Present situation in DH sector Pricing regulation and taxation

WitoldWitold CherubinCherubinAdviserAdviser toto thethe PresidentPresident

ofof thethe EnergyEnergy RegulatoryRegulatory OfficeOffice

HEAT SUPPLY AND COGENERATION IN CEE HEAT SUPPLY AND COGENERATION IN CEE COUNTRIES – PRESENT STATUS ANDCOUNTRIES – PRESENT STATUS AND

PERSPECTIVE OF DEVELOPMENTPERSPECTIVE OF DEVELOPMENT

Present situation in DH sectorPresent situation in DH sector Pricing regulation and taxationPricing regulation and taxation Energy and environmental policy and perspective of Energy and environmental policy and perspective of

DH sector developmentDH sector development

WitoldWitold CherubinCherubinPRESENT SITUATION IN DH SECTORPRESENT SITUATION IN DH SECTOR

CountryCountry DHeat supplyDHeat supply [GWh] [GWh] DH shareDH share [%] [%]

BulgariaBulgaria 8 7778 777 1818

CzechCzech RepRep.. 40 56240 562 4444

EstoniaEstonia 10 20010 200 4040

HungaryHungary 16 02416 024 1616

LatviaLatvia 9 1809 180 7070

LithuaniaLithuania 10 57210 572 5050

PolandPoland 105 000105 000 5454

RomaniaRomania 23 01023 010 2424

SlovakiaSlovakia 7 8707 870 4040


DH networksDH networks heat carrier distribution system heat carrier distribution system

heat production heat production different technologies and fuels different technologies and fuels

Different structure of primary energy in CEE countriesDifferent structure of primary energy in CEE countries

coalcoal major fuel for DH systems major fuel for DH systems about 50 % about 50 %

natural gasnatural gas intensively used intensively used approx. 35 % approx. 35 %

dependency on single gas supplier dependency on single gas supplier security of supply security of supply

oil oil share share about 9 % about 9 %

renewables renewables increasing share (from 1.5 to 5 %) increasing share (from 1.5 to 5 %)

wastes & industrial surplus heat wastes & industrial surplus heat about 1 % about 1 %


Heat demands reduction during last 10 – 15 yearsHeat demands reduction during last 10 – 15 years

different reasons different reasons DSM & industrial production DSM & industrial production

Energy policies and regulations in several countriesEnergy policies and regulations in several countries

Increasing number of connected customersIncreasing number of connected customers

Heat production stabilisation (except BG and RO)Heat production stabilisation (except BG and RO)

DH systems modernisationDH systems modernisation

reduction of heat losses (still in range 10 - 20 %)reduction of heat losses (still in range 10 - 20 %)

beginning of District Cooling implementationbeginning of District Cooling implementation

general improvement of DH systems effectivenessgeneral improvement of DH systems effectiveness


CHP productionCHP production in some countries 1 – 2 % increase in some countries 1 – 2 % increase

Energy policyEnergy policy support schemes (micro & small CHP) support schemes (micro & small CHP)

New CHP plants & existing plants modernisationNew CHP plants & existing plants modernisation

HOB plants replacement by CHP unitsHOB plants replacement by CHP units

Hungary Hungary highest increase of CHP production highest increase of CHP production

favouring small size CHP over a long periodfavouring small size CHP over a long period

weighted average CHP share in CEE countries = 55 %weighted average CHP share in CEE countries = 55 % from 35 % in Baltic States to 72 % in Hungaryfrom 35 % in Baltic States to 72 % in Hungary

WitoldWitold CherubinCherubinPRESENT SITUATION IN DH SECTOR PRESENT SITUATION IN DH SECTOR

Different organisational and legal forms of DH Comp.Different organisational and legal forms of DH Comp.

State owned enterprises State owned enterprises not transformed not transformed

Municipal budgetary unitsMunicipal budgetary units

Ltd. Companies owned by municipalityLtd. Companies owned by municipality

Joint stock companies owned by municipality Joint stock companies owned by municipality

Private companies Private companies different type different type

Various forms of Public – Private Partnership Various forms of Public – Private Partnership


CountryCountry OrganisationOrganisation OwnershipOwnership

BulgariaBulgaria CentralisedCentralised DifferentiatedDifferentiated

CzechCzech RepublicRepublic DecentralisedDecentralised DifferentiatedDifferentiated

EstoniaEstonia DecentralisedDecentralised DifferentiatedDifferentiated

HungaryHungary DecentralisedDecentralised DifferentiatedDifferentiated

LatviaLatvia DecentralisedDecentralised DifferentiatedDifferentiated

LithuaniaLithuania DecentralisedDecentralised DifferentiatedDifferentiated

PolandPoland DecentralisedDecentralised DifferentiatedDifferentiated

RomaniaRomania DecentralisedDecentralised DifferentiatedDifferentiated

SlovakiaSlovakia DecentralisedDecentralised DifferentiatedDifferentiated


Movement to a vertical integration Movement to a vertical integration production & distribution production & distribution

