44988 China: Formal Report 330/08 De velopment of National He at Pricing China: Development and B of National Heat Pricing illing P olic and Billing Policy y March 2008 Formal R epor t 330/08 Energy Sector Management Assistance Program Energy Sector Management Assistance Program (Esmap) Purpose The Energy Sector Management Assistance Program (ESMAP) is a global technical assistance partner- ship administered by the World Bank and sponsored by bi-lateral official donors, since 1983. ESMAP's mission is to promote the role of energy in poverty reduction and economic growth in an environ- mentally responsible manner. Its work applies to low-income, emerging, and transition economies and contributes to the achievement of internationally agreed development goals. ESMAP interventions are knowledge products including free technical assistance, specific studies, advisory services, pilot projects, knowledge generation and dissemination, trainings, workshops and seminars, conferences and roundtables, and publications. ESMAP work is focused on four key thematic programs: energy security, renewable energy, energy- poverty and market efficiency and governance. Governance And Operations ESMAP is governed by a Consultative Group (the ESMAP CG) composed of representatives of the World Bank, other donors, and development experts from regions which benefit from ESMAP's assistance. The ESMAP CG is chaired by a World Bank Vice President, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Program's strategic agenda, its work plan, and its achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank, and from the energy and development community at large, to conduct its activities. Funding ESMAP is a knowledge partnership supported by the World Bank and official donors from Australia, Austria, Denmark, France, Germany, Iceland, the Netherlands, the State Department of the United States of America, Norway, Russia, Sweden, and the United Kingdom. ESMAP has also enjoyed the support of private donors as well as in-kind support from a number of partners in the energy and development community. Further Information For further information on a copy of the ESMAP Annual Report or copies of project reports, please visit the ESMAP website: www.esmap.org. ESMAP can also be reached by email at esmap@worldbank. org or by mail at: ESMAP c/o Energy, Transport and Water Department The World Bank Group 1818 H Street, NW Washington, D.C. 20433, U.S.A. Tel.: 202-458-2321 Fax: 202-522-3018 Formal Report 330/08 China: Development of National Heat Pricing and Billing Policy Anke Sofia Meyer and Bernd Kalkum Energy Sector Management Assistance Program 5035-FM.indd i 5035-FM.indd 5/29/08 1:58:22 PM 5/29/08 1:58:22 PM Copyright © 2008 The International Bank for Reconstruction and Development/THE WORLD BANK GROUP 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Produced in the United States of America First Printing March 2008 ESMAP Reports are published to communicate the results of ESMAP's work to the development community with the least possible delay. The typescript of the paper therefore has not been prepared in accordance with the procedures appropriate to formal documents. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this report are entirely those of the author(s) and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its board of executive directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the ESMAP manager at the address shown in the copyright notice. ESMAP encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. 5035-FM.indd iiii 5035-FM.indd 5/29/08 1:58:23 PM 5/29/08 1:58:23 PM Contents Foreword vii Acknowledgments ix Abbreviations and Acronyms xi Units of Measure xiii Energy Unit Conversion xv Currency Equivalents xvii Executive Summary xix Introduction xxxv Importance of Heat Price Reform xxxv Structure of the Report xxxvi 1. Background on Chinese Heating Sector and Heat Reform Initiatives 1 Drivers of Heat (Price) Reform 1 Rapid Growth of the Building Stock 1 Environmental Problems of Coal Use 1 The Centralized Heating Industry in China 3 Emergence of District Heating 3 Deficiencies of Traditional District Heating Systems in China 4 Viability of District Heating 6 Cost of District Heat and Cost Coverage 6 Consumers of Centralized Heat--Impressions from Household Surveys 7 Heat Reform Initiatives in China 9 Previous Reform Initiatives 9 2003 Government Heat Reform Guidelines and Follow-up 11 Vision of a Reformed Centralized Heating Sector in China 14 2. Heat Reform in Eastern Europe and the Role of Heat Pricing 17 Heat Pricing: Key Principles, Requirements, and Determination of Regulated Heat Prices 21 Basic Principles of Heat Price Reform 21 Caveats and Requirements 22 Determination of the Regulated Heat Price 22 Functions of Regulated Prices and Pricing Principles 24 Practical Issues I: Defining and Determining Costs 28 Practical Issues II: Cost Structure and Cost Distribution 32 iii 5035-FM.indd iii 5035-FM.indd iii 5/29/08 1:58:23 PM 5/29/08 1:58:23 PM CONTENTS Taxes 33 Profits 35 Cost-Reflective Pricing: Two-Part Heat Tariffs 36 Tariff Setting--How Many Customer Groups? 39 Tariff Setting--Uniform versus Individual Tariffs 41 Stimulating Efficiency Improvements 42 Heat Tariffs and Connection Costs 43 Conclusions 45 Promotion of Heat Metering and Consumption-Based Billing 46 Options for Metering and Controlling Heat Consumption 47 Issues in Consumption-Based Billing 49 Heat-Contract Modalities 49 Allocation of Heat Consumption and Costs to Consumers 50 Billing, Collections and Payment Terms 53 Impacts from Heat Metering and Consumption-Based Billing 54 Recommendations for China 57 3. Improved Heat Price Administration System 59 A New Regulatory Framework for the Centralized Heating Sector 59 Flexible Heat Price--Automatic Partial Adjustment 60 Coordination between Power, Bulk Heat, and Heat Pricing--Role of Cogeneration 63 4. Transfer of Payment Responsibility to Consumers, Transparent Subsidies, and Social Support for Low-income Consumers 65 Transfer of Payment Responsibility from Work Unit to Consumer 65 Compensation through Explicit Cash Payments 66 Social Support for Poor Heat Consumers 66 Conclusions 68 5. Implementation of Heat Price Reform 69 Implementation Strategy: Actions and Sequencing 69 Initial Implementation Experiences: Tianjin 72 6. Conclusions and Recommendations 75 Important Steps Forward toward Rational and Market-based Heat Pricing 75 Many More Steps Are Necessary to Move beyond the Transition Phase 76 Steps Needed to Achieve the Expected Results and Impacts 78 Moving from the Transition Phase to Real Heat Price Reform 79 Annex: Glossary of Heating Technical Terms 81 References 89 List of Formal Reports 93 iv 5035-FM.indd iv 5035-FM.indd iv 6/11/08 10:59:06 AM 6/11/08 10:59:06 AM Contents Boxes Box 1.1 Affordability of Heating--Results from Household Surveys in Eastern Europe 9 Box 2.1 District Heating in Eastern Europe 18 Box 2.2 District Heating in Western Europe 19 Box 2.3 Tianjin Methodology to Determine Two-Part Tariffs 31 Box 2.4 Poland--Extreme Tariff Differentiation Can Be Counterproductive 40 Box 2.5 Price Caps in the District Heating Industry 43 Box 2.6 Connection Fees in Tianjin and Other Cities 44 Box 2.7 Connection Fees in Europe 44 Box 2.8 Collective Heating Contracts in Poland 49 Box 2.9 Heat Metering and Consumption-Based Billing in Tianjin 50 Box 2.10 Heat Metering in Baotou 52 Box 2.11 Consumption-based Billing on a Monthly Basis 54 Box 2.12 Energy Savings and Reduced Heat Bills in Poland, 1992 to 2000 55 Box 2.13 Impact of Consumption-based Billing on Heating Bills in Bulgaria 56 Box 2.14 Thermo-Renovation in Lithuania 57 Box 3.1 DH Tariff Increases below Inflation in Poland, 1991 to 2000 61 Box 5.1 Experiences with Heat Price Reform in Tianjin 72 Figures Figure 1.1 Urban Building Stock More than Tripled in 14 Years 2 Figure 1.2 Heating Has Been the Fastest-growing Coal-use Activity 2 Figure 1.3 Heated Urban Residential Building Stock and Energy Implications 3 Figure 1.4 Climate Zones in China 3 Figure 1.5 Annual Average Household Heat Bills (in yuan) and Their Payment Sources, 2003 to 2004 8 Figure 1.6 Heat Bill Burden­Average of Four Cities (Heat Bill in Percent of Household Income by Income Group) 8 Figure 2.1 Estimated Average District Heating Prices in Europe (1999 to 2003) in Euro/MWh, without VAT 20 Figure 2.2 Procedure for Determining the Justified Costs 28 Figure 2.3 Cost Structure Based on Cost Distribution 33 Figure 2.4 Roles and Functions of the Two Tariff Components 37 Figure 2.5 Demand Variation of a Typical DH System 37 Figure 2.6 Load Curves for Different Consumption Patterns 40 Figure 2.7 Heat Sales per m2 in Poland and Finland, 1992 and 1999 (in GJ/m2) 55 Figure 2.8 Heat Sales per m2 in Poland and Finland, 1992 and 1999 (in PLN/m2 in 1999 prices, without VAT) 55 Figure 2.9 Distribution of Monthly District Heating Bills in Plovdiv, Bulgaria, 2002 to 2003 56 Figure 3.1 DH Tariff Increases and Inflation in Poland, 1991 to 2000 61 Figure 3.2 a­b Coal and Heat Price Development 2000 to 2005 62 Figure A.1 Schematic View of Typical District Heating System in China 82 Figure A.2 Energy Balance of Separate and Cogeneration of Power and Heat (for Solid Fuels) 83 Figure A.3 Building Internal Heat Distribution: One Pipe Vertical Risers Connected in Series 85 Figure A.4 Building Internal Heat Distribution: Horizontal Distribution with a Two-pipe System 86 Tables Table 1.1 A Vision of the Chinese Heating Sector Reform 12 Table 2.1 Alternative Approaches to Heat Price Reform Issues 23 Table 2.2 Cost-of-service Regulation versus Incentive Regulation 25 Table 2.3 International Comparison of VAT and Other Taxes for DH and Other Fuels, 2003 34 Table 2.4 Heat Prices for Residential Consumers 39 Table 4.1 Social Programs in Pilot Cities 67 Table 5.1 Heat Price Reform Components and Actions Proposed by Chinese Experts 70 v 5035-FM.indd v 5035-FM.indd 5/29/08 1:58:24 PM 5/29/08 1:58:24 PM 5035-FM.indd vi 5035-FM.indd vi 5/29/08 1:58:24 PM 5/29/08 1:58:24 PM Foreword Energy conservation is a high priority for China's Government, which has set an ambitious target of reducing 20 percent of energy consumption per unit of GDP by 2010. In addition to national benefits, this will yield significant contributions to worldwide actions addressing climate change. Achieving the energy conservation target requires joint efforts of industry, government and society at large. While technical innovations will play an important role in improving supply efficiency, major changes in consumption patterns and consumer behavior are equally needed. The Central Government's reform policies in the coal-based central heating sector and building efficiency are important for the environment and energy savings. Its proposed heat pricing and billing policy reforms will enable greater consumer control over consumption and create incentives for greater cost effective supply and efficient heat use. There is also recognition of the need for targeted heating subsidies for poor households together with heat pricing and billing reform. Progress has been made during the last few years, especially on the heat commodification agenda described in this report, with pilot efforts proceeding in various northern cities. Tianjin became the first large city to adopt reforms to fully shift responsibility for paying heat bills to consumers. A number of medium-sized cities have also implemented this reform, and plans are in fairly advanced stages in most cities. MOC guidelines calling for deployment of consumer-controlled heating systems within all newly constructed buildings are becoming more routinely observed. A wider variety of experiments in heat-metering technologies have been undertaken. The basic design of a new national heat pricing method has been completed, and adopted for large blocks of consumers in Tianjin for the first time in China, during the winter of 2005 to 2006. The World Bank has been a partner in these efforts, assisting in particular on strategizing according to economic principles and on expanding knowledge in China of practical international experience in addressing the issues, especially experience from Eastern Europe, where the Bank has been closely involved in heat system reforms since the late 1980s. Engaging through an initial study on "Opportunities to Improve Energy Efficiency in Buildings (2000)," a second technical study focused on heat metering and billing options (2002). The GEF investment project--China Heat Reform and Building Energy Efficiency (2005)--provides a mechanism for supporting physical investments in new, innovative building and heating system design and construction in support of the country'sheat reform and energy efficiency objectives, and related technical studies. This ESMAP-project supported a major joint Bank/MOC study, "Heat Pricing and Billing Policy," which has resulted in the design of the new national pricing method and the Tianjin piloting case. This report provides a summary of the results of the activities completed during the two stages of the ESMAP project implemented from 2003 to 2005. It develops recommendations for the reform of heat pricing and billing, based on the outputs of this project. It reviews the proposals of the pilot vii 5035-FM.indd vii 5035-FM.indd vii 5/29/08 1:58:24 PM 5/29/08 1:58:24 PM Chinese cities and national experts and, against the experiences in Western and Eastern Europe with heat pricing, recommends how heat pricing could best be reformed to achieve the objectives of heat reform in China, especially development of a more market-based and efficient heating sector that provides affordable services to consumers. Junhui Wu Sector Manager Transport, Energy and Mining Sector Unit Sustainable Development Department East Asia and Pacific Region viii 5035-FM.indd viii 5035-FM.indd viii 5/29/08 1:58:25 PM 5/29/08 1:58:25 PM Acknowledgments Heat pricing reform and the introduction of consumption-based billing are essential in making heat a commodity and introducing market mechanisms to the urban heating sector. In China, however, there is virtually no experience with billing of heat according to actual use or with two-part tariffs that are commonly used in the district heating industry in most countries. With the financial support from ESMAP, this project was implemented jointly by the East Asia and Pacific Energy and Mining Unit (EASEG) of the World Bank, the Ministry of Construction (MOC) and the Municipal Governments of the pilot cities--Tianjin, Changchun, Harbin, and Taiyuan--to provide transfer of knowledge from Eastern European experience in heat pricing and support the development of a heat pricing methodology and its practical application in those pilot cities. The Joint Study Team responsible for this report consists of Chinese national and social experts, local experts from the four pilot cities and international experts. Anke Meyer and Bernd Kalkum are the principal authors of this report, prepared under the guidance of Robert P. Taylor, the leader of the World Bank team, which also included Liu Feng and Gailius Draugelis. Liu Heming of the Urban Construction Department of MOC provided leadership on the Chinese side. The report is based on extensive discussions among the Joint Study Team members and the following reports completed during 2003-2005: · Guidelines for Setting Heat Tariffs, March 2003 (Bernd Kalkum) · International Experience in Heat Pricing and Billing: Issues in Design and Implementation and Lessons Learned, September 2003 (Anke Meyer) · Guidelines for Tianjin Team to Set Heat Tariff in the First Phase, August 2003 (National Experts Team: Chen Ming, Jiang Runyu, Di Hongfa, and Xu Wei) · Proposal on Tianjin Feasible Heat Pricing and Billing Policy, October 2003 (Tianjin Experts Team: Qi Jinzhou, Ma Jiuxian, Wang Fuquan, Lu Yue, and Liu Yaohao) · Proposal for a Framework for Heat Pricing in China, Interim Report, February 2004 (World Bank Team: Anke Meyer, Bernd Kalkum, Liu Feng, and Bob Taylor) · Heat Price Management Reform--a possible outline, Memo to MOC, April 2004 (Bernd Kalkum and Anke Meyer) · Summary on Heat Metering in Tianjin, January 2005 (Tianjin Experts Team: Qi Jinzhou, Ma Jiuxian and Liu Yaohao) · Research on Heating Price Determination and Billing Policy in Changchun, January 2005 (Changchun Experts Team: Shi Jiusheng, Meng Jicheng and Ding Wenyong) · Research on Heating Price Determination and Billing Policy in Harbin, January 2005 (Harbin Experts Team: Lu Qingtao, Fang Xiumu and Zou Zhiwei) · Research on Urban Heating Price and Billing Policy in Taiyuan, January 2005 (Taiyuan Experts Team: Yang Yuan, Su Baoqing and Sun Kun) · Study on Urban Heat Tariff Reform and Heat Tariff Policies, June 2005 (National Experts Team: Chen Dezun, Chen Ming, Jiang Runyu, Di Hongfa and Qi Jinzhou) ix 5035-FM.indd ix 5035-FM.indd ix 5/29/08 1:58:25 PM 5/29/08 1:58:25 PM · Impact and Mitigating Policies of Urban Heat Reform on Low-Income and Poor People, March 2005 (Social Experts Team: Zhang Xiulan and Xu Yuebin) · Recommendations for Heat Pricing and Billing Reform in China, Final Report to MOC, June 2005 (Bernd Kalkum and Anke Meyer) The various reports and recommendations were discussed in several workshops between 2003 and 2005.At the final workshop in Huludao (Liaoning Province) in July 2005, cosponsored byASTAE, the results were disseminated to participants from central government and officials and experts from almost all the northern provinces. The valuable inputs and support to the entire project team by Hao Bin (MOC) are much appreciated. The reviewers of the interim report, Karl Jechoutek, Kari Nyman, and Apurva Sanghi, as well as Carolyn Gochenour, Peter Johansen, and Pekka Salminen, provided valuable comments, which informed the second phase of the project. x 5035-FM.indd x 5035-FM.indd 6/2/08 8:20:04 AM 6/2/08 8:20:04 AM Abbreviations and Acronyms ADB Asian Development Bank ASTAE Asia Alternative and Sustainable Energy Program CHP Combined Heat and Power CO2 Carbon Dioxide DH District Heating DHW Domestic Hot Water EHP EuroHeat&Power ESMAP Energy Sector Management Assistance Program EU European Union GEF Global Environment Facility HOB Heat-Only Boiler IBRD International Bank for Reconstruction and Development IFI International Financial Institutions MLS Minimum Living Standard MOC Ministry of Construction NDRC National Development and Reform Commission RBEES-95 Residential Building Energy Efficiency Standard of 1995 RoR Rate-of-Return SOE State-Owned Enterprise VAT Value-Added Tax xi 5035-FM.indd xi 5035-FM.indd xi 5/29/08 1:58:25 PM 5/29/08 1:58:25 PM 5035-FM.indd xii 5035-FM.indd xii 5/29/08 1:58:26 PM 5/29/08 1:58:26 PM Units of Measure GCal Gigacalorie (109 calories) GJ Gigajoule (109 joules) kg Kilogram (103 grams) kWh Kilowatt-hour (103 watt-hours) m2 Square meter Mt Million tons (metric) MWe Megawatt electricity (106 watts) MWt Megawatt thermal (106 watts) MWh Megawatt-hour (106 watt-hours) TCE Ton of standard coal equivalent (metric) W Watt xiii 5035-FM.indd xiii 5035-FM.indd xiii 5/29/08 1:58:26 PM 5/29/08 1:58:26 PM 5035-FM.indd xiv 5035-FM.indd xiv 5/29/08 1:58:26 PM 5/29/08 1:58:26 PM Energy Unit Conversion 1 GCal = 1.16 MWh = 4.186 GJ 1 GJ = 0.278 MWh = 0.239 GCal 1 MWh = 0.86 GCal = 3.6 GJ 1 TCE = 7.0 GCal = 29.31 GJ = 8.314 MWh xv 5035-FM.indd xv 5035-FM.indd xv 5/29/08 1:58:26 PM 5/29/08 1:58:26 PM 5035-FM.indd xvi 5035-FM.indd xvi 5/29/08 1:58:26 PM 5/29/08 1:58:26 PM Currency Equivalents Local currency per US$1 June 2003 July 2006 EU (EUR or ) 0.86 0.78 China (yuan) 8.28 8.01 xvii 5035-FM.indd xvii 5035-FM.indd xvii 5/29/08 1:58:26 PM 5/29/08 1:58:26 PM 5035-FM.indd xviii 5035-FM.indd xviii 5/29/08 1:58:27 PM 5/29/08 1:58:27 PM Executive Summary Market-basedreformsinChina'surbancentralized Reform Commission (NDRC) and the Ministry of heating sector are essential to addressing the Construction (MOC) jointly issued a regulation perpetualinefficiencyofasectorbuiltonwelfare- in October 2005 to allow the partial automatic based principles. The reform of heat pricing and adjustment of heat prices in case of coal prices billingisacrucialpartofoverallheatreform,since changes, an important feature recommended in it will commodify heat and thus create economic the heat pricing methodology. incentives to provide and use heat much more Applying this methodology is a first and efficiently. Heat pricing and billing reform important step to implement a more rational requires substantial changes in four interrelated heat pricing system in the cities of China's areas: heating zone. However, the methodology needs to be developed further in order to move from (1) Transfer of heat payment responsibility a transitional stage toward a fuller realization from work units to consumers, a change of the heat reform objectives. In particular, the from invisible to visible heat subsidies incentive features for heating companies need and an improved targeted subsidy to be strengthened. system; The methodology for determining a two- (2) Determination of an economically effi- part tariff was first developed for Tianjin by a cient and equitable heat pricing system; team of local experts (city working group), along (3) Promotion of heat metering, consumer with national and international experts under control of heat consumption and the leadership of MOC and with funding from consumption-based billing; the World Bank's ESMAP program. The Tianjin (4) Improvement of the system of heat price methodology has subsequently been applied for administration. additional case studies in Changchun, Harbin, and Taiyuan, and experts there accepted it for Analytical and practical work in several pilot application. It has been broadly discussed in cities during 2003 to 2005 has resulted in the several national seminars and is recognized development of a heat pricing methodology that among national and municipal officials and determines heat tariffs based on the full costs of other experts in China's heating sector as an the core heating business. This methodology can important step forward in heat pricing reform. be used to calculate heat tariffs for unmetered The World Bank and its international customers, and it can be transformed into a two- experts contributed to the development of the parttarifftobeusedforconsumption-basedbilling new heat pricing methodology by expanding of metered customers. The methodology was knowledge in China of practical international adopted for large blocks of consumers in Tianjin experience in addressing the issues, especially forthefirsttimeinChinaduringthewinterof2005 experience from Eastern Europe where the to 2006. It is also the basis for the new national Bank has been closely involved in heat system heat pricing management method coming into reforms since the late 1980s. There, similar forceinlate2007.TheNationalDevelopmentand problems had to be overcome, and a slow and xix 5035-CH00_EXSUM.pdf xix 5035-CH00_EXSUM.pdf xix 5/27/08 8:16:14 AM 5/27/08 8:16:14 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY somewhat circuitous process eventually led to Energywasteinspaceheatingisenormousin heat pricing and billing reforms that resulted Chinesebuildings,whichrequire50to100percent in substantial energy savings, lower heat more energy to heat, compared to buildings in bills for consumers, and a more efficient and comparable climates in North America and commercially oriented heating industry. Heat Europe. This is in large part due to inefficient reform in Eastern Europe was rarely the result heatproductionanddistributionandtheabsence of smooth implementation of carefully planned of basic economic incentives for consumers to and sequenced interventions. Results were save energy. The centralized heating systems achieved based on trial and error rather than were built according to designs similar to those on comprehensive strategies aiming to reform employed in Russia and other Eastern European the (district) heating sector. The analysis of the countries.1Automation, metering, and consumer Eastern European experience and knowledge control used to be nonexistent. Technical and of the pros and cons of approaches and their operational inefficiencies are far greater than practical implementation was an advantage to in modern, energy-efficient, and demand- Chinese decision makers in devising a reform responsivedistrictheatingsystems.Eventhough process that could avoid much trial and error standards for the thermal performance of new and lead to a smoother implementation with residential buildings have existed since 1986 quicker results. and were updated in 1995, a survey carried out China has one major advantage over Eastern in 2004 by MOC shows that at least 70 percent Europe, in that the economy and urban incomes of the construction does not comply with the are growing rapidly, and major new housing and standards that were designed to save 50 percent heating systems are being built. This may enable of the energy required for heating. China to leapfrog and leave behind the planned Space heating in China is almost exclusively economymorequicklybyallowingacompetitive dependent on coal, and is fast growing. About provision of heat where possible. This would be 200 million tons of raw coal were used to heat more similar to the Western European heating buildings (both residential and non-residential) sector model, which does not rely on regulation in northern cities and towns in 2002. This of the sector but on competition among various accounts for 10 percent of total energy use, heating modes and fuels. 15 percent of coal use, and over 50 percent of building energy use in China per annum. Four million tons of sulfur dioxide emissions and 400 Background: Growth in million tons of carbon dioxide (CO2) emissions Construction, Centralized per year are produced as a result. Heating and Coal Use The urban residential building stock in northern China is expected to grow from About 250 million people live in the densely 4 billion m2 in 2004 to 10 billion m2 in 2024. populated urban areas in China's heating zone, If heating systems would adopt modern consisting of the cold and severe cold regions technologiesanddemand-drivenoperationsand in the northern part of the country, where buildings would be built according to advanced three to six months of space heating per year energy efficiency standards, the increase in are needed, thus constituting a vital part of heating coal use and relevant emissions need not people's livelihood. About 70 to 80 percent of follow construction growth. It could be reduced this population is served by centralized heating to about one third compared to a baseline systems, which grew 10 times in total service scenario; see Figure 1.3. area between 1990 and 2004, along with the However, until very recently, there were no urban construction and modernization boom. economic incentives for reducing energy waste 1 Unlike in Western and Eastern European district heating systems, domestic hot water is usually not provided centrally. xx 5035-CH00_EXSUM.pdf xx 5035-CH00_EXSUM.pdf xx 5/27/08 8:16:15 AM 5/27/08 8:16:15 AM Executive Summary in heating systems and buildings. The urban with State Council approval. In June of 2006, heatingsectorstilloperatedonprinciplessetback MOC established a new Heat Reform Promotion in the 1950s, when central heating started out as Office, and this was followed with instructions at a limited all-paid welfare for state employees the National Heat Reform Working Conference in severe cold regions. Heating was still largely in August 2006 for localities to set up specific regarded as a public service supplied to urban offices to lead implementation of municipal heat residents as welfare, paid for by the work units reform efforts, beginning with the development (employers). Heat was not metered and billed of specific action plans. Heat reform in general on basis of square meters of heated area. and the need to achieve significant energy Centralized heating companies are under savings in the heating and building sector has the management of local governments. They also been emphasized in China's "11th Five-Year have largely been able to cover their operating Plan." expenses from sales revenues, even though at Heat reform involves a series of intertwined times additional government funding had to be issues, all of which need to be addressed brought in, for example, in the mid 1990s when for success to be achieved. One set of issues economic trouble in state-owned enterprises revolves around the need to "commodify" heat resulted in very low collection rates, or during through reforms in the areas listed on page 1. thepastfewyearswhensteepcoalpriceincreases A second set of issues revolves around the were not matched by timely tariff increases. need to reposition the heat supply industry Many companies have had problems in general as separate from government, including: carrying out maintenance and replacement of (i) consolidation among the many small urban worn-out components. Expansion of heating heating companies, developing blocks for infrastructure is routinely financed in large part franchising out, restructuring heating companies from connection fees from real estate developers into proper corporate entities that can access and, thus, ultimately by consumers. financingfornewinvestment,andintroductionof modern heat utility operations and management practices, and (ii) development of a government Heat Reforms to Move regulatory and industry oversight system divorced from heating company ownership, the Heating Sector into operation, and management. the Market Economy and Progress has been made during the last few Reduce Energy Waste years, especially on the heat commodification agenda, with pilot efforts proceeding in various China's top leadership is determined to northern cities. Tianjin became the first large city reform the old heating economic system into a to adopt reforms to fully shift responsibility for commercially oriented system conducive to the paying heat bills to consumers, including the market economy, with a completion target of compensation of civil servants. A number of three to five years from now. In 2003, the eight medium-sized cities have also implemented this involved central government ministries and reform, and plans are in fairly advanced stages commissions jointly issued "Guidelines for Pilot in most cities. In most cities, poor households Projects of Urban Heating Reform," with the receiving social welfare payments (di bao) under Ministry of Construction (MOC) designated as the existing social assistance system based on the working secretariat, officially launching the the Minimum Living Standard (MLS) Scheme reform. Following two years of piloting efforts are (partially) exempted from heat bill payments and experimentation in pilot cities in the 16 or have them partially covered from special northern provinces and autonomous regions, governmentfunds.NewMOCguidelinescalling the eight ministries issued "Instructions to for deployment of consumer-controlled heating Further Push Forward Urban Heat Reform," systems within all newly constructed buildings xxi 5035-CH00_EXSUM.pdf xxi 5035-CH00_EXSUM.pdf xxi 5/27/08 8:16:16 AM 5/27/08 8:16:16 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY are becoming more routinely observed. A To promote a more rational use of heat wider variety of experiments in heat-metering energy, consumers need technology and technologies have been undertaken. economic incentives to control and regulate their heat consumption. Billing based on metered consumption would allow adjustment of heating The Traditional Heat costs to actual consumption.Anew heat pricing Tariff System and billing regime is necessary. Heat bills for all customers are currently calculated based on prices per square meter Determination of a Heat of heated area times heated area in square Pricing System Compatible meters, regardless of the heat actually used. with the Market Economy Tariffs for residential customers range between 14 yuan/m2 per heating season in the southern Theory of heat pricing. In competitive markets, part of the heating zone and 32 yuan/m2 in prices that are set equal to marginal costs best the colder northeastern provinces. Tariffs for provide the productive efficiency signals. For other customers are somewhat higher. In each network-based services, the marginal cost to municipality heat is typically provided by many provide the service is, however, lower than the heating companies, for example, more than average cost, due to the cost of building and 200 in large cities such as Tianjin or Shenyang maintaining the network. Marginal cost pricing and on the order of ten in smaller cities. Heat would result in financial deficits for the service tariffs are set by the municipal governments at provider. A two-part pricing structure can a uniform level for each customer group for all reconcile productive efficiency and financing companies in one city.2 In many municipalities objectives. A price per unit set at the marginal heat tariffs were kept stable for many years, cost of supply will preserve the incentives to despite significant increases in input prices, produce and consume efficiently, while a fixed particularly coal, which has more than doubled fee will recover the deficit. A price equal to the in price since 2000 to around 400 yuan per averagecostswouldalsoeliminatethedeficitbut metric ton at the start of the 2005 heating lead to a lower-than efficient level of production season. and consumption. Average annual household heating bills Variouspricingprinciplesforregulatednetwork- range from 700 yuan to 1400 yuan, often paid basedpublicservicessuchastelecommunications, at or even before the beginning of the heating electricity, natural gas, and water supply have period. This constitutes about 4 percent and been developed during the past few decades that 23 percent of the income for high-income and combine efficiency and financing objectives. They poor households, respectively, but since work fall into two basic groups: cost-of-service and units still pay a large share of the bill, the de facto incentive pricing. burden is only about half of that amount. For di In the first category, cost-plus pricing is the bao households with partial exemption from heat most common pricing principle applied in the bill payments, the de facto income burden would heating industry, while rate-of-return pricing be 9 percent, but the actual heating expenditures was once very common in the utility sector in of poor households receiving neither subsidy North America. Under both principles firms nor work unit support represent on average cover costs, but they cannot extract extra profits 14 percent of their income.3 and thus have no incentive to improve efficiency. 