electricity). However there is a significant potential for increasing energy efficiency of both private and public buildings.

To reduce the energy consumption and costs it is necessary to renovate and implement energy efficiency measures in existing buildings and to design and build new buildings according to present norms.

On the territory of capital Podgorica, there is potential of researched under ground waters with a constant temperature of 12–14 °C, which could be used for cooling during summer months.


9.13 Poland


Main heating indicators of Poland


50,336 MW


85,800 GWh


18,577 km


0–2°C


752

Percentage of households in cities connected to the network. (2005)

above 50%


Fuel used for DH

2001 2003 2005

Coal 90.2% 83.6% 79.4%

Oil 2.4% 5.1% 7.8%

Natural gas 5.2% 8.3% 5%


Waste 0% 0.5% 0.5%

Other fuels 0% 0% 3.4%


Climate Conditions:54The overall climate of Poland has a transitional – and highly variable – character between maritime and continental types. Six seasons may be clearly distinguished.

Sunshine reaches its maximum over the Baltic in summer and the Carpathians in winter, and mean annual temperatures range from 8°C to 7°C. The average heating degree days based on the last 40 years are between 3,600–4,000 because the various regions of Poland are considerably different.

Market:55The installed capacity in Poland is 50,000 MW. The annual supply is circa 86 TWh. More than the half of all Polish buildings is supplied by district heating. The annual heat production has totaled nearly 270 TWh in recent years. Distribution loss was around 10% of total production. Approximately 52% of net production was utilized in residential households. The industrial sector consumed less than 80 TWh and has a market share of approximately 30%. The rest of the produced heat was used for communal units, which amounts to a market share of around 18%.

Similarly to other countries in the region considerable differences can be observed between rural and urban areas. On average three-quarters of total heat demand is covered by DH in cities, which means that more than 15 million Polish citizens are supplied with heat from centralized systems. Economic transformation spurred the division of 50 former state owned DH companies into hundreds of small entities. Thus the DH sector is presently dispersed and there are no complete statistics for the sector. Companies of various size supply heat: smaller ones sell tens of thousands of GJ of heat annually to the largest DH supplier which bears over 35 PJ of annual supply; this equals 11% of total Polish district heating demand. In the next decade stable growth and development are expected in the sector due to the effects of Directive 2004/8/EC.

Around 50% of total domestic energy consumption is used for heating purposes. Thermo modernization undertakings have received significant supported in the last decade. Companies were provoked into implementing measures, increasing energy efficiency for both heat production and transportation.


55 Source: Euroheat & Power: District heating and cooling 2007


Operating heating systems are generally deemed to be in good condition. As heatsources are large, capacities presently exceed demand. Between 2000 and 2005new, large CHP plants were commissioned in Lublin, Nowa Sarzyna, Zielona Góra,Gorzów Wielopolski and Siedlice. Based on large stores of domestic hard coalsupply, further development of this sector is expected.

The installed capacity of professional and industrial CHPs equals about 44 GW.In 2005 CHPs produced 91 TWh of heat out of which around 65 TWh was suppliedto heating networks and the rest, 25 TWh, was consumed by them.

As a general share of district heating systems, cooling capacity is estimated tobe 5% (2,500 MW) of the total capacity for district heating. However DH forcooling might not be employed in smaller, but solely in medium or large systems.As a result of this fact cooling capacity is between 250 and 750 MW and demandfor district cooling systems will fall to between 225 and 675 GWh, according toexperts. It can be assumed that according to this trend total cooling demandwill reach 3,000 GWh by 2020, if technical barriers (development of absorptiontechnology and securing big volume cooling water for absorption units) areremoved.56

Source: http://www.lsta.lt/files/seminarai/080911_Budapestas/Poland.pdf

Ownership structure:

� State Company 3%� Other Company 4%� Housing Associations 3%� Units directly belonging to

municipality 9%� Lim ited Liability Company 55%� Joint Stock Company 26%

� Coal� Oil� Natural gas� Renewables and waste� Other sources

8%

54

80 %

3

PL

85.8 TWh

52%

© 2009 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG networkof independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

56 Source: The Polish National Energy Conservation Agency: District Heating Sector National Report – Poland

9.14 Romania


Main heating indicators of Romania


58,000 MW


16,830 GWh


8,184 km


-2; -8°C


179

Percentage of population connected to the network (2005)

20% (4,430,864

inhabitants)

Source: DH 2005,2007

Fuel used for DH

2001 2003 2005

Coal 46% 46.45% 42%

Oil 6% 6.32% 4%

Natural gas 48% 46.43% 53%

Renewables 0% 0.8% 0.003%


Climate Conditions:57 Romania enjoys four seasons, though there is a rapid transition from winter to summer. Autumn is frequently longer, with dry warm weather from September to late November.

