1. Key Challenges in Developing Small-Scale Heat Generation Installations Igor Bashmakov Center for Energy Efficiency, Moscow, Russia Market and Technology Developments in Small Scale Heat Generation International Workshop, Baku, Azerbaijan, October 20, 2005

2. Russian District Heating Is regularly ignored, when energy and GHG mitigation policies are discussed and determined, while It accounts for about 45% of all domestic energy consumption in Russia, and for over 50% of fossil fuel use, and Is the largest single product market in Russia split into more than 50000 local markets with: –US$ 30 billion annual sales, and –US$ 50 billion efficiency improvement investments potential, but with only US$ 500 million annual investments (it will take 100 years to release the potential); –at least 20% of the nation-wide potential for fossil fuel consumption and GHG emission reduction Over 50% of district heat is consumed by buildings Industrial consumption went down by 35% in 1995-2001 The future for large CHPs in Russia is gloomy. The market for large CHPs is squeezed by the competition vice Given the shortage of meters, heat in Russia is still traded in the mist of heat quantities and real costs Large businesses have recently moved to the heat market

3. Russian District Heating Indicators IndicatorUnits Volume Volume Combined heat and power plants Units485 Including CHPs of RAO EES Rossii Including CHPs of RAO EES RossiiUnits242 Large boilers Units>190000 Individual heat generators and boilers Units>600,000 Heat generation Million Gcal 2,300 Own use Million Gcal 74 Distribution losses Million Gcal 442 Heat networks 1000 km 183.3 Final heat consumption Million Gcal 1,784 Fuel efficiency %71.5 Total energy inputs to heat generation Million toe 462 Heat tariffs, average $/Gcal18 Heat tariffs, range $/Gcal5-300 Heat sales $ billion 30.0 Potential savings from efficiency improvements $ billion 10.0

4. Russian Heat Balance. 2000-2001 (million Gcal). Supply side Indicator Public utility companies Industrial and municipal boilers Individual boilers Total Generation1515.7613.2170.72299.6 CHP CHP680.0 RAO EES Rossii RAO EES Rossii494.0 170.773.9 Industrial CHPs Industrial CHPs176.021.20.02225.7 Own use 52.7592.0 441.7 Sold to the network 1463.0157.0 20% Heat losses 284.727% 91.0 Share of heat losses (%) 19% 17% Heat losses attributed to Industry Industry74.017.091.0 Agriculture Agriculture8.83.6 Residential buildings Residential buildings61.486.012.3 Public buildings Public buildings105.348.4147.4 Other Other35.12.1153.7

5. Large is not always bad, while small is not always good Municipal plans need to decide on the level of heat supply centralization In Helsinki, over 90% of customers are connected to large DHS Large DHS are attractive, if appropriately managed and if heat loads density is high Nevertheless, the market niche for small-scale heat generators (SSHG) is growing, as the distributed power trend progresses This niche is divided into two sectors: –over 600,000 individual heat generators, and –over 100,000 small district heating systems Put together, they generate about 15% of heat in Russia SSHG are applied predominately in the agricultural sector, residential, public and commercial buildings

6. Small heat supply systems design and performance problems Substantial supply overcapacity Excessive estimates of consumers’ heat loads Excessive centralization of small DHSs Low density of heat loads and corresponding high level of distribution losses in small DH networks No regulation of heat supply parameters to balance with demand High distribution systems maintenance costs undermine the competitiveness of small DHSs Lack of benchmarking indicators to assess and compare DHS performance Lack of incentives to improve efficiency and shortage of qualified personnel, especially in small-scale HGs

7. Installed heat capacity surplus (shortage) for the sample of 210 local DHSs (assuming normal capacity reservation 35%) Mainly small DHS

8. Specific fuel consumption in heat generation (sample of 230 Russian boiler houses) Mainly small coal and oil powered DHS