2 Some cities have different tariffs for heat from different generation technologies, e.g., cogeneration versus heat-only boiler (Shenyang and Changchun) or different fuels, coal versus gas-fired systems (Beijing). 3 These data are based on a four-city survey in 2004, carried out within the scope of this ESMAP project. Official statistical information is not available, since heating is not one of the official statistical expenditure categories. xxii 5035-CH00_EXSUM.pdf xxii 5035-CH00_EXSUM.pdf xxii 5/27/08 8:16:17 AM 5/27/08 8:16:17 AM Executive Summary Since profits are based on costs or investments, be subject to the same tariff within one city, firms have incentives to inflate them. The costs whether all customers should have the same of regulation are high because tariffs need to be tariff, and how to provide incentives to suppliers approved frequently when costs are changing. and customers for efficient use of energy. While Price caps are the most widely applied there are several choices, the decision will largely incentive pricing mechanism.Amaximum price depend on the particular historical situation and is set for goods or services for a certain period institutional environment in a country. of time; price increases are limited to inflation Cost basis. The starting point for the (in the simplest form) minus a factor reflecting design of heat tariffs (regardless of the pricing the expected productivity increase in the sector principle that will be applied in practice) is the (X factor). Within the time period of validity analysis of the costs of providing the service. of the baseline price, the firm can retain any There is general agreement that all costs that cost savings as additional profits. At the next can be attributed to heat supply should form price review, those efficiency improvements the basis for heat tariff calculation--that is, may result in lower prices, thus benefiting the costs caused by the supply of the service consumer. This form of price regulation requires should be fully recovered. The relevant some form of regulation of service quality that costs are usually those that are justified or might otherwise be lowered in the attempt to indispensable, relating to the core heating minimize costs. business. Although well-defined accounting In practical applications, rate-of-return costs should be the basis for determining the and price-cap regulation approaches tend to justified costs, they are past costs. Since heat converge: Initial prices tend to be cost-based tariffs should cover costs in coming periods, under price-cap regulation and many rate-of- costs and heat demand need to be forecasted return regimes use price adjustment clauses. The as a basis for heat tariffs. ability of balancing the provision of incentives Within this project, the city working groups to improve efficiency and to reduce costs, chose to use a mix of adjusted accounting costs financing requirements, and eventual sharing and standard costs, and to use past costs. Details of benefits with consumers makes (hybrid) price- are on page xxv (see Heat price determination in cap regulation the preferred approach. Although Tianjin and other pilot cities). The reason for this the information requirements seem to be too procedure is that the many heating companies complex for immediate application in a large that typically exist in each city do not apply welfare-based heating sector such as in China, it a uniform accounting framework. Costs of could be the preferred approach in the mid-term. The different companies are therefore currently not initial prices would be cost-based with profits directly comparable. based on the value of assets, and they would be Profitsareremunerationsforcapitalemployed adjusted over time according to an adjustment in a firm and important to attract investment to formula. The X factor could be set to zero an industry. A profit related to costs creates initially to support the financial recovery of the incentivestoinflatecostsandefficientcompanies sector characterized by under-capitalization on that manage to reduce costs would be punished the one hand and high investment requirements with lower profits. Relating profits to the capital on the other hand. employed in a company (i.e., value of assets and Practical considerations for determining working capital) creates better incentives, but it regulated heat prices. The main issues to be may lead to overinvestment. decidedindeterminingheatpricesforaregulated For most heating companies in China, industry are what the cost basis should be (this is ownership of assets is unclear, and in many true regardless of the pricing principle that will cases, inventories of assets do not exist. Asset be applied in practice), how the profit margin values may not reflect the real values, and may would be determined, what the price structure have to be restated. Until ownership is clarified shouldbe,whetherallheatingcompaniesshould and the proper valuation of assets is realized, xxiii 5035-CH00_EXSUM.pdf xxiii 5035-CH00_EXSUM.pdf xxiii 5/27/08 8:16:17 AM 5/27/08 8:16:17 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY either estimated standard asset values (similar as Tianjin, while in their cases variable costs to the approach of standard costs) or costs could are higher than fixed costs. Although interim be used as a basis for profits. The latter was the measures may be required during the initial choice of the city working groups. They also phases of the reform, tariff components should used different profit rates for residential (lower) best follow the real cost structure as closely as and nonresidential customers (higher), which possible, at least as long as consumer behavior results in some cross-subsidization. is not known and consequences for heat supply Price structure. Heat supply creates fixed companies and consumers cannot be assessed and variable costs, and heat demand can properly. fluctuate substantially, even for a given ambient Number of customer groups. Not only the total temperature level. To minimize the volume heat quantity consumed, but also the structure risk from those variations in demand, heating of the heat demand (consumption pattern) has companies prefer to use two-part tariffs where an impact on costs. In the case of lump-sum the share of the two tariff components reflects tariffs, differences in consumption are not taken the share of the two cost components. A into account and are thus not reflected in the properly designed two-part tariff can contribute heat bill. But with a two-part tariff, different to the optimal allocation of resources by consumption levels and different consumption providing incentives to consumers about energy patterns will result in different heating bills, consumption and savings through the energy even with the same tariff, provided the fixed charge, depending on metered consumption part of the tariff is based on capacity (kW) (kWh) and about the optimal heat load or rather than on area (m2). This is another capacity through the fixed or capacity charge, benefit of an appropriately designed two-part depending on the heat load (kW).Alternatives to tariff. Although the location of a customer two-part tariffs are one-part tariffs, either as a flat within a network also has an impact on costs, rate that depends only on the size of the heated this is generally disregarded in tariff design area or as an energy-only tariff that depends because it would be too complex and costly to only on the heat consumed. A flat rate tariff as determine a multitude of tariffs. One tariff for it currently exists does not require metering, all average customers is therefore generally but also does not provide any incentives for sufficient. Heating companies conclude special consumers and involves substantial volume contracts with negotiated prices with special risks for the supplier. With a one-part tariff customers. depending on consumed heat energy, consumers In the four case studies, tariffs for residential would have maximum incentives to save energy, and nonresidential customers are the same butheatsupplierswouldnotbeabletomatchthe except for higher profit rates for non-residential reduction in sales with an equivalent reduction customers. Tianjin unified tariffs for all types of in costs, due to the fixed costs. A two-part heat nonresidential customers. tariff covering all justified costs of the heating Uniform citywide or company-specific tariffs. businessisconsideredbestpracticeandiswidely Setting company-specific tariffs reflecting the applied in Western Europe and increasingly in real supply costs of each firm provides signals Eastern Europe. about the performance of the firm. Company- All Chinese experts involved in this study specific tariffs can provide better incentives to supported the application of a two-part tariff. reduce costs with an appropriate tariff system In Tianjin, the local expert group decided to than uniform tariffs. In Europe, district heating base the fixed charge on square meters, since tariffs are almost universally company-specific. heat loads are not currently known. They also Benchmarking within and across cities and decided to use equal shares of fixed and variable publication of tariffs and benchmark results charges, even though fixed costs have a slightly is one way to exercise some pressure on lower share in the cost structure. The other management of heating companies with high three cities opted for the same tariff structure tariffs to reduce costs and improve efficiencies. xxiv 5035-CH00_EXSUM.pdf xxiv 5035-CH00_EXSUM.pdf xxiv 5/27/08 8:16:18 AM 5/27/08 8:16:18 AM Executive Summary Many Chinese experts favor company- recovered through a one-time charge--the first specific tariffs, recognizing, however, the type of connection charge. The second type of difficulties to implement such a system in an connection charge would cover the investment environment with fragmented local heating costs of establishing a network and would sectors and application of different accounting depend on the customer's contracted capacity. systemsandtaxtreatmentforheatingcompanies. Whether companies effectively require payment This would make the determination of specific of this charge from their customers depends tariffs and their supervision very difficult and on the competitive situation. Since it is an costly. Thus, as a practical measure, it is clear obstacle for promoting new connections, heating that heat tariffs in each city will need to remain companies usually avoid the second type of uniform during an initial, transition phase, with connection charge, at least as long as they can the possible exception of separate tariffs for arrange for alternative financing, such as loan different generation technologies and fuels. financing. Incentives for efficiency improvements. Two- In China, the preferred sources of financing part tariffs will provide effective incentives new heating infrastructure are connection on the demand side for consumers to use heat fees paid by real estate developers and thus more efficiently. Incorporating incentives for ultimately by heat consumers. In such cases, efficiency improvements on the supply side it should be ensured that such charges are into tariff design is a difficult science. Incentive- accounted for properly and are considered based pricing has better properties in this regard in the determination of the tariff. A possible than cost-of-service pricing (see page xxiii) solution that avoids charging customers twice and has shown good results, for example in may be to treat depreciation of assets as a cost, the British electricity and water sectors. Where and customer contributions to fixed assets as implementation of incentive-based pricing is a source of revenue. This would reduce the difficult, at least initially, however, nontariff revenue required from tariffs in order to fully instruments are used frequently to improve recover costs. efficiencies in the heating sector. Regulators can Heat price determination in Tianjin and other review tariffs and investment programs and pilot cities. As the first step in the approach approve them together with certain efficiency pioneered by the Tianjin experts team, several performance targets. representative heating companies are selected It is doubtful that the application in Chinese and their heating costs analyzed. Costs cannot cities of uniform tariffs based on standard costs be directly compared since the companies apply and with cost-based profits will lead to efficiency different accounting standards. Therefore, improvements. Under this system, some experts determine reasonable standards for the companies could earn profits and some would variable cost components (fuel, electricity, and make losses, independent of their performance, water) by adjusting unreasonable factors and but due to exogenous factors. Whether loss- considering actual operational experiences. making companies would actually be able to Depreciation is based on typical investment reduce costs and improve efficiencies depends costs in some cities and on typical depreciation partly on their financial means and the political rates as percentage of fixed assets in other will to effect change. cities. The other cost components are weighted Heat tariffs, financing of heating infrastructure, average costs of the selected companies. Heat and connection costs. Among all issues related supply costs are computed as average costs of to tariff design, the treatment of connection the past one to three years. Taxes and profits (as costs seems to be among the most contentious a percentage of costs) are added to determine in China and in greatest need of clarification. It the final tariffs, expressed in terms of yuan/m². is standard practice within network industries After establishing the fixed and variable cost to charge customers to connect their premises shares, the variable tariff charge (in yuan/ to a network. The actual costs would be kWh) can be calculated by multiplying with xxv 5035-CH00_EXSUM.pdf xxv 5035-CH00_EXSUM.pdf xxv 5/27/08 8:16:18 AM 5/27/08 8:16:18 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY the normative average heat demand of typical level heat meters], none is clearly preferable buildings. Taiyuan, Harbin, and Changchun to all others. Apartment-based heat meters made allowances for different generation tend to be more reliable and accurate than technologies, defining, for example, separate heat allocation meters, but there is no categories of heat tariffs for centralized heat evidence that their much higher costs are from combined heat and power (CHP) plants compensated by higher benefits. Thus a and heat-only boilers or for customers with their "one size fits all" approach in heat metering own substations. should be avoided. ... (page 35) Although this approach of calculating a Least-cost solutions for metering should be uniform tariff based on standard costs has many identified for both building types, i.e., energy- drawbacks,itisanimportantstepforwardasitis efficient and other buildings. The solutions an approach to approximate a full cost recovery will not necessarily be the same for both types; tariff and to decouple the determination of different technologies could be applied. heat tariffs from political deliberations. This Themainrecommendationofthereport--the approach should, however, only be viewed as a implementation of a gradual, two-step approach transitory measure, since it does not result in a in adopting heat-metering and consumption- transparent pricing system with good incentive based billing--is still considered appropriate properties. for China: As a first step, it should be required to meter Heat Metering and all buildings, new as well as existing, or at the very minimum other wholesale units Consumption-Based Billing such as heat substations. This will enable The introduction of consumption-based billing the basic commodification of heat [through is essential in making heat a commodity a consumption-based bill for the building and introducing market mechanisms in the which can be divided among residents in a heating industry. It requires that heat supply variety of ways] ..., provide direct incentives is metered, consumers can control their for heating companies to improve the heat consumption, an appropriate tariff that efficiency of heat production and delivery, depends on consumption is in place, the heating and should also provide some incentives to company is prepared or has contracted for realize energy savings on the consumption processing metering data and issuing bills on side. ... (page 36) this basis, and consumers have been informed In the second step, the objective is to and educated about the process of metering and realize the potential end-use energy savings billing, changes in payment terms, likely impact by adopting apartment-level heat metering, of metering on heating bills, and possibilities which is considered essential for motivating to save energy. heating energy conservation among end- The issues surrounding heat metering and users. ... (page 37) consumption-based billing have been discussed Almost five years later, heat metering in China for many years. A 2002 report for in China is still limited to mostly small the World Bank and MOC documented the demonstration projects in many cities, and only experience and lessons learned from heat a few consumption-based billing experiments metering in Europe and from demonstration were carried out in the absence of metered tariffs. projects in China. One of its main conclusions Tianjin has accumulated the most extensive was as follows: experience and is now applying the two-part [Amongtheavailablemeteringtechnologies-- heat tariff for consumption-based billing in substation-orbuilding-levelheatmeters,heat several large developments with buildings cost allocators, flow meters and apartment- conforming to the building energy efficiency xxvi 5035-CH00_EXSUM.pdf xxvi 5035-CH00_EXSUM.pdf xxvi 5/27/08 8:16:19 AM 5/27/08 8:16:19 AM Executive Summary standard. The results from five years of piloting Heat Price Administration heat metering and billing in Tianjin show that the actual heat consumption of consumers in Municipal agencies are currently responsible the demonstration buildings is, on average, for setting heat prices and for the supervision substantially below the norm consumption of the local heating industry in general, while assumed by the heating companies for those the national government is responsible for the types of buildings. About two-thirds of the development of methodologies and standards. apartments in five demonstration buildings There is consensus that the government should involved in the Tianjin pilot received refunds on continue to be involved in setting heat prices their heat bills, amounting to almost one third "to restrict monopoly earnings and protect of the original bill revenue. the benefits of the residents" (National Expert TheexperiencefromEuropeconfirmsthatthe Report 2005), but through a more transparent, Tianjin results are fairly typical. Heat metering flexible, and efficient process. This process and consumption-based billing have a huge would be greatly supported by the reform of the impact on energy consumption and individual government regulatory and industry oversight heat bills. In general, a reduction of gross system in general in a manner that divorces it heat supply requirements by 20 to 30 percent from heating company ownership, operation is typical. Much of this can be achieved with and management. The Bank and MOC also are metering at the building level, which should beginning collaboration on this general effort. be widely and quickly implemented as a As a first step toward more transparency, minimum requirement. In Poland, for example, flexibility, and efficiency in price setting, the a combination of heat metering, investments governmentissuedaregulationin2005allowing in heating systems and insulation of buildings partial automatic heat price adjustments in case resulted in a reduction of heating costs by about of large coal price increases. By not depending 50percent.However,thesebenefitstoconsumers on existing price approval procedures, such were achieved partially by severely limiting automatic adjustments should improve the heat tariff increases, and thus by squeezing heat cash flow situation of heating companies, suppliers' revenues and profits. This negatively provide reasonable continuity and planning impacted their ability to finance investment security and avoid overt political influence on programs. heat prices. From a public policy point of view, the The heat price adjustment procedure is a main purpose of adopting heat metering is the good example for the necessity to balance the creation of a market incentive for end-use energy interests of heat suppliers and consumers in conservation. This incentive to realize cost the process of setting heat prices. If regulators savings may directly result in energy savings. have only the interests of consumers in mind Consumption-based billing will also provide by maintaining low tariffs, they will ultimately incentives for consumers to buy better, more hurt heat suppliers by squeezing their revenues energy-efficient apartments that are supplied and profits. This will negatively impact heat by more efficient heating systems. The overall suppliers' ability to adequately maintain heat impact of a package of heat price reform and supply infrastructure and finance investment improved building energy efficiency with a programs. growing building stock is several times larger Heat purchased from CHP plants is an than that of consumption-based billing in important cost factor in many heating systems isolation. It is estimated to reduce growth of with a significant impact on retail heat tariffs. It is coal consumption for heating and associated unclear whether the determination of bulk heat CO2 emissions over a twenty year time period tariffs (which involves the allocation of common by at least one third compared to the baseline costs) for which the power sector regulatory (see Figure 1.3). agency is responsible takes into account xxvii 5035-CH00_EXSUM.pdf xxvii 5035-CH00_EXSUM.pdf xxvii 5/27/08 8:16:20 AM 5/27/08 8:16:20 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY the potential for energy savings from joint MLS scheme, a national transfer program, for production of heat and power in CHP plants. It the targeting of heating subsidies. The main is proposed to undertake a review of the current tools of supporting poor heat consumers are procedures and the development of a pricing locally funded heat security funds, discounts methodology for heat and power--including a and waivers of heating fees, and enhancement cost-allocation methodology--that maximizes of the MLS scheme by including heat fees into the economic benefits from cogeneration. the MLS benefits. Several issues need to be addressed in the future to assure the continued access of poor and low-income consumers to Transfer of Payment basic heat services: Responsibility to Consumers, · Municipal programs are often underfunded, Transparent Subsidies sincetheyrelyonlocalfundsonly.Cofunding and Social Support for with the central government would be a Low-income Consumers more sustainable solution. · Heating companies should in general not For the Chinese government and experts, be the source of subsidy funds. This is in the introduction of consumer payment contradictiontoamorecommercialbehavior. responsibilities and transparent heat subsidies They should, however, offer more flexible, constitutes a most fundamental and important customer-tailoredpaymenttermsthatwould part of the heat reform agenda. De facto, improve affordability and collection rates, consumersalmosteverywhereinnorthernChina especially from low-income customers. are now responsible for payment of the heating · Only a subset of needy households get bill. Only those who work for the government, support in securing basic heating needs. public institutions (schools, universities and Poornon-MSLhouseholdsarerarelycovered hospitals, for example) and organizations and by subsidies. Some local governments enterprises that are or were state-owned may, are expanding coverage to people not however, be entitled to varying degrees of covered by MLS but near poverty, such reimbursement by their employers. This in-kind as unemployed, laid-off, and other poor labor compensation stems from the old welfare people. Although a widening of eligibility system for the state-owned sector, in which criteria seems necessary, it is a challenge to heating service was either provided or paid for maintain simplicity, so that the system does by employers.An initial step of reform involves not become too complicated, intransparent, transferring such in-kind subsidy to an explicit and difficult to administer. cash compensation for employees when heat bill · Especially for poor consumers a reduction payment responsibility shifts from employers of heat consumption through heat metering, to employees. Such compensation payments controls and some basic insulation might are already in force for many government be preferable to a reduction in heat bills. employees. Problems exist, in particular, for Applying subsidies to such investments employees of financially troubled state-owned or other innovative financial instruments enterprises (SOEs). Workers of bankrupt SOEs should be considered. join other groups of poor consumers, who then require targeted government subsidies for heating. Their heat bills can reach a high, Implementation of Heat possibly unsustainable percentage of their Price Reform Requires income (see page xxxv). a Phased Approach Many cities in northern China have adopted measures to subsidize the heat consumption The basic premise of the heat reform guidelines of poor households, using mostly the existing of the eight ministries is the necessity of the xxviii 5035-CH00_EXSUM.pdf xxviii 5035-CH00_EXSUM.pdf xxviii 5/27/08 8:16:20 AM 5/27/08 8:16:20 AM Executive Summary heating sector to move from the planned to the developed by a national agency. Supervision market economy. This will require substantial of compliance on the local level is the changes in the organization of the centralized responsibility of local agencies. heating sector in China. Table 1 describes the expected changes and results (visions) for the Formanyoftheissues,thenecessarychanges issues most relevant to heat-price reform: are quite sweeping, require substantial financial inflows for investment in heat supply systems · The centralized heating sector undergoes and for targeted social assistance, and would a rationalization, based on municipal best be carried out in several steps. This involves heat planning according to least cost and passingthroughatransitionphase(seeTable1.1), environmental criteria. This results in far where initial steps are taken to move the sector fewer separate heating networks and heat into the right direction (important examples supplycompaniesineachcity.Heatsuppliers are merging heat networks and heat suppliers, evolve into corporate entities, which can metering at the building level, introduction access financing for new investment and of two-part tariffs and partial automatic tariff introduce modern heat utility technologies, adjustment), and basic requirements are put in operations and management practices. place that are necessary to move closer to the · The heat price system in a commercialized ultimately desired results, such as enforcing heating sector is based on full cost recovery compliance with uniform accounting standards, of justified costs, including a fair profit uniform tax treatment, clarification of asset margin based on asset values with tariffs ownership, and asset revaluation. specific for each heat supply company. A price cap regime under which base line Conclusions and tariffs are valid for a period of three to five years and prices are adjusted automatically Recommendations: A First will provide