Increasing the Efficiency of Heating

Systems in Central and Eastern Europe and

the Former Soviet Union

ESM234

Energy

Sector

Management

Assistance F

Programme

Report 234,00

a1 YT1 1. August 20CO

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JOINT UNDP / WORLD BANKENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)

PURPOSE

The Joint UNDP/World Bank Energy Sector Management Assistance Programme(ESMAP) is a special global technical assistance program run as part of the World Bank'sEnergy, Mining and Telecommunications Department. ESMAP provides advice togovernments on sustainable energy development. Established with the support of UNDPand bilateral official donors in 1983, it focuses on the role of energy in the developmentprocess with the objective of contributing to poverty alleviation, improving living conditionsand preserving the environment in developing countries and transition economies.ESMAP centers its interventions on three priority areas: sector reform and restructuring;access to modern energy for the poorest; and promotion of sustainable energy practices.

GOVERNANCE AND OPERATIONS

ESMAP is governed by a Consultative Group (ESMAP CG) composed of representativesof the UNDP and World Bank, other donors, and development experts from regionsbenefiting from ESMAP's assistance. The ESMAP CG is chaired by a World Bank VicePresident, and advised by a Technical Advisory Group (TAG) of four independent energyexperts that reviews the Programme's strategic agenda, its work plan, and itsachievements. ESMAP relies on a cadre of engineers, energy planners, and economistsfrom the World Bank to conduct its activities under the guidance of the Manager ofESMAP, responsible for administering the Programme.

FUNDING

ESMAP is a cooperative effort supported over the years by the World Bank, the UNDPand other United Nations agencies, the European Union, the Organization of AmericanStates (OAS), the Latin American Energy Organization (OLADE), and public and privatedonors from countries including Australia, Belgium, Canada, Denmark, Germany, Finland,France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,Sweden, Switzerland, the United Kingdom, and the United States of America.

FURTHER INFORMATION

An up-to-date listing of completed ESMAP projects is appended to this report. For furtherinformation, a copy of the ESMAP Annual Report, or copies of project reports, contact:

ESMAPc/o Energy, Mining and Telecommunications Department

The World Bank1818 H Street, NW

Washington, DC 20433U.S.A.

Increasing the Efficiency of Heating Systemsin Central and Eastern Europeand the Former Soviet Union

August 2000

Joint UNDPNWorld Bank Energy Sector Management Assistance Programme(ESMAP)

Copyright 0 1999The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing August 2000

ESMAP Reports are published to communicate the results of theESMAP's work to the development community with the least possibledelay. The typescript of the paper therefore has not been prepared inaccordance with the procedures appropriate to formal documents.Some sources cited in this paper may be informal documents that arenot readily available.

The findings, interpretations, and conclusions expressed in thispaper are entirely those of the author(s) and should not be attributed inany manner to the World Bank, or its affiliated organizations, or tomemnbers of its Board of Executive Directors or the countries theyrepresent. The World Bank does not guarantee the accuracy of the dataincluded in this publication and accepts no responsibility whatsoeverfor any consequence of their use. The Boundaries, colors,denominations, other informration shown on any map in this volume donot imply on the part of the World Bank Group any judgement on thelegal status of any territory or the endorsement or acceptance of suchboundaries.

The material in this publication is copyrighted. Requests forpermission to reproduce portions of it should be sent to the ESMAPManager at the address shown in the copyright notice above. ESMAPencourages dissemination of its work and will nornally givepermission prormptly and, when the reproduction is for noncommercialpurposes, without asking a fee.

CONTENTSContents ......................Preface .......... vAcknowledgments ........................... viiAbbreviations and Acronyms .................... ixUnits of Measure ...........Energy Unit Conversion .......... ...... ...

Currency Equivalents ........... ... .. ---. xExecutive Summary .... . ........ . ._. .

Introduction ....... IInvestment Requirements in the Heating Sector ..... ..................................................................2Competitiveness of District Heating . . . . . .................................................................. 3The Need for Policy Changes and Restructuring of Energy Companies ..................................................5Transitional Requirements . . . . ................................................................... . 7Conclusion ....... . ................ .. ..............................................8

Introduction . . . ................................................................ . . 91.1 The Problem . . . .................................................................... . 91.2 World Bank Activities in the Heating Sector . . . . . ................................................................. I 11.3 Purpose of this Report . . . . . . ................................................................ 121.4 Issues and Opportunities to Improve Efficiency in the Heating Sector: A Guide to this Report.. 12

Restructuring the Heating Sector in CEEIFSU: An Overview ............................................. 152.1 The Inherited Structure of Heat Supply and Demand .................................................................... 152.2. The Future of Heat Markets in CEE/FSU ............................... ....................................... 192.3 Integration of Supply Side and Demand Side Options .................................................................. 202.4 A New Paradigm for Heat Supply and Demand ...................................................................... 20

