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District Heating and Distributed Energy: Practical Experience Relevant to

Northeast Asia Security

William Chandler

Laboratory FellowBattelle Memorial Institute

Pacific Northwest National Laboratory

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OutlineOutlineOutlineOutline

• Technology of rehabilitation

• Economics of upgrading

• “Financial engineering” of projects

• New solutions

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Why “District Energy” MattersWhy “District Energy” MattersWhy “District Energy” MattersWhy “District Energy” Matters

Matter of survival in cold climateLarge share of heating (70 % in Russia)Financial burden on governments and individualsPolitically sensitive Consumer cost Stranded assets Economic efficiency

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Russia, Poland, Ukraine, Czech Republic, China, Bulgaria

Functions

• Policy reform

• Technology transfer

• Demonstration

• Public information

Centers Created:Centers Created:

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AfterAfterBeforeBefore

Improvements to CHPImprovements to CHP“Nothing needs reforming quite so much as other people’s

bad habits.” -- Mark Twain

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Steam DrivenSteam DrivenChillersChillers

Steam DrivenSteam DrivenChillersChillers

ChilledChilledWaterWater

ChilledChilledWaterWater

Details of the DealDetails of the DealIntegrated Utility SystemIntegrated Utility System

Electric PowerElectric PowerElectric PowerElectric Power

Combustion TurbinesCombustion TurbinesCombustion TurbinesCombustion Turbines

Electric PowerElectric PowerElectric PowerElectric PowerHeating SteamHeating SteamHeating SteamHeating Steam

PEPCOPEPCOPEPCOPEPCO

Electric PowerElectric PowerElectric PowerElectric Power

HighHighPressurePressureSteamSteam

HighHighPressurePressureSteamSteam

ExhaustExhaustHeatHeat

ExhaustExhaustHeatHeat

Back PressureBack Pressure SteamSteam

TurbineTurbine

Back PressureBack Pressure SteamSteam

TurbineTurbine

Heat Heat RecoveryRecovery

Steam Steam GeneratorsGenerators

Heat Heat RecoveryRecovery

Steam Steam GeneratorsGenerators

Heating SteamHeating SteamHeating SteamHeating Steam

FuelFuelGas or OilGas or OilFuelFuelGas or OilGas or Oil

UMCP CampusUMCP CampusBuildingsBuildings

UMCP CampusUMCP CampusBuildingsBuildings

BoilersBoilersBoilersBoilers

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• $71M in improvements

• Energy use cut by 1/3

• $120M Savings

• Low cost, off-balance sheet financing

Results

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Pensioners protest “monetization” of utilities and other benefits, St. Petersburg, 17 January 2005 (Photo: A. Maltsev, Sipa Press, via MSNBC)

Typical Typical Problems Problems of District Energy:of District Energy:Financial Burden on GovernmentsFinancial Burden on Governments

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Russian Government Interest in Energy Management is Cost-Driven

1. Water and heat for public buildings cost $5 billion in federal subsidies, or 6 percent of budget

2. Savings of 30 percent could readily be obtained.

3. Subsidies to pensioners cost another 5 percent of GDP.

- The U.S. and Russian governments have an agreement to cooperate on “Federal Energy Management”

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Typical Typical Problems Problems of District of District Energy:Energy:

Low Thermal Integrity of BuildingsLow Thermal Integrity of Buildings

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Typical Typical Problems Problems of District of District Energy:Energy:

Low Thermal Integrity of BuildingsLow Thermal Integrity of Buildings

Typical Typical Problems Problems of District of District Energy:Energy:

Low Thermal Integrity of BuildingsLow Thermal Integrity of Buildings

• Shortage of funds to pay for heat services

• Poor quality of heat supply

• Lack of heat meters

• Poor building insulation and maintenance

• Lack of qualified personnel

• Lack of financing to improve facilities’ energy efficiency

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Typical Problems of District EnergyTypical Problems of District EnergyAging Equipment, Poor MaintenanceAging Equipment, Poor Maintenance

Typical Problems of District EnergyTypical Problems of District EnergyAging Equipment, Poor MaintenanceAging Equipment, Poor Maintenance

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Major Problems of Major Problems of Heat SuHeat Supplypply:: BoilersBoilers

Major Problems of Major Problems of Heat SuHeat Supplypply:: BoilersBoilers

Lack of financing and low fuel stocks

Shortened heat supply season and lowered temperatures

Absence of fuel and heat metering

Shortage of qualified boiler personnel

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Major Problems of Major Problems of Heat SuHeat Supplypply Networks:Networks:

Pipeline MaintenancePipeline Maintenance

Major Problems of Major Problems of Heat SuHeat Supplypply Networks:Networks:

Pipeline MaintenancePipeline Maintenance

Wear, failures, leaks, broken insulation, inefficient pumps, old heat exchangers, poor controls, multiple owners, non-collection of heat bills, overcharging of customers....