Romania’s location in the southeastern portion of the European continent gives it a climate that is transitional between temperate regions and the harsher extremes of the continental interior.

The average annual temperature is about 11°C in the south and about 8°C in the north, although, as noted, there is much variation according to elevation and related factors. Extreme temperatures range from about 45°C in the Bărăgan region to -38°C in the Brașov valley. Romania has approximately 4,000 heating degree days per year, with 5,650 in the mountains and 2,810 in the south.

Market:58 After the energy crisis in 1973, centralized heating systems were developed in Romania. Given their age and out-of-date condition, presently these systems operate with losses of around 30–35%, low efficiency and very high costs of production, transportation, and distribution.

Because of the above mentioned factors the majority of district heating users cannot handle costs. In the residential sector numerous bills are paid late or become bad debts; to give context to the severity of the problem, the share of non-payment in the DH system was 40% in June 2001. These debts are generally owned by low-income consumers, who, when faced with legal proceedings will chose disconnection, either from the inability to pay the bills, or from the desire to install individual heating sources. As a result the district heating market has lost approximately 450,000 customers in the last five years.

To mitigate the burden on the residential sector the Government subsidizes customers according to the State Budget Law, whereby 45% of the amount is granted by the central budget and 55% should be covered from the local budget. The subsidy refers to the whole chain of production, irrespective of the production source or the fuel used. The level of subsidies differs from town to town, according to costs registered by local district heating systems.





54%

4 %

42% RO

16.8 TWh

20%

Main disadvantages of the subsidy system: • All residential costumers are subsidized with no distinction, because it was

implemented to lower the price of thermal energy regardless of income. • Subsidies do not reflect the market price of heat. • The subsidy goes to the utility and not to low-income households.

Lack of transparent and simple models for the privatization of public utilities and the regulation of the outsourcing system for public services were also perceived as market barriers apart from the massive disconnections and distrust amongst customers. This has strengthened the competitive advantage of decentralized heating versus district heating systems.

Local municipalities own the majority of the DH companies followed by the share of the government and public private partnerships which bear 7 and 3% respectively.

The largest district heating scheme located in Bucharest is owned by RADET Bucuresti. The company has 1,278,664 connected customers and installed capacity of 3,931 MWth. It delivers 7,100 GWh heat per year through an 876 km long distribution pipeline system.

District cooling does not exist in Romania.59



9.15 Serbia


Main heating indicators of Serbia


6,600 MW

Supplied heat energy produced by DH plants (2006)

5,952 GWh


-1°C


51

Households connected to central heating network (2006)

746,828

Percentage of households connected to the network

27%

Source: Republic of Serbia Statistical Office, Energy Balances, 2005 and 2006 Statistical Yearbook of the Republic of Serbia 2007

Climate Conditions:60 Differences in elevation, proximity to the sea, and exposure to wind lead to significant climatic differences within Serbia. In general, however, the climate is continental, with cold, relatively dry winters and warm, humid summers.

The difference between average temperatures in January and July in Belgrade is 22°C. The region of Vojvodina most clearly exhibits characteristics of the continental climate. July temperatures average about 22°C, and January temperatures hover around -1°C. Summer temperatures in mountainous areas of Serbia are notably cooler, averaging about 18°C. Winter precipitation tends to fall as snow, with 40 days of snow cover in northern lowlands and 120 days in the mountains.

Market:61 There are nine power plants in Serbia, six of which produce only electricity for general use, and three plants producing both power and heat. The heat produced this way is used for district heating. Fifty-one district heating systems are located within the country; these consist of thermal power plants and several boiler houses. District heating is used for space heating and to a minor extent to serve industrial consumers.

