Needs-Challenges-Barriers-Opportunities

Needs/challenges, barriers, opportunities

Country

Lithuania

Urgent Needs/Challenges

Lithuanian DH sector – very important energy sector in the country, delivering to final consumers’ biggest amount of energy after fuel sector. Together with new challenges arising with quick technological changes and fuel market, there still are unsolved important issues inherited from the past.

Having widely developed District heating technology in Lithuania during the times of planned economy country faced many problems when turned to market relations in whole energy sector and particularly in heat supply.

Fundamental energy sector reorganization started in 1997 by separation of heat sector and transfer of shares of newly established DH companies to municipal ownership. Regardless to warn of consultants, big debts of state energy company were left for new DH companies. Commercialization of the sector started later, and heat prices previously set by Government decree were inadequate to heat supply costs. Heat companies accumulated huge losses and some of them appeared in bankrupt situation. Some municipalities facing lack of funds for fuel purchase were forced to lease networks and generation sources to private investors. Today about half of total heat delivered to consumers is from networks, operated by private companies, including capital city Vilnius.

Important problems arise with consumers living in block houses, privatized apartment-by apartment and having no single owner. It is very complicated - almost impossible to find common decision on overall management of common house property, especially when talk goes about investment into buildings’ engineering system, building renovation.

Different income level, compensations for low-income families, empty or rented flats and legal basis requiring consensus of all apartment owners makes decision making process very complicated. Housing sector management problems partially determine slow building renovation process and negatively affect DH image because of high residents’ expenses for heating poor insulated buildings.

Recent oil and gas price shock raised new challenges for DH companies related to high prices of imported fuel, and need to elevate heat prices for consumers. Tough prices of indigenous fuel also raised following market principles, the elevation was considerable lower. Ability to produce heat from various fuels is essential for heat price stabilization, at the same time encouraging competition between fuel suppliers.

Aging networks is additional urgent need for DH companies. The simple task from first view in reality becomes rather complicated because of uncertainties in future heat demand, related to approaching building renovation program and lowering heat demand. The best choice would be postpone pipes replacement until new heat demand will be defined. However delay increases risk of pipe bursts and interruptions of heat supply. Such sad experience is known from accident 20 January 2006 in Telsiai DH system.

Relations with customers also need to be addressed at new level. Possibility for consumer to control owns heat consumption would be one of measures at consumer side in line with Energy Efficiency and Services directive.

Economy of heat supply needs to be addressed implementing full commercialization of the activity. Regulated heat tariffs rules were corrected introducing more flexibility with regard to rapidly changes of fuel prices, however, depreciation of assets do not ensures restoration of networks because of low bookkeeping value of DH routes.

Calculated profit/loss of the sector was positive during 2001-2006, nevertheless recent price shock and inadequate tariffs led to losses.

Fig. Estimated profit/loss of DH sector

Main Driving Forces

Under development of DHC in Lithuania we understand as increasing efficiency and better services for consumers. Expansion of networks and connection of new consumers’ is mainly related to newly constructed buildings, and there yearly rates of new routes are rather small, comparing with the length of already existing networks. New connections to DH networks are conditioned by Heat supply plans of municipalities. However not always new objects are connected to DH networks. Industrial buildings often prefer natural gas grid and cogeneration installations producing heat and electricity, or trigeneration installations.

Significant impact for modernization of heat generation equipment plays stronger emission standards and fossil fuel prices.

Modernization of consumers’ installations (building substations) is driven by commercial losses, which are related to improper measuring and accounting, especially for hot water supply.

Main Barriers

Relatively high payments of customers do not allow new investments increasing heat price. Investment plans of DH company should be approved by municipalities. Towns’ authorities usually do not agree with investments which raises heat prices. Bearing in mind low value of existing assets often it is impossible modernize existing infrastructure at the same price, and benefits do not cover project financing expenses though in long-term perspective the effect might be positive.

There still are shortages in legal base, related to common property management in block apartments, where high heating needs and payments are painful for majority of customers having average income. Comparatively low income level in the country is in contradiction with high costs of modern technologies.

Main Opportunities

DH in Lithuania’s towns supplies heat to about 75% of residential building area. The heat supply networks, most investment needed infrastructure, already is in place. It is assumed, that heat demand can be reduced by 40% if all buildings are renovated. Thus, existing networks have enough capacity for new consumers.

Dependence from imported fuel can be reduced significantly switching to indigenous local fuel resources – mainly biomass and municipal waste. Estimated local fuel potential allows increase local fuel share in DH to 70-80%. This is the one of main priorities for DH in Lithuania.

Widely used DH creates favourable opportunities for electricity production in DH generating sources. These advantages can be realized given adequate electricity feed-in tariffs are in place.

Draft Renewable Energy Acton plan foresee important role for EU 2020 energy and environment policy targets. DH is most suitable technology for large-scale biomass integration into energy systems, this way reducing security of energy supply and simultaneously diminishing emissions into atmosphere. Concerning efficiency of final energy use, DH can contribute by suggesting new energy services to consumers, including better heating control. This task can be solved only by tight collaboration with customers.