Source: Center for Energy Efficiency, Moscow

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Russian District Heating IndicatorsRussian District Heating IndicatorsRussian District Heating IndicatorsRussian District Heating Indicators

Indicator Units  VolumeCHP plants No. 485Heat generation Million Gcal 2,300Network losses Million Gcal 442Final heat consumption Million Gcal 1,784Fuel efficiency % 72Heat tariffs, average $/Gcal 14Heat tariffs, range $/Gcal 8-300Heat sales $ billion 30.0Potential savings in efficiency

$ billion 10.0

Source: Igor Bashmakov, Center for Energy Efficiency, Moscow

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Heat Transportation ProblemsHeat Transportation Problemsin Russiain Russia

Heat Transportation ProblemsHeat Transportation Problemsin Russiain Russia

Heat losses range from 20 to 70%Maintenance requires 50% of DH costsOnly 2% of pipes are replaced annuallyHigh leakages ratio, lack and low quality of insulation;Buildings are overheated or under-heated

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Chernobyl—Chernobyl—Aerial ViewAerial View

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Closing Chernobyl by Saving EnergyClosing Chernobyl by Saving EnergyClosing Chernobyl by Saving EnergyClosing Chernobyl by Saving Energy

How did it work?

U.S. AID/DOE grants through PNNL and others to develop project $30 million financing developed for buildings Kyiv City Administration invested $5 million World Bank invested $17 million in buildings and

$100 million in DH system Results: ~30% savings in buildings alone

$100 million financing developed for heat supply system

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District Energy Efficiency, Kyiv

Source: Arena-Eco and PNNL

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Upgrading District Energy:Upgrading District Energy:Adding Heat Controls in BuildingsAdding Heat Controls in Buildings

Upgrading District Energy:Upgrading District Energy:Adding Heat Controls in BuildingsAdding Heat Controls in Buildings

Source: Pacific Northwest National Laboratory

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• KIBA, a $30 million energy efficiency project in 1,300 schools, hospitals, and cultural buildings in Kyiv• Savings equivalent to the output of a 160 MW power plant.

Kiev Institutional Buildings ProgramKiev Institutional Buildings ProgramKiev Institutional Buildings ProgramKiev Institutional Buildings Program

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Source: Year 2004 Review, Austrian Federal Ministry of Agr., Env. , Water

KyivEnergo Rehabilitation

Item Cost FRR$M %

Boiler Plant Rehabilitation-1 39 29Boiler Plant Rehabilitation-2 17 16Pipe Replacement, Valves 13 13TETS 5 Rehabilitation 11 21TETS 6 Rehabilitation 6 15Substation Rehabilitation 16 27Distribution Pipe Rehab 0.8 13

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Kharkiv District Heating ProjectKharkiv District Heating ProjectKharkiv District Heating ProjectKharkiv District Heating Project

• Add six steam turbines (84 MW)

• Replace 50 km of transmission pipelines

• Replace 200 km of distribution pipelines

• Replace 443 old infficient boilers

• Installation of 3,870 individual heat substations

- Total cost = $173 million.

- Saves ~$37 million per year.

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Cost of Saved Energy in Czech Apartments

1 - TRV’s, Allocators, & Balancing (15%)

2 - Weatherization (3%)

3 – External Wall Insulation (19%)

4 – Roof Insulation (7%)

Cost-Effective Total = 44%

Note: Interactions between measures not included.

5 – Floor Insulation (2%)

6 – Thermal Windows (16%)

0

10

20

30

40

50

0 200 400 600 800 1,000 1,200 1,400 1,600

Savin

gs C

ost

(US

D/G

J)

Current heat price from DH

5

12

34

6

Saved energy (GJ/year)

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Plutonium and District HeatingPlutonium and District Heating

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0102030405060708090

22292527216 1413205 191 2812243 9 4 232 7 1115108 1626Measure Number (see definitions)