Fifty-five towns in Serbia have district heating systems installed with a total capacity of around 6,600 MW and a total heat production of 5,00–6,000 GWh, which indicate low utilization of around 10%. Approximately 27% of Serbian households are connected to a central heating system.62The systems installed are mainly fueled by natural gas; heavy fuel oil is also used as secondary fuel type. Currently no biomass or waste incineration is utilized.63


61 Source: Jasmina Knezevic, Milijana Ceranic: Serbia’s Informative Inventory Report 2008

62 Source: Statistical Yearbook of the Republic of Serbia 2007

63 Source: http://www.swedishtrade.se/miljoteknik/docfile/34697_Serbien.pdf



16%

6 5 %

1% 18%

RS

5.95 TWh

27%

Fuel used for DH 2006

Coal 1%

Oil 18%

Natural gas 65%

Renewables 0%

Other fuels 16%

Source: http://www.swedishtrade.se/miljoteknik /docfile/34697_Serbien.pdf

Due to under investment and destruction over the past two decades, district heating systems are in desperate need of repair, reconstruction and modernization. International financing as well as financing from own resources has resulted in several renovation projects:

• EUR 30 million was granted by the KfW bank group for replacement of pipelines, reconstruction of substations and modernization of the heat production process in Belgrade, Novi Sad and Nis.

• EUR 22 million was provided by the European Agency of Reconstruction for renovation projects in Subotica, Pancevo, Cacak, Valjevo and Uzice.

• A loan from the EBRD (European Bank of Reconstruction and Development) and a donation from SIDA (Swedish International Development Cooperation Agency), totaling EUR 22 million, has resulted in a DH rehabilitation project in Belgrade and a feasibility study for a new CHP plant at the same location.

The 10 cities whose systems are under reconstruction will need another EUR 50 million to finish the ongoing modernization process, while the other 45 towns will require at least EUR 100 million in the next 10 years.

Supported by the Energy Law adopted in 2004 and backed by the EU process, increased energy efficiency is a priority in the Serbian government. Apart from efficiency issues there are other objectives in the DH sector that require attention, for example: decreases in heat losses, emission reduction, increased use of natural gas and biomass fuels, modernization of the network and substations, rational use of fuels and the introduction of new environmental technologies.


9.16 Slovakia


Main heating indicators of Slovakia


3,990 MW


5,299 GWh


970 km


1.9°C


500


40%


Fuel used for DH 2003 2005

Coal 33.5% 37.1%

Natural gas 66.1% 60.5%

Renewables 0% 2%

Geothermal 0.4% 0.4%


Climate Conditions:64 Slovakia’s easterly position gives it a more continental climate than that of the neighboring Czech Republic. Its mountainous terrain is another determining factor. The mean annual temperature drops to about −4°C in the High Tatras and rises to just above 10°C in the Danubian lowlands. Average July temperatures exceed 20°C in the Danubian lowlands, and average January temperatures can be as low as −5°C in mountain basins. Snow remains on the higher peaks into the summer months.

The average heating season has 270 days and the average number of heating degree days for the country are 3,000–3,300 in southern, and 3,400–3,700 in the northern part of Slovakia.

Market:65 In Slovakia district heating has a 40% penetration in the heat market. More than 90% of flat blocks are still supplied by heat from public energy systems: district heating, blocks of boiler plants and industrial heat supply.66 After the radical restructuring of the energy sector, it is now steadily on the way towards a market based system as more and more companies aim to develop customer support centers and are looking forward to introducing new support services to customers. The Slovak DH sector uses a large amount of natural gas as a primary fuel while simultaneously attempting to substitute brown coal with renewables, particularly biomass.

An estimated 500 companies operating in the district heating sector serve approximately 2 million people with heat through a 970 km long distribution network. The government turned all state owned companies into joint stock companies in 2001 in order to open the privatization process that started in 2005.67

The government considers energy sector enterprises as strategic and limits the participation of foreign investors to 49% of their shares.