DHC operating one DH system in a single city DHC operating one DH system in a single city decentralised decentralised

Some DHC operate DH system in different cities Some DHC operate DH system in different cities centralised centralised

Horizontal integration with other energy servicesHorizontal integration with other energy services

CHP and DH companies privatisationCHP and DH companies privatisation

Sale of DH shares or DH system as a wholeSale of DH shares or DH system as a whole

Leasing of DH plants and/or networks Leasing of DH plants and/or networks


Ownership/Organisation changes Ownership/Organisation changes start of DHC restructuring start of DHC restructuring Economic transformation Economic transformation related technical activities related technical activities

energy use effectivenessenergy use effectiveness decrease of environment pollutiondecrease of environment pollution increase of quality and reliability of heat supplyincrease of quality and reliability of heat supply improvement of customer’s servicesimprovement of customer’s services

Existence of DH schemes Existence of DH schemes opportunities for : opportunities for : CHP production developmentCHP production development integrated supply plans integrated supply plans incineration plants, waste heat use etc. incineration plants, waste heat use etc.DH systems modernisation & buildings thermo-modernisationDH systems modernisation & buildings thermo-modernisation heat losses reduction heat losses reduction heat production/demand decrease heat production/demand decrease


Similar trends in DH sector restructuringSimilar trends in DH sector restructuring

improvement of DH schemes efficiency and profitabilityimprovement of DH schemes efficiency and profitability change of fuels structure change of fuels structure growth of gas and renewable share growth of gas and renewable share CHP development CHP development small plants especially small plants especially investments on supplies and demand (DSM) sidesinvestments on supplies and demand (DSM) sidesDifferent financial sourcesDifferent financial sources own national fundsown national funds loans from national and foreign banksloans from national and foreign banks private investors private investors direct foreign investments direct foreign investmentsDifferent financial mechanismsDifferent financial mechanisms preferential taxespreferential taxesCHP encouragementCHP encouragement financing by third partyfinancing by third party


CountryCountry Investment Funds/Type of investmentsInvestment Funds/Type of investments

BulgariaBulgaria WB and EBRD loans WB and EBRD loans mainly DH networks mainly DH networks

CzechCzech RepRep.. Mainly own funds & EU funds & commercial banksMainly own funds & EU funds & commercial banks

EstoniaEstonia Own funds & EU funds Own funds & EU funds mainly RES mainly RES

HungaryHungary Own funds & EU funds Own funds & EU funds mainly CHP mainly CHP

LatviaLatvia Own funds (public & municipal) & EU fundsOwn funds (public & municipal) & EU funds

LithuaniaLithuania Own funds & EU funds & WB, EBRD loansOwn funds & EU funds & WB, EBRD loans

PolandPoland Own funds & EU funds & WB, EBRD loans and otherOwn funds & EU funds & WB, EBRD loans and other

RomaniaRomania Own funds & EU funds & WB, EBRD, EIB loansOwn funds & EU funds & WB, EBRD, EIB loans

SlovakiaSlovakia Self - financingSelf - financing

WitoldWitold CherubinCherubinPRICING REGULATION AND TAXATIONPRICING REGULATION AND TAXATION

Pricing Pricing crucial parameter of economic transformation crucial parameter of economic transformation Extremely low heat prices in the pastExtremely low heat prices in the past

DH sector subsidising in CEE countriesDH sector subsidising in CEE countries consumer payments consumer payments small lump sum (per m small lump sum (per m2 2 , per person), per person)

Recently DH prices moved to cost reflectionRecently DH prices moved to cost reflection

two component tariff structure started to become standardtwo component tariff structure started to become standard measurement implementation measurement implementation great effort in some countries great effort in some countries individual heat costs allocation & room temperature controlindividual heat costs allocation & room temperature control

Lack of measurements in some countries Lack of measurements in some countries lump sum uselump sum use


NoNo CountryCountry Heat priceHeat price (exc.. VAT) (exc.. VAT) [€/MWh] [€/MWh]