Share holders of DH companies are municipalities. They also are responsible for heat supply planning.

DH companies have strong representative organization – Lithuanian district heating association, which represents DH interests in legislation, public relations, international collaboration, dissemination of good practise and in some cases initiates studies related to DHC development.

Ministry for Energy is responsible for general energy policy, including implementation of the National Energy Strategy and country’s international obligations in energy sector.

Ministry of Environment is responsible for building sector regulations, including rehabilitation of buildings, end-use energy efficiency.

Separation of energy generation - supply-consumption chain between the two ministries negatively affects resources planning process.

Important role is plays independent heat producers, suggesting heat sources for DH.

National Control Commission for prices and energy (NCCPE), together with municipalities is responsible for heat pricing and in some cases decide on expediency of investments.

Decisions to invest into DH modernization is initiated either in preparing DH plans by municipalities, usually with involvement of independent consultants, or by DH companies. Investment plan in each case is necessarily should be adopted by municipality and NCCPE.

Both municipalities and NCCPE can refuse investment plan when it causes increase in heat tariff. Naturally, municipality, as owner of DH infrastructure have right to control modernization and investment processes and defend consumers’ interest against possible overspendings of monopolistic utility. NCCPE being arbiter in tariff setting should also estimate expedience of investment, as in tariff are included not only capital costs of investment, but also profit margin, depending of main assets.

DHC as infrastructure have three types of ownership – purely municipal or with part of shares belonging to private capital, generating sources – belonging either to DH company or private industry.

Most common operation model is municipal DH company, though a number of municipal companies are leased and operated by private operators. An activity of private operators is less transparent but with higher relative investments into infrastructure. It is difficult to judge on which model is better. Good and bad examples can be found in both categories.

Consumers are protected by laws (Civil code, Heat law), NCCPE, Heat supply regulations, representatives in municipalities and various NG consumers’ organizations. They have right and are invited to participate in legislating building. Transparency of heat supply business is the best way to protect consumers’ interests.

During 1997-2009 about 1.5 mlrd. Litas (~430 MEur) was invested into DH infrastructure.

Main part of investment is own money and ES funding. Some amount was received from Lithuanian Environment Protection Fund – mainly for modernization of generating sources. Generally, investment amounts (~60 MEur/a) are insufficient to modernize existing infrastructure for meeting foreseen targets. The most projects are relatively small – up to 1-2 MEur, excluding cogeneration project in Vilnius 23.5 MEur (2009).

Main investors in DHC are DH companies, private operators and ES funds. Capital costs of investment for heat tariff calculations is limited by Heat pricing rules as well as rates of annual depreciation. Therefore investments into DHC have long pay-of time and are not very attractive for investors, tough are less risky.

There are two main types of investments – indispensable restoring functionality of worn-out equipment and routes, changes required by environmental requirements, and those, which main reason is higher operation efficiency and cost savings. For second type return of investment during reasonable time is the main criteria.

District heating development priorities are formulated in the National Energy Strategy. Among them – 1) constructing of CHP plants with a total capacity of 400 MW in Klaipėda, Panevėžys, Šiauliai, Alytus, Marijampolė and other cities by 2020 (investments amount to approximately LTL 2 billion); 2) heat and electricity generation from indigenous and renewable energy resources, as well as from combustible waste; 3) construct a waste incineration facility, with the intended annual capacity of approximately 200 000 tons of such waste, by 2010 in Vilnius. During the period 2010-2025, to construct similar facilities in Kaunas, Klaipėda, Šiauliai and Panevėžys. 4) modernising heat supply systems by 2015: to construct reserve pipelines that would ensure their reliability and replace up to 75% of the current heat supply pipelines by using the support from the EU structural funds (investments amount to approximately LTL 1.4 billion);

Actual heat pricing regulations encourages investment into DH infrastructure by principle when profit margin included in heat tariff is calculated from assets value. The main risks for investor is competition from other heat sources if heat generation costs are too high, and disconnection of consumers. Disconnection of whole building is allowed by Heat sector law and there are such examples.

DH cost savings can be achieved buying cheaper waste heat from industry, reducing heat losses in networks and by using cheaper biomass fuel.

DH companies have to pay environmental taxes, profit tax, what is not the case for individual heating. Therefore areas of individual single family houses likely will not connect to DH and opposite – block apartment houses will be heated from DH systems. At present approximately 60% of newly built residential area is in single family and 40% - in block apartment houses. During 2007-2009 were built app. 1 million m² of living area annually. Likely newly connected area will remain app. 0.4 mill per year, what makes 1.14% of total DH heated area.

The areas in which intervention of policy-makers would be expedient, are improving of planning at municipal level, creation of favourable conditions for biomass and waste projects, allocation of necessary funds for support of energy efficiency in buildings, improving relations with consumers.