CS

E,

$/G

cal CSE

26 $/Gcal

14,8 $/Gcal

9,1 $/Gcal

4,8 $/Gcal

Cost of Saved Energy (CSE) Versus Energy Price, Zheleznogorsk

Source: CENEf and PNNL

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22 Hydropneumatic cleaning of in-house heating pipelines29 DHW regulation unit upgrade in open-type district heating systems25 Installation of a balancing valve at the building input27 Replacing hydroelevators with pumps and regulation and automation control system21 Restoration of re-circulation in the DHW system6 Insulation of outer walls from the inner side14 Insulation of windows (installation of heat reflecting films)13 Insulation of windows (doors) + elimination of holes between window (door) frame and the wall 20 Insulation of in-house DHW pipes5 Insulation of attic floor19 Installation of electric water heaters1 Insulation of basement from the inner side28 Installation of individual heating points12 Insulation of flat roof24 Installation of heat meters on the building level3 Insulation of the floor (1st floor)9 Insulation of walls from the outer side with molded board lining4 Insulation of floor on the logs23 Installation of efficient faucets2 Insulation of basement ceiling7 Insulation of walls from the outer side with mineral wool and thin plaster11 Installation of heat mirrors15 Installation of energy efficient windows10 Insulation of walls from the outer side with plastic or aluminum siding8 Insulation of walls from the outer side with thermo-insulating slabs16 Installation of ceiling-mounted ventilators17 Installation of thermostatic valves on the radiators

Definitions of Measure Numbers, Zheleznogorsk

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How to Start a Power Company?How to Start a Power Company?How to Start a Power Company?How to Start a Power Company?

317 kW gas-fired combined heat and power plant

Mini CHP Technology in ChinaMini CHP Technology in China

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Economics of a Typical Commercial Building Combined Heat and Power Installation

Capital 950 $/kW Size 1000 kW Initial Capital 950,000 $ Power Sales 6,570,000 kWh/Year Grid Power Price 0.090 $/kWh Contract Power Price 0.081 $/kWh Power Cost 0.040 $/kWh Power Sales Margin 0.041 $/kWh Annual Revenues 534,307 $

Economics of Combined Heat and Power

Source: W. Chandler

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New Cement Plant in Zhejiang:New Cement Plant in Zhejiang:Potential for 13 MW Heat RecoveryPotential for 13 MW Heat Recovery

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Cement Plant Heat Recovery

1. Zhejiang Cement Company, a 5,000 ton per day manufacturing plant near Hangzhou. 2. Waste heat recovery has been proven in Wan An plant in Shanghai. 3. Price of power is $0.065 per kWh.

4. Notional system: 13 MWe at $1,000/kW, 85 percent capacity factor.

• Investment = $13,000,000• Internal Rate of Return = 22%• Project financial life = 5 years

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PolicyPolicyPolicyPolicy

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What Can Government Do?

• Stabilize the investment environment

• Develop legal and policy infrastructure

• Conduct market reforms and decentralization

• Share risk (financing)• Demonstrate new approaches

and technologies• Provide information

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Energy Intensity Improvement in the Transition Economies, 1990-2003

0

20

40

60

80

100

120

140

160

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Ind

ex,

19

90

=1

00

Central Asia

Ukraine

Russia

Central Europe

Source: William Chandler, Energy and the Environment in the Transition Economies (Boulder: Westview Press, 2000), updated by the author 2005.

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Reported Growth in ChineseReported Growth in ChineseGDP, Energy Consumption, and GDP, Energy Consumption, and

Power DemandPower Demand

-10

-5

0

5

10

15

20

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Per

cen

t C

han

ge

on

Pre

vio

us

Yea

r GDP

Energy

Power

Source: Jeff Logan, International Energy Agency, private communication, 2005.

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0 10 20 30 40 50 60 70 80 90

Azerbaijan

Uzbekistan

Georgia

Romania

Belarus

Ukraine

Albania

Armenia

Bulgaria

Russia

Revenues Over Billings (percent)Source: EBRD, Energy in Transition, 2001

Utility Bill Collections Rate, 2000

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District Heating SubsidiesDistrict Heating SubsidiesPercent of Local Budget, 2001Percent of Local Budget, 2001

District Heating SubsidiesDistrict Heating SubsidiesPercent of Local Budget, 2001Percent of Local Budget, 2001

0 10 20 30 40

Zeleznogorsk

Dzerzhinsk

Orel

Kostroma

Yu.-Sakhalinsk

Lytkarino

Zhukovsky

Chelyabinsk

Murmansk

Percent

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0 1 2 3 4 5 6 7 8 9

Latvia

Czech

Bulgaria

Romania

Kazakhstan

Ukraine

Russia

$/GJ

District Heat Pricing, Selected Countries

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Electric Power Prices, 2002

0 0.02 0.04 0.06 0.08 0.1

USA

Russia

Poland

Kazakhstan

Hungary

Czech Republic

US$ per kWh

IndustryHouseholds

Source: U.S. Energy Information Administration, 2004. Note: Kazakh data are for 2001.