better incentives for realizing Important Step Toward efficiency gains. Heat Price Reform Is Being · Consumers are responsible for full payment of heating bills. They are able to Made--But Further Efforts control consumption and pay according Are Needed to Move Beyond to consumption. Heat is metered in the a Transition Phase premises of the consumer, in addition to the building level.Atwo-part tariff with energy The heat pricing methodology developed under and capacity charges provides incentives this project determines heat tariffs that are based for consumers for energy conservation and on the full costs of the core heating business. reduces revenue risks to heat suppliers This methodology can be used to calculate of fluctuating demand. Commodification heat tariffs for unmetered customers and it of heat is supplemented by a system of can be transformed into a two-part tariff to be financial support to allow low-income used for consumption-based billing of metered groups (continued) access to basic, clean, customers. and affordable heating services. The partial automatic pass-through of coal · A system of government regulatory and price increases that has recently come into force industry oversight system divorced from is an important advance, since it limits the need heating company ownership, operation, and for formal tariff reviews. This will contribute managementisimplemented.Theregulatory to securing sufficient financing for heat supply framework is transparent and protects both companies during periods of rapidly increasing consumers and investors. Methodologies input costs, providing a reasonable continuity and rules for tariff setting--identical for and planning security and avoiding overt all centralized heating companies--are political influence over heat prices. xxix 5035-CH00_EXSUM.pdf xxix 5035-CH00_EXSUM.pdf xxix 5/27/08 8:16:21 AM 5/27/08 8:16:21 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Table 1 A Vision of the Chinese Heating Sector Reform Current Situation Vision Transition Stage Rationalization of Heat Supply Fragmented local Few DH companies supply DH in Merging enterprises (e.g., heating sectors with each city through franchising) many heat supply enterprises Uncoordinated Sector consolidation based on Preparing heat plans and establishment of municipal heat planning, based business plans addressing heat supply networks on environmental and least-cost sector consolidation and enterprises considerations; competition for the market through bidding for supply of new developments Many isolated (coal- Small (coal) boilers are eliminated Preparing heat plans (observing fired) boilers with low if a connection to DH is viable or environmental objectives) and efficiency are converted to cleaner fuels business plans addressing interconnection of isolated boilers and networks DH based State of art DH systems (i.e., Rehabilitation and on outdated efficient, demand-driven, with modernization investments technologies with low variable-flow technology) efficiency Heat supply Commercialized DH companies Giving more responsibility companies mainly in being also responsible of financial to management, creating charge of operation performance, investment, and incentives for good and maintenance business planning performance Tariff System Partially subsidized Full coverage of justified costs; Gradually approaching cost tariffs targeted subsidies for low-income recovery consumers Uniform local tariffs Tariffs for each company based Uniform local tariff as long as on individual justified costs plus sector is fragmented asset-based profit margin Different area-based Uniform application of two- Gradual introduction of two- tariffs for residential part tariffs; same tariffs for all part tariffs with small tariff and nonresidential customers except for those with differences between customer customers special contracts groups due to different profit rates No or nonspecified Profit margin based on asset Profit margin related to costs; profit margin values. Some profits to be different profit margins for invested in DH rehabilitation and/ different consumer groups or expansion Tariff adjustments Base-line tariffs will be valid for a Tariff adjustments require new require new approval period of three to five years; price approval procedures; for some procedures; since adjustment formulas allow tariff important inputs such as coal late 2005 partial changes without official approval a partial automatic cost pass- automatic cost pass- through is allowed through xxx 5035-CH00_EXSUM.pdf xxx 5035-CH00_EXSUM.pdf xxx 5/27/08 8:16:21 AM 5/27/08 8:16:21 AM Executive Summary Table 1 Continued Current Situation Vision Transition Stage Billing and Collecting Payment Full payment responsibility of Gradual shift of payment responsibility is consumers coupled with targeted responsibility from work units shifting from work social assistance for low-income to consumers units to consumers groups Billing based on Billing based on two-part tariff Coexistence of both billing heated area/volume with energy charge based on systems depending on heat metered consumption meter installations; if only buildings are metered, distribution of costs among flats based on flat size Heat metering only in Metering at building level Minimum requirement: Building- some demonstration with cost allocation based level meters projects on apartment-metering/heat allocation Prepayment of Flexible, customer-tailored Prepayment of heating bills, but heating bills with payment terms to improve with negotiated payment plans incentives for even affordability and collection rates earlier payment Regulation All collective Only heat suppliers with All heating systems are subject heating systems are monopolistic characteristics are to regulation, as long as uniform under government subject to regulation methodologies and rules do not supervision exist Tariff approval by National regulatory entity Tariff approval by municipality, municipality determines methodologies and based on methodologies rules for tariff setting, municipal determined by national entities supervise compliance and government regulate details Municipalities own System of government regulatory Increased transparency of heating companies and industry oversight separate regulatory oversight (e.g., and also carry out from heating company ownership, through automatic procedures) administrative operation and management supervision Source: Joint Study Team. Note: DH stands for district heating. In China it applies to centralized heating with capacities above 10 tons/h, able to supply more than 100,000 m2. The need to proceed with heat metering to properly calibrate tariffs so that heat-supply and consumption-based billing has been re- costs are covered by sales revenues. emphasized. The minimum requirement of Establishing consumer responsibility for a meter at the building level is now widely paying heat bills is an important ingredient in accepted for new buildings. Metering and making the heat market work. The government consumption-based billing demonstration has emphasized that this component of heat pilots should become more meaningful with the reform has to be in place by the end of 2007. application of a two-part tariff. This will provide The implementation of plans to replace a better basis for gathering information on actual employer-provided or paid-for heat services performance of heating systems (i.e., heat losses) with explicit cash payments and to extend social and on consumer behavior. Both are necessary programs to provide heat subsidies targeted at xxxi 5035-CH00_EXSUM.pdf xxxi 5035-CH00_EXSUM.pdf xxxi 5/27/08 8:16:22 AM 5/27/08 8:16:22 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY low-incomeconsumershasstartedinmanycities. also be able to reflect the different costs of With a wider application of these programs, customers with different consumption levels the probability of collection and affordability and patterns. problems should be fairly low. · Introduction of incentive-based pricing The implementation of the proposed first under which properly designed base heat steps of heat price reform is thus important in tariffs would be in force for three to five moving toward a more rational heat pricing years with automatic pass-through of the system in northern Chinese cities. In the most important cost components. This short term, it can be considered an acceptable would provide better incentives for heating compromise between continuing with the old companies for efficiency improvements than heat pricing system and a proper cost-related cost-of service pricing as proposed for the two-part tariff system. However, to move from transition phase. a transitional stage toward a fuller realization of the reform objectives, the methodology needs The implementation of these changes to be developed further. The most important depends on removing certain obstacles that heat pricing features to be introduced in order prevent the actors in the heating sector from to achieve resource savings and other efficiency overcoming the welfare-based way of doing gains both in the supply and use of heat and business. These are among the most important establish a financially sound heating industry changes to be introduced as soon as possible: that can extend clean, reliable and affordable heat services to a growing number of consumers · Application of uniform rules of doing are the following: business, including accounting standards and taxation. · Company-specific heating tariffs. Among · Consolidation of local heating sectors, taking the most important advances to be made intoaccountmunicipalheatplanscarriedout is the transition from uniform citywide to with regard to least cost and environmental company-specific heating tariffs. Tariffs considerations. based on the individual costs of a heat · Licensing of heating companies to ensure supply enterprise cover the justified that they are technically and financially able costs of individual suppliers and reflect to operate a sound and efficient business. cost differences due to differences in the · Completing metering of customers, at management and performance of the heat minimum at the building level and distribute supply enterprises, the use of different fuels a consumption-based bill at the building (gas being scarce and much more expensive level among all inhabitants in a variety than coal), or different supply conditions. of ways. Consumer behavior is one of the Thus, heat suppliers would be able to cover key factors in making the new paradigm of their operating as well as their capital costs, demand-driven heating work effectively, including the replacement of assets. and therefore consumer information and · Profit margins based on asset value are education must be carried out with a higher particularly important with company- priority. specific heating tariffs. Under the alternative · Commercialization of heating companies of cost-based profits it would be even harder including separating municipal ownership to control the incentive for companies to from regulation and supervision. Heating inflate costs. infrastructure assets need to be clearly · Two-part tariffs with fixed charges based assigned and valued properly. on capacity instead of square meters would · Improving the knowledge base about and provide incentives to customers to properly withinthecentralizedheatingsectorthrough determine required heat demand. Such extended data gathering as part of regular properly designed two-part tariffs would statistical surveys, analysis of metering xxxii 5035-CH00_EXSUM.pdf xxxii 5035-CH00_EXSUM.pdf xxxii 5/27/08 8:16:23 AM 5/27/08 8:16:23 AM Executive Summary data, customer surveys and benchmarking to realize the expected benefits of substantially of heating company operations within and reduced coal consumption and improved across municipalities. This also requires urban environments, lower heat bills and more more professional regulatory agencies on comfort for consumers and a heating industry the national, but especially on the local which becomes a tax payer instead of requiring levels. periodic injections of public funds. By moving forward quickly in all areas, heat price reform can join other areas of heat reform xxxiii 5035-CH00_EXSUM.pdf xxxiii 5035-CH00_EXSUM.pdf xxxiii 5/27/08 8:16:23 AM 5/27/08 8:16:23 AM 5035-CH00_EXSUM.pdf xxxiv 5035-CH00_EXSUM.pdf xxxiv 5/27/08 8:16:23 AM 5/27/08 8:16:23 AM Introduction Importance of Heat of the 16 northern provinces and autonomous Price Reform regions to implement heat reforms in several pilot municipalities. Urban heating has been called the "last fortress Introducingmarket-basedreformstoChina's of China's planned economy" (Deputy Minister urban centralized heating sector is essential to of Construction Qiu Baoxing, cited in Xinhua addressing the perpetual inefficiency of the News Agency, March 29, 2006). Employers still heating industry. The reforms are also critical pay a significant part of heating bills for their to the success of another important government workers, consumption is not measured and policy agenda: achieving sustained energy thus bills are calculated based on square meters, efficiency improvements in buildings. The and energy is wasted in old heating networks stakes are high and the potential impact could and in buildings. By making the centralized be huge because centralized space heating is heating sector function according to market a fundamental urban service to a large and economy principles and commercializing it, growing population in China's heating zone. "Heat reform will help solve accumulated Urbanization is a fairly recent phenomenon in problems under the old system, such as energy China, and over half of the urban building stock waste, outdated equipment and payment in2020isyettobeconstructed.Theestimatednet delays" (Chen Wenzhan, Head of the Beijing increase of centrally heated residential buildings Municipal Administration Commission, cited is about 6 billion square meters over the next in China Daily, December 19, 2005).At the same 20 years.Earlyandsuccessfulimplementationof time, social concerns are taken very seriously, the heating sector reforms and matched progress acknowledging that low-income households in building energy efficiency could result in very need government support during the reform large energy savings and economic efficiency process (e.g., Deputy Minister of Construction gains in the next two decades and beyond. Qiu Baoxing in a speech at the urban heat reform Upon the request of the government, the demonstration meeting, August 2003, cited in World Bank began looking into the issues Zhang/Xu 2005). involved with energy use in the urban building The need to implement heat system reforms sector in 1999. An initial sector analysis4 has been discussed in China for years, but put concluded that the most effective approach to off many times due to the social sensitivity of achievingsustainedenergyefficiencygainsinthe such reforms. In the last few years, however, urban space heating sector is to simultaneously the country's leaders have made it clear that the addresscriticalproblemsinthecompleteheating reforms must proceed. In July 2003, eight central chain from heat source through the network government ministries and commissions jointly into the buildings and to the apartments and issued Heat Reform Guidelines, calling for each occupants. Simply put, policies have to address 4Summarized in the report China: Opportunities to Improve Energy Efficiency in Buildings (World Bank 2001). xxxv 5035-CH00_INTRO.pdf xxxv 5035-CH00_INTRO.pdf xxxv 5/27/08 8:17:49 AM 5/27/08 8:17:49 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY the supply side (heat production and delivery) price and billing reforms in the overall reform of and the demand side (buildings and occupants) theheatingsectorinEasternEuropeancountries. together. This two-hand approach has gained The experiences from Eastern Europe, where the support of Chinese experts and the government DH sector was reformed under a more or less and has since become the foundation for the strict regulatory umbrella, are emphasized due design of a World Bank-led international to the many common features with China. In assistance program, the China Heat Reform contrast,experiencefromWesternEuropeshows and Building Energy Efficiency Program. This that DH can also develop in a commercial and comprehensive program includes a stand-alone competitive environment. The relevant lessons US$18 million GEF project (World Bank 2004), learnt from the impact of such a different sector a series of World Bank technical and policy organization are presented as well. analysis and advisory activities, and a proposed In the next four chapters the key principles of IBRD lending project for district heating (DH) heat price reform, the possible choices, and their investments in Liaoning province. trade-offsarediscussed.Thesechaptersarebased This ESMAPproject--one of the World Bank on the international experiences, the work in the technical assistance activities--has supported participating cities (Tianjin, Changchun, Harbin, one of the key components of the government's and Taiyuan), and discussions with the national heat reform pilot program. Heat pricing reform expertsteamandawiderangeofChineseexperts. and the introduction of consumption-based In Chapter 3 the four key components of heat billing are essential in making heat a commodity pricereformarebrieflydiscussed,followedbyan andintroducemarketmechanismstotheheating extensive presentation and discussion of the core industry. In China, however, there is virtually of heat price reform, which is the determination no experience with billing of heat according of the level and structure of heat tariffs that are to actual use or with two-part tariffs that are economically efficient, can provide sufficient commonly used in the DH industry in most revenue and are equitable. The practical issues countries. Because of the similarities in DH to be considered in China play an important role system technology and management between in the choices made by the Chinese counterparts. current China and pre-reform Eastern Europe, Chapter 4 contains a summary of options and the transfer of knowledge of the experiences recommendations of heat metering and billing and lessons learned in heating sector reform in options, originating mostly from an earlier general and heat price reform in particular in joint World Bank/MOC project, with updates many Eastern European countries would benefit based on more recent experiences. Heat reform China in its own development of necessary requires an improved system of government reforms. regulatoryandindustryoversightsystem,which Theconclusionsandrecommendationsofthis is divorced from heating company ownership, project largely coincide with those of a similar operation, and management. Chapter 5 provides project, supported by the Asian Development a brief discussion and recommendations of the Bank (ADB) and also implemented with MOC, regulatory issues most relevant to heat price but with different participating cities (see PA reform, ensuring that the heat pricing process is Consulting 2004). transparent and flexible.Amore comprehensive investigation of how to transform the heat Structure of the Report regulatory system will be the topic of a new collaboration between World Bank and MOC. InChapter1backgroundinformationisprovided Last, but not least, Chapter 6 deals with the on the Chinese heating sector, the drivers of heat social issues of heat reform, which are in fact price reform are analyzed, and government heat the primary issues to be resolved in the Chinese reform initiatives and objectives are presented. context--namely, shifting the responsibility Chapter 2 briefly summarizes the role of heat for heat bill payment from employers to heat xxxvi 5035-CH00_INTRO.pdf xxxvi 5035-CH00_INTRO.pdf xxxvi 5/27/08 8:17:50 AM 5/27/08 8:17:50 AM Introduction consumers and providing some compensation ESMAP project and recommendations about for employees in general and targeted subsidies further necessary reform steps are presented for poor consumers in specific. in the final Chapter 8. For those unfamiliar The sequencing of the many actions required with centralized heating technology, the annex fortheimplementationofheatpricereformisthe defines some important technical concepts, topic of Chapter 7, which also summarizes the which have an influence on the design of heat implementation experiences in Tianjin, the most pricing and billing reform. extensive so far in China. Conclusions about the heat pricing reform proposals developed in the xxxvii 5035-CH00_INTRO.pdf xxxvii 5035-CH00_INTRO.pdf xxxvii 5/27/08 8:17:50 AM 5/27/08 8:17:50 AM 5035-CH00_INTRO.pdf xxxviii 5035-CH00_INTRO.pdf xxxviii 5/27/08 8:17:50 AM 5/27/08 8:17:50 AM 1 Background on Chinese Heating Sector and Heat Reform Initiatives Drivers of Heat lower rate, almost doubling between 2004 and (Price) Reform 2020 (see Figure 1.1). In the late 1980s, about three quarters of The most important aspect of China's urban urban residential floor area was in low-rise heating sector development is the rapidly buildings of three stories or less. By 1997 low-rise expanding demand for centralized heating, buildings accounted for only about one-half of drivenbytherapidgrowthinnewurbanhousing the urban residential stock. The most popular construction. District heating (DH) systems are new residential buildings are five to six stories favored for their higher technical efficiency and high, enabling greater land conservation, but improved environmental controls in serving without the added cost of elevator installation, densely populated urban areas. The broad and which is required by the building code for long-term growth aspect of DH in China, which buildings of seven or more stories. In large cities is in contrast with Eastern Europe's stabilized or city centers, high-rise buildings are also being DH markets, affords opportunities for reforms built, due to land scarcity. In Beijing, for example, and experiments in new developments and residential buildings of 10 or more stories now facilities, similar to the development of DH in account for about a quarter of the residential South Korea since the late 1980s. China needs floor area. to deal with the rehabilitation of deteriorated existing systems and the additional institutional Environmental Problems complication also, especially in the northeast, of Coal Use but their relative importance is lower than in Eastern Europe. About 250 million people require space heating for three to six months every year. Heating is almost exclusively dependent on coal. About Rapid Growth of the 200 million tons of raw coal were used to heat buildings in the heating zone in 2002. This is Building Stock actuallythefastest-growingcoal-useactivity(see The urban residential and commercial building Figure 1.2) and currently accounts for 10 percent stockinChina(excludingsmalltowns)increased of total energy use, 15 percent of coal use, and from 3.98 billion square meters of construction over 50 percent of building energy use in China floor area in 1990 to 7.7 billion square meters in per annum. As a result, 4 million tons of sulfur 2000. It took only four more years for the urban dioxide emissions and 400 million tons of carbon building stock to almost double again, to 14.9 dioxide (CO2) emissions per year are produced. billion square meters at the end of 2004. Between Without significant improvement of space 1990 and 2004 the share of residential buildings heating energy efficiency, heating coal use and in total construction floor area increased from 50 relevant emissions could double by 2020. to 64 percent. The growth of construction area Over the next 20 years, the urban residential is expected to continue, albeit at a somewhat building stock in northern China is expected 1 5035-CH01.pdf 1 5035-CH01.pdf 5/27/08 8:18:20 AM 5/27/08 8:18:20 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Figure 1.1 Urban Building Stock More than Tripled in 14 Years 30 25 Meters 20 e 15 Squar 10 Billion 5 0 1990 1995 2000 2004 2020 Commercial Residential Source: China Statistical Yearbook 2005; 2020 estimates: World Bank Staff. Figure 1.2 Heating Has Been the Fastest-growing Coal-use Activity 350 100 300 = Coal for Space Heating 250 200 150 Consumption 100 Total Coal Consumption 50 1990 0 1990 1995 2000 2002 2003 Source: China Statistical Yearbook 2005. to grow from 4 to 10 billion square meters. expansion. The coal-fired small boiler houses Heating coal use and relevant emissions need in particular are a primary source of winter air not increase that drastically if heating systems pollution in China's cold weather cities. The would adopt modern technologies and demand- small boilers operate at a reported 60 percent driven operations and if buildings would be efficiency (as compared with about 75 to built according to advanced energy efficiency 85 percent for new large boilers) and use no standards. Up to 60 million tons of coal could dust or sulfur-removal equipment. In addition be saved annually in new residential buildings to its negative impact on city aesthetics (e.g., in the heating zone (see Figure 1.3). slag and coal dust in residential centers and Replacing small boilers with modern, clean short smokestacks belching black smoke just centralized heating services in city centers above the roofs of apartment buildings), city is important for social well being and urban air pollution is a major contributor to chronic livability. Many small boiler houses were built obstructive pulmonary disease and pulmonary in the early stages of urbanization, and back heart disease, and is a factor in lowering labor then the placement of the boiler house in the productivity and increasing incidence of center of the heat load was the state-of-the- premature death.5 Larger heat-generation units art. The small boilers now find themselves can better absorb the costs of pollution control in dense urban centers after strong urban equipment than smaller units. 5 Studies have estimated the damages associated with air pollution at 1.2 to 3.8 percent of GDP. Government of the People's Republic of China and World Bank. 2007. 2 5035-CH01.pdf 2 5035-CH01.pdf 5/27/08 8:18:22 AM 5/27/08 8:18:22 AM Background on Chinese Heating Sector and Heat Reform Initiatives Figure 1.3 Heated Urban Residential Building Stock and Energy Implications Urban residential building stock in the But the amount of coal used to heat heating zone of China will increase dramatically these buildings does not have to 12 Baseline Billion m2 200 MTce Scenario 180 RBEES- 10 95 160 Advanced Scenario RBEES 8 140 Scenario 120 6 100 2004 4 80 Indicative 2024 60 heating coal 2 40 demand 20 0 0 2004 2024 Source: Liu 2005. Figure 1.4 Climate Zones in China Severe Cold Severe Cold Cold Cold Hot Summer Cold Winter Temperate Hot Summer Warm Winter Source: MOC. The Centralized Heating for nearly half of the total residential floor area Industry in China of the country. In the severe cold region, the heating season lasts more than 150 days, in the Emergence of District Heating cold region between 90 and 150 days. In the mid-twentieth century, most homes Space heating is required in China's cold and were heated with small coal stoves. Gradually, severe cold regions (heating zone, or northern these have been replaced with centralized, China in short), defined as regions that have at hot-water radiator heating systems in areas of least 90 days of average outdoor temperature at relatively high population density. The urban or below 5ºC, which cover about two thirds of construction area supplied with centralized the national territory (see Figure 1.4) and account heating increased tenfold between 1990 and 3 5035-CH01.pdf 3 5035-CH01.pdf 5/27/08 8:18:23 AM 5/27/08 8:18:23 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY 2004, from only 0.21 billion m2 to 2.16 billion m2. in Hebei province, and Yingkou in Liaoning In most cases, centralized heating began with province. small, block systems, using relatively small, heat- only boilers (HOBs) for one or several buildings. Deficiencies of Traditional District Gradually, and increasingly during the late 1980s and 1990s, larger centralized heating systems Heating Systems in China (generally referred to as district heating (DH)) China's centralized hot-water heating systems have been developed to cover parts of most are based on standard Soviet-era technology cities in the heating zone. Today, most cities in except that only heat, but no domestic hot water, northern China have one or several major DH is provided. The advantage of these systems is systems within the city center, and a fairly large that they are relatively simple and inexpensive number of smaller, block systems in the suburban to construct and robust to run, but they operate areas. Use of small coal stoves is limited mostly with low energy efficiency and allow little to homes in older and smaller buildings, as flexibility. Heat supply can be quite unbalanced well as in small cities and towns. Government within different parts of the system. Especially in policy continues to strongly promote increasing fall and spring, open windows are an indication development of larger DH systems, to capture of excessive heat supply. the economies of scale and reduce air pollution. DH systems are traditionally designed Due to its major cost advantage, and shortages and operated in constant flow mode. The of alternatives, coal is expected to remain the water flow is kept constant whilst the supply dominant fuel for heating for the foreseeable temperature at the heat source is varied future. according to outdoor temperature to match In the heating zone, about 70 to 80 percent the system output with expected heating need. of the urban residential building stock of This mode does not require flow regulation currently 4.1 billion square meters is supplied equipment and has therefore lower investment with centralized heating. Coverage with larger costs. In other words, the heat source regulates DH systems--with capacities of 10 tons/h and how much heat the customers are expected above--onlyextendstoabouthalfofthebuilding to need. In contrast, modern DH systems stock. In the large cities of the northeast, where are operated in variable flow mode. Both the centralized heating started early, larger DH supply temperature and the water flow are systems typically supply more than 50 percent varied according to outdoor temperature to of the residential building stock. In the north and match the system output with the real heating northwest, centralized heating started later and need. Flow regulation valves are installed at larger DH systems currently cover, for example, points of consumption and circulation pumps only 10 percent of the residential building stock at heat sources are equipped with speed in cities in Shaanxi and Henan provinces. controls to save electricity in the variable flow The local centralized heating sectors are mode. Heat consumers regulate how much typically very fragmented, with most cities heat they really need, and supply temperature having hundreds of heating companies that and water flow are adjusted accordingly at the are under direct municipal control or under heat source (see the Annex for a more detailed the control of various municipal organizations. description). Tianjin, for example, had more than 400 heating Energy waste also occurs due to poorly companies; the number is now reduced to about maintained and insulated pipe networks and 200. The situation is similar in Shenyang and the use of inefficient boiler technologies. Small Changchun. Only very few municipalities have boilers are ubiquitous and operate at a reported consolidated the sector and are now served 60 percent efficiency (as compared with about by one or a few DH suppliers--for example, 75 to 85 percent for new large HOBs), and use Mudanjiang in Heilongjiang province, Tangshan no dust or sulfur removal equipment. 