Being a member of the European Union since May 2004 implies the gradual privatization of the sector and abolition of subsidies for energy consumers. Pursuant to the valid energy policy, development of Slovakia’s heat industry in the medium and long term will focus on more extensive utilization of renewable energy resources, such as biomass and geothermal energy.



66 Source: http://www.solar-net.info/fileadmin/user_upload/solarstrat/Veranstaltung_Bratislava/ SOLARSTRAT_ECB_English_final_conference.pdf




61

%

37%

2%

SK

5.3 TWh

40%

Increase DH price from 1990–2005

16

14

12

10

8

6

4

2

0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

€/G

J

Source: www.solar-net.info

The share of combined heat and power plants in DH in Slovakia is notably high – 45% of the total installed capacity. There are 39 CHP plants that produce more than 53% of heat sold through district heating systems.

Presently, district heating is facing competition from individual gas, electric, or coal heating. The reason may be the artificially low gas prices and easy access to Russian natural gas imports. However the prices of both gas and electricity are set to increase with the removal of subsidies. Apart from the competition between DH and individual heating options, it also exists between district heating utilities and gas boiler producers too. On the other hand electricity and small scale CHP do not represent a threat. Over the last decade the heat energy market passed through a decentralization process, mainly because of price evolution. Many companies estimate that it is better to have their own sources, so DH utilities must deploy a greater effort to attract new customers.

Currently there are no existing district cooling systems in Slovakia.68

68 Source: Euroheat & Power: District Heating and Cooling 2005,2007


9.17 Slovenia


Main heating indicators of Slovenia


1,569 MW

Supplied heat energy (2007

3,401 GWh


678 km


0–2°C


52

Connected household customers (2007)

113,267

Source: http://www.agen-rs.si/en/

Climate Conditions:69 Slovenia may be divided into three climatic zones. Conditions in Istria and near Trieste indicate a transition from the Mediterranean climate of the Dalmatian coast to a moderate continental climate. In this zone the highest temperatures often rise above 27°C in June and July. Winter temperatures rarely drop below 10°C, but the mild winters are sometimes interrupted by the awful “bora”, a cold northerly wind. Central and northern Slovenia have a continental, “cool summer” climate, while the eastern third of the country also falls into the continental category but has warm summers and a growing season almost as long as Istria’s.

From November to February, temperature readings below freezing are common in both zones, above all in the cool summer region. The average number of degree days is 3,550.

Market:70 District heating is an important part of the Slovenian Energy supply sector; with around 1,600 MW of total installed capacity it represents 12% of the national energy supply. From the total heat delivered to customers nearly 50% (1,282 GWh) went to residential customers in 2005.

In Slovenia there are 48 district heating companies of which 13 have their own CHP plant. Supplies go to 111,283 customers through a 652 km long pipeline system. The largest district heating scheme is located in the capital city of Ljubljana. It is 64% state owned and 36% owned by the municipality. In general DH schemes in big cities are all municipality owned.71

In 2007 the largest five distribution companies supplied 85,267 households, or 81.9% of all the households, distributing 73.3% of the heat used for district heating.72

69 Source: www.britannica.com


71 Source: http://www.agen-rs.si/en/

72 Source: Energy Agency of the Republic of Slovenia: Report on the energy sector in Slovenia for 2007



35%

3 %

56

%

1%

SI

3.4 TWh

16%

Fuel used for DH

1999 2005 2007

Coal 58% 51.4% 57%

Oil 2.6% 5.8% 2.6%

Natural gas 37.7% 38.6% 34.9%


Others 0% 0% 0.7%

Source: District Heating and Cooling 2005 http://www.agen-rs.si/en/

District heating production was 1,360 GWh from cogeneration in 2005 which translates as nearly 50% of heat demand being produced in CHP plants. The majority (83%) of CHP plants were fueled by coal.

The main barrier for potential investors in CHP plants is the low ratio between electricity and natural gas prices as well as the high volatility of the price of gas. According to the Statistical Office of the Republic of Slovenia district heating prices were highly competitive in 2005, with an average DH price of EUR 34.35 per MWh including VAT. Fuel cost represents an average of 60% of all costs with investment and other costs covering 12% and 28% respectively.