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0.0740.0670.1140.0650.110Shanghai

0.0540.0770.1210.0470.047Beijing

Off-PeakPeakOff-PeakPeak

HomesCommercialI ndustryCity

Electric Power Prices,November 2003 (US$/ kWh)

0.0740.0670.1140.0650.110Shanghai

0.0540.0770.1210.0470.047Beijing

Off-PeakPeakOff-PeakPeak

HomesCommercialI ndustryCity

Electric Power Prices,November 2003 (US$/ kWh)

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District Energy Policy in HungaryDistrict Energy Policy in Hungary

Mandatory purchase of cogenerated electricity up to 20 MW with favorable prices

Investment support for small scale CHP

Investment boom in gas systems

Regulatory issues in cost allocation between heat and power generation

Source: International Energy Agency

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Poland: Four Cities’ Experience,1992 – 1999

• 22% energy savings in district heat• Heat tariffs dropped more than 50%.• Consumer subsidies eliminated• Customers able to control heat level

Source: Ira Birnbaum, U.S. AID

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WADE* Survey of Poland’s Electric Power Sector

*World Alliance for Decentralized EnergySource: World Survey of Decentralized Energy, 2005, www.localpower.org

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Steps to Reform Russian DHS marketsSteps to Reform Russian DHS marketsSteps to Reform Russian DHS marketsSteps to Reform Russian DHS markets

Mandating municipal energy plansTransition to metered heat, gas and waterCreating associations of communal services payers (ACSePs)Attracting ESCOsLaunching “profits-from-savings” mechanisms to pay for rehabilitationEliminate cross-subsidies and getting prices right Ending “cost plus” approach

Source: Igor Bashmakov, Center for Energy Efficiency, Moscow, presented to the International Energy Agency, Prague, 2004

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WADE* Survey of Russia’s Electric Power Sector

*World Alliance for Decentralized Energy

Source: World Survey of Decentralized Energy, 2005, www.localpower.org

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Lack of well-prepared projectsLenders’ inexperience with efficiency projectsRegulatory issuesLenders’ perceived risk for small and medium borrowers and for efficiency

Source: Chandler, International Finance Corporation, 2004

China CHP Barriers/Opportunities

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China CHP Investment Risks

Technical riskUncertain regulatory environmentNon-transparency of customer financesLack of collateral

Source: Chandler and Gwin, International Finance Corporation, 2004

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Overview of Privatization and Overview of Privatization and CompetitionCompetition

Overview of Privatization and Overview of Privatization and CompetitionCompetition

Privatization of natural monopolies requires special steps:

Determining competitive parts of the system, separating them, introducing competition.

Creating legal, institutional framework to regulate prices and return on investment.

Commercializing–introducing hard budget constraints for–all power sector enterprises.

Attracting investment through concessions or privatization.

Source: Coming in from the Cold: Improving District Heating Policy in the Transition Economies (Paris: International Energy Agency, 2004)

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Frontier FinancingFrontier Financing

Russia World Bank Housing Divestiture, $500 MCzech Republic: ESCO promotion, $30 MUkraine: Kyiv City Buildings, $30 M

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Project Financing in the Project Financing in the Municipal SectorMunicipal Sector

Project Financing in the Project Financing in the Municipal SectorMunicipal Sector

Subsidy shift--from fuel to capital

Local budgets and regional efficiency funds

Heat supply company investments

Foreign, multilateral banks

Consumer expenditures

25%

7%

2%16%

40%

10%

Loan Energy efficiency fund

Oblast budget City budget

Heat supply companies Population

Source: Center for Energy Efficiency, Moscow

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0%

20%

40%

60%

80%

100%

120%

0 2/1 4/2 6/3 8/4 10/5 12/6 14/7 16/8

communal and housing (numerator) and energy expenditures (denominator) as percentage of family income (%)

colle

ctio

n r

ate

Purchasing power limits:Purchasing power limits: Bashmakov’s wing Bashmakov’s wing

Purchasing power limits:Purchasing power limits: Bashmakov’s wing Bashmakov’s wing

Threshold 2: rigidity of collecting payments

actions brings no results

Threshold 1: collection rate

starts declining

 

Source: Igor Bashmakov, Center for Energy Efficiency, Moscow

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District Energy Efficiency Investment

Source: Mykola Raptsun, Arena-Eco, Ukraine