9. Heat losses in DHSs as a function of heat load density (sample of 190 Russian DHSs) High heat supply centralization efficiency zone Marginal heat supply centralization efficiency zone Effect of low heat supply networks maintenance quality

10. Operation of obsolete small heat generators faces a long list of problems High specific fuel consumption Unsatisfactory metering of fuel consumption and heat generation Low remaining lifetime of equipment Lack of regular boilers tuning Low quality of fuel leading to failures of burners Insufficient possibilities to regulate heat supply parameters Lack or poor quality of water preparation systems High fuel costs Shortage and low qualifications of personnel

11. Seven principles of municipal planning 1. Clear setting the desired performance indicators for years to come based on the benchmarking approach: reliability indicators, energy efficiency, quality of service, economic indicators 2. Reliability, quality of service and prices as drivers behind the level of centralization 3. Ability to translate performance indicators requirements into municipal measures and actions to improve and modernize heat supply systems in place with an account of energy efficiency as a valuable resource 4. Checking for the ability to mobilize investments to realize the proposed program 5. Shifting the affordability control focus from tariff to customers’ purchasing power. Energy costs for households have been staying in the narrow range of 2-4% in many countries for decades 6. Full life-cycle costs analysis with flexibility tests for energy prices volatility 7. Differentiation of connection charge based on heat loads density and reserve capacity

12. Investigating heat loads density in municipal energy planning Low density – market for natural gas, other fuels and renewables High density – market for DHS

13. Consumers’ behavior in the heat market is poorly known Uncertainty with the product on sale Deprivation of households’ “market rights” to determine the quality and quantity of product they buy and to negotiate the price Substantial overbilling for heat, which was never delivered Low heat meters and regulation devices saturation rate (below 10%) Low flat-level water consumption meters saturation rate (below 10%) Minor behavioral change in terms of hot water consumption even after flow meters are installed and heat tariffs are growing Poor insulation of buildings and insufficient development of housing weatherization services Lack of energy efficiency incentives where consumption is not metered, or there are no budget limitations Limited ability and willingness to cover escalating energy costs and strong opposition to any price increase

14. Limits to purchasing power: the Bashmakov wing Threshold 2: rigidity of payment collection measures brings no results Threshold 1: collection rate declines

15. Heat costs DHS companies are evaluated mainly based on the reliability of heat supply, whatever the costs. These costs are in the range from US$ 8 to 300 per Gcal Heat generation and transportation costs are often not allocated, but if allocated, heat transportation costs in many DHS exceed generation costs In many DHS, fuel efficiency improvement is not a crucial factor for general DHS efficiency improvements due to the low (10-25%) share of fuel costs There is no effective system to control costs, as well as build-in cost reduction motivation

16. Heat tariffs Lack of tariff flexibility –the tariff menu is poorly populated –no winter and summer tariffs –no differentiation in the connection charge –no appropriate fuel costs allocation for CHPs, which undermines its market share Cross-subsidies send wrong signals to customers and investors. They make decentralization attractive in the industrial sector and not attractive in the residential sector

17. Not just SSHG technology In Azerbaijan, small triple generation systems (electricity, heating and cooling) may be a valuable solution The problem of establishing small-scale heat generators is not just a problem of technology availability SSHG should be assessed based on a comprehensive approach accounting for many different factors Municipal energy plan should allow it to avoid duplication of gas supply and heat supply systems development Evaluation of municipal economic futures becomes a key. Used in the FUSSR General plans do not perform this role.

18. Key Challenges for SSHGs Uncompromised safety Ability to compete economically with large DHS Applied mainly in areas with low heat load densities Only small distribution systems attached, if any Higher flexibility in meeting heat demand fluctuations Reliable fuel supply (possible double fuel or gas/solar combination) High boiler fuel efficiency Affordability and low capital intensity of boilers with high working resource Appropriate balance between building efficiency and boiler capacity established through the life-cycle costs analysis Large variety of boiler capacities on sale and hot water storage to escape oversizing Low equipment service costs