Estimated cooling demand in the residential and commercial sector is about 460 GWh/year. One district cooling system operated by means of a hot water absorption chiller is being designed. Its capacity is approximately 1.5 MW to supply five commercial and municipal buildings in Velenje. The relatively high investment cost of district cooling systems compared to local cooling is perceived as the main barrier to such installations in Slovenia.


89Best Practice

10. Best Practice73

District heating experts from numerous countries have studied the Danish district heating sector because of its uniqueness.

Denmark has one of the world’s largest district heating system in the Copenhagen region. In total, around 50 million m2 of heated floor area is supplied from one, pool-operated system and total heat production is around 30,000 TJ annually. The Danish system is not only one of the largest but one of the leaders in terms of technology and regulation as well.

It is important to note that district heating in Denmark developed in the same manner as in other countries. In this chapter we are going to describe the most important characteristics of this system and review the suggestions of Danish experts.

1. Increasing market share of DH and CHP

District heating is an essential part of the Danish energy policy. The centralized heating systems ensure the following: • National least-cost solution • Security of supply at a national level • Energy efficiency • Low level of emission of CO2 and other pollutants • Low level of local pollution • Suitable thermal comfort.

At the same time it is important to note that the objectives of the energy policy can only be achieved if the majority of densely populated cities have a high coverage of district heating supply.

2. Strong support from central authorities

The central authorities are able to support the development of district heating through national least-cost energy planning, the monitoring of the least-cost urban heat planning and the zoning of the district heating system.

With a strict and consistent regulation system local authorities and utilities can be encouraged to implement least cost projects and, with the implementation of legal measures, building owners can be persuaded to connect and remain connected to the district heating system.

The high taxation of fossil fuels for heating, a ban on electric heating in new buildings and investment subsidies to utilities that rehabilitate DH networks and to consumers who install central heating and connect to district heating are all possible to increase the share and competitiveness of district heating.

73 Source: http://www.dbdh.dk/artikel.asp?id=462&mid=24


90 Best Practice

These measures, which combine the advantages of strong regulation and controlled use of market forces, are very important; however, they are far from sufficient without the other components listed.

3. Strong support from municipalities

Municipalities play very important roles in the implementation of the national energy policy, as they have a natural interest in developing a good local district heating system for the benefit of the inhabitants of urban areas.

4. Consumer ownership

Most of the district heating companies are owned by the consumers, either directly as consumer co-operatives or indirectly as municipally owned companies. This gives certain benefits, like all company profit being given back to consumers at the end of the year or transferred to the next year to lower the heat price. Additionally, management is encouraged to provide good consumer services at the lowest possible price and at consequently consumers may be more motivated to pay their bills. Via this strategy, budgets and prices are transparent for the consumer, who is able to make profit on the heat supply or suffer possible losses.

5. Efficient financing

While financing used to be a problem in many countries, it has not been in the district heating sector in Denmark. Most companies finance their investments completely in networks and CHP plants via international credits at the lowest market based interest rate. Banks typically compete to offer the best conditions as long as the security is high. And security is high, due to following reasons: • The national energy policy is stable • Municipalities provide guarantees for loans, to consumer co-operatives as well • Consumers are obliged to remain connected and to pay fixed tariffs at a minimum • Proven technology and maintenance management ensure long life-time • Consultants provide know-how on feasibility studies and project implementation • There are clear roles of responsibility and efficient decision-making at the suppliers.

Consequently, other private investors, ESCOs, BOOT concepts and the like offer no real competition.

6. Variety of technical solutions

In Denmark there are no obligatory norms or standards that specify detailed technical solutions and design criteria which have to be followed. Consequently, technological development has been very dynamic and there is a wide variety of technical solutions. New installations are usually based on different solutions adjusted to local conditions and on the judgments of local decision makers.

7. Large integrated systems with optimal load dispatch

The district heating system in the Copenhagen region is one of the world’s largest with around 50 million m2 of heated floor area and about 30,000 TJ of heat production annually.