Technical Requirements and Investment Strategies for a More Efficient HeatingSector: District Heating, Decentralized Heating Options and Buildings .................. 23

3.1 Distnct Heating Systems ...................................................................... 233.1.1 Deternining the Optimum Size of District Heating Systems .233.1.2 Rehabilitating and Modernizing District Heating Systems .253.1.3 Typical Large-City District Heating Systems and Connected Buildings: A

Description .253.1.4 Investments to Optimize Heat Generation Capacity .313.1.5 Investments to Reduce Technical Losses in Transmission and Distribution .353.1.6 The Economics of Investments in More Efficient System Regulation .453.1.7 Rationalization of Steam Supply .48

3.2 Modermization and Expansion of Natural Gas Systems ................................................................ 493.2.1 The Need to Modernize Gas Distribution Systems ........................................................... 493.2.2 Technical Options for Gas Use in the Residential Sector ................................................. 5232.3 The Costs of Expanding the Use of Natural Gas .............................................................. 54

3.3 Options for Energy Savings in Buildings ................................................................ 563.3.1 Energy Efficiency Measures ................................................................ 573.3.2 Integrated Combinations of Retrofit Measures ................................................................ 58

Identification of Least-Cost Heating Options: Results of the Six Case Studies ... 614.1 Factors Affecting the Cost Advantage of District Heating ............................................................ 61

4.1.1 Sources of Competitive Advantage and Disadvantage of District Heating: AnOverview ................................................................ 61

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4.1.2 Factors Affecting the Cost of Heat Production ................................................................. 624.1.3 Factors Affecting the Cost of Heat Distribution ............................................................... 674.1.4 Sunk Cost Advantage of District Heating in CEE/FSU .................................................... 71

4.2 Least-Cost Supply of Heat in the Six Cities .................................................................... 724.2.1 Scope of Analysis ................................................................... 724.2.2 Heat Supply Options: The Results ................................................................... 734.2.3 The Impact of Demand Side Investments on the Ranking of Heating Options ................ 75

4.3 The Impact of Environmental Valuation on the Ranking of Heating Options .............................. 784.3.1 The Environmental Effects of Alternative Heating Options ............................................. 784.3.2 The Economic Costs of Air Pollution ................................................................... 814.3.3 Results for the Six Case Studies .................................................................... 83

Organizational Requirements for a More Efficient Heating Sector . . 855.1 Ongoing Reforms ................................................................... 855.2 Specific Issues and Lessons for Organizational Restructuring ...................................................... 87

5.2.1 Introduction .875.2.3 Promotion of Competition: and Privatization in District Heating .945.2.4 Promotion of Interfuel Competition: The Role of Heat Planning .945.2.5 Introducing Metering, Cost-based Tariffs, and Targeted Subsidy Schemes .985.2.6 Economic Regulation of the Heating Sector .1075.2.7 Institutional Aspects of Energy Efficiency Investments in the Building Sector .1135.2.8 Identification of New Sources of Finance .114

Conclusions: Recommendations for Heating Sector Policies and Projects ................. 1196.1 Competitiveness of District Heating with Alternative Heating Options ..................................... 120

Main Factor for Competitiveness of DH: Source of Cheap Heat ................................................ 120District Heating and Cogeneration: The Need for Political and Regulatory Action ................... 122

6.2 Policies and Organizational Reforms for Improved Heat Supply and Demand .......................... 1236.3 The Need for Transitional Strategies ................................................................... 125

6.3.1 Financial and Fiscal Measures ................................................................... 1266.3.2 Streamlining of Business Activities ................................................................... 1296.3.3 Streamlining the Organization of District Heating Companies ...................................... 131

6.4 Role of the World Bank Group ................................................................... 132

ANNEXES

Annex A: World Bank Activities in the Heating Sector .................................... .................. AlAnnex B: Determination of Heat Demand: A Market Analysis .......................................... B9Annex C: Cogeneration of Heat and Power: Energy Efficiency and Cost of Heat

Production ............................................................... C15Annex D: Technologies for Heat Distribution ............................................................... D21Annex E: Energy Efficiency Investments in the Building Sector .................................... E29Annex F: Economic Cost of Fuels, Heat Production and Distribution Costs,

and Environmental Impact of Heating Systems ................................................ F39Economic Cost of Fuels ................................................................... F39

Annex G: Dnipropetrovsk/Ukralne: Integrated Heat Demonstration Project .................. G49Annex H: Definations ............................................................... H53References ............................................................... R59