4 5035-CH01.pdf 4 5035-CH01.pdf 5/27/08 8:18:24 AM 5/27/08 8:18:24 AM Background on Chinese Heating Sector and Heat Reform Initiatives In China, slightly more than 40 percent of of the total installed capacity of thermal power, heat-generation capacity is in CHPplants, which and 1,090 million GJ of heat.8 One contributing generate slightly less than half of the heat fed factor to a smaller share of CHP heat is the lack into centralized heating networks.6 Compared of domestic hot water (DHW) supply in Chinese with Western and Eastern Europe, this share DH systems. In European DH systems the year- of cogenerated heat is rather small. A share round domestic hot water supply allows the of CHP of 30 to 50 percent in total capacity, operation of CHP plants also in summer, and it resulting in 65 to 90 percent of production, is spreads supply costs over more delivered heat. typically economically optimal (see ESMAP Building-internal heat supply installations 2000). In the Netherlands and Finland, about are also characterized by simplicity and low 90 percent of DH is produced in CHP mode, in energy efficiency. Traditionally, vertical single- Germany and Denmark about 65 percent, and pipe systems are used where radiators are in Poland and Russia the share of CHP heat is sequentially connected from top floor to about 50 percent.7 bottom floor. Each apartment is thus crossed Cogeneration is considered a key feature for by several strings. With these arrangements the the competitiveness of DH systems, as the high introductionofapartment-basedheatmetersand capital costs for building up the networks can be controls would be difficult and expensive, since compensated by low heat-generation costs due each string and radiator would require them, to the high efficiency of such plants. The joint including a bypass at each radiator. In contrast, production of electricity and heat can generate in Western Europe and in new buildings in energy savings between 15 and 40 percent when China pipes are arranged horizontally, so compared with the separate production of that each radiator (and DHW) source in an electricity and heat in conventional production apartment is supplied in one single loop; two- plants. pipe systems are standard. Apartment-based TheEuropeanUnion(EU)regardscogeneration controls, typically thermostatic radiator valves, as one of the most promising and cost-effective and some form of metering (see page 46­47), are technologies to improve energy efficiency and a common feature almost everywhere in Europe reduce emission of greenhouse gases. In its in dwellings with centralized heating, due to 2004 directive (2004/8/EC), the EU established the improved comfort and energy and heat bill commonrulesforthepromotionofcogeneration, savings they offer to consumers. including from emerging technologies such as In China, even in new buildings, there is no micro turbines and fuel cells. individual heat control or measurement of heat In China, cogeneration facilities are typically consumption in apartments or at the building installed where a large heat demand exists, or substation level, with the exception of some and electricity is the byproduct. As a result, demonstration projects in several cities. As in the selection of the type and capacity of the other countries using Soviet-era centralized cogeneration units in China is driven by the heating technology, customers are billed each connected thermal load rather than by electricity season according to a flat rate per square meter needs. Therefore, units with smaller capacities of floor area. are usually selected. In 1999, 1,402 heating units More generally, until very recently, heat with at least 6 MWe per unit were operating was not treated as a commodity. Most urban in China, amounting to a total capacity of dwellers supplied with centralized heat were 28,153 MWe, and resulting in an average capacity not paying their heating bills--this was largely of about 20 MWe. This represents 12.6 percent the responsibility of their employers. Stemming 6Data for 2005, compiled by MOC. 7For detailed information about CHP in Western and Eastern Europe, see, for example, Gochenour 2003. 8China Energy Conservation Investment Corporation and Energy Resources International, Inc. 2001, p. 11. 5 5035-CH01.pdf 5 5035-CH01.pdf 5/27/08 8:18:25 AM 5/27/08 8:18:25 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY from coal subsidy programs in northern China region. Several additional reasons are favoring that began in the 1950s, heat supply in major DH in China: northern urban centers has been considered a public welfare entitlement. Indeed, heat · The clean grid-bound alternative natural supply has been the last unreformed element gas is very expensive compared with coal of the public welfare system from the time and has a limited availability. For example, of the planned economy. Although reform of in Beijing, it costs about three times as much urban housing to individual ownership has to provide one GJ of natural gas compared proceeded strongly since 1996,9 employers have to one GJ of coal.10 In Tianjin, in 2002 to continued to provide heating to their employees 2003 it cost about 26 yuan/m2 to produce directly or by contracting with municipal centralized heat from natural gas, compared heating companies. Payment levels to heating with 17 to 21 yuan /m2 for coal-based DH companies had generally been fairly good until (Tianjin experts team 2003). However, in city the economic downturn of the mid-1990s in centers where DH from clean sources such as the northeast, when payment levels in many CHP plants located outside of the city center cities fell to around 60 percent, before generally is not available, natural gas may be the only rising to over 80 percent more recently with the clean fuel for heating. adoption of tougher collection measures. · Raw coal is the most common fuel used for Acertain amount of progress has been made heating. Burnt in individual stoves and small in addressing the deficiencies during the last building boilers, coal consumption is a major 10 years (see page 9). In many provinces and contributor to serious problems with air municipalities the payment responsibility is pollution in winter. Coal can be burnt with gradually being transferred from work units high efficiency and low emission levels in to heat consumers. Building energy efficiency large boilers or CHP plants, which together standards are better enforced in new residential withDHnetworksprovideeconomiesofscale construction. Many major DH companies in emission prevention and heat supply. have adopted aspects of Western European technology in some new projects. However, Cost of District Heat and Cost heat metering, even in new buildings, is not yet Coverage mandatory. Serious energy waste in heat supply The costs of DH provision vary widely in China, and consumption remains the norm. depending on the severity of the climate and length of the heating season. Fuel, usually coal, is Viability of District Heating the single most important input, accounting for Numerous studies have shown that DH is the about 40 percent of the supply cost on average. most cost-effective heating system in densely With the dramatic increase in coal prices since populated urban areas with high heat loads. The 2004 to 2005 (see Figure 3.2A)--reaching about break-even point is typically in the range of 2 to 400 yuan/t during 2005--costs of DH supply 4 MW per km of network length (see ESMAP increased substantially. 2000). In China, the average heat load density is In many municipalities heat prices for around 3 MW/km, varying from 1.5 in Tianjin residential consumers have been kept stable and 2.5 in Heilongjiang to 4.7 in Beijing (based for many years (e.g., since 1995 in Changchun). on 2004 data from 2005 StatisticalYearbook). DH Heat tariffs for nonresidential customers are is clearly a viable heating option in the densely typically slightly higher than residential tariffs. populated urban areas of China's severe cold It is difficult to unambiguously assess the 9 More than 80 percent of the urban residential apartments are now privately owned. 10This comparison is based on a natural gas price of 1.90 Yuan/m3 in 2004 with a gas heating value of 38 GJ/1000m3 and a coal price of 370 Yuan/ton with a coal heating value of 5500 Gcal/ton. 6 5035-CH01.pdf 6 5035-CH01.pdf 5/27/08 8:18:25 AM 5/27/08 8:18:25 AM Background on Chinese Heating Sector and Heat Reform Initiatives degree of cost coverage of heating tariffs due Household incomes show a wide variety to the inconsistency of the applied accounting across and within cities. Average annual standards. The emerging overall picture is household incomes range from about 17,000 mixed. Although detailed calculations are not yuan in Taiyuan and Changchun to 20,000 yuan available, it is estimated that cost coverage, for in Harbin and 30,000 yuan in Tianjin. Within example, in Tianjin was about 80 percent on each of these four cities, the lowest 20 percent average from 2002 to 2003. However, an initial income group (quintile) has only about one- financial analysis of four DH companies in eighth of the income of the highest quintile. medium-size cities in Liaoning suggests that the Averageannualhouseholdbillsforcentralized majority has not been able to cover operating heating vary only by size of the apartment costs with tariff revenues during the past three within each city. Since poorer households to five years and relies instead on government tend to have somewhat smaller apartments, subsidies. Independently of the degree of cost their square meter­based heating bills are coverage, DH companies also need to make lower than those of wealthier households. In greater efforts to improve their collections. general, a stronger correlation between income Although collection rates have increased over and heating expenses can be observed when the dismal levels of only 60 percent in the 1990s, households are connected to individual heat they are still at unsatisfactory levels of 80 to sources like electricity or stoves, which can be 90 percent. regulated. Poorer households that can regulate Reactingtothequicklydeterioratingfinancial their heat consumption tend to heat fewer rooms situation of DH suppliers in the face of the coal and reduce indoor temperatures.11 price hikes, the central government issued a Annual average heating bills of Chinese decree in the fall of 2005 to allow a partial (70 to households connected to DH range from 700 90 percent) automatic pass-through of coal price yuan in the warmer southern part of the heating increases of more than 10 percent (see details zone to 1400 yuan in the colder cities of northeast on page 84). In many cities, heat tariffs were China.Figure1.5alsoshowshowthesebillswere increased as a result; see Figure 3.2b. paid during the 2003 to 2004 heating season. In Tianjin, the transfer of heat bill payment to the individual households occurred several years Consumers of Centralized ago (see Box 5.1), and they pay almost the entire Heat--Impressions from heat bill themselves. Also, there are relatively Household Surveys few poor households, and thus only a small part of heat bill payments is subsidized (government Representative statistical information on the paid). In the other three cities--Changchun, consumption of centralized heat and, more Harbin and Taiyuan--work units are still importantly, on the consumers themselves is contributing about one-third of the payments for not officially available, since heating due to its heating. Subsidies to poor households contribute welfarenaturehasuntilnownotbeenincludedas 6 to 7 percent in Harbin and Changchun. one of the expenditure categories covered by the On average, heating bills would constitute regular statistical surveys in China. Surveys of about 4 and 24 percent of the incomes of high heat consumers were carried out in several cities andlowincomehouseholds,respectively,butthe in the context of heat tariff studies sponsored by de facto burden--that is, of the self-paid heating both theADB (in Shenyang, Qiqihar, Kuitun and bill--is significantly smaller (see Figure 1.6). Dezhou in 2002/03; see PAConsulting 2004) and At the time of the surveys, work units in most the World Bank (Changchun, Harbin, Taiyuan cities still paid a large share of the bill, Tianjin and Tianjin in 2004; see Zhang/Xu 2005). being the exception. Public employees usually 11See notes in Zhang/Xu 2005 and data for Armenia in Lampietti/Meyer 2002. 7 5035-CH01.pdf 7 5035-CH01.pdf 5/27/08 8:18:26 AM 5/27/08 8:18:26 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Figure 1.5 Annual Average Household Heat Bills (in yuan) and Their Payment Sources, 2003 to 2004 Tianjin Taiyuan Harbin Changchun 0 500 1000 1500 2000 Sources of Heat Bill Payment, RMB Self-Paid Work Unit Paid Government Paid Other Source: Based on Zhang/Xu 2005. Figure 1.6 Heat Bill Burden--Average of Four Cities (Heat Bill in Percent of Household Income by Income Group) 30 25 income 20 total 15 of 10 cent 5 Per 0 <20% 20- 40- 60- >80% 40% 60% 80% MLS Non- Poor Low Middle Upper High MLS Middle Total Heat Bill Out of Income Self Paid Heat Bill Out of Income Source: Based on Zhang/Xu 2005. obtain compensation in form of higher wages; cracks--receiving neither heat subsidy nor work and those poor households receiving payments unit support (see page 69). under the Minimum Living Standard (MLS) In Eastern Europe during the 1990s, ever- program12 are (partially) exempted from increasing fuel prices at a time of declining payments for heating. For MLS households incomes and decreasing energy subsidies and with partial exemption from heat bill payment privileges created severe affordability problems the de facto income burden is about 9 percent. Of for many households, including middle class some concern is the income burden of 14 percent households, in many countries. Real incomes of those poor households falling through the in Eastern Europe fell to only about half of their 12Those households are referred to as di bao. 8 5035-CH01.pdf 8 5035-CH01.pdf 5/27/08 8:18:27 AM 5/27/08 8:18:27 AM Background on Chinese Heating Sector and Heat Reform Initiatives level before transition started, while energy prices increased more than twofold. The price Box 1.1 Affordability of Heating---- Results from Household Surveys of clean fuels (electricity, natural gas, district in Eastern Europe heat, liquefied petroleum gas and kerosene) In Kiev, the capital of Ukraine, households rose much faster than that of dirty fuels (coal, connected to DH spent on average 6 percent of wood and diesel).13 Box 1.1 shows the results of their expenditures on DH and 4 percent on hot household energy surveys in Russia, Ukraine, water, a total of 10 percent, based on information Lithuania, and Bulgaria. Even though cost from a 1997 household survey. But this share recovery at the time of the surveys was still far varied from slightly above 15 percent for the from complete, households paid between 5 and poorest households to 5 percent for the richest. 20 percent of their incomes or expenditures for For Kiev, the average heat tariff at the time of heat and hot water. the survey was US$22/Gcal (which would cover Conclusions. Forpoorerhouseholds,heatbills the cost), and cost recovery from residential constitute a much larger share of income than for customers was about 80 percent. households with higher incomes. This is not a Several surveys were carried out in Russia in large problem under the traditional system with 1995, when utility cost recovery was around 30 employers paying for their employees or the percent. Average housing costs (maintenance + utilities) amounted to about 5 percent of government paying for di bao. However, some household monetary incomes. If tariffs were poor without employment, but not qualifying increased to full cost recovery levels, the share for MLS payments, are confronted with heat of housing costs in incomes would increase to bills they cannot afford. With the transfer of about 15 percent. The survey results for Vladimir the invisible to a transparent subsidy under and Volkhov point to an average 10 percent the ongoing heat reform and responsibility of share of housing costs in household income, and households for payment, the problem of an 20 to 25 percent for the poorest households. unsustainable heat bill burden for low-income A large household energy survey in the households becomes larger and very visible. Lithuanian cities of Vilnius and Kaunas in early Hence, workable subsidy mechanisms that do 1995 had the following results: On average, not neglect the problem on poor non-di bao households spent 11 percent on energy (DH households need to be devised as part of heat was about 50 percent of that), low-income households as much as 20 percent. Cost reform (see Chapter 6). recovery was then about 30 percent. In Bulgaria, the heat bill as share of average Heat Reform household income reached about 12 percent in Initiatives in China the capital Sofia and 20 percent in Pernik. With tariffs increasing to cost recovery level by 2007, Previous Reform Initiatives increasing incomes and decreasing average The economic reforms, which started in the consumption due to efficiency improvements on both the supply and demand side, spending for early 1980s in China, accelerated economic heat is expected to decrease from 2007 on. growth, but also brought about increasing Source: Meyer 2003. energy demand and occasional serious energy shortages. In 1986, the State Council issued a "Provisional Ordinance on Energy Saving and Management," promoting the application of recommending the elimination of small coal- more advanced and efficient technologies in all fired boilers and stoves and their replacement sectors, including urban heating. In the same with DH systems. In the following decade, more year, a special order (No. 22) was issued by the than 210 CHP projects with a total capacity of State Council to promote DH and cogeneration, 5,800 MWe were implemented. 13See Lampietti/Meyer 2002. 9 5035-CH01.pdf 9 5035-CH01.pdf 5/27/08 8:18:27 AM 5/27/08 8:18:27 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY In the mid-1990s, the central planning during the past 20 years. China introduced its system was gradually replaced by a more first mandatory national residential building market-oriented approach. Almost all state- energy efficiency standards at the end of 1995 owned enterprises were forced to reform and (referred to as National RBEES-95) after limited cope with market mechanisms, but many trials of a less stringent version were carried of them turned out to be inefficient and ran out in selected cities between 1986 and 1995. into financial difficulties. The heat supply Effective since July 1, 1996, the standard includes enterprises, which depended on the regular minimum energy efficiency requirements for payments of enterprises whose employees newly constructed (or expansion of) residential they supplied with heat, experienced financial buildings and associated central heating systems difficulties too, as a result of increasing arrears in China's heating zone. The goal of the National from financially troubled enterprises. The RBEES-95 is to reduce the specific space heating situation was exacerbated by increasing fuel energy consumption of newly constructed and electricity prices. With collection rates of residential buildings in the cold regions by only 60 to 70 percent, many heating companies 50 percent over the 1981 standard designs, by could only maintain partial operation, a improving building envelope thermal integrity situation that could not be allowed in the as well as heat supply energy efficiency.14 severe cold regions. In early 1995, the State Implementationofthe1995standardhasbeen Council issued an order, demanding that slow initially. According to official estimates, local governments assist the heat supply the rate of compliance in meeting building enterprises to overcome the financial crisis. envelope thermal integrity requirements was In addition, several initiatives were started a mere 6 percent across the heating zone in to reform the heating sector. MOC selected 2000. Although compliance has improved in several cities as pilot cities for various aspects recent years--to 30 percent, according to a of heat reform. During the next couple of 2004 survey--only a handful of northern cities, years, the consolidation of the heating sector notably, Beijing, Tianjin, and Tangshan, have and commercialization of the heat supply achieved significant success in compliance companies was piloted in Mudanjiang and enforcement. Increased efforts are being made to Yantai (Shandong province); in Tianjin the systematically enforce the standard as part of the transfer of the payment responsibility from existing local procedures for construction quality work units to households and compensation inspection. Heat metering and consumption- through explicit cash payments was piloted. based billing of consumers should also improve The welfare legacy of centralized heating, compliance by providing an economic incentive coupled with earlier financial problems of for home buyers to invest in more comfortable the centralized heating companies, left few apartments with slightly higher first cost but choices of financing sources for additional DH significantly lower running costs. infrastructure. For the time being, generation In parallel to supporting cities to improve and network facilities are financed by real estate enforcement, MOC is elaborating a new, more developers, and thus ultimately by consumers, stringent RBEES that would reduce energy through contributions to construction costs consumption by an additional 30 percent. Tianjin (connection fees; see para. 220ff). and Beijing have already locally adopted such Building energy efficiency improvements a standard. It is the basis for support under the are an important component of heat reform. In World Bank-GEF Heat Reform and Building this area, serious efforts have been undertaken Energy Efficiency project (see also Box 5.1). 14For details see Liu 2005. 10 5035-CH01.pdf 10 5035-CH01.pdf 10 5/27/08 8:18:28 AM 5/27/08 8:18:28 AM Background on Chinese Heating Sector and Heat Reform Initiatives 2003 Government Heat Reform as Tianjin, Hebei, Shanxi, Jilin, Inner Mongolia, Guidelines and Follow-up Sinkiang, Qiqihar, Daqing, Mudanjiang, Liaoyuan and 10 districts of Beijing) have issued After the small-scale piloting of various regulations requiring government work units components of heat reform in the 1990s, eight to transform in-kind benefits into explicit cash ministries and committees jointly issued payments. guidelines for heat reform15 in July 2003 to scale The December 2005 follow-on circular of up reform by requiring each of the 16 provinces the eight ministries ("Instructions to Further in the heating zone to assign pilot cities and Push Forward Urban Heat Reform," No. 220) to report on progress in implementing pilot underscores the need for progress in heat reform heat reform programs in those cities. These and,inparticular,setsatwo-yeardeadlineforthe guidelines were followed up--with State completion of the transfer of heat bill payments Council approval--in December 2005 with from work units to consumers. In June 2006, "Instructions to Further Push Forward Urban MOC set up the Heat Reform Promotion Office Heat Reform." (HRPO) to actively promote urban heat reform The goals of the heat reform program with a focus on transfer from invisible subsidies outlined in the heat reform guidelines are to to visible subsidies and implementing heat commodify heating by addressing key sector metering. This was followed with instructions at issues: the National Heat Reform Working Conference i. Shifting the responsibility for payment of in August 2006 for localities to set up specific heat bills from employers to consumers offices to lead implementation of municipal heat and transforming the nontransparent reform efforts, beginning with the development subsidy into a transparent one, including of specific action plans. improving the system of targeted The second priority issue is heat pricing, subsidies for poor consumers; triggered in particular by the coal price increases ii. Introducing heat metering and billing duringthepastthreeyears.TheMOCcollaborated based on consumption, promoting with the ADB and the World Bank/ESMAP on consumercontrolofheatingandbuilding the development of a new methodology for energy efficiency, including far stricter heat pricing. The pilot city approach was used enforcementoftheGovernment'sbuilding here as well, culminating in the application of energy efficiency standards for all new the methodology in several pilot areas and the residential buildings; drafting of implementation documents (heat iii. Developing safe, clean and demand- pricing management method) as the basis for responsive heat supply systems; applying heat tariff reform principles more iv. Reforming heat pricing; and broadly. The heat pricing management method v. Acceleratingreformofheatingenterprises, was issued jointly by the National Development consolidating many small enterprises in and Reform Commission (NDRC) and MOC cities, introducing competition, and in June 2007 and will become effective starting fostering and standardizing the heat October 2007. Another result of the heat pricing market.16 work was a joint regulation (No. 2200) by the The first issue has attracted most attention so NDRC and MOC in October 2005 to allow the far, and several provinces and many cities (such partial automatic adjustment of heat prices in 15Notice on Printing and Distributing the "Guidelines for Experimentation in Urban Heating Restructuring at Selected Places," Department of Urban Construction in the Ministry of Construction [2003] No. 148. 16Already at the end of 2002, the "Circular on Distributing Opinions on Quickening the Process of general adoption of the market principles for Municipal Public Utilities Sector" was issued to "promote the process of general adoption of the market principle for municipal public utilities sector. This document describes how the utility sector will be opened for franchising and concessions. 11 5035-CH01.pdf 11 5035-CH01.pdf 11 5/27/08 8:18:29 AM 5/27/08 8:18:29 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Table 1.1 A Vision of the Chinese Heating Sector Reform Current Situation Vision Transition Stage Rationalization of Heat Supply Fragmented local Few DH companies supply DH in Merging enterprises (e.g. heating sectors with each city through franchising) many heat supply enterprises Uncoordinated Sector consolidation based on Preparing heat plans and establishment of municipal heat planning, based business plans addressing heat supply networks on environmental and least-cost sector consolidation and enterprises considerations; competition for the market through bidding for supply of new developments Many isolated (coal- Small (coal) boilers are eliminated Preparing heat plans (observing fired) boilers with if a connection to DH is viable or environmental objectives) and low efficiency are converted to cleaner fuels business plans addressing interconnection of isolated boilers and networks DH based State of art DH systems (i.e., Rehabilitation and on outdated efficient, demand-driven, with modernization investments technologies with variable-flow technology) low efficiency Heat supply Commercialized DH companies Giving more responsibility companies mainly in being also responsible of financial to management, creating charge of operation performance, investment and incentives for good performance and maintenance business planning Tariff System Partially subsidized Full coverage of justified costs; Gradually approaching cost tariffs targeted subsidies for low-income recovery consumers Uniform local tariffs Tariffs for each company based Uniform local tariff as long as on individual justified costs plus sector is fragmented asset-based profit margin Different area-based Uniform application of two- Gradual introduction of two- tariffs for residential part tariffs. Same tariffs for all part tariffs with small tariff and nonresidential customers except for those with differences between customer customers special contracts groups due to different profit rates No or nonspecified Profit margin based on asset Profit margin related to costs; profit margin values. Some profits to be different profit margins for invested in DH rehabilitation and/ different consumer groups or expansion 12 5035-CH01.pdf 12 5035-CH01.pdf 12 5/27/08 8:18:29 AM 5/27/08 8:18:29 AM Background on Chinese Heating Sector and Heat Reform Initiatives Table 1.1 Continued Current Situation Vision Transition Stage Tariff adjustments Base-line tariffs will be valid for a Tariff adjustments require new require new approval period of three to five years; price approval procedures; for some procedures; since adjustment formulas allow tariff important inputs such as coal late 2005 partial changes without official approval a partial automatic cost pass- automatic cost pass- through is allowed through Billing and Collecting Payment Full payment responsibility of Gradual shift of payment responsibility is consumers coupled with targeted responsibility from work units to shifting from work social assistance for low-income consumers units to consumers groups Billing based on Billing based on two-part tariff Coexistence of both billing heated area/volume with energy charge based on systems depending on heat metered consumption meter installations; if only buildings are metered, distribution of costs among flats based on flat size Heat metering Metering at building level Minimum requirement: building- only in some with cost allocation based level meters demonstration on apartment-metering/heat projects allocation Prepayment of Flexible, customer-tailored Prepayment of heating bills, but heating bills with payment terms to improve with negotiated payment plans incentives for even affordability and collection rates earlier payment Regulation All collective Only heat suppliers with All heating systems are subject heating systems are monopolistic characteristics are to regulation, as long as uniform under government subject to regulation methodologies and rules do not supervision exist Tariff approval by National regulatory entity Tariff approval by municipality, municipality determines methodologies and based on methodologies rules for tariff setting, municipal determined by national entities supervise compliance and government regulate details Municipalities own System of government regulatory Increased transparency of heating companies and industry oversight separate regulatory oversight (e.g., and also carry out from heating company ownership, through automatic procedures) administrative operation and management supervision Source: Joint Study Team. 13 5035-CH01.pdf 13 5035-CH01.pdf 13 5/27/08 8:18:30 AM 5/27/08 8:18:30 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY case of coal prices changes of at least 10 percent fewer separate heating networks and heat in more than a year. Accordingly, heat prices in supplycompaniesineachcity.Heatsuppliers many cities increased just before the beginning evolve into corporate entities, which can of the 2005/06 heating season (see Figure 3.2b access financing for new investment and and page 62 for details). introduce modern heat utility technologies The central government has also decided (based on demand-driven operating and that a comprehensive regulation of the heating resource-saving principles), operations and sector or a heat law would be needed to achieve management practices. Competition will heat reform goals and initiated a project with the be introduced to provide heat supply to WorldBank/ESMAPinlate2005todeterminethe new housing developments, for example, contents of such regulation and best approaches by requiring that the right to supply to achieve heat reform goals. Detailed work is them is established through an open and scheduled to start in late 2007. transparent bidding process complying with The urgency to achieve significant energy environmental requirements. savings in the heating and building sector · The heat price system in a commercialized through heat reform has also been emphasized heating sector is based on full cost recovery in China's "11th Five-Year Plan."17 of justified costs including a fair profit margin based on asset values with tariffs specific for each heat supply company. A Vision of a Reformed price cap regime under which base-line Centralized Heating tariffs are valid for a period of three to five years and prices are adjusted automatically Sector in China will provide better incentives for realizing Based on the realities in China as described in efficiency gains. the previous sections, specifically rapid urban · Consumers are responsible for full payment growth and improving standard of living and of heating bills. They are able to control environmental considerations, centralized consumption and pay according to heating will become or remain the dominant consumption.Heatismeteredinthepremises heating option in areas with high heat-load of the consumer, in addition to the building densities. The basic premise of the guidelines of level.Atwo-parttariffwithenergyandcapacity the eight ministries is the necessity of the heating chargesprovidesincentivesforconsumersfor sector moving from the planned to the market energy conservation and reduces revenue economy. This will require substantive changes risks to heat suppliers of fluctuating demand. in the organization of the DH sector in China Commodification of heat is supplemented by during the next decade. a system of financial support to allow low- Table 1.1 describes the expected changes and income groups (continued) access to basic, results (visions) for some of the most important clean, and affordable heating services. issues. Moving the centralized heating sector · A system of government regulatory and into the market economy essentially means industry oversight system divorced from that heat will become a commodity with the heating company ownership, operation and following consequences: managementisimplemented.Theregulatory framework is transparent and protects both · The centralized heating sector undergoes consumers and investors. Methodologies a rationalization, based on municipal and rules for tariff setting--identical for heat planning according to least cost and all centralized heating companies--are environmental criteria. This results in far developed by a national agency. Supervision 17See NDRC's "Medium and Long-Term Special Program for China's Energy Efficiency and Conservation" (November 2004). 