91Best Practice

Figure 16: District heating system of Copenhagen

� CTR district heating area

� VEKS district heating area

� VFIncineration heating area

� KE steam area

� AMV Amager Power Station

� HCV HC Oersted Power Station

� AVV Avedoere Power Station

� Incineration Plant

� CHP Station � Transmission pipeline � Municipal border

AVV

HCV

SMV

AMV

AMF

VEGA

VF

KARA

RLF

The heat is supplied from four CHP plants, four waste incinerators and more than 50 peak boiler plants to more than 20 distribution networks by three interconnected transmission companies – regardless, it is still one single pool of optimal load dispatch.

8. Heat accumulation

Almost all district heating systems in Denmark have heat accumulators installed. This has been done for several reasons: • To optimize production from small-scale and large CHP plants • To optimize operation of solid fuel boilers • To level daily heat load variations • To provide for peak hour load on the coldest days.

Simple pressureless tanks with direct connections can be found in sizes ranging from 500–50000 m3. A few accumulators of a more complex type (with temperatures up to 120°C and separate connection via pumps and throttle valves), like the tanks in the Copenhagen system, have capacities of 2x20000 m3.

9. Simple technical solutions

Obviously advanced solutions often attract the most attention, but simple and cheap solutions could be more important for the further market development of district heating in western countries and for the survival of the small local distribution systems in the Central and Eastern European states.


93Investment Opportunities

11. Investment Opportunities

The fundamental idea of DH is simple but powerful: connect multiple thermal energy users through a piping network to environmentally optimum energy sources, such as combined heat and power (CHP), industrial waste heat and renewable energy sources such as biomass, geothermal and natural sources of heating and cooling. The ability to assemble and connect thermal loads enables these environmentally optimum sources to be used in a cost-effective way.

DH is most effective in areas of high building density.The trend toward worldwide urbanization offers a growing market, particularly in emerging economies and in the area of district cooling. Growing urbanization presents significant energy and environmental challenges, and district heating and cooling (DHC) can be an important part of a sustainable urban development policy. DHC network technology supports urban design that uses space well and can be served by energy efficient transit systems. DHC helps control urban air pollution, improving the quality of life and the vitality of city centers.

Many think that DH is yesterday’s technology; on the contrary district heating will increasingly move away from fossil fuels, toward recovery and use of waste from power plants, municipal waste and biomass. Network systems are required in order to maximize the environmental benefit of new power technologies such as fuel cells and high efficiency gas turbines as well as older technologies such as coal-fired power plants.

The heat recovered through CHP or other energy sources can be converted to cooling, and worldwide, as well as Central and Eastern European implementation of district cooling is growing. In addition to integrating the best of new energy supply technologies, there has been and will continue to be progress in improving and reducing the cost of DH pipe networks.

Another widespread misconception is that DH systems in CEE are a sinkhole for investment; in fact, DHC networks in CEE create opportunities for increasing CHP.


94 Investment Opportunities

CHP Investment Opportunities in CEE

• Large potential to develop cogeneration

• Major political and economic reforms

• Industry restructuring and privatization

• Specific legislative and regulatory policies

• Each country-unique socioeconomic context, variation in the transition process and different privatization schemes

• Energy and environment sectors require a significant capital investment in energy sector to comply with EU energy and environmental directives

Source: www.chp-research.com

The poor performance of district heating systems in the CEE countries is due to the centralized imposition of a single design concept in a non-market economic system. The major technical innovation of pre-insulated pipes could not be used because it was Western technology that could not be imported. Significant efforts are now being made by many parties to bring the networks up to the required technical standard. The expansion of the gas system in some cases does not consider the full environmental advantage of using a premium fuel to first produce power, and then using the refurbished district heating network to supply buildings with the rejected waste heat. Policy-makers need to recognize these networks as a national environmental asset rather than as liabilities.

DH is important for implementing CHP because it expands the pool of potential users of recovered thermal energy beyond the industrial sector to include commercial, institutional and multi-unit residential buildings. The temperatures required by these users are relatively low, which allows CHP to operate at higher efficiencies compared to plants producing higher-temperature industrial process heat. In addition, as industry becomes more electrically intensive, large industrial heat sinks for low-grade energy are increasingly hard to find. Urban buildings, accessed through DH, are a more stable long-term partner for CHP plants.74

In Summary

We have identified four main factors that are likely to spur investment in the district heating energy sector in the CEE region. These main factors are considered to be the potential size of the domestic district heating market, improvements and modernization of the network, development of district cooling systems and cost efficiency of the supply. The above factors were then considered to provide an overall assessment of each market. These characteristics differ vastly among these countries and thus investment opportunities should be examined on a case-by-case basis for each country.

