Warming to CHP and district heating refurb

21 February 1999

In the field of combined heat and power and district heating the opportunities outweigh the challenges in Central and Eastern Europe

Under the command economies of the Soviet Union and the countries of Central and Eastern Europe, energy was an entitlement of the population and was provided by the state as a resource for which there was no need to save or indeed to measure consumption. As with many other products, energy was allocated to industry, district heating systems and the domestic consumer based on theoretical calculations of the consumption not on the actual consumption at the time.

The energy utilities were required to measure output not productivity and fuel was allocated to organisations and not sold. There is a very limited history of metering consumption and therefore it was impossible to ascertain the efficiency of use.

When compared with the best equivalent in the West the Central and Eastern European economies are very wasteful and the scale of the wastage presents a significant opportunity for Energy Services Companies (ESCOs), where the main market for energy and cost reduction is in energy use and distribution not in bulk generating capacity.

Urban heating opportunity

Urban heating presents a major opportunity for ESCOs. From Prague to Vladivostock around 80 per cent of the urban population is served by district heating, amounting to no less than 185 million consumers. For example, in Ukraine all the major towns use district heating, with the total population served being around 45 million people. The operation of district heating is thus a utility of comparable proportions to that of electricity or gas.

District heating can compete on cost terms but only when the principal generating technology is cogeneration. One of the major challenges for economies like Ukraine is to integrate electricity and heat provision through cogeneration in a way that maximises the benefits of the technology, whilst satisfying the needs of the emerging market economies in terms of privatisation and liberalisation.

Wider use of cogeneration can contribute to a substantial reduction in CO2 emissions and developments in Poland will be a vital factor – it accounts for almost half the emissions of the whole of Central and Eastern Europe. In a recent market study by COGEN Europe, the potential for cogeneration is put at 15 000 MWe, or 40 per cent of total power production.

District heating systems are significant assets to CIS and Central and Eastern Europe. The challenge is to supply heat to them from highly efficient cogeneration and integrate their operation into both the electricity and energy demand sectors.

Cogeneration is a relatively expensive investment, hence the economic justification is sensitive to the balance of energy prices over a number of years. At present, there is little long-term experience of energy pricing related to market mechanisms. It is thus imperative that pricing policies are implemented that result in long-term stability in the energy market.

Finance is always a potential barrier to the development of cogeneration projects, even in Western Europe. To offset the need for industrial companies and municipalities to find the capital to invest in the cogeneration for their sites, a range of alternative financing options are available. These options include: leasing cogeneration equipment, third party finance and full contracting out through energy service companies (ESCOs). There is often little or no experience with any of these financing mechanisms for cogeneration and little, if any, for other types of energy project. Some of the criteria needed to attract foreign investors are still to be resolved. In Western European countries, where the financial regime allows third party investment, such as the United Kingdom, ESCO-funded projects account for around 50 per cent of all cogeneration projects. In economies like Ukraine, where access to large amounts of capital to invest in cogeneration is likely to be extremely difficult for the foreseeable future, ESCO-type projects may be the only way forward. Energy Service Companies are starting to penetrate the cogeneration markets of Poland, Czech Republic and Hungary.

There are plenty of large international corporations with both the capital and the interest and expertise to invest in cogeneration projects in Central and Eastern Europe. Whether they do or not is however dependent on creating the right environment to attract the investment.

Sample of current Cogen projects in eastern Europe

Rehabilitating district heating


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