11 BulgariaBulgaria 2222 (average) (average)

22 CzechCzech RepublicRepublic from from 2525 to to 7575

33 EstoniaEstonia 3030 (average) (average)

44 HungaryHungary from from 2525 to to 5050

55 LatviaLatvia from from 1818 to to 3333

66 LithuaniaLithuania 32.7532.75 (average) (average)

77 PolandPoland 3636 (average) (average)

88 RomaniaRomania 1919 (average) (average)

99 SlovakiaSlovakia 47.4047.40 (average) (average)

1010 AustriaAustria 53.8453.84 (average) (average)

1111 DenmarkDenmark from from 4040 to to 5050

1212 FinlandFinland 42.2042.20 (average) (average)

1313 GermanyGermany 54.8654.86 (average) (average)

1414 NetherlandsNetherlands 53.4553.45 (average) (average)

1515 NorwayNorway 5151 (average) (average)

1616 SwedenSweden 4848 (average) (average)


DSM & reduction of industrial activity in CEE countriesDSM & reduction of industrial activity in CEE countries

heat demand decrease heat demand decrease systematic rise of heat prices systematic rise of heat prices DH sector subsidising in CEE countriesDH sector subsidising in CEE countries

Low real income of the population Low real income of the population ability to pay heat bills ability to pay heat bills heat costs heat costs 60 % accommodation related payments 60 % accommodation related payments

Disconnecting problem Disconnecting problem industrial and residential consumers industrial and residential consumers in some countries (H) industrial customers onlyin some countries (H) industrial customers only serious situation in RO serious situation in RO 21 % households disconnected 21 % households disconnected small DH units closed down in many townssmall DH units closed down in many towns 40 DH companies collapsed during last 2 years40 DH companies collapsed during last 2 years recently recently program for DH sector rehabilitation program for DH sector rehabilitation


Heat tariffs Heat tariffs set or approved by regulatory bodies set or approved by regulatory bodies national level (BG, CZ, EST, LT, PL and RO)national level (BG, CZ, EST, LT, PL and RO) municipal level (H, LV, SK) municipal level (H, LV, SK) not guaranteed independence not guaranteed independence national regulator national regulator more effective option more effective option

Regulation Regulation supplier and customer interest balancing supplier and customer interest balancing covering reasonable (justified) costs of heat supplycovering reasonable (justified) costs of heat supply consumers protection against supplier’s market powerconsumers protection against supplier’s market power cross – subsidies eliminationcross – subsidies elimination

Mainly „cost plus” regulationMainly „cost plus” regulation incentive regulation in some countries (CZ, EST, LT)incentive regulation in some countries (CZ, EST, LT) trend toward „price cap” regulation (CZ, EST) trend toward „price cap” regulation (CZ, EST)


AAlternative energylternative energy sources sources heat suppl heat supply ay availabilityvailability pricing policy adjustpricing policy adjusteded to market conditions ( to market conditions (competitive heat competitive heat pricesprices)) main competitorsmain competitors individualindividual gas heating; rarely oil & electricitygas heating; rarely oil & electricity

Lack of Lack of rerealal competition in heat supply competition in heat supply artificially low gasartificially low gas and and electricity prices f electricity prices for some customersor some customers tariff structure favortariff structure favorss small c small cononssuumersmers social social && political reasons political reasons cross subsidies between different categories of customerscross subsidies between different categories of customers direct competition between NG and DH networks (Cdirect competition between NG and DH networks (CZ, Z, EEST, ST, HH, , LLV,V, L LT,T, R RO, SK)O, SK) buildings connected to NG buildings connected to NG && DH networks DH networks disconnection problems in DH sectordisconnection problems in DH sector

MMunicipal (local) energy planningunicipal (local) energy planning in some countriesin some countries optimisation of energy supply optimisation of energy supply Local Energy PlanningLocal Energy Planning (EST) (EST) Local Energy Plan Local Energy Plan “zoning” of the city area between NG and DH “zoning” of the city area between NG and DH networknetworkss compulsory connection to the DH or NG networks in defined city area compulsory connection to the DH or NG networks in defined city area


Specific problem common for CHP production Specific problem common for CHP production e.g. Hungary e.g. Hungary

electricity market liberalization influence on heat prices levelelectricity market liberalization influence on heat prices level

electricity market liberalized in 2004 electricity market liberalized in 2004 open for all consumers except dwelling open for all consumers except dwelling

CHP plants often not belong to the DH CompanyCHP plants often not belong to the DH Company

CHP owners interested in competitive (low) electricity priceCHP owners interested in competitive (low) electricity price

large CHP plants sell electricity at low prices and heat at high prices large CHP plants sell electricity at low prices and heat at high prices

Favourable legislation for CHP plants < 50 MW Favourable legislation for CHP plants < 50 MW

obligatory purchase and guaranteed electricity priceobligatory purchase and guaranteed electricity price

significant reduction of heat pricessignificant reduction of heat prices


Country VAT level [%] Fuel taxesCzech Rep. DH 5; others 22 Fuel taxes for heating from 2007Estonia DH 5; others 19 Shale oil use in DH exemption until 2013