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BOXES

Box 1.1: What is District Heating? ................................................................... 10Box 4.1: Model for Screening of Heat Supply Options: Assumptions for Kiev ................................... 69Box 4.2: Caveats Regarding Orenburg, Dnipropetrovsk, and Kaunas .................................................. 75Box 5.1: Heat Planning in Wroclaw ................................................................... 98Box 5.2: Affordability of Heating: Results from Household Surveys ................................................. 103Box 5.3: Improving Collections ................................................................... 106Box 6.1: Merits andd Problems of DH ................................................................... 120Box A-I: District Heating Projects in Poland ................................................................... A-7Box A-2: District Heating Project in Latvia ................................................................... A-8

TABLES

Table 1.1: Issues and Required Actions in the Heating Sector in CEE/FSU ........................................ 14Table 2.1: Characteristics of Case Study Countries and Cities: Market Share of DH in

CEEIFSU and Westem Europe ................................................................... 16Table 2.2: Efficiency of Heat Supply: Paradigm Shifts ................................................................... 22Table 3.1: Use of CHP in Heat Production ................................................................... 34Table 3.2: Characteristics of Cogeneration Technologies ................................................................... 35Table 3.3: Comparison of Water and Estimated Heat Losses in Transmission and Distribution:

Case Study Cities and Westem Europe ................................................................... 37Table 3.4: Improving Gas Efficiency and Saftey: Comparative Merits of Technical Alternatives ...... 52Table 3.5: Main Characteristics of Decentralized Gas Heating Options .............................................. 53Table 3.6: Summary of Typical Investment Costs for Increased Residential gas use, per

Dwelling (US$) ................................................................... 56Table 3.7: Typical Energy Efficiency Measures in Buildings ............................................................... 57Table 4.1: Cost of Fuel Delivered to District Heating Plants and Building Boilers ............................. 63Table 4.2: Non-fuel Costs of Boiler Operation: District Heating Plants Versus Building Boilers ....... 64Table 4.3: Electricity Production Cost and CHP Situation Within Power Sector, by Country ............. 66Table 4.4: Comparative Cost of Heat Production ex Plant (USS/MWh) .............................................. 67Tablc 4.5: Density of Heat Demand: Six ESMAP Study Cities ............................................................ 69Table 4.6: Sunk Cost Advantage of District Heating in Sofia ............................................................... 71Table 4.7: Comparison of Heat Supply Options: Six ESMAP Case Study Cities ................................ 73Table 4.8: Impact of Demand Side Investnents, Sofia DH System ...................................................... 74Table 4.9: Economic Heat Energy Cost and Heat Bill, per Dwelling ................................................... 78Table 4.10: Energy/Environmental Efficiency of Different Heating Technologies (percentage) ... 81Table 4.11: Emissions per Delivered Gcal, by Type of Heating Technology . . 82Table 4.12: Economic Cost of Emissions in CEE/FSU and EU (US$/ton) . . 83Table 5.1: Responsibility Framework for Heat Supply and Demand .................................................... 91Table 5.2: Typical Cost of Heat Metering and Individual Controls in Apartments ............................ 100Table 5.3: Energy Cost Recovcry in the Residential Sector (in percent) ............................................ 102Table 6.1: Comparison of DH System Energy Economy in CEE/FSU and in Western Europe ......... 121Table A-1: Selected World Bank Projects in the Heating Sector ....................................................... A-1Table D-l: Performance Indicators for DH Distribution Systems .................................. A-28Tablc E-1: Demand Side Measures: The Example of Orenburg ...................................................... E-35Table F-I: Estimated Economic Costs of Natural Gas at City Gate, July 1996 . . A-40Table F-2: Economic Costs of Coal, Power, and Fuel Oil in CEE/FSU ................ ........................... F-41

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Table F-3: Difference in Cost of Heat Production: CHP-DH Versus Building Boilers asFunction of Heat Losses ...................................................................... A42

Table F4: Difference in Cost of Heat Production: HOB-DH Versus Building Boiler asFunction of Heat Losses ...................................................................... A-43

FIGURES

Figure 3.1: Schematic View of Typical District Heating System in CEE/FSU .................................... 26Figure 4.1: District Heating Versus Building Boilers: Cost Advantage at Plant Level ........................ 68Figure 4.2: Screening Curves for Heat Supply Options ..................................................................... 70Figure 4.3: Orenburg: Annual Heat Costs per Dwelling, Excluding and Including Environmental

Costs ..................................................................... 84Figure 4.4: Wroclaw: Annual Heat Costs per Dwelling, Excluding and Including Environmental

