Municipal Network for Energy Efficiency

Draft Heat Law of the Russian Federation and its Implications for Energy Efficiency

The Draft Heat Law of the Russian Federation aims to divide responsibilities for provision of heating within the country between federal and regional governments; to establish a firm and clear scheme for heating tariff formation; and to create a legislative basis for stimulus of competition within the heating sphere. Despite the fact that the Draft Law has many opponents, it is hoped that the Law will be finalized and ratified in 2005.

The situation which has led to the creation of this law is the following. Within the Russian Federation, more than 68% of total heating is provided by large CHPs within the central heating system, which are in private ownership. The central CHPs do not have access to the final consumer, but are nonetheless responsible for the overall inefficiency of the system. Before the heat reaches the final consumer, it has to pass through a distributor, which is primarily a regional municipality. The municipalities are the monopolists and have the power to increase prices while generating inefficiencies and losses. Through cross-subsidies, the municipal distributors subsidize the residential heat tariff at the expense of industrial consumers, which results in a recent trend where industrial enterprises build on-site small CHP facilities. The municipalities also have the legal power to increase the generation capacity by installing additional boiler capacity or building new boiler stations to increase their revenues, displacing the demand from the central CHPs.

As a result, the central CHPs are not functioning at full capacity, and thus become inefficient. This drives up both heat and electricity generation costs which then are passed down to the final consumer. Reciprocally, the government subsidizes these costs, creating further inefficiencies. In addition to the large central heating plants, there is also a number of small CHPs which are also deprived of a competitive market. These market distortions and the inability to have a competitive integrated co-generation of heating by large and small heating plants can have a downward spiral effect on future tariffs and efficiencies. Therefore, the model which is proposed in the Institute for EnergyPolicy's version of the Draft Heating Law will help create stable and effective markets for heat provision in areas inhabited by approximately 60% of the population. The law will stimulate central CHPs to function at full capacity which would allow to utilize most effectively the unique effect of combined heat and power production. In addition, this will allow the CHP sector to become free from subsidies and to increase its financial and resource efficiencies in the long run.

The draft law is seen as a solution as it attempts to provide effective utilization of central heating systems from both the energy utilization as well as the economic perspective. This will implicitly stimulate production and installation of energy-saving technologies, decrease inefficiencies, increase investment into modernization of heating infrastructure. Overall, the Heating Law will have a wide spectrum of positive effects on energy efficiency, access to communal services and reliability of heating systems, among many other ancillary benefits such as improved health and thus increased longevity.

The following sections are of particular importance for energy efficiency:

Section III
Article 14. Requirements for organizing the operations of centralized heating systems infrastructure
Article 15. Formation of Trends in Heat Load in centralized heating systems
Article 16. Structure of tariff (price) formation in centralized heating systems
Article 18. Accounting Requirements for heat energy in centralized heating systems

Section IV.
Article 22 Guarantees of reliability of heat provision within decentralized system framework
Article 23. Development of Decentralized systems

For text of Draft Law, economic and legal models and opinions regarding the law, visit the website of Institute of Energy Policy Legislation Initiatives .

For more information, contact Ms. Astghine Pasoyan apasoyan@ase.org.

District Heating and Water Utility Restructuring: The issue: Many city heating and water supply companies in the region are run by the same people as the old system and have not adapted to the new changes. The result is that heating and water systems continue to deteriorate because prices are low, accounting practices remain the same, and foreign investors and banks look the other way. The national government has a role to play in encouraging city-owned heating companies to operate more like commercial businesses - serve the client (the consumers), recover costs, and make investments so the enterprise is more productive.
What are some steps a national government can do? For one, transfer ownership and control of municipal infrastructure - heat and water supply systems - to local governments. Reform rules that discourage interaction between municipal enterprises and the private sector. Complete privatization of district heating companies is often politically-sensitive, but there are other options - such as concession contracts (see below).

The Alliance to Save Energy organized a seminar on district heating (DH) reform in Sofia, Bulgaria, in July 2002, for representatives of Sofia city government, which is interested in attracting private investment
to rehabilitate its district heating system.

A presentation on the Private Sector Participation in DH is available in the MUNEE Papers section of our Library. The presentation outlines the Alliance's analysis of private sector participation (including lease and concession contracts) in communal services reform in the Czech Republic, Lithuania, and Poland, and lists lessons learned and recommendations from selected case studies.

MUNEE STUDY ON DH REFORM

Privatization and restructuring of municipal heating companies are important factors in improving the commercial and energy efficiency of district heating systems. There has been a good deal of experience, particularly in Poland and the Czech Republic, on transforming district heating companies into more commercial-like enterprises. Sometimes these utilities can be privatized. Sometimes municipally-owned companies can still operate on commercial principles.

Whatever the case, if a heating utility cannot raise its collection rate, cannot maintain better accounting procedures and cannot reduce operating costs, it will not be able to attract the investment necessary to improve efficiency and quality of service.

Starting with Poland, MUNEE is assessing the experience of district heating restructuring and its impact on energy management. Poland, perhaps more than most countries, has a district heating sector with a wide variety of ownership and management structures. Some cities have done nothing -- district heating companies have undertaken few if any managerial reforms and are maintaining the status quo. On the other side, other companies have aggressively sought foreign investment and completely privatized.

Given the range of management and ownership structures in Poland, the country is a good place to study the impact of restructuring on heating service and on overall energy management.

Has privatization worked for Polish cities from an environmental, social and economic point of view?
Are certain structures better for large or small cities?
What kind of capacity does a city need to restructure successfully?
. Every unit of energy lost in the system means more fuel costs, which affects the operator's bottom line. The concession system is in use in Slovakia, Roma

The Alliance, the Polish Foundation for Energy Efficiency (FEWE), and the chief advisor to the President of the Energy Regulatory Authority have researched the range of models for district heating (DH) ownership in Poland. This MUNEE research team has selected examples of cities that have moved through the process successfully and unsuccessfully, and prepared case studies of four selected enterprises that have privatized. The cases are available upon request (in English or Polish), and a policy paper is forthcoming. The policy paper will include some "how-to" guidelines for cities across the region that are interested in reforming their heating utilities.

SPOTLIGHT ON CONCESSION CONTRACTS

One method of district heating reform that is becoming more popular in the region is the issuing of concessions. Under this system, the city essentially gives all responsibility for operation and management of the district heating system to a private operator - while the city continues to own the assets. This system can work in terms of improving efficiency because the private operator will have every incentive to improve efficiencynia, Lithuania and other countries. One of the leading companies in this area is the French company Dalkia.

Dalkia is involved in managing district heating systems in Romania and handles heating and hot water distribution in the Romanian cities of Albaiulia, Boldesti, Cluj Napoca, Plojesti, Sinaia and Tulcea. In Lithuania, Dalkia's subsidiary Litesko manages district heating systems for the cities of Marijampole (population 52,000), Vilkaviskis, and Kelme. For more information and to assess whether a concession contract might be appropriate for your city, contact Angela Allen Morin .

Keep a look out at this site - we will post the results of these analyses as soon as they are completed!