HungaryDH and NG 15Electricity 25

Energy and environmental taxes from 2004 reclaimed for CHP and DH; Till 2010 transition

period for coal, electricity, NG & DH

Latvia Under discussion Heavy oil use in DH excise taxTransition period till 2010

Lithuania DH households 5DH others 18

Coal, coke, lignite, NG exemption till 2010

Poland All products 22 Oil and LPG use in DH excise taxTransition period 2010 coal; 2014 NG

Slovakia All products 19 Electricity & NG transition period till 2010

WitoldWitold CherubinCherubinENERGY & ENVIRONMENTAL POLICY and ENERGY & ENVIRONMENTAL POLICY and

DH SECTOR DEVELOPMENT PERSPECTIVEDH SECTOR DEVELOPMENT PERSPECTIVE

National energy policy and legislative framework

direct or indirect influence on CHP/DH sector

driven mainly by EU Directives

EU legislation different national implementation

more or less positive results in CHP/DH development

EU energy & environmental policy EU Directives

new EU legislative initiatives

WitoldWitold CherubinCherubinENERGY & ENVIRONMENTAL POLICY and ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVEDH SECTOR DEVELOPMENT PERSPECTIVE

Directive 2003/53/ECDirective 2003/53/EC electricity internal market electricity internal market

Directive 2003/55/ECDirective 2003/55/EC gas internal market gas internal market

Directive 2001/77/ECDirective 2001/77/EC promotion of electricity produced in RES promotion of electricity produced in RES

Directive 2002/91/ECDirective 2002/91/EC energy performance of buildings energy performance of buildings

Directive 2003/87/ECDirective 2003/87/EC greenhouse gas emission trading scheme greenhouse gas emission trading scheme

Directive 2004/8/ECDirective 2004/8/EC promotion of cogeneration promotion of cogeneration useful heat useful heat

Draft DirectiveDraft Directive on energy end-use efficiency & energy services on energy end-use efficiency & energy services


Legislative frameworkLegislative framework

Country Energy Electricity NaturalGas

DH/heatsupply

CHP EnergyEfficiency

Bulgaria YES no no no no YESCzech Rep. YES no no no no YESEstonia no YES YES YES no noHungary no YES YES YES no YESLatvia YES YES no no no noLithuania YES YES YES YES no noPoland YES no no no no noRomania no YES YES draft no YESSlovakia YES no no no no not yet


Energy policy sustainable development & security of supply

Different legislative framework for energy sector

several countries single Energy Law covers all different sectors some countries sectoral Laws for different energy sectorsEU policy concerning CHP/DH sector CEEC implementation

before Directive 2004/8/EC CHP development schemesafter Directive 2003/87/EC National Allocation Plans till 2007competition with individual heaters CHP/DH “penalized” individual installations not covered by Directive CHP/DH development allowances purchase costs increase


CHP support mechanismsCHP support mechanisms

Country Purchasingobligation

Tariffsupport

Capitalincentives

Comments

Bulgaria YES YES YES Preferential price for units < 50 MW

Czech. Rep. YES YES Bonus for decentralised system

Estonia YES Guaranted price for 7 years

Hungary YES YES Guaranted price for units < 50 MW

Latvia YES YES Preferential price for units < 4 MW & local fuel

Lithuania Not really 1/3 investments for CHP

Poland YES Electricity obligatory purchase from RES & CHP

Romania Not really least costs analysis

Slovakia YES Electricity obligatory purchase from RES & CHP

WitoldWitold CherubinCherubinENERGY & ENVIRONMENTAL POLICY and ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVEDH SECTOR DEVELOPMENT PERSPECTIVELimited possibilities to build up new DH systems

Existing DH systems modernization costs optimization

improvement of energy efficiency on supply side lower costs production fuel use decrease & fuels basket optimization transmission & distribution heat & water losses decreaseimprovement of energy efficiency on demand side lower heat use improvement of heat supply control in substations and buildings heat supply measurements buildings cost allocation flats maximizing of existing capacity use customers connecting local HOB plants liquidation different fuels new buildings different customers commercial; residential


Custome’s payments according to heat use (measurements)operational costs optimization fuel costs 50 - 70 %maintenance costs reduction

Subsidies elimination cross and direct - subsidizinginstitutional support for poor households removed from DHC

Gradual heat prices increase heat supply costs coveringPricing evolution two-part tariffs & new elements in future environmental or fuel elementrational CHP electricity purchase procedures

EU environmental policy CHP/DH sector “penalized”competitive individual heaters not covered by Directive

DH development allowances purchase supply costs increase

Documents

Present situation in DH sector Pricing regulation and taxation