74 Source: IEA DHC/CHP Executive Committee


41%

59%

HR

2.6 TWh

11%

1%

9%

8 3 %

7%

HU

14.3 TWh

16%

15 %

33%51

% 1%

BG

6.97 TWh

18%

16 %

42%

42%

BA

1.06 TWh

40%

41%

22%

37%

AL

0.06 TWh

n.a.

63%

37%

CZ

58.3 TWh

41%

23%

46 %

31% EE

7.6 TWh

53%

24

% 5%

70 %

1%

LV

6.9 TWh

70%

61%

37%

2%

SK

5.3 TWh

40%

12%

4%

82 %

2%

LT

8.55 TWh

43%

8%

54

80 %

3

PL

85.8 TWh

52%

20%

4%

75 %

1%

MK

1.58 TWh

9%

54

%

4 %

42% RO

16.8 TWh

20%16

%

6 5 %

1% 18%

RS

5.95 TWh

27%

35%

3 %

56

%

1%

SI

3.4 TWh

16%

� Coal � Oil � Natural gas � Renewables

and waste � Other sources

Country code

Supplied heat energy

Market share

96 Investment Opportunities

Size of district heating market

The size of a country’s district heating market sets a limit on the possible built-in thermal capacity, thus it limits the size and amount of investments as a result.

Opportunities by country

It can be seen from the accompanying map that the countries having the greatest district heating investments potential in general are Hungary, Romania, Serbia and Slovenia. In terms of district heating market size, Macedonia, Croatia, Slovenia, Hungary, Serbia, Bulgaria and Romania are most favorable. Potential for developing DH systems in rural areas is apparent throughout the entire CEE region.

The condition of district heating systems varies significantly among these countries. Kosovo and Montenegro have less developed DH systems within the CEE region: in Kosovo district heating exists in only three major cities and covers only 5% of heat demand; in Montenegro no district heating system exists. In contrast, Estonia and Lithuania have a well developed and functioning district heating system with a relatively high market share. Additional investments into the modernization of systems are required in Bosnia and Herzegovina, Bulgaria, Croatia, Hungary and Serbia. In the case of Bulgaria, Hungary, Latvia, Lithuania, Serbia a high level of energy inefficiency could also be considered as a factor favorable toward investments.

Almost all the countries’ district heating systems face considerable competition mainly from gas suppliers due to consumer preferences based on the cost inefficiency of DH supply. Such strong competition can be observed in the Czech Republic, Estonia, Latvia, Hungary, Slovakia and Slovenia.


97Investment Opportunities

Opportunities for investment into district cooling systems are favorable in Latvia, Romania, Serbia, Slovakia and Slovenia.

In Slovenia, Estonia, Latvia and Poland there is potential for investing in CHP plants as 50% of heat demand is produced in these, but the high volatility of gas prices could be considered the main limitation. The viability of CHP and its prospects for development are also exemplified by existing DH network and gas lines in Estonia; sentiment to decrease dependency on primary energy source imports mainly from Russia in Latvia; and are based on large supplies of domestic hard coal in Poland.

Opportunities by energy source

There are excellent investment opportunities in primary energy sources in the CEE region; however, each country’s district heating is dominated by different sources.

Countries where gas is a dominant source of energy include: Romania, Hungary, Lithuania, Slovakia, Bulgaria, Latvia, Serbia, Estonia, Croatia and Bosnia and Herzegovina. Therefore, gas can be indentified as a primary energy source for DH in CEE. The second most important source is hard coal due to large sources of domestic supply. Hard coal makes up a significant share in Poland, the Czech Republic, Romania, Bulgaria, Slovenia and Bosnia and Herzegovina. Oil as a primary energy source has great importance in Serbia and Macedonia and is significant in Croatia, Bosnia and Herzegovina and Albania.


99What can KPMG firms offer?