Costs ..................................................................... 84Figurc 6.1: Divisional Structure for a District Heating Company ....................................................... 131Figure B-l: Heat Losses in the District Heating System, Timnisoara, 1995 ....................................... B-I IFigure B-2: Estimated Heat Losses in the District Heating System, Timisoara, 2015 ...................... A-12Figure C-I: Energy Balance of Separate and Cogeneration of Power and Heat (for Solid Fuels) ...C-1 7Figure D-1: Direct DH Connection with Hydro-elevator Supplying Mixed Supply and Return

Water to Radiators Connected in Series ..................................................................... D-23Figure D-2: Indirect DH Connection (with radiators connected in parallel) ..................................... A-24Figure F-I: Heat Density and Network Architecture ..................................................................... F45Figure F-2: Cost of Investment and Heat Losses as a Function of Pipe Diameter ............ ................ F45Figure F-3: Demand Density and Cost of Investment in District Heating ................ ........................ F46Figure F4: Orenburg: Total Annual Heat Costs per Dwelling Excluding and Including

Environmental Costs ..................................................................... F-47Figure F-5: Wroclaw: Total Annual Heat Costs per Dwelling Excluding and Including

Environmental Costs ..................................................................... F47

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Preface

The World Bank as well as other multilateral and bilateral development institutions provides animportant source of funding for investments to modernize the heating sector in CEE/FSU. Thisreport aims to put these investments within the overall context of sector restructuring. It is basedon the ESMAP project Improving the Efficiency of Heating Systems in CEE/FSU as well as on awealth of experiences with district heating (DH) in both Western Europe and CEE/FSU.

ESMAP financed the present study to examine the following questions:

o Which factors determine the choice of the economically preferred heating option from a setof alternatives?

o Under which circumstances is DH, decentralized heating with natural gas, or anotheralternative the preferred option?

o How does the institutional environment have to change in order to foster cost-effective heatsupply and demand?

a How can the preferred option be implemented when the countries in CEE/FSU are in a periodof transition?

To answer these questions, case studies of the heat situation in six CEEIFSU cities were carriedout in 1996: Dnipropetrovsk in Ukraine, Kaunas in Lithuania, Orenburg in Russia, Sofia inBulgaria, Timisoara in Romania, and Wroclaw in Poland. In all six cities, DH is the dominanttechnology for the supply of heat.

The six case studies followed the same methodology, which emphasized the analysis of the scopefor interfuel substitution between DH and alternatives such as building boilers and apartmentboilers using natural gas. The issue of interfuel competition seemed to be inadequately addressedin many of the feasibility studies for DH systems that had been prepared previously. Themethodology also emphasized the identification of the institutional and policy changes that arerequired to provide an enabling environment for cost-effective heat supply and demand.

This report summarizes the main findings from the case studies and describes the major issuesencountered in the modernization of DH systems, the commercialization of companies in theheating sector, and requirements for policy changes. It provides examples of best practices in thereform efforts in CEE/FSU and of investments designed to make heating more efficient.

This report is intended to assist (1) World Bank staff, in preparing and implementing DHprojects; (2) politicians and planners in CEE/FSU, in dealing with the restructuring of the heatingsector, and (3) consultants, in preparing feasibility studies for investments in the heating sector.

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AcknowledgmentsThis report was prepared by Anke Meyer and Wolfgang Mostert. It benefited from the leadershipof Willem Floor and from the inputs of Henri Beaussant, Bernd Kalkum, and Peter Quaak, whowere part of the core team implementing the ESMAP project. The sections on energy-efficientrehabilitation of buildings are based on the work of Eric Martinot for the World Bank. We thankour colleagues inside and outside the Bank for their collaboration during the long gestationperiod of this report, especially Mats Andersson, Pentti Aro, Rachid Benmessaoud, John Besant-Jones, Henk Busz, Witold Cherubin, Lev Freinkman, Joe Gilling, Carolyn Gochenour, MarcHeitner, Maurits Henkemans, Tord Holmstrom, Pawel Kaminski, Dominique Lallement. LaszloLovei, Simon Minett, Jim Moose, Mantas Nocius, Arto Nuorkivi, Eric Peterson, lonur Purica,Lee Schiipper, Konstantin Skorik, Gary Stuggins, Yoshi Uchimura, Peggy Wilson, and SalmanZaheer.

The report is based on the results of six case studies undertaken by the consulting teams ofMVV/Sofregaz, Stork Comprimo, and Tebodin/ECN/ENECO. We are grateful to the authoritiesin the six cities in which the case studies were carried out, as well as to the respective nationalgovernments for the support they provided. The work relied on the financial support of the DutchMinistry of Economic Affairs, the THERMEE program of the EU Commission, and Kreditanstaltfir Wiederaufbau, as well as the advice of many heating experts in Eastern and Westem Europeas well as in development institutions. Without this support and advice, this project could nothave been undertaken.

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