14 5035-CH01.pdf 14 5035-CH01.pdf 14 5/27/08 8:18:30 AM 5/27/08 8:18:30 AM Background on Chinese Heating Sector and Heat Reform Initiatives of compliance on the local level is the of uniform accounting rules and tax treatment, responsibility of local agencies. clarification of asset ownership, and asset revaluation. Formanyoftheissues,thenecessarychanges The long-term vision for the Chinese are quite sweeping, require substantial financial centralized heating sector is similar in many inflows for investment in heat supply systems respects to the results of heating sector and for targeted social assistance, and would restructuring in Eastern Europe after a decade of best be carried out in several steps. This involves transition. This is not surprising, given that the passingthroughatransitionphase(seeTable1.1), initial conditions both in terms of technologies where initial steps are taken to move the sector and economy are comparable. The basic into the right direction (important examples organization of the DH sector and the changes are merging heat networks and heat suppliers, since the early 1990s in Eastern Europe and the metering at the building level, introduction lessons learned regarding heat pricing will be of two-part tariffs and partial automatic tariff summarized in the next chapter, as well as the adjustment), and basic requirements are put in somewhat different DH sector organization place that are necessary to move closer to the under a more competitive model in Western ultimately desired results, such as application Europe. 15 5035-CH01.pdf 15 5035-CH01.pdf 15 5/27/08 8:18:31 AM 5/27/08 8:18:31 AM 5035-CH01.pdf 16 5035-CH01.pdf 16 5/27/08 8:18:31 AM 5/27/08 8:18:31 AM 2 Heat Reform in Eastern Europe and the Role of Heat Pricing The broad problem description and proposed that are targeted by the Chinese government in reforms for the Chinese heating sector resemble, its heat reform program. to a large extent, those in Eastern Europe during Box 2.1 gives a summary of the basic pre- thefirstdecadeoftransition.Onemajordifference and post-reform features of the DH sector in is that heat reform in Eastern Europe was rarely Eastern Europe. In the next chapters the aspects the result of smooth implementation of carefully most relevant to heat pricing will be examined planned and sequenced interventions. Results in more detail to inform the recommendations were achieved based on trial and error rather for heat price reform in China. than on comprehensive strategies aiming to Atthebeginningofthetransitionprocess,DH reform the (district) heating sector. Laws and in Eastern Europe was typically characterized regulations were often formulated when heating by shrinking markets due to the loss of many sector restructuring had already been underway industrial customers, energy efficiency measures for a considerable time. It is hoped that an on the demand side and disconnections. The analysis of the Eastern European experience and resulting bad financial status of the DH sector knowledge of the pros and cons of approaches gave the impetus for introducing changes. Still, and their practical implementation can help early in the 1990s, most decision makers were Chinese decision makers to devise a reform focusing on technological improvements to the process that avoids much trial and error and Soviet-style DH systems. Urban construction leads to a smoother implementation with has resumed by now, but most new residential quicker results. construction is concentrated in small buildings, Since the end of the 1980s, the district which are rarely connected to DH. Only through heating (DH) sectors in Eastern European the integration of small isolated networks countries have experienced profound changes: into their large integrated networks have DH In most countries,18 including Poland, Czech companies managed to somewhat stem losses Republic, and the Baltics, most consumers pay in heat demand and sales. for their heat, general subsidies are mostly Heat pricing first became an issue in Eastern eliminatedandhavebeenreplacedwithtargeted Europe when the first DH modernization subsidies for poor households, metering and projects were cofinanced by the international consumer controls, and consumption-based financial institutions (IFIs) in the early 1990s. The billing are more and more commonplace, many IFIs requested that the technical rehabilitation heating companies have modernized their be accompanied by a significant and steady generation plants and networks, heat suppliers increase of the tariffs to improve the financial are commercially oriented, and the private status of the DH companies and enable them to sector is increasingly engaged in centralized heat pay back the loans. This happened, for example supply. These results are quite similar to those in Poland, where the World Bank provided loans 18With the general exception of countries in the Commonwealth of Independent States (CIS). 17 5035-CH02.pdf 17 5035-CH02.pdf 17 5/27/08 8:19:04 AM 5/27/08 8:19:04 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Box 2.1 District Heating in Eastern Europe Early 1990s Currently in Most Advanced Countries · Many heating companies in each city · In each city: One to few companies that provide · Many small (coal) boilers and networks; small centralized heating share of cogeneration · Small boilers integrated into large DH networks and larger share of cogeneration · Energy savings and other operational and · No incentives for efficiency improvements commercial efficiency improvements are and energy savings promoted by heat pricing and management · Heat is not metered and cannot be controlled; reforms lump sum tariffs are based on square meters · Heat is metered and can be controlled by · Mostly state-owned companies; often consumer; heat bill depends on consumption; owned by state-owned-enterprises to supply both two-part tariffs and one-part tariffs with employees or part of the national power energy charges only are applied supply system; transition to municipal · Many different ownership forms with regulation ownership of DH suppliers by independent local or · One tariff for residential buildings in one city national agency or even the entire country, does not recover · One tariff for each heating company----recovers all costs all justified costs · Most companies make losses · DH is becoming a profitable business · Heat is considered welfare; work units pay · Consumers are responsible for full payment of bulk of heating costs heat bills · All residential consumers receive subsidized · Only low-income families receive targeted heat subsidy · No competition in the heating sector · Shrinking market for DH: loss of industrial consumers, improved building energy efficiency, temporary disconnections due to competition from other heat sources and affordability problems Source: Meyer 2003. to five cities for DH improvements (see Box 2.12 it was not used as a means to reform the whole and 3.1). sector and to improve the performance of the In the beginning of the reform process, heat DH enterprises. Only recently have heat pricing pricing was mostly an instrument to bring heat and tariff regulation in some countries become pricesclosertoproductioncoststhathadsuffered an active instrument to develop the heating substantial increases due to fuel prices rapidly sector. approaching world market price levels. The tariff Nevertheless, heat price reform, even in its level was simply increased without changing most basic form as increasing heat-price levels the tariff system itself. Tariff regulation used to to better reflect supply costs, together with the be a political instrument to prevent "excessive" technical modernization of heating systems price increases aiming to avoid harmful social and management reforms, has resulted in a and political consequences. The main task of comprehensive, but still ongoing remodeling the regulatory entities became safeguarding of the heating sectors in Eastern Europe. The consumers' interests (through low prices), but degree of success of pricing reform and technical 18 5035-CH02.pdf 18 5035-CH02.pdf 18 5/27/08 8:19:06 AM 5/27/08 8:19:06 AM Heat Reform in Eastern Europe and the Role of Heat Pricing modernization varies significantly from country to country. It is evident that clear visions of the Box 2.2 District Heating in Western Europe future of the DH sector (such as in Lithuania) helped accelerate the commercialization process · DH is mostly under municipal control and and achieve systematic improvements of the dominated by municipal utilities, but private sector, while the lack of visions (e.g., in Romania, ownership is increasing. and for a long time in Bulgaria) contributed · EventhoughdistributionofDHisconsidered to deadlock and eventually the decline of the a natural monopoly, DH is operating in an sector. inherently competitive environment, since Studying this experience from Eastern alternative heating methods (based on Europe can help China avoid costly mistakes. natural gas, light heating oil, electricity) have An important lesson is that the development always been available to customers. and implementation of a systematic heat · Unlike electricity or gas, DH is generally not reform strategy could save time and money. subject to regulatory oversight, including Another lesson is to avoid the vicious circle of price setting. Exception: Denmark heat tariffs falling below cost recovery levels, · DH connection is based on contracts in leading to severe declines in service quality accordance with commercial codes. by cash-strapped heat suppliers, unhappy · Prices are uniform for residential consumers consumers, deteriorating collections and further within a DH supplier's market; prices for decline in service quality, observed in many larger commercial, public, and industrial heating systems in Eastern Europe. The early customers are negotiated between customer implementation of heat metering, consumer and supplier. controls, and consumption-based billing, · In most DH systems, two-part tariffs are together with two-part tariffs at cost recovery applied. levels, will provide incentives for households · Changes in heat prices are usually proposed to use heat more efficiently and will force heat by the DH company and approved by its suppliers to adopt technical and operational board. measures to cope with the demand-driven · Consumer protection is carried out by anti- changes. Such improved performance of the monopoly or competition offices. centralized heating systems to make them · EU policies targeted at promoting combined- efficient, flexible, and cost-effective should heat-and-power (CHP) generation are also result in satisfied consumers who appreciate indirectly benefiting DH. the comfort provided and are willing to pay for · With energy costs on average only about the service. Finally, early implementation of an 4 percent of household income, only a very effective system of targeted subsidies to low- small percentage of low-income households income consumers needs to supplement the heat are eligible for targeted social benefits that reform measures. include payments toward heating bills. Knowledge transfer from Eastern Europe is Source: Meyer 2003. emphasized due to the similarities in the initial conditions and the need for a well-defined reform process. In some aspects, however, the planned economy more quickly in favor China is characterized by more favorable of approaches that maximize the benefits of conditions than Eastern Europe, specifically competition in the heating sector (i.e., consumer- economic growth and income growth of the oriented, efficient, clean and affordable heating). urban population with resulting construction This would be relevant mostly for new housing boom and improved living conditions. This developments. For example, developers could may enable China to leapfrog and leave behind bid out infrastructure supply in general and 19 5035-CH02.pdf 19 5035-CH02.pdf 19 5/27/08 8:19:06 AM 5/27/08 8:19:06 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Figure 2.1 Estimated Average District Heating Prices in Europe (1999 to 2003) in Euro/MWh, without VAT 70 60 50 40 30 20 10 0 R. oatia Austria DenmarkFinlandGermanyHollandSwedenAverageBulgaria Cr Czech Latvia EstoniaHungary Poland LithuaniaRomania Average Slovak EU6 EE10 1999 2000 2001 2002 2003 Source: Werner 2006. heat supply in particular within the limitations protection from potential monopolistic behavior imposed by environmental and heat planning. when entering contracts with heat providers. In Under these conditions, the experience the mid- to long-term, however, in cities where from centralized heating in Western European multiple options for space heating are available, could become more relevant for China. Here, regulationshouldbeasminimalaspossible,with DH is not regulated,19 since it is operating in market-based DH prices set in competition with a competitive environment where alternative other heating options. heating methods based on natural gas, light fuel A comparison of average DH prices in oil, and electricity have always been available Western and Eastern European countries (see to consumers. Box 2.2 lists some of the relevant Figure 2.1) provides little evidence that the features of DH in Western Europe, which will mere existence and type of regulation have be elaborated in later chapters. any significant influence on the price level. For Weighing these two examples, it is example, Denmark, the only country within the recommended to regulate the Chinese DH EU6 countries where DH is regulated, has higher industry, at least during a transition period, since prices than all other EU6 countries where DH is little competition is expected in the centralized operated under competition. Obviously, other heating market in the short and medium term. factors play a more significant role. Climatic Consumersarejuststartingtobecomeresponsible factors are important, as the fixed costs (capital for heat payments and may therefore need extra costs) per heat unit (MWh) go down with the 19The only exception is Denmark where prices are regulated, since most DH customers have been connected according to governmental planning initiatives (see Werner 2006). 20 5035-CH02.pdf 20 5035-CH02.pdf 20 5/27/08 8:19:07 AM 5/27/08 8:19:07 AM Heat Reform in Eastern Europe and the Role of Heat Pricing length of the heating period. This fact contributes access to clean heat services for consumers. The to low DH prices, for example, in Finland. In all following principles to be applied to heat prices listed Eastern European countries the DH sector have been uniformly agreed by the joint study is subject to regulation, including DH pricing. team. Heat prices need to Heat tariffs are rather different, ranging from 20 to almost 40 /MWh. Lithuania and Czech · provide incentives for the efficient supply Republic are the two Eastern European countries and use of heat; with a rather advanced privatization in the · enable heat supply companies to operate on sector. Both countries have among the highest a sound financial basis, and tariffs in this group. · be set in a clear and transparent way, making In some of the countries in Eastern Europe, the tariff system easily understood especially the increases of DH prices during 1999 to 2003 by final consumers. reflect policy decisions to bring energy tariffs closer to cost recovery levels (e.g., in Bulgaria In the Chinese context the realization of and Romania). It also reflects the establishment the heat price reform objective and principles of regulatory agencies that are less prone requires that measures in four main areas are to consider political motives in their tariff undertaken (see, for example, National Experts decisions. Thus, DH tariffs do not necessarily Report 2005): reflect the real production costs, but, rather, the competence and willingness of regulators to 1. Introduction of consumer payment approve reasonable tariffs. responsibility and a change from invisible An isolated comparison of prices does not to visible heat subsidies. This includes the allow us to draw any conclusions about costs transfer of payment responsibility from of heating. Ahigh heat price can reflect the high work unit to consumer and compensating investment costs of a very efficient system that cash payments. For poor and unemployed also reduces heat supply and heat consumption consumers social assistance for payment of while improving the comfort. Thus, resulting heat bills needs to be provided. heat costs could be lower than in a system 2. Determinationofthejustifiedheatprice:What with lower average costs and prices but lower shouldbethebasisforthetariff?Howdocost efficiencies. But of course, a high heat price can and price relate? How can tariffs provide just reflect the inefficiency of an outdated, badly incentives for efficiency improvements? managed system. How would tariffs be structured for different heatingcompaniesandfordifferentcustomer groups? Heat Pricing: Key 3. Promotion of heat metering, consumer con- Principles, Requirements, trol of heat consumption and consumption- and Determination of based billing: What is the best tariff structure appropriate for heat metering that meets the Regulated Heat Prices interests of both supplier and consumer? Basic Principles of Heat Price What types of heat meters should be used and what would be the implications for Reform consumption-based billing schemes? Should In line with the objectives of the overall heat new energy efficient buildings and existing reform guidelines (see page 11), the objective of buildings be treated in the same way? heatpricereforminChinaistoimprovetheoverall 4. Improvement of the system of heat price efficiencyoftheheatingindustrysothatitgainsa administration: How can the monopoly sound financial footing and provides affordable power of heat suppliers be reigned in 21 5035-CH02.pdf 21 5035-CH02.pdf 21 5/27/08 8:19:07 AM 5/27/08 8:19:07 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY and political influence on tariff setting be distribution, heat transfer to buildings, etc.). avoided? Coordination between power, bulk Prices and tariffs thus do not properly reflect heat, and heat pricing is necessary. Partial the actual costs and provide misleading signals automatic tariff adjustment formulae should to suppliers and consumers. A rational tariff be used. system requires that the accounting costs of heat supply are determined uniformly in a clear and Caveats and Requirements transparent fashion and that taxes are applied uniformly across the sector. Based on this general agreement about the Other hurdles are the lack of clear ownership principles of heat pricing, it is obvious that a and proper valuation of heat infrastructure tariff system incorporating those principles assets. These and other problems should, and requiring substantive changes from the however, not be an excuse for not moving ahead current practice in China will deeply affect not with reform. In many cases, first best solutions only suppliers' business practices, but even will not be implemented right away, but instead, more so consumers' pocketbooks and behavior. transitional solutions will be employed while the Many steps have to be taken to design and basic prerequisites for deeper reform are being implement a heat pricing system that is suited put into place. The decisions about the choice for a market economy. It should, however, also of instruments will thus largely depend on the be acknowledged that some steps could be taken particular historical situation and institutional quicklyand/orthatsomemunicipalitiesortypes environment in China. Table 2.1 lists the most of buildings could move at a faster speed and in important issues to be decided in the four areas a flexible manner, especially in the case of new of heat price reform and possible alternatives housing developments. which will be discussed in detail in the following In addition, the implementation of a more chapters. rational tariff system is hampered by the In the remainder of this chapter, practical existence of a very fragmented heating sector. recommendations for the core issue in heat Tens (in smaller cities) or hundreds (in larger pricing--the determination of structure and cities) of heating companies of different sizes level of heat prices--are developed based on and with different owners supply heat within Chinese conditions and expected developments a municipality. The historical development of and informed by the experience of reforming the Chinese heating sector has led to a veritable heat prices in Eastern Europe. The other three jungle of cost accounting rules and different tax areas described at the beginning of this chapter regimes, depending on ownership and corporate will be examined later. structure and to a mix of actual and normative costs in the determination of heating costs. Uniform accounting standards for business Determination of the Regulated enterprises were issued in 2001, and in 2005 Heat Price the Ministry of Finance issued a regulation Thecoreofheatpricereformisthedetermination making them applicable also for state-owned of the level and structure of heat tariffs that enterprises (SOEs) in a gradual process. The promote the objectives of heat reform. The compliance with the standard is, however, not ESMAP project focused on the determination enforced and SOEs' accounts are not externally of retail heat prices. Most heating companies audited. In addition, the applied accounting in China generate the heat they supply to rules usually do not allow to identify the costs consumers. Exceptions are heating companies for individual products or services (such as hot that source bulk heat from large combined heat water for space heating, domestic hot water, and power (CHP) plants. The pricing of CHP steam, etc.) and activities (generation, transport, heat requires an analysis of the cost allocation 22 5035-CH02.pdf 22 5035-CH02.pdf 22 5/27/08 8:19:08 AM 5/27/08 8:19:08 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Table 2.1 Alternative Approaches to Heat Price Reform Issues Issues Alternative 1 Alternative 2 Alternative 3 Alternative 4 Pricing Cost-of-service Incentive principle based based Cost basis Accounting Standard costs Future costs Justified costs costs Profit margin Cost-based Asset/capital- based Customer/ One Differentiated Tariffs groups Price structure Fixed, lump-sum Consumption- Consumption- based: based: One-part Two-part Scope of tariffs Uniform in each Individual for city each heating company Metering Substation-level Building level Apartment level Consumption- With Without based billing compensation compensation factors factors Extent of Complete Partial None compensation Approach Only for MLS Extend to non- to social beneficiaries MLS poor assistance Financing of Financing Financing Financing Shared social support from heating from local from central for heating company government government Heat price Central Municipal Shared administration regulator regulation responsibilities Tariff Basic Automatic adjustment procedures adjustment with approvals, formulae hearings etc Source: Authors. between heat and power.20 Frequently, it is a range of additional stakeholders that could not determined by the relative negotiating powers be accommodated in this project, but is expected of supplier and customer. Bulk heat and CHP to be the subject of a subsequent analysis. pricing would therefore have required an The following section reviews the theoretic additional level of analysis and involvement of basis of price setting in regulated infrastructure 20For a comparison of different cost allocation methods see Gochenour 2003. 23 5035-CH02.pdf 23 5035-CH02.pdf 23 5/27/08 8:19:09 AM 5/27/08 8:19:09 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY sectors and the discussion about cost-of-service deteriorate in the pursuit of efficient production. and incentive pricing, before turning to the For an overview of quality of service issues in practical application for the Chinese centralized utility regulation see, for example, Holt 2004. heating sector. In competitive markets, prices that are set equal to marginal costs best provide the Functions of Regulated Prices productive efficiency signals. For network-based and Pricing Principles services, the marginal cost to provide the service In regulated industries with (natural) monopoly is, however, lower than the average cost--due characteristics (see footnote 22), prices do not to the cost of building and maintaining the result from the interaction between supply network.22 Marginal cost pricing would result and demand, but they are based on regulatory in financial deficits for the service provider. decisions that intend to approximate efficient, A two-part pricing structure can reconcile competitive outcomes. In addition to efficiency productive efficiency and financing objectives. objectives, regulators pursue financing and A price per unit set at the marginal cost of equity objectives with their price setting supply will preserve the incentives to produce decisions. The main functions of an efficient and consume efficiently, while a fixed fee will price setting system21 are thus to recover the deficit. A price equal to the average costs would also eliminate the deficit but lead 1. Provide signals about the scarcity of services to a lower-than-efficient level of production and (allocative efficiency) so that consumers consumption.23 use heat efficiently, and suppliers produce Toachievetheequityobjectiveitisfrequently it as efficiently as possible (productive necessary to supplement pricing measures24 with efficiency); other measures such as targeted social assistance 2. Ensure that heat suppliers earn sufficient (see Chapter 4). Preference should be given to revenue to cover their operating costs and those supplementary measures that preserve the future investments (financing objective); and other two objectives. 3. Ensure a fair distribution of benefits between Various pricing principles for network-based members of society (equity objective), public services such as telecommunications, betweenserviceprovidersandconsumers(for electricity, natural gas, and water supply have example, ensuring that the cost savings from been developed during the past few decades that modernization and efficiency improvements combine the efficiency and financing objectives. are shared and do not accrue solely to the They fall into two basic groups: cost-of-service provider) and between different classes of and incentive pricing.25 These two approaches consumers (for example, setting prices in and their basic pros and cons are summarized such a way that low-income consumers can in Table 2.2. access the service). Cost-of-service regulation sets prices that are based directly on the costs of the regulated A pricing system will best achieve these firm. Rate-of-return (RoR) regulation was once objectives if it is transparent so that consumers very common in the utility sector in North can easily understand their bills and react to America. The regulator determines a fair return pricing signals. Finally, regulators must pay on capital assets and then sets prices to deliver attention to the quality of services so they this outcome. The objective of RoR regulation is are provided at an agreed level and do not to ensure that prices are set at a level that allows 21See, for example, McCarthy Tetrault 2000, for the telecommunications sector. 