12. What can KPMG Firms Offer to the District Heating Sector?

KPMG is a global network of professional firms providing audit, tax and advisory services with an industry focus. We operate in 144 countries and have more than 137,000 professionals working in member firms around the world.

KPMG’s Global Energy and Utilities practice

The ENR practice is one of KPMG’s fastest growing and the third-largest

industry sectors within the global network of member firms.

KPMG’s Global ENR practice is dedicated to assisting a wide range of organizations, from global supermajors to next-generation leaders, in dealing with industry trends and business issues, and meeting compliance requirements. KPMG’s Global ENR practice is organized through a global leadership team aligned with KPMG’s overall organization and member firms’ ENR practices.

KPMG’s ENR Industry Segments

KPMG’s ENR professionals help our member firms’ clients address the complexities and challenges that change brings, by grouping industry segments including Oil & Gas, Power & Utilities, and Mining and Forestry under the sector umbrella of ENR. Where there is commonality we aim to bring critical mass and where there is a need for industry understanding and insight, we operate through KPMG’s network, including Centres of Excellence. These Centres are located in 11 key cities around the globe.


100 What can KPMG firms offer?

Centres of Excellence

KPMG’s Global Power & Utilities Centres of Excellence comprise audit, regulatory, taxation, financial, and risk advisory professionals. Each center is headed by a dedicated Power & Utilities industry professional that can accessthe relevant people and resources regardless of geographical borders. Our people bring to the industry professional advice and support that addresses the issues and supports the strategic and transactional activities undertaken by utilities organizations.

KPMG’s Energy & Utilities Advisory Services in Central and Eastern Europe

The KPMG Energy and Utilities practice located in Budapest, Hungary is a KPMG Global Energy & Utilities Centres of Excellence. It provides business advisory services to the oil, gas, electricity and water industries.

Building on the resources and knowledge base of the KPMG global network of member firms, our team has access to market information on a global and regional basis.


101What can KPMG firms offer?

This allows us to offer strategies to our clients on both domestic and international assignments based on international experience and detailed knowledge of the local market.

Drawing upon a wealth of experience, well-tested methodologies, and the resources of local KPMG member firms in each country, the KPMG Energy and Utilities practice develops industry-specific, customized approaches for our clients. We provide professional advice and support that addresses clients’ issues and supports the strategic and transactional activities undertaken by member firms operating in the energy and utilities sectors in the CEE region.


102 What can KPMG firms offer?

Our services

KPMG`s Energy & Utilities Centre of Excellence located in Budapest can provide advisory services to support investments in the district heating sector:

• Market analysis and forecasting within the CEE energy sector

• Analysis of the current regulatory regime and its expected future

• Assessment of renewable energy source potential

• License acquisition, support of negotiation with regulators and with other licensing authorities

• Financial modeling

• Local partner identification

• Feasibility study preparation

• Business plan preparation and review

• Arranging finance, searching for equity partners

• Project management

• Coordination of engineering firms and legal support

• Market entry and exit strategies

• Mergers and acquisition support

• Competitors analysis

• Identification of investment opportunities

• Investment opportunity assessment


kpmg.hu

KPMG’s Energy and Utilities Advisory Services Contacts in Central and Eastern Europe

Global and Regional Leader

Péter Kiss

(KPMG in Hungary) Tel.: +36 (1) 887 7384 E-mail: [email protected]

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(KPMG in Romania) (KPMG in Slovakia) Tel.: +40 (741) 800 800 Tel.: +421 (2) 5998 4803 E-mail: [email protected] E-mail: [email protected]

Danilo Nikolic Peter Tatarko

(KPMG in Serbia) (KPMG in the Czech Republic) Tel.: +381 (11) 20 50 577 Tel.: +420 222 123 902 E-mail: [email protected] E-mail: [email protected]

Dariusz Marzec Petr Kubat

(KPMG in Poland) (KPMG in the Czech Republic) Tel.: +48 (22) 528 1253 Tel.: +420 222 123 901 E-mail: [email protected] E-mail: [email protected]

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(KPMG in the Baltics and Belarus) (KPMG in Romania) Tel.: +371 (67) 038 054 Tel.: +40 (741) 800 747 E-mail: [email protected] E-mail: [email protected]

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