District heating tariffs as a tool to change consumers’ behaviour

Klaus SørensenConsul GeneralRoyal Danish Consulate

St.Petersburg

How to price DH?There is no single and correct mathematical solution to the problem of pricing DH.Instead, one can say that a tariff should satisfy a number of criteria, which are important for the DH company, the customers and the national energy authorities.

What makes a good tariff?

Inexpensive and clear to measure the components.Inexpensive to administrate.Easy for the consumers to understand.Accepted by the consumers as reasonable.Inform the consumers about the real cost structure of the heat supply.Encourage the consumers to use heat efficiently for improving comfort.Encourage the consumers to develop least-cost energy saving measures.

Tariff regulation DH is a vital part of the infrastructure of cities and the capital intensive network is therefore a typical natural monopoly.There are two overall methods of price regulation:

A fixed tariff levelA cost based tariff level

A fixed tariff level The regulating body gives the DH company license to sell heat at a guaranteed price. This system does not encourage the implementation of least cost energy saving measures on the demand side, as the overall objective of the owner is to make profit on the business of selling heat.

A cost based tariff levelThe regulating body allows the DH company to include only the absolutely necessary costs in the price.The consumers have the right to complain to the regulator.

This principle is logical if the DH companies, like in Denmark, are mainly owned by the consumers directly (as consumer co-operatives) or indirectly (as municipal companies).This system does encourage least-cost energy saving measures on both supply and demand side, as the overall objective of the DH is to provide the thermal comfort at the lowest possible total costs.All profit is immediately used to lower heat prices or to invest in energy efficiency measures.

Individual tariffs based on general guidelines

The DH companies alone have the responsibility of calculating tariffs.The District Heating Association, which is the democratic organisation uniting almost all DH companies, prepare tariff guidelines in co-operation with some of the member companies.The guidelines, which also include general and technical conditions for the customer relationship, have been presented to the Danish Energy Regulatory Authority.The DH companies use the main principles of the guidelines.

Identify the customerThe first and most important step in introduction of DH tariffs is to identify each customer as a legal body.This is not regarded as a problem in Denmark as apartment buildings are owned by condominiums, housing co-operatives and housing companies with local democratic departments.Organisation of apartment buildings is a major problem for the heating and housing sector, in new markets. It is difficult to sell DH to a building if you can not find the customer!

Point of saleIdentify the point of sale between the DH company and the customer.Tradition that the point of sale is at the point where the pipes enter the cellar wall. Thus the customer then replaces the old boiler with a new DH substation.A new trend however, involves DH companies offering to deliver and install the DH sub-station for the consumer.The DH tariff will always cover all heat which is delivered to the building for all purposes.

Case 1: Fixed tariffFixed charge only: Euro/m2 floor

Previously used by many utilities in Denmark and is used in DH systems before meters are introduced.The advantage is that it is simple and cheap.The disadvantage is that there is no incentive to save heat and flow consumption.

Case 2: Fixed annual tariff Fixed component only: Euro/m3/h

Could be relevant for constant flow systems which are balanced every year.The consumers will pay in accordance with their share of the flow, which could be measured by a portable flow meter once a year after the system has been balanced.

Case 3: Variable heat tariff

Variable charge: Euro/GJ (or Euro/Gcal)

This tariff is often used for consumers who have installed heat meters.The advantage is that it is very simple for the consumers to understand.

Case 3: Variable heat tariffMany disadvantages:

Does not reflect the real cost structure, as a significant part of the costs are independent of the variable consumption.Does not reflect the costs of flow consumption and the consumer has no incentive to reduce the return temperature.The consumer gets too strong incentives to save heat and to supplement with heat, for example, from individual stoves.Difficult for the DH company to forecast the heat price

Case 4: Two part tariff with energy meter

Fixed capacity charge: Euro/m2 floorVariable charge: Euro/GJ heat

This tariff, with a heat meter, is used with success by many DH companies.The advantage is that the consumers are billed for the energy they consume.The disadvantage is that there is no incentive to cool the DH water and hereby reduce the return temperature.

Case 5: Two part tariff with flow meter

Fixed annual charge: EuroFixed capacity charge: Euro/m2 floorVariable charge: Euro/m3 flow

This tariff, with a simple flow meter instead of a heat meter, is used with success by many DH companies.The advantage is that simple meters can be used and the consumers get a strong incentive to reduce the flow and thus the return temperature.The disadvantage is that it may be necessary to install thermostat regulated bypasses in the end of the network to ensure a reasonable low difference in supply temperature.

Case 6: Three part tariffFixed annual charge: EuroFixed capacity charge: Euro/m2 floorVariable heat charge: Euro/GJ heatVariable flow charge: Euro/m3 flow

This tariff has the advantages of the above two cases and it is fair to say that it has none of the disadvantages. The ratio between the three last components could be, for example, in the order of 30:40:30.

Case 7: Three part tariff with cooling incentive

Fixed annual charge: EuroFixed capacity charge: Euro/m2 floorVariable heat charge: Euro/GJ heatCooling incentive:+/-Euro/GJ heat/0C

This tariff is becoming more and more normal to supplement the insufficient two-part heat tariff (case 4).

Why incentive tariffs?An overall wish to maintain a DH tariff as cheap as possible.This is achieved by reducing the costs for:

Production and transmission of the heatPumping for local distribution of water Heat loss in the local distribution net work

Incentive tariffsTariff for coolingTime tariffEffect/flow tariffTemperature tariff

Why incentive tariffs? Consumers are encouraged to balance the heating system and to invest in a better heating system.The tariff focuses on the temperature difference.The impact of the cooling incentive is neutral to the budget.

ConclusionGood DH tariffs are important in order to give the customers the correct incentives to develop least cost solutions.There is no single correct solution, but a number of principles can be used with success and even adjusted to the local conditions and preferences.The tariffs should divide the total costs among the customers in a reasonable way.The customers are the only ones to pay for the meters and for the administration of the tariff. If the customers have influence and understand the fairness and incentives of the tariffs, there is a hope that the customers will be happier to react to the tariff incentives and to pay the heating bill.

Tariff structure in RussiaWhere to Start

Law 261 allows to fix the tariff for 5 yearsEnergy audit goes for life cycle cost and first for project with pay back period less than 5 yearsIntroduce a fixed fee to finance the metersAlways use BAT ( Best Available Technology)

Tariff structure In RussiaGet Started

Introduce e.g. through the Housing and Dwelling Foundation to assure guaranties for credit up to 5 years for investment in BAT ( Best Available Technology) calculated after LIFE CYCLE COST Credit organisation In Denmark, world wide and in Russia are ready with credits for energy efficiencyNew Credit Scheme from Denmark is possibilities for energy efficiency loan with a grace period in the construction period so the saving will enough to pay back the loanAlso Credit to large Companies/organisations as shopping lines for e.g 100 Mio Euro

And this will Create Growth in Russia

BAT technology will attract FDI. EG by using BAT technology for pipelines a market in an

region for 10 Million EURO will create production and 50 workplaces.

Energy efficiency general creates local job in the sectors

FDI in BAT technology creates InnovationDenmark has today 60.000 Workplaces and

export for 10 Billion EURO ( 10 % of DK export)

Thank you

For further information:

www.Greencapacity.ruklasor@um.dk