22This fact constitutes the "natural" monopoly: one single supplier can supply the entire market at lower cost than several suppliers. 23See, for example, Berg/Holt 2001. 24In the electricity sector life-line tariffs are frequently used for this purpose; see, for example, Lovei et al. 2000. 25For comparison of regulatory pricing approaches see, for example, McCarthy Tetrault 2000. 24 5035-CH02.pdf 24 5035-CH02.pdf 24 5/27/08 8:19:09 AM 5/27/08 8:19:09 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Table 2.2 Cost-of-service Regulation versus Incentive Regulation PRO CON Cost-of- Firm covers actual costs, Firm has no incentives to operate efficiently service- but cannot extract excess and has no or only very small opportunities to regulation profits. accumulate equity capital. Consumers immediately Information requirements are substantial. benefit from efficiency Costs of regulation are high due to frequent and performance approval procedures (including hearings etc.). improvements. Delays in tariff approvals can generate high losses, especially with high inflation rate or high input price increases. Subject to direct political intervention through the regulatory or price setting authority. 1. Cost-plus Information requirements Profit is based on costs --> firm has incentives are limited to expenses/ to inflate costs; efficient companies that costs. reduce costs are punished by lower profits. 2. Rate of Investors are offered Profit is based on assets/ investments --> firm return guaranteed returns. has incentives to overinvest. Requires additional information on capital/ asset values which are especially difficult to determine in economies with (past) high inflation rates. Incentive Provides incentives for Companies need to be capable and have access regulation cost minimization and to capital to exploit opportunities for cost managerial efficiency reduction and efficiency improvements. since firm retains Service quality may deteriorate unless quality profits due to efficiency of service is regulated as well (remedy: improvements. performance standards with penalties and rewards; establishment is data intensive ). Information is used more Information requirements are even more effectively by regulator. substantial for initial price approval than for cost of service regulation and determination of productivity factor is complex, but no frequent approval procedures required. 1. Price cap Consumers do not benefit from lower costs before the next approval of a baseline tariff. 2. Price Consumers benefit cap with partially from greater adjustments efficiency and lower for exogenous costs. changes in input prices Source: Authors. 25 5035-CH02.pdf 25 5035-CH02.pdf 25 5/27/08 8:19:10 AM 5/27/08 8:19:10 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY ongoing supply of the goods or services by the regulated firm will not benefit from reducing regulated company, but are not set so high as to costsasanyresultingsavingsarepassedontothe allow excess profits. customer. There have been attempts to improve Cost-plus pricing is widely applied for the outcomes from cost-based regulation. public services regulation in Eastern Europe. Benchmarking techniques have been applied Under cost-plus pricing, the tariff calculation is to overcome information problems inherent in (ideally) based on the company's future revenue RoR regulation, though with limited success. requirements (i.e., recovering its full cost of Another approach has been profit-sharing (or operations and allowing for income to pay taxes, sliding-scale) regulation, which is a variant of dividends, finance the rehabilitation of existing RoR regulation. and construction of new assets). The main flaw An alternative to checking the individual of this approach is that in practice, it is usually costs in detail is the benchmarking approach, aimed at the recovery of invested assets, but which compares the costs26 of an individual heat does not adequately reflect the needs for future supply company with industry benchmarks. The development of the infrastructure. In addition, first issue is the decision of which benchmarks to the allowed profit is typically a share of the total use: the average costs of the industry, the costs of cost, creating an incentive to inflate costs and the "best" company, costs of a theoretical green thereby increase profits. Companies that are field company, and so on. Simple benchmarks, efficient and manage to reduce their costs would such as costs per MWh, staff per km pipe, or fuel be punished by a lower profit. consumption per MWh fail to take into account The information requirements for both the specific peculiarities of an individual DH variants are high, but in a well-managed system. Sophisticated benchmark systems are company, the necessary information should complex and costly. The main concern about already be available to the management. For the benchmarking approach is that it assumes cost-plus pricing, the main problem lies in that high costs are caused solely by inefficiencies the determination of the justified costs of each and bad performance.27 Under a benchmarking regulated company. For RoR pricing, the approach, tariff adjustments will be required if regulator--using information provided by the the benchmarks change or if input prices change firm on its projected operating and capital costs, in case only physical benchmarks are used. asset base, and projected sales--must determine In view of the poor incentive for productive what constitutes a fair rate of return (including efficiencyofcost-basedregulation,otherformsof an assessment of risk), whether the operations regulation have been developed. These attempt and proposed investment are efficient, and then to provide regulated firms with appropriate what would be appropriate unit prices over the incentivesforefficientsupplyandpricestructures, regulatory period. Since there is information while at the same time encouraging firms to asymmetry between the firm and the regulator, implementefficientpricelevels(andearnnormal the firm has a huge incentive for inflating costs profits) over time.As summarized by Vogelsang and/or investment. (2001): ". . . [incentive-based regulation] means ThefundamentalproblemwithRoRregulation that the regulator delegates certain performance- is that because the regulation is effectively cost- related decisions to the firm and that the profits plus and because prices are typically reset on of the regulated firm depend on performance an annual basis due to changes in the costs, the measures of the regulator. Incentive regulation 26Costs can be expressed in monetary terms (e.g., $/MWh), as well as in physical terms (kg of fuel per MWh). 27For example, high distribution costs can be caused by (i) high heat and water losses, but also by (ii) an extensive network due to a low heat density. Fixing the approved distribution cost in accordance to a lower benchmark may promote investment in pipe replacements in case (i), but it would not help to reduce the costs in case (ii) except by closing down the whole or at least a part of the network. Whether the latter would be viable has to be tested by a least cost study; it cannot be answered by benchmarking. 26 5035-CH02.pdf 26 5035-CH02.pdf 26 5/27/08 8:19:10 AM 5/27/08 8:19:10 AM Heat Reform in Eastern Europe and the Role of Heat Pricing makes use of the firm's information advantage. opportunities. It is interesting to note the The regulator thus controls less behavior but price-cap approach in the English and rather rewards outcomes." Welsh water sector: Increased investment Price-cap regulation is the most common form to improve water quality with a resulting ofincentiveregulation.Here,themaximumprice increase in water prices was expected, and for a bundle of goods or services provided by the therefore a price cap scheme of RPI + K was regulatedindustryisspecifiedforacertainperiod devised, where K = Q ­ X, with Q the cost of of time. Typically, price increases are constrained meeting quality targets (see Klein 1996). to a level determined by an index--commonly · Service providers bear a larger share of risk the rate of inflation (RPI, which serves as a proxy under price-cap than under RoR regulation for exogenous rises in the prices of inputs)-- (where consumers share in some of the risk) minus an X factor that (predominantly) accounts and therefore face a higher cost of capital (see for expected productivity improvements in the Alexander/Irwin 1996). regulated industry (RPI-X). Any cost savings · To work effectively, price-cap regulation achieved beyond the performance-adjusted rate needs qualified management that is capable of inflation accrue to the firm within a given to exploit the benefits of price-cap regulation. regulated period, usually three to five years, Implementation of a price-cap regulation thus creating incentives to reduce costs. After should therefore be linked with industry and the end of the period of validity, the price cap is company restructuring. reviewed and adjusted downward (see also the note below on the price-cap approach in the UK Hybrid regulation regimes have become water sector). more common (i.e., under a price-cap regime a Although price-cap regulation has important large number of cost components are allowed incentive features and can reduce the cost automatic pass-through into tariff adjustments). and complexity of regulation, it has some In practice, the number of adjustments is usually drawbacks: limited (for example, once per year) and/or the tariff may only be adjusted if input price · To avoid that the costs savings are generated increases exceed a preset ceiling. by reducing the service quality, the service Conclusions. In practical applications, RoR quality has to be supervised as well, leading and price-cap regulation approaches tend to to quality of service regulation. converge: Initial prices tend to be cost-based · The procedure for determining the initial under price-cap regulation and many RoR price is basically the same as for cost-based regimes use price adjustment clauses (see regulation, but more difficult as the impact Estache/Guasch/Trujillo 2003). The ability of accidental factors should be eliminated.28 of balancing the provision of incentives to This is especially true when there is only improve efficiency and to reduce costs, financing limited measurement of inputs and outputs, requirements and eventual sharing of benefits common in the DH industry in transition withconsumersmakes(hybrid)price-capregulation economies. the preferred approach. · The most disputed element of this regulation Althoughtheinformationrequirementsseem is the determination of the X factor, express- to be too complex for immediate application in a ing expected productivity improvements.29 large welfare-based DH industry like in China, A rational determination of the X factor hybrid price-cap regulation could be the preferred requires a comprehensive knowledge base approach in the midterm. The initial prices would of the regulated sector and its development be cost-based with profits based on the value of 28Actually, the boundary between both price setting approaches is fuzzy. Even a cost-based regulation allows retaining profits due to cost savings realized in the short period between tariff approvals. 29For a discussion of the X factor, see, for example, Olson/Richards 2003. 27 5035-CH02.pdf 27 5035-CH02.pdf 27 5/27/08 8:19:11 AM 5/27/08 8:19:11 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY assets, and they would be adjusted over time years with a price cap, compared to three years according to an adjustment formula. Typically, for public DH companies. Similarly, public DH the use of the X factor reflecting the expected companies could be regulated under RoR and productivity increase in the sector reduces the private DH companies could get a price cap. potential extra profits due to cost savings. Taking into account the large undercapitalization of the Practical Issues I: Defining Chinese heating industry on the one hand and and Determining Costs high investment requirements on the other hand, Regardless of the pricing principle applied in setting the X factor at zero could support the practice, the starting point for the design of heat financialrecoveryofthesector.Itshould,however, tariffs is an analysis of the costs of providing the be ensured that these profits are invested into the service. The first question to resolve is, which rehabilitation,modernization,orexpansionofthe costs should form the basis for determining the heating systems. The introduction of efficiency heat price--actual reported (accounting) costs, improvement targets for producers could be justified costs, standard costs, benchmark costs, introduced, similar to the regulation for the or future costs? English and Welsh water sector. There is general agreement that all costs During a transition period, a cost-based that can reasonably be attributed to heat supply approach to setting heat tariffs is more practical should form the basis for heat tariff calculation. for the reasons outlined on page 42. It can In Eastern Europe, relevant costs are usually build on existing information and procedures, those that are justified or indispensable, relating improve on them, and put into place new to the core heating business. As Figure 2.2 information requirements and procedures. The shows, some nonreported costs may have government/regulator might also consider to be added to reported costs, for example, establishing different pricing principles for depreciation of investments contributed by private and public heating companies. This others. Costs of noncore business or costs was done, for example, in Lithuania to promote considered unnecessary should be deducted, private-sector participation in the heating sector. for example, operation of recreation centers There, the privately owned DH company will or very expensive cars. The cost basis and cost benefit from a longer approval period of five accounting rules for heating enterprises should Figure 2.2 Procedure for Determining the Justified Costs Unnecessary costs Non reported costs Non core-business Reported Justified cost Costs Source: Authors. 28 5035-CH02.pdf 28 5035-CH02.pdf 28 5/27/08 8:19:11 AM 5/27/08 8:19:11 AM Heat Reform in Eastern Europe and the Role of Heat Pricing be well defined, so that heating enterprises can charges in Tianjin are based; see Box 2.7) and easily use their accounting costs as input for the lifetime of major equipment. calculation of heat tariffs. · The other costs are weighted average costs of Accounting costs, however, are past costs, the five DH companies that had been chosen while heat tariffs should cover the costs to be as examples for cost investigation and tariff incurred in the coming heating period(s). The determination. use of future costs requires forecasting of demand · Financial costs are excluded from and costs related to this demand. Ideally, those consideration,31 because they are either very forecasts would be combined with the business low or loans to finance investment costs are plan of the heat enterprise that describes offset by construction charges (connection physical and financial flows during the next fees). heating seasons. As costs cannot be predicted · Standard costs are related to the supplied with a reasonable precision over a longer period, floor area (in yuan per m²), since hardly any tariffs should be based on a forecast covering metered data on heat produced or consumed three to five years. During this period prices are available. Of particular importance is should be allowed to be adjusted to inflation or the assumption of normative average heat changes in input prices (see page 82). When price demand of typical buildings (see item 4 in adjustment formulas are used, there is no need Box 2.3). to predict future input prices. The current or known input prices can be inserted in the price The standard costs are the cost basis for adjustment formula to easily adjust the tariffs to determining the tariffs. In the four cities the changing input prices. standard costs have been computed as average As explained earlier, Chinese heat supply costs over the past one to three years, assuming enterprises use different methods to report that they would be representative for all heat their expenses, according to the requirements suppliers in the respective city. of their legal and ownership status. Until all Taxes and profits are added to determine heating companies actually apply the uniform the final tariffs, which are expressed in terms accounting standards that are in force for of yuan/m²: business enterprises and SOEs (see page 44), it will be extremely difficult to compare the costs of p = c * (1 + r) (1 + t) * different kinds of heating companies. Within the where ESMAP project, the teams in the four pilot cities p heat tariff [yuan/m²] therefore used an approach whereby total heat c standard costs [yuan/m²] supply costs are determined as standard costs r profit rate [percent] instead of accounting costs. The methodology t tax rate [percent] pioneered by the Tianjin Working Group may serve as an example (see Box 2.3): The main reason for selecting the standard costapproachwasthelackinguniformaccounting · Fuel,electricity,andwatercostsaredetermined system, which made serious comparisons of the according to norms and actual operational costs of the various companies difficult, if not experiences (see item 5 in Box 2.3). impossible. · Depreciation is calculated based on typical Standard costs are not benchmarks that investment costs30 (on which construction shouldbeachievedbytheheatsuppliersthrough 30In Harbin the same approach is applied. In Changchun, the normal value of depreciation set at 6 percent of fixed assets and standard lifetime of equipment is used. In Taiyuan the depreciation rate of 6.76 percent is applied to the investment in heat supply actually completed in the relevant year. 31In Harbin, financial expenditures are not accounted for separately. In Changchun, they are lumped together with taxes. Only in Taiyuan do they constitute a separate component. 29 5035-CH02.pdf 29 5035-CH02.pdf 29 5/27/08 8:19:12 AM 5/27/08 8:19:12 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY improving the efficiency and performance, but · Profits are linked with costs, providing an rather, are typical or "state of art" costs, and incentive to inflate costs. The main reason they mix actual and normative costs. Standard for not linking profits with the assets, and costs should also not be confused with justified thereby investments, is that assets of heating costs, as they do not take into account the specific companies are not properly inventoried and characteristics of an individual heat supply valued.Theworkinggroupsdidnotconsider company. For example, heating companies with determining them as standard values as an gas-fired boilers have higher fuel costs due option. to high gas prices. If such boilers are used for · Companies with production costs below the environmental reasons, their costs should be standardcostswillgetextra(windfall)profits. considered justified. Under Tianjin's standard This would be justified if only companies cost approach, however, these differences were with a good performance would benefit from neglected. Taiyuan, Harbin and Changchun these extra profits. The methodology does made allowances for different generation not, however, allow distinguishing between technologies, defining, for example, separate profits/losses due to good/bad performance categories of heat tariffs for CHP- and HOB- of the company (internal reasons) and based centralized heat. profits/losses due to favorable/unfavorable The local experts of the participating cities conditions (external reasons). For example, advocate uniform tariffs for the whole city. in Tianjin, the two companies with very high A major reason to determine uniform tariffs supplycostsabovethestandardcostswere(i) instead of individual tariffs for each company is a small supplier with a gas-based HOB and the large number of heat suppliers, which makes (ii) a large DH company using cogenerated the individual determination of company- heat with high depreciation and repair costs specific tariffs based on the justified supply and a low heat density. The latter is the only costs of each company arduous and difficult (see company among the five that is liable to pay page 63 for details). VAT. Thus, the losses seem to be triggered Although this approach of calculating a by a mix of internal and external reasons. uniform tariff based on standard costs has many It could be considered to use extra profits drawbacks,itisanimportantstepforward,asitis exclusivelyforrehabilitation,modernization, an approach to make the real costs of heat supply and expansion investments or for funding of visible and to decouple the determination of heat social assistance programs. tariffs from political deliberations. This approach · A uniform tariff was also justified with should, however, only be viewed as a transitory the fact that heat is not yet accepted as a measure, since it does not result in a transparent commodity, but continues to be considered pricing system with good incentive properties. as a welfare service. However, in most Among the shortcomings are the following: markets Chinese consumers are aware of different prices of commodities and accept · The standard cost approach cannot replace such a situation. the need for the uniform application of an · As explained earlier, Chinese heat supply appropriate accounting system for all heat enterprises use different methods to report supply companies. their expenses. Thus the determination of · The standard cost approach is based on standard prices is highly subjective and relies historical costs, not projected costs, and is on the knowledge and expertise of experts. thus not forward looking. Worse, in some applications, the calculation of standard Recommendations.Tariffsshouldbecloselyand costs was based on averaging cost data of directly related to costs. Moreover, since tariffs several years back. are related to future sales and, correspondingly, · Taxes are added regardless of the actual tax future costs, they have to be based on projected obligation of the individual company. costs rather than on past (historical) costs. 30 5035-CH02.pdf 30 5035-CH02.pdf 30 5/27/08 8:19:12 AM 5/27/08 8:19:12 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Box 2.3 Tianjin Methodology to Determine Two-Part Tariffs 1.Select several typical heat supply companies, covering at least x% of total centralized heat supply (or supply area) of the city 2. Document individual supply costs and their components for each DH company (in RMB/m2) 3. Experts determine reasonable averages for each cost component; company individual costs are adjusted accordingly 4.Determine heat consumption indicators of residential and non-residential consumers residential building: 34W/m2, public building: 44W/m2 5. Experts determine standard for each cost c omponent, by adjusting unreasonable factors and considering practical heat supply operations Depreciation: Based on investment cost (construction charges) and standard life time of main equipment Items Unit Standards 1 Fuel consumption kg-- m2 25 Variable 2 Water consumption kg-- m2 55 Costs 3 Power consumption kWh-- m2 3 1 employee/ Permanent: 0.57 Fixed 4 Employees 10,000m2 Part-time: 0.9 Costs 5 Depreciation cost RMB-- m2 3.96 6 Maintenance cost RMB-- m2 1.12 7 Overhead cost RMB-- m2 0.58 8 Other costs RMB-- m2 0.32 Note: financial costs are omitted sincethey are very smallor offset by construction charges (Box 2.6) 6. By applying current unit price for variable inputs and employees, standard heat supply costs are calculated Items Symbol Unit Ratio 1 Fuel cost C RMB-- m2 7.5 r 2 Electricity cost C RMB-- m2 1.8 d 3 Water cost C RMB-- m2 0.29 s 4 Salaries and welfare cost C RMB-- m2 1.61 z 5 Depreciation cost C RMB-- m2 3.96 j 6 Maintenance cost C RMB-- m2 1.12 w 7 Overhead cost C RMB-- m2 0.58 g 8 Other costs C RMB-- m2 0.32 t 9 Heating supplycost C RMB-- m2 17.18 q 7. Calculate heat supply cost per unit of heat consumption: residential: (17.18/0.034*24 hours*140 days)= 0.1504 RMB/kWh 8. Determine reasonable profit level as percent of heat supply cost residential: 2%, non-residential: 8% 9. Tax calculation: sales tax minus net purchase taxes plus urban construction and education taxes about 6% of heat supply costs 10. Heat price calculation: unit price = net supply cost plus profit ratio plus tax ratio residential: 0.1626 RMB/kWh non-residential: 0.1722 RMB/kWh 11. Calculate tariff for non-metered area residential heat consumption is 114.24kWh/m2, resulting in heat price of 18.575 RMB/m2 non-residential heat consumption is 147.84kWh/m2, resulting in heat price of 25.458RMB/m2 12. Calculate tariff for metered area: two-part tariff proportion of fixed charge=50%=proportion of variable charge Fixed part of heat tariff (residential): 0.1626*0.5*0.034*(24*140)* [m of construction area] Variable heat tariff (residential): 0.1626*0.5* [heat consumption, kWh] Annual Heat Bill = 9.288 * [m of construction area] + 0.0813 * [heat consumption kWh/y] Source: Tianjin Experts Team 2003. 31 5035-CH02.pdf 31 5035-CH02.pdf 31 5/27/08 8:19:13 AM 5/27/08 8:19:13 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Implementing this approach requires the energy and capacity charges of a two-part tariff general application of uniform accounting are directly linked with both cost components standards and financial forecasts for the next should consider the real cost dependencies. few heating seasons. Such financial forecasts are The costs incurred by a heating company particularlyrelevantforheatsupplysystemsthat should also be allocated to various cost centers are expanding rapidly. Chinese experts suggest and to products and services that are provided. that the existing uniform accounting standards Cost allocation serves to allocate the various cost forbusinessenterprisesshouldbeadaptedforuse types to the various products or services (i.e., hot by heating companies, independent of their legal water for space heating and domestic hot water, status. The application of these standards should and steam). In addition, it allows allocating the be mandatory for all heat supply companies. costs to a number of cost centers along the value Simplified standards could be established for chain(i.e.,generation,transmission,distribution, very small heat supply companies (e.g., with a substations, sales, and overhead). connected load below 5 MW). Fixed costs are costs that remain constant Transition period. Until uniform accounting regardlessofthesalesvolumeduringthedefined rules for heating enterprises are established, planning period. They include interest expenses, an approach based on standard costs may be rent, depreciation, insurance, and salaries of preferable to the current practice. Care has to be the permanent staff. The determination of the taken, however, to determine standard costs in fixed costs depends obviously on the length a more transparent way that does not provide of the defined period, as in reality no costs are windfallprofitsforsomecompaniesandpunishes purely fixed. However, this distinction serves others unjustifiably. If the cost structures of heat the purpose of cost accounting for a limited supply companies are different, say due to planning period. Variable costs change directly different heat generation technologies, different with the level of production and sales. They tariffs should be considered. Examples are heat include, for example, fuels, direct materials, and from CHPplants versus HOBs or gas-based heat labor linked with the level of production. In most versus coal-based heat for which many cities are cases, it is easy to determine whether costs are already using different tariffs (see page 43). variable or fixed. For example, the biggest cost item, fuel, is a variable cost. With other inputs Practical Issues II: Cost Structure it is more complicated. For example, water and and Cost Distribution electricity consumption are partially linked with After the relevant costs of heating have been sales, partially independent of sales. determined, the next step in the process of tariff The distinction between fixed and variable setting is to distinguish different types of costs costs helps to prepare more reliable costs that will have a bearing on the structure of the forecasts, as it allows to determine whether tariff. As mentioned on page 44, centralized and to what extent certain costs will vary with heating is a network service with a substantial changes in outputs. The more precisely such cost share of fixed costs that do not vary with sales. distribution is carried out, the more reliable the With the transition from area-dependent tariffs projections will be. Accordingly, costs should to tariffs that depend on consumption, it will be be analyzed as carefully as possible, but with necessary to distinguish between fixed costs that reasonable efforts and costs (see Figure 2.3). do not vary with consumption and variable costs Cost allocation would be easy if all costs that do. In the simplest manner, fuel, water, and could be unambiguously assigned to a specific electricity consumption are assigned to variable product or cost center (i.e., if all costs were costs, while all other costs are considered direct costs). However, if inputs are used for fixed costs. The cost data can be taken directly various processes or products, their costs are from existing accounting information, but this common costs. For example, electricity can only method is not precise. A more reliable basis for be unambiguously assigned to the respective cost projections and tariff setting where the cost centers if these are equipped with separate 32 5035-CH02.pdf 32 5035-CH02.pdf 32 5/27/08 8:19:13 AM 5/27/08 8:19:13 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Figure 2.3 Cost Structure Based on Cost Distribution (a) Simple method (easy, but imprecise) (b) Method with cost distribution (sophisticated, but reasonably precise) Cost items Cost structure Cost items Cost Distribution Cost structure Fixed Others Others Variable Fixed Depreciation Depreciation Fixed Repair Repair Fixed costs Fixed costs Variable Fixed Maintenance Maintenance Variable Permanent Labor Labor Seasonal Lighting Electricity Electricity Pumping Water Water Fixed Variable Fixed Variable costs Variable costs Fuel Fuel Variable Source: Authors. electricity meters. Otherwise, criteria or cost supply companies own other substations. The distribution keys have to be defined on the tariff for the first group is reduced by the costs basis of which the costs can be distributed. For related to substations. example, the electricity used by the network pumps can be estimated based on the pump Taxes capacity and hours of operation. DH companies are almost universally taxed Cost distribution may seem to be too on their net income. This does, however, not sophisticated in the early stage of heat tariff constitute a cost. In addition DH is generally reform, as the calculation of tariffs as described subject to three other kinds of taxes: Value-added above does not require this. A reasonable tax (VAT), special fuel excise taxes or energy decomposition of costs by cost centers has, taxes and environmental taxes. Consumers of however, various advantages. It provides a DH services have to pay VAT in most countries useful management tool to improve efficiency (see Table 2.3). Reduced VAT rates for residential and performance of the heating company by heat customers were common in Eastern Europe, facilitating the identification of inefficiencies easing somewhat the transition to full cost- and cost drivers in the company. Intercompany recovery tariffs.32 comparisons will be more effective, as not only In China, the most important tax on heat is the total production costs can be compared, but the value-added tax (VAT). Under the current also the costs of the individual cost centers. If regime, some enterprises (particularly heat and tariffs have to be differentiated based on the power companies) have to pay VAT, while others scope of services, identifying the respective do not have to pay, depending on the legal status. costs will be easy. For example, in Taiyuan some Other, smaller taxes such as urban construction customers are owners of substations, while heat- and education taxes can be applied, but this also 32See Meyer (2003). Based on a 2006 EU directive, reduced VAT rates can be applied to district heating until the end of 2010; see http:// ue.eu.int/ueDocs/cms_Data/docs/pressData/en/misc/88237.pdf. Such reduced VAT rates have been applicable for gas and electricity for several years. The EU directive has thus created a level playing field between several competing heat supply technologies. 33 5035-CH02.pdf 33 5035-CH02.pdf 33 5/27/08 8:19:14 AM 5/27/08 8:19:14 AM Table 2.3 International Comparison of VAT and Other Taxes for DH and Other Fuels, 2003 Country VAT Level Type of Taxes Austria 20 percent Energy taxes are applied and used for CHP/ DH support measures Bulgaria 20 percent n.a Croatia 22 percent n.a Czech Republic 5 percent for DH will be Taxes on fuels used for heating will be kept until 2007* introduced from 2007 22 percent for other energy sectors Denmark 25 percent No exception for DH sector Estonia 5 percent for DH Exemption and afterwards taxation 18 percent for other energy reduction on shale oil used for DH until sectors 2013 Finland 22 percent Energy taxes used to promote DH Germany 16 percent Fuel taxes and electricity taxes; exemption or reduction of taxes on certain fuels are used for CHP units Hungary 15 percent for DH and NG Energy and environmental taxes started to be 25 percent for electricity introduced but can be claimed back for CHP and DH; transitional period up to 2010 for taxation on electricity, NG and coal for DH Iceland 14 percent No other taxes for DH sector 24.5 percent for other products Italy DH: 10 percent for n.a residential and 20 percent for other customers Korea 10 percent Fuel taxes Latvia Under discussion Excise tax on heavy fuel oil for DH but with transitional period up to 2010 Lithuania DH : 5 percent for Exemption for coal, coke, lignite and NG households (18 percent and until 2010 13 percent compensation) 18 percent for other energy sectors Netherlands 19 percent Fuel taxes, environmental taxes, excise duties Poland 22 percent Excise tax on oil and liquefied gas for DH, transitional period for coal used for DH until 2010 and until 2014 for NG under certain conditions Romania 16 percent n.a. Slovakia 19 percent Transitional period until 2010 for electricity and NG taxation Sweden 25 percent Excise duties on fuels, energy taxes and carbon taxes are applied and used for the promotion of CHP/DH Source: Euroheat&Power "District Heat in Europe--2005 Survey". *Note: See footnote 32. NG: natural gas. 34 5035-CH02.pdf 34 5035-CH02.pdf 34 5/27/08 8:19:14 AM 5/27/08 8:19:14 AM Heat Reform in Eastern Europe and the Role of Heat Pricing dependsonthelegalstatus.Theaveragetaxrates profit is accepted as a transitional measure (but on heat included in the heat tariff as reported by see Transition section below). The level of the the participating cities vary widely: profit rate would be limited by the commercial bank interest rates for savings (about 2 percent) Tianjin Changchun Harbin Taiyuan and interest rates for loans (up to 8 percent). Average 6 percent 13 percent 6 percent 9 percent Another indicator for setting profit rates in the tax rate heating industry would be investment profit For calculating the new tariffs, all city reports rates in other industries, which are, on average, assumed that VAT and income tax have to be 6 to 7 percent. paid by all companies. Several cities propose--at The city working groups chose to base least for a transition period--an exemption profit on total costs (see page 31). The profit from VAT and a reduction of the income tax. rate for residential consumers would be set at a Although a tax exemption would mitigate the lower level than for nonresidential consumers, impact of other cost increases and possible according to the pricing principle of "break-even tariff increases, all customers would benefit with meager profit," referred to in the heat reform from the tax exemption regardless of their guidelines: financial situation. Tax exemption is a specific Tianjin Changchun Harbin Taiyuan form of subsidy that generates price distortions, Profit rate 2 3 2 5 particularly if alternative heating systems do not residential benefit in the same way. consumers, percent Recommendations.Applicabletaxratesshould Profit rate 8 3 6­8 15 be the same for all heat supply enterprises, nonresidential regardlessoftheirlegalstatus.Thisisparticularly consumers, important when uniform heat tariffs are applied percent for all heating companies in a municipality. For A cost-based profit rate ignores the a transition period, tax exemption or a lower fundamental difference between (running) costs VAT rate for residential customers could help to andcapital.Iftheprofitshouldberelatedtocosts, cushion the effect of increasing heat bills, but this it would be more reasonable to compare it with would benefit all customers regardless of their the operating margin or return on sales of other income level. If fiscal measures in support of industries. The biggest drawback of relating centralized heating were considered, it would be profitstocostsisthedangerofcreatingincentives preferable to choose them in a way that advances to inflate costs in order to increase profits. heat reform--for example, by introducing Defining different profit rates for residential and reduced tax rates for meters, control equipment, nonresidential consumers as proposed by the and other energy-efficient equipment. local working groups does not have an economic rationale; it is a relic of the old welfare system. Profits Recommendations. Heat tariffs should Tariffs currently do not explicitly comprise include a fair profit. Otherwise it would be a profit component. Under the current tariff difficult to attract investors to this sector. In system, a heating company would generate many countries, profits of DH companies profits if its revenues exceed its expenses. depend on costs, even though it is almost The national experts emphasize the universally acknowledged that this provides importance of a profit margin to be included incentives to increase costs, while the opposite as a tariff component to attract private capital should be achieved. With cost-based profits, and accumulate equity capital. The profit rate regulators assume the task of controlling costs. should be related to fixed assets and working Experience shows, however, that they have not capital, with the possible exception of the capital been very successful in the burdensome and that represents the connection fees.Acost-based costly task of controlling of the costs of utilities. 35 5035-CH02.pdf 35 5035-CH02.pdf 35 5/27/08 8:19:15 AM 5/27/08 8:19:15 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Coupling the profits with capital (e.g., value provision of network-based energy requires the of assets and working capital) instead would build-up of an elaborate infrastructure, resulting contribute to stimulating investments targeted in fixed costs in addition to the variable costs, at the rehabilitation and possibly the expansion which depend on the amount of energy actually of the heating systems. There is a chance that produced and consumed. Two-part tariffs reflect this might create incentives for overinvestments. this cost structure and thus consist of a fixed or In some instances, investments are controlled capacity component (yuan/m2 or yuan/MW) by regulators; for example, in Lithuania the and an energy component (yuan/MWh). They regulatory agency and the regulated company are able to provide incentives to suppliers and have to agree on an investment plan with targets consumers to use resources efficiently. See for efficiency improvements. Figure 2.4 for an illustration. Transition. Profit margins should be related The energy charge (covering variable costs) to capital as soon as possible. If inventories of allocates resources (mostly fuel) efficiently by assets do not exist, they could be estimated adjusting the supply to the actual demand of using standard values similar to the approach consumers. Similarly, the fixed charge (mostly applied to define standard costs. In this way, the covering capital or related costs) will help to incentive to increase costs would be eliminated allocate capital and other fixed factors efficiently. without impacting the profit. The estimated asset Whenthefixedchargeisbasedonthecustomer's values should be replaced by the real values as installed capacity (MW), the customer has an soon as possible. Enterprises should be obliged incentive to size the capacity correctly or even to inventory and revalue assets within a certain to invest in energy-saving measures to reduce period. In parallel with changing to asset-related capacity and thus decrease the heating bill. profitmargins,profitratesforallcustomergroups Such a reduction in existing customers' demand should be equalized as soon as possible at a rate allows the heat supply company to use the that is commensurate with attracting investors. released capacity to supply new customers, without having to invest in new heat-generation Cost-Reflective Pricing: Two-Part facilities and (partially) other components.33 Heat Tariffs Most Western European DH companies Traditionally, heat was not metered in DH use such a two-part tariff, since it eliminates systems under central planning, and customers the volume risk resulting from fluctuations in were billed according to area (m2) or volume heat demand. These can be very substantial (m3). In general, this is still the case in China. even for a given temperature level, as shown in The definition of area varies between cities--it Figure 2.5 for a typical modern DH system. In can be construction area, living area, heated area, the typically capital-intensive CHP-based DH and so on--which makes tariff comparisons very systems in Western Europe, the share of fixed challenging. costs is rather high, about 70 percent. However, When metering is introduced, a heat to provide more incentives for heat consumers tariff that accommodates metering is usually to save energy, DH tariffs tend to have a rather structured like tariffs of other network-based low share of the fixed component (20 percent in energies, such as electricity and natural gas. The Denmark, 30 percent in many other countries).34 33In practical applications, two-part tariff systems differ from the "ideal two-part tariffs" discussed on page 46. The practical two-part tariff components are calculated as an average of the variable costs (not as incremental or marginal production costs) and of the fixed costs, respectively. A "true" marginal cost pricing approach would define the marginal costs as the production costs of the last unit (i.e., the marginal costs of this company). This is the cost of peak production, which is usually extremely expensive. This would likely result in unacceptably high tariffs. If in contrast the average short-term costs (i.e., the variable costs) are applied, the tariff would not cover the fixed costs. The marginal cost approach could be applied to differentiate tariffs based on the time of use (such as in the electricity sector with night time and daytime tariffs). 34The EU SAVE directive and the national implementation norms specify that for consumption-based billing only 30 to 50 percent of total heating costs can be allocated independently of metered consumption (JP/CEEB 2002). 36 5035-CH02.pdf 36 5035-CH02.pdf 36 5/27/08 8:19:16 AM 5/27/08 8:19:16 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Figure 2.4 Roles and Functions of the Two Tariff Components Promoting Promoting Heat Energy Optimal Load Savings allocation of Optimization resources (fuel and capital) Energy Capacity Charge Charge Two parts of the customer's bill Variable Costs Fixed Costs Covering costs according to actual demand Source: Authors. Figure 2.5 Demand Variation of a Typical DH System 375 MWh 325 300 275 250 225 200 input 175 heat 150 125 100 75 50 25 0 -10 -5 0 5 10 15 20 ºC 25 outside temperature Source: Stadtwerke Flensburg. 37 5035-CH02.pdf 37 5035-CH02.pdf 37 5/27/08 8:19:16 AM 5/27/08 8:19:16 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY This approach is feasible in most Western mid- to late 1990s, especially where competition European countries, as the volume risk is much from other fuels was fierce and/or affordability lower than in Eastern Europe, since most of the problematic.35 For DH companies a one-part, energy saving potential on the demand side is energy-only heat tariff would lead to a more already exploited and industrial demand has variable revenue stream and a reduction in sales stabilized. that would not be compensated by an equivalent In Poland, for example, the fixed costs of costdecrease.Bankruptcywouldbeunavoidable, DH supply are usually closer to 60 percent. The unless the supplier could drastically reduce initial regulations for the DH sector, however, capacity, connect new customers or seek and did not allow companies to recover any fixed obtain a tariff increase. costs above 30 percent or to recover them instead The Chinese experts decided that two-part as part of the variable tariff component. A more tariffs would be the most appropriate choice recent ordinance defines heat losses and that part for the heating sector in China. All city reports of fixed costs exceeding the 30 percent limit as start with calculating fully cost-covering lump- justified variable costs (ESMAP 2001). sum tariffs. Table 2.4 compares the old and Inadditiontofixedandvariablecomponents, the new lump-sum tariffs for residential and other tariff elements such as charges for water nonresidential customers. Two-part tariffs are or condensate losses (charged as $/m3) are derived from those lump-sum tariffs by using quite common. In Denmark, but also in cities the normative figures for heat load (W/m²) in other countries, DH companies encourage and heat energy (kWh/m², yr). In principle, consumers to lower return temperatures, which one component covers the fixed costs (capacity would allow more efficient operation of CHP charge) and the other variable costs (energy plants; they offer up to 10 percent payback charge). for return temperatures below average and The fixed part of the tariff will, for the time require an additional payment of 10 percent being, depend on area, since real heat loads for return temperatures above average. As a of customers are unknown. Thus, the heating result, within a few years, return temperatures sector is forgoing one important potential dropped 10 to 15ºC (from previously above 65ºC; benefit of the two-part tariff. It is highly likely DBDH 2/1999). In South Korea, nonresidential that the installed capacity of substations in customers are subject to time of use charges existing heating systems is oversized (in terms (JP/CEEB 2002). of real heat demand and not of theoretical heat In several countries in Eastern Europe, one- demand). With a capacity-related fixed charge, part heat tariffs with only an energy component are customers would have an incentive to reduce applied for residential customers. The reasons capacity.36 The released heat capacities could be are twofold. Consumers would have more used for the supply of new customers. incentives to invest in measures to reduce their The shares of fixed costs in the four cities heat consumption and thus their heat bills if they range from 44 to 56 percent of total costs (Tianjin, were faced with a one-part heat tariff, resulting in 44 percent; Changchun, 51 percent; Harbin, a faster payback of energy-saving investments. 55 percent; Taiyuan, 56 percent). The experts in An additional reason to promote a one-part tariff all four cities propose to deviate somewhat from was the increasing incidence of DH customers theactualcoststructureandtoallocate50 percent disconnecting from the DH networks in the of the costs to the energy charge and the other 35The three Baltic countries are examples, and even in the new German states some companies apply a one-part energy tariff for small customers (Meyer 2003). 36This could be achieved with investments that reduce capacity, such as building energy efficiency measures, as well as installing flow-limiters in the substation or on the flow-meters. The latter devices allow maximum permissible water flow levels to be set on flow- meters or regulators in the supply pipe. Once the desired maximum flow rate is set, the device prevents the water flow to rise above the contracted level. 38 5035-CH02.pdf 38 5035-CH02.pdf 38 5/27/08 8:19:17 AM 5/27/08 8:19:17 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Table 2.4 Heat Prices for Residential Consumers Taiyuan Tianjin Changchun Harbin Direct/indirect Original tariff (yuan/m2)* 15.40 23.50 31.15 3.3/3.8** Calculated tariff based on 18.56 25.58 34.52 16.10/22.98 standard costs (yuan /m2) Two-part tariff energy charge 0.813 0.983 Not 0.066/0.086 (yuan /kWh) calculated Two-part tariff capacity charge 9.28 12.49 Not Not shown (yuan /m2) calculated Source: City reports. * Note: The definition of m2 changes from city to city. ** Monthly tariff--for heating period of 5 months tariffs would be 16.5/19 yuan/m2. 50 percent to the fixed charge. The larger the new buildings, the fixed part of the two-part deviations of the real consumption from the heating tariff should be based on heat load, and forecasted consumption, the larger could be the for existing buildings, efforts should be made to difference between real and forecasted revenues. determine heat loads.37 If the variable tariff charge is higher than the actual share of variable costs, consumers will Tariff Setting----How Many Customer Groups? have a slightly higher incentive to save energy, Aquestion that comes up frequently is whether and if they reduce heat consumption, this could all consumers should have the same tariff even result in losses for the heating companies since if they have different consumption patterns. The the revenue decrease is not fully compensated underlying issue is that cost is affected not only by a decrease of the variable costs. by the total heat quantity consumed, but also by Recommendations. A two-part tariff with the structure of the heat demand (consumption an energy charge and a capacity charge will pattern). Even if the total heat consumption is the stimulate the rational use of energy two-fold: same, it makes a big difference costwise whether heat consumption is uneven and, for example, · The energy charge will provide an incentive short periods of sharp peaks are followed by to consumers to save heat energy. a longer period of no or low consumption, or · The fixed charge based on capacity will whether the heat consumption is even without provide an incentive to consumers to adjust distinctivepeaks.Inthefirstcase,alargerportion the maximum heat load to their real needs. of the total supply capacity is needed to satisfy the consumer needs than in the second case. Decoupling the tariff components from In case of lump-sum tariffs, differences in the actual cost structure would be risky in an consumption are not taken into account and are economy where the behavior of consumers thusnotreflectedintheheatbill.Consumerswith is widely unknown and not yet analyzed. different consumption patterns should therefore Therefore, the tariff components should follow have different tariffs. But with a two-part tariff, the real cost structure as closely as possible, at different consumption levels (quantities) and least as long as consumer behavior is not known different consumption patterns (even or uneven and consequences for the heat supply company consumption over time) will result in different and consumers cannot be assessed properly. For heating bills, even with the same tariff, provided 37Since it is not practical to determine heat loads of individual flats, each individual consumer would be assigned a share of the building heat load proportional to the flat size. 39 5035-CH02.pdf 39 5035-CH02.pdf 39 5/27/08 8:19:17 AM 5/27/08 8:19:17 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Figure 2.6 Load Curves for Different Consumption Patterns (hourly numbers) KW 100 90 80 70 60 50 40 30 20 10 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 KW 100 90 80 70 60 50 40 30 20 10 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Source: Authors. thefixedpartofthetariffisbasedoncapacity(kW) rather than on area (m2). Box 2.4 Poland----Extreme Tariff Differentiation Can Be This cost-reflectiveness of the two-part tariff Counterproductive is illustrated in Figure 2.6, which shows the load The secondary legislation implemented the curves of two consumers. It is assumed that they objective of avoiding cross-subsidies in a way reflect the load of the day with the highest peak that resulted in extreme differentiation of costs loads.Totalheatconsumptionisthesameforboth and, thus, of tariffs. The total costs consist of consumers, and therefore the costs due to the heat generation costs, heat transmission costs energychargesarethesame.However,consumer and heat distribution costs. They all have to B has a much higher peak load. Assuming that be calculated separately for each separate he has contracted 100 kW, the part of his heating heat source and network, and a tariff is then bill that is due to the capacity charge is much calculated for each of the separate parts. higher than for consumer A, who needs only 40 Thus, the customers of one DH company can kW. Consequently, the average heating costs (in be exposed to quite different tariffs if they are yuan/kWh) are higher for consumer B with the connected to heat supply systems with different uneven consumption pattern. cost structures. Quite obviously, the complexity Inadditiontodifferentconsumptionpatterns, of this system does not result in transparent heat prices and is an administrative nightmare. the location of customers within the service territory of a heat supply company also has an Source: ESMAP 2001. impact on costs. For example, those customers who are close to the heat generation facility since the complexity and cost of regulation have lower distribution costs than more remote would not be justified. In Poland, for example, customers and the former cross-subsidize the the first version of the secondary heating sector latter if the heat tariff is the same for both. In legislation provided for a large number of network industries it is, however, common customer groups and had to be revised since it practice to disregard such location differences, proved to be too unwieldy; see Box 2.4. 40 5035-CH02.pdf 40 5035-CH02.pdf 40 5/27/08 8:19:18 AM 5/27/08 8:19:18 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Inpractice,onlyonecustomergroupofgeneral The national experts favor company-specific or tariff customers is usually defined, for which a tariffs, recognizing, however, the difficulties public tariff is applicable. With special customers, to implement such a system under the current which are either very big or have very special circumstances.Themainargumentsagainstuniform consumption patterns and/or time of use than tariffs are that they tend to hide inefficiencies and average customers, supply companies conclude bad performance and do not provide the right specialcontractswhichcouldincludeanegotiated incentives to reduce costs. To promote efficiency price taking into account these peculiarities. and performance improvements under a uniform Recommendation. For an integrated heating tariff, regulation, and supervision would be network, one tariff for all general or average required,whichwould,however,bequitecostly.In customers can accommodate many different contrast, individual tariffs reflecting the real costs consumption patterns, if structured as a two-part of the companies would provide signals about tariff with energy and capacity charge. good and bad performers. Uniform tariffs produce (windfall) profits Tariff Setting----Uniform versus or losses for some companies, which are not Individual Tariffs the result of their performance. Uniform Currently, heat tariffs (lump sum tariffs) for all tariffs do not take into account reasonable and customers within one customer group are almost justified differences in costs. For example, in always uniform within a city, regardless of the China suppliers using natural gas have higher individual cost structure of the heat supply production costs than those using coal. Heat enterprises. Exceptions are different tariffs for supply companies operating in an area with a cogeneration-based and HOB-based heat in lower building density have higher costs due to cities such as Shenyang and Changchun, for the extended network than those operating in different fuel basis (like a much higher tariff for an area with a higher density. The application of oil or gas-based centralized heating in Beijing), several basic groups of heat supply companies, or for customers supplied by direct or indirect such as those listed above, should be considered systems like in Taiyuan. during a transition period. All cities involved in this project proposed Recommendations. The proposed uniform to continue charging uniform tariffs for the tariff could be reasonable during a transition whole city. Tariffs for different customer groups period, but a swift conversion to individual differ only by profit rates. A major reason to tariffs would be preferable and should be determine uniform tariffs instead of individual actively pursued through various measures. tariffs is the large number of heat suppliers (for The development of an appropriate and uniform example, about 230 in Tianjin), which would accounting system for all heat supply companies make the determination of individual tariffs and (and the enforcement of its use) was already their supervision arduous, difficult and costly. mentioned. A system of equal tax treatment Problems are exacerbated by the application for all heat supply companies should also be of different accounting standards for different established. The most important would be types of heating companies. In addition, it is the consolidation of the heating sector, which argued that consumers would not understand should be supported by interconnecting heating and accept tariffs that differ, depending on networks in compliance with local heat plans which heat supplier is serving them. and by merging heat supply companies.38 38Mergers could help to (i) reduce the costs of regulation and supervision of these enterprises, (ii) achieve economies of scale (mostly in terms of personnel costs and heat generation costs), (iii) create interconnected networks more suitable for cogeneration, and (iv) improve the efficiency and environmental performance of heat production. Uniform tariffs which could be applied for a transition period could promote such consolidation, as the owners of loss-making companies would have an incentive to merge them with profit-making ones. It is unlikely, though, that heat price reform alone could achieve consolidation. Separate measures are necessary, such as municipal heat supply development plans. Local governments will have to take an active stance in this process to ensure that consumers are not left out in the cold as a result of consolidation. 41 5035-CH02.pdf 41 5035-CH02.pdf 41 5/27/08 8:19:18 AM 5/27/08 8:19:18 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Consumers' awareness about heat becoming as price caps, provides some hope that suppliers a commodity with varying costs should be will realize efficiency improvements.Abaseline increased through information and education tariff is established based on the justified costs campaigns. Expanding the use of heat metering, during the base period; it will be valid during a controlsandconsumption-basedbillingwillgive period of three to five years. Atariff-adjustment consumers the tools to determine their preferred formula links tariff development over time with comfort and thus consumption levels. inflationdevelopmentandexpectedproductivity To accelerate the transition to company- improvements. Companies that reduce their specific tariffs, it should be considered to limit production costs during this period will realize the use of uniform tariffs to a period of, say, 2 higher profits. Only after the next tariff review to 3 years. Afterwards, individual tariffs would would the tariff be reduced, in effect sharing be mandatory for larger heat supply companies. the benefits of cost reduction and efficiency For small heat supply companies, uniform prices improvement with consumers. Box 2.5 shows could continue to be applied for several more the application of price caps in the DH industry heating seasons. Publication of tariffs within and in Lithuania and the Czech Republic. across cities by the regulatory or supervisory In addition to pricing instruments, a variety agencies could exercise an effective pressure on of nontariff instruments are used to improve the management of companies with high tariffs the efficiency of heat supply. A benchmarking to reduce costs and improve efficiency. system could assist managers in identifying the weak points of their respective heating Stimulating Efficiency Improvements systems. In some countries, such as in Lithuania, The existing lump-sum tariff system offers no the regulator has the power to order regulated effective incentives to improve efficiency, neither companies to achieve certain benchmarks or on the supply side nor on the demand side. It performance targets within a certain period is universally recognized that both parties need of time. In China, municipal governments strong incentives to improve efficiency to reduce are experimenting with mandating heating heating costs. The introduction of consumption- companies to reduce inputs by a specified based billing with two-part tariffs for final percentage. This is in response to the goal of consumers will be an effective tool to improve the "11th Five-Year Plan" to reduce the energy the efficiency of heat consumption (see page 39). intensity of the Chinese economy by 20 percent It should be supplemented by other measures to during the planning period. For example in save energy, such as effective implementation Tianjin, annual fuel consumption should be of building energy efficiency standards (see lowered from 25kg/m2 to 23kg/m2. page 90) or financial support for poor consumers One big obstacle to achieving efficiency to improve building insulation (see page 10). improvements and cost reductions is the For the supply side the proposed tariff existence of norms and standards relating methodology based on standard costs with a to the use of traditional centralized heating cost-based profit provides few, if any, incentives technologies, such as requirements for reserve to reduce heat supply costs. One could argue capacities of boilers, minimum staffing of central that those companies with costs above standard substations, and so on. Modern automated costs would try to reduce costs in order to reduce technologies are very reliable, and the benefit losses. But this may be wishful thinking if they of additional safety margins is very small continue to rely on support from municipal compared to the costs. Norms and standards governments or lack the financial means or face should therefore be updated to allow for the political obstacles to effect change. energy efficient and cost-saving application of Based on the experience of pricing other modern technologies. infrastructure services such as electricity and Ultimately, only in a commercialized heating water(seepage 29),incentive-basedpricing,such sector with heating companies responsible for 42 5035-CH02.pdf 42 5035-CH02.pdf 42 5/27/08 8:19:19 AM 5/27/08 8:19:19 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Box 2.5 Price Caps in the District Heating Industry In the DH industry, a form of price-cap regulation has been introduced only in Lithuania and in the Czech Republic. The formula applying to the Vilnius DH Company in Lithuania actually specifies a hybrid form of price regulation. The initial tariff is approved for a period of five years, and in addition to general inflation almost all cost drivers are indexed. Efficiency improvements that would reduce price increases are not included in the formula: P = P [0,416 (G /G) + 0,06 (M /M) + 0,018 (K /K) 1 1 1 1 + 0,096 (V /V) + 0,169 (S /S) + 0,241 (1 + ir/100)] 1 1 where P = initial heat price P = new heat price 1 G = initial natural gas price G = new gas price 1 M = initial gas transport price M = new gas transport price 1 K = initial gas distribution price K = new gas distribution price 1 V = initial cold water price V = new cold water price 1 S = initial average salary S = new average salary 1 ir = official inflation rate In the Czech Republic, the Energy Regulatory Office (ERO) regulates only CHP-based DH companies. The ERO announces periodical maximum allowable price increases (similar to the price cap approach) and can grant exemptions to the regulation formula. The heat prices are, however, not approved in advance by the ERO. Instead, the companies are audited by a separate agency to verify the correctness of the tariff. There are severe penalties for overcharging that seem to be effective in limiting price increases. Source: Meyer 2003. their financial performance and with a very is the most common source. In China, the clear regulatory framework, real incentives for preferred financing source for new heat supply efficiency improvements will be present. The facilities are connection fees paid upfront by real experience in many cities in central and Eastern estate developers. See Box 2.6 with the example Europe--where heat supply is now as efficient from Tianjin. as in Western Europe--is providing examples It is useful to distinguish between two that this is not merely wishful thinking. different kinds of connection fees, as applied, for example, in various Western European Heat Tariffs and Connection Costs countries (see Box 2.7), (a) charges for the Investments in centralized heating infrastructure direct connection of customers to a network can be financed from different sources. and (b) other contributions to the DH system Rehabilitationofexistinginfrastructurewouldbe construction costs (investment costs): covered mostly by depreciation charges, which are included in the tariff. In China, however, a. The charges for building service connections depreciation is calculated based on average or cover only those equipment components standard costs of equipment and not on actual particular to connecting a customer/ values such as original acquisition costs or building to a nearby network. Depending current replacement costs. As discussed on on the system architecture they would page 41, assets need to be revalued, if necessary, comprise connection pipes between the to enable companies to calculate depreciation building and the network and perhaps a properly. building substation. Such customer-specific Different sources of financing should be equipment cannot be put to a different use considered for new or expansion of existing if the customer disconnects and it should heating infrastructure. In Europe, loan financing therefore be financed through a one-time 43 5035-CH02.pdf 43 5035-CH02.pdf 43 5/27/08 8:19:20 AM 5/27/08 8:19:20 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Box 2.6 Connection Fees in Tianjin and Box 2.7 Connection Fees in Europe Other Cities In many Western European countries customers InTianjin,connectionfeesarelabeledconstruction are charged two kinds of connection fees---- charges. For new buildings, Tianjin municipality provided the competitive situation allows this. charges 92 yuan/m2 for construction of heat The first covers the cost of connecting a building supply facilities. This includes 57 yuan/m2 for the to the closest distribution pipe of the heating heat source, 25 yuan/m2 for the primary network network. This is pretty straightforward, and and 10 yuan/m2 for the central substation. The the actual costs are charged. The second is a secondary network (from substation to building contribution to the costs of establishing the entrance) construction cost amounts to about network and it is charged depending on the 18Y/m2, but this is normally directly handled capacity of the customer's connection (see, for by the real estate developer. In other cities example, the General Conditions of DH supply connection fees based on construction costs are in Germany, footnote 42). This does, however, substantially lower----for example, in Harbin they not constitute any ownership in the DH system. amount to 68 yuan/m2. In Taiyuan, connection The latter is an unusual practice if applied at all, fees cannot be charged. since it could be an obstacle for promoting new connections. It is therefore avoided, at least as Source: Tianjin Experts Team 2003, Harbin experts team 2005, Taiyuan Experts Team 2005. long as DH companies can arrange financing in a different way. In Poland, a connection fee is applicable only for those parts of the heating system that are payment by the customer who would dedicated for the customer, such as a branch become the legal owner. The heat supply from the main network to the building. As per company would have the right to operate national regulation, the connection fee can be and maintain the equipment for the duration charged for only 25 percent of the cost; the rest of the contract. is recovered in the tariff over about 10 years. In b. The second type of connection fee is, in fact, Bulgaria, the nationally uniform one-part tariff a (partial) contribution to the construction was replaced in 2002 with a two-part tariff. costs of the heat infrastructure with each In addition, DH companies can now charge customer covering his share in the entire customers for the cost of connection. system cost, depending on the customer's Source: Authors. connected load. As customers should not be overcharged by way of recovery of depreciation through tariffs on assets · Longer-term loan provided by the consumers. not owned and financed by the heating Interest should be paid on the amount of company, appropriate accounting and tariff customer contribution, at an agreed rate, calculation methods should be applied. which should normally not be less than the interest commercial banks would pay on In China, there is an urgent need to clearly long-term deposits. This amount is deducted define the legal status of connection fees and from the customer's heat bill. apply appropriate accounting methods, since it · Equity contribution. The consumer would seems that customers are currently overcharged become co-owner or shareholder and would in many cases by way of recovery of depreciation participate in the profits. through tariffs on assets not owned and financed · The cost contribution is treated as a subsidy. by the heating company. This reduces the original investment, costs Iftheheatsupplycompanyrequiresadditional and thereby depreciation charges and the cost contributions from customers to finance tariff-rate base for calculation of return on equipment such as distribution network or heat assets. generation facilities, they should be treated in · Depreciation of assets is treated as a cost, but one of the following ways: customer contributions to fixed assets are treated 44 5035-CH02.pdf 44 5035-CH02.pdf 44 5/27/08 8:19:20 AM 5/27/08 8:19:20 AM Heat Reform in Eastern Europe and the Role of Heat Pricing as a source of revenue. If tariffs are determined if the customer disconnects. If the heat supply based on revenue requirements of the utility, company requires additional cost contributions this procedure will reduce the revenue to finance other equipment such as distribution required from tariffs and thus lower tariffs. network or heat generation facilities, it should be ensured that the customer is not charged Although the last alternative may not be twice--that is, through a connection charge and perfectly equitable in that all customers would through the heat tariff. benefit from the contributions not required universally, this procedure seems to be the norm Conclusions among utilities. It has the advantage of being The Tianjin methodology for the determination relatively simple from an accounting point of of a two-part tariff has been applied for view. Regulators in network industries, using additional case studies in Changchun, Harbin, rate of return tariff regulation, tend to treat the and Taiyuan and experts there accepted it for connection fee as a customer deposit akin to the application. It has been broadly discussed and utility financing its investments through debt. is recognized among national and municipal Assets so created are considered utility assets officials and other experts in the DH sector as an and qualified for inclusion in the rate base. important step forward in heat pricing reform. It As a more market-based alternative to is the basis for the recently issued national heat charging connection fees, heating companies' pricing management method. access to bank financing should be improved. Applying this methodology is a first and This could be achieved by clarifying asset important step to implement a more rational ownership and a proper valuation of assets that heat tariff system in northern Chinese cities.39 would be serving as security for bank loans. However,themethodologyneedstobedeveloped Bank or capital market financing of heating further in order to support the realization of the infrastructurewouldalsobesupportedbypaving heat reform objectives. the way for private sector participation. The tariffs are uniform across a municipality Recommendations. A sustainable heating and are based on adjusted standard or average system requires that the service is provided by costs, rather than on the individual costs of a a financially sound and effective enterprise. heat supply enterprise. Therefore, they cannot Therefore, heat supply companies need to have reflect cost differences in different heat supply accesstofinancialmeanstofinancetheiractivities, enterprises due to the use of different fuels (gas including operations and maintenance and being scarce and much more expensive than system expansion. The most important source coal), different supply conditions, or differences for heat system rehabilitation and expansion are in the management and performance of the depreciation charges, which should in principle heat supply enterprises. Until heating systems be used to replace equipment that has reached are more integrated into larger, more efficient the end of its service life, loans from commercial systems and the number of heating companies is banks, and infusion of capital through private reducedfromthehundredstoamoremanageable sector participation, for example, through the number, the use of individual tariffs by heating proposed franchise system. company would be a task that the current Connection fees in the form of an up-front supervising municipal authorities would not be payment by the customer should cover those able to handle. Additional requirements for the equipment components particular to connecting application of company-specific tariffs would a customer/building to the network and where be the application of uniform cost accounting the equipment cannot be put to a different use standards and a uniform tax treatment of all 39The World Bank team agrees with the basic approach to heat price reform, but does not take responsibility for the specific results of the cities' case studies. The heating companies involved were not audited and the team did not undertake a financial analysis of the heating companies. 45 5035-CH02.pdf 45 5035-CH02.pdf 45 5/27/08 8:19:21 AM 5/27/08 8:19:21 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY heating companies regardless of their ownership Promotion of Heat and legal status. Metering and Consumption- The proposed tariff methodology does not provide any incentives or obligations for the heat Based Billing supply enterprises to improve efficiency and The introduction of consumption-based billing performance. Under the proposed methodology, is essential in making heat a commodity and tariffs are determined purely on a cost-plus basis. introducing market mechanisms in the heating Profits are related to costs, thus providing an industry. It requires that heat supply is metered, incentive to elevate costs. Relating the profit to consumerscancontroltheirheatconsumption,an the asset value or using a price-cap tariff system appropriate tariff that depends on consumption would improve incentives for efficiency, but the is in place, the heating company is prepared or value of heating infrastructure assets is, at best, has contracted for processing metering data and a very rough estimate. The use of competitive issuing bills on this basis, and consumers have mechanisms to award concessions for heat been informed and educated about the process supply areas, benchmarking of performance and of metering and billing, changes in payment enforcement of efficiency standards would be terms, likely impact of metering on heating bills nontariff measures to improve efficiencies. and possibilities to save energy. There is a consensus that a two-part heat The issues surrounding heat metering and tariff should be adopted. Provided the energy consumption-based billing have been discussed charge and the fixed charge are properly set, it in China for many years. The World Bank can achieve a balance between financial security and MOC commissioned a team of Chinese for the heat supply company, which will prefer and foreign experts between 2000 and 2002 to to minimize unpredictable variations in revenue, document the experience from heat metering and the need to provide strong incentives for in Europe and from demonstration projects efficient use of energy. A two-part tariff with a in China, with the aim to analyze the factors capacity charge based on contracted maximum affecting the choice of various heat metering demand would also provide proper signals to schemes, review the lessons learned and make consumers about the costs of capacity. For the policy recommendations.40 time being, it will, however, be related to the Almostfiveyearslater,heatmeteringinChina apartment area and thus not be able to provide is still limited to mostly small demonstration the correct signals. Heat-supply companies projects in many cities and consumption-based should start to adopt heat load based capacity billing was applied on a very limited basis in charges as soon as possible, particularly for new Tianjin (see Box 2.9). Within this project, the real estate developments. experiences gained and the continuing problems Evaluating the results of heat metering with heat metering and billing were reviewed is another important task to allow a better and proposals to move forward were discussed. understanding of the actual heat demand and At least two important requirements mentioned factors affecting the demand and designing above are now in place: Almost everywhere an appropriate tariff base. Basing decisions consumers are now responsible for payment about heat price structure and level on solid of heating bills and appropriate heat tariffs, information will reduce the probability of i.e., two-part tariffs, have been determined misjudging reactions of consumers and and are now applied in a large demonstration suppliers of heat services and would thus area in Tianjin. In addition, there seems to be prevent frequent adjustments in tariffs and a consensus to accelerate the introduction of a other parameters. 40See JP/CEEB 2002. 46 5035-CH02.pdf 46 5035-CH02.pdf 46 5/27/08 8:19:21 AM 5/27/08 8:19:21 AM Heat Reform in Eastern Europe and the Role of Heat Pricing minimum metering option at the substation or systems to switch to heat metering and building level. consumption-based billing at the building In the following, the main relevant level, a minimum requirement for heat conclusions of the 2002 report are summarized commodification, without encountering the before new results, discussions, and conclusions significantadditionalhardwareandsoftware are presented. costs and billing complications which the other metering options entail. · To accomplish individual heat metering, Options for Metering and adoption of the other options will be Controlling Heat Consumption necessary. Heat cost allocators (option There seems to be a strong preference in China B), widely used in Germany, Denmark, for apartment-based heat meters, emulating Austria, Switzerland, Poland, Bulgaria the individual metering of electricity. Such and other Eastern European countries, heat meters can be installed in apartments have the advantage of achieving most with horizontal piping, such as in new and if not all of the benefits of individual reconstructed buildings (i.e., buildings where heat metering at a modest metering cost. verticalrisershavebeenreplacedwithhorizontal However, the application of Option B also piping in apartments), but they are not suitable requires extensive knowledge of radiator for apartments with vertical risers.41 specifications, special skills for billing (heat Worldwide, apartment-level heat meters cost allocation) and annual replacement of take a backseat to other metering options, devices if evaporative allocators are used. building-level heat metering only, building- The newer electronic heat cost allocators level metering with heat cost allocators at each are more user friendly and can be equipped radiator, and hot water flow meters. These four to be read remotely, thus accelerating and options (and various types of control equipment) facilitating billing (see Box 2.11). Heat flow were investigated in depth in the 2002 report meters (option C), adopted in South Korea, with the following conclusions: simplify the heat cost allocation with the application of one hot water meter per · Building level meters (option A), the apartment, and the billing is based on simple dominant metering method in Finland arithmetic calculations without the use of and in many other European countries, is special techniques. Finally, apartment-level the least costly of the four and is simple heat meters (option D), although the most technically and for billing arrangements. expensive of the options and therefore Since each apartment is billed according to only rarely used internationally, provide a its floor area, Option A may generate little direct heat consumption reading for each incentive for individual households to save apartment, and are the simplest and most energy, although the building owner or transparent set up for billing. The apartment- management company may have a direct level heat meter can serve to allocate heat interest in energy conservation. It is argued expenses to an individual apartment (as in that for well insulated buildings with well option B), but more often it is used for direct balanced heat distribution, such as the case billing based on the heat supply contract. of many Finnish buildings, Option A could In South Korea, problems with unreliable be the most cost-effective metering method. individual heat meters and bad water quality Adifferent, highly relevant aspect for China forced a switch from option D to option C. is that Option A provides an easy step for · Although all four metering options enable many of the existing buildings and heating consumers to be billed according to their 41See the Annex for an explanation and for schemes of horizontal and vertical piping. 47 5035-CH02.pdf 47 5035-CH02.pdf 47 5/27/08 8:19:22 AM 5/27/08 8:19:22 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY consumption, the degree of precision, and give heat consumers incentives to monitor and simplicity in determining what the heat influence their heat consumption. To accomplish consumption is for one apartment varies the latter, heating systems need to be equipped for the different metering options. The costs with controls. Temperature-compensated and benefits of heat metering and billing controllers at building-level substations and are critical factors affecting the choice of a a well-balanced piping network provide certain option. Based on experiences from constant indoor temperatures in each apartment, Western and Eastern Europe, consumption- providedtherearenosignificantvariationsinthe based billing of whole buildings can save 5 heat load of different rooms, due, for example, to 10 percent of the heat supply, mostly due to solar radiation or internal heat gains. Since to improved control and regulation.Adding these factors are usually present, apartment- flat-wise consumption-based billing could level controls, either in a central location or generate another 15 to 20 percent of savings. radiator-based, are required as well. In single- At least for the lower cost metering options, pipe systems, bypasses need to be installed when those energy savings could make up for radiator valves are used in order not to cut off some or all of the additional cost within a heat supply to other radiators on the same string. reasonable period of time. The use of controls in a centralized heating · There is no heat metering technology that is network that works according to the supply- clearly preferable to all others. Apartment- driven, constant flow principle will change the based heat meters tend to be more reliable system to a demand-driven, variable flow mode and accurate than heat allocation meters, but as soon as a sizable share of consumers employs there is no evidence that their much higher controls. This provides the essential link that costs are compensated by higher benefits. will enable the realization of energy savings all Thus, a "one size fits all" approach in heat the way from the point of heat consumption to metering should be avoided. Least-cost the heat source. solutions for metering should be identified Initial experiences in China with heat meters for both building types (i.e., energy-efficient and controls have often been disappointing, and other buildings). The solutions will since many of them failed after a short period. not necessarily be the same for both types; The reasons are manifold, ranging from different technologies could be applied. immature technology over bad water quality to insufficiently trained staff and uninformed In systems with bigger substations, as in consumers (see, for example, the experience in China, it would be preferable to meter the heat Baotou, Box 2.10). It is thus important to ensure supply to each building separately, or equip each that meters are reliable, tested, calibrated and staircase entrance in case of larger buildings. properly installed and maintained, and that the Thiswouldbeareasonablecompromisebetween underlying heating system is of a quality that is lowering the cost of metering and still putting sufficient for metering (with special emphasis the meter close to the consumer. All consumers on water quality). One would expect that heat are jointly responsible for heat consumption supplycompanieswouldhaveincentivestokeep behind the meter, which includes building- meters in working order when they become part internal heat losses, and--in case individual of a generally applied business model. heat meters are installed--any consumption that In the future it would be important to avoid is not registered by the flat-wise meters. They oneofthekeygapsinmeteringandconsumption- would be responsible for bill payment, and the based billing: an uninformed and uneducated total costs would be distributed among them consumer. The use of different kinds of metering based on square meters. and control equipment requires substantial The main reason for installing heat meters behavioralchangesofconsumersandtheyneedto and introducing consumption-based billing is to be nurtured through information and education. 48 5035-CH02.pdf 48 5035-CH02.pdf 48 5/27/08 8:19:22 AM 5/27/08 8:19:22 AM Heat Reform in Eastern Europe and the Role of Heat Pricing In addition, expectations about the impact of metering and billing need to be managed. Box 2.8 Collective Heating Contracts in Poland Whether consumers' heat bills will be reduced throughmeteringandconsumption-basedbilling DH companies deal directly with housing depends on many factors, such as the extent of cooperatives and not with individual building tenants. DH companies deliver heating at the underheating and/or the emphasis on increased building substation level, and cooperatives comfort, level of pre-reform heating tariffs--or are responsible for delivering the heat to the rather extent of cost coverage (if it is low, tariffs individual tenants through the building internal would eventually have to go up and with it heat heat installations. The cooperatives collect, bills). Thus, proponents of heat reform would be on a monthly basis, the rent and other utility irresponsible if they would suggest that one of and building expenses (including heating, the results of heat reform would be that heat bills domestic hot water, water and sewage, building would be decreased for every single consumer. management, and building maintenance and However, on average, it is quite likely that heat renovation) directly from the tenants and any consumption would go down, and with it, heat nonpayments by individual tenants are first bills. covered by the cooperatives' reserves and then recovered from the tenants through specific repayment arrangements. . . . The role of Issues in Consumption-Based the Polish housing cooperatives in contracting Billing directlywithDHcompanieshasbeenasignificant factor (in addition to income growth [and social Heat-contract Modalities support programs for low-income families in all DH companies prefer to deal with a smaller municipalities]) in creating a mechanism for DH number of customers and thus contracts. companies to ensure the adequate collection of In Western Europe, but also in Poland (see domestic heating accounts. Box 2.8), contracts are usually of a collective Source: ESMAP 2001. nature, with the heating company signing a contract with an entity that represents a group of households (called a collective contract 100,000 customers as it can be for 100. Box 2.11 hereafter), such as a homeowners' association provides an example from Bulgaria, where or a housing management company. In this monthly billing of individual consumers has case, individual households do not deal with been introduced. Collection of full payment, the heating company directly. They pay heating however, tends to be more costly for individual bills to the intermediary that represents them, contracts compared to collective contracts due who in turn remits the heating company to problems with enforcement of individual according to contract terms. In Eastern Europe payment when the connection is collective and the rule seems to be individual contracts, with individual disconnection is technically difficult the heating company directly responsible for and costly. As an incentive to enter collective serving each individual household and each contracts a DH company could, for example, household in return responsible for payment charge a fixed collection fee that would be the to the heating company.42 With computerized same for each contract, independent of the customer accounting and meters that can be capacity contracted, or the collection fee could read remotely, billing can be done as easily for be included in the fixed charge, with discounts 42Independently of whether contracts with customers are on a collective or an individual basis, they usually exist together with general terms and conditions for heat supply in most European countries. The general conditions also describe the general obligations and liabilities of both supplier and consumer regarding the service quality. Written contracts should specify more detailed agreements, for example, about supply temperature, length of the heating season, if applicable. For example in Germany, general conditions for provision of district heating (Allgemeine Bedingungen für die Versorgung mit Fernwärme) have been established by governmental decree (Verordnung des Bundesministers für Wirtschaft vom 20. Juni 1980 (BGBl. I S.742)), and all contracts with non-industrial consumers are subject to those general conditions; see www.agfw.de. 49 5035-CH02.pdf 49 5035-CH02.pdf 49 5/27/08 8:19:23 AM 5/27/08 8:19:23 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Box 2.9 Heat Metering and Consumption-Based Billing in Tianjin Heat metering with different technologies has types of buildings. During the five years of piloting been applied in demonstration projects in Tianjin heat metering and consumption-based billing, 64 since 1997. Typically, apartments in new buildings percent of all apartments in five demonstration are now equipped with horizontal heat piping that buildings involved in the pilot received refunds on allows metering the heat supplied to each individual their heat bills, amounting to about 30 percent dwelling. However, in practice, very few have of the original bill revenue. In two buildings using actually installed meters and, so far, there was no heat evaporation meters for cost allocation, simple tariff system in place that allowed the consumption- compensation factors were applied differentiating based billing of individual apartments. A simple between apartments on different floors and with form of consumption-based billing has been applied different exposures. For the 2005 to 2006 heating for a period of six heating seasons in several season, the municipal heating office determined to demonstration areas with buildings complying with use the following compensation factors: building energy efficiency standards. Households still had to prepay their heating fee based on square · all flats on the last floor get a reduction of meters. Those households that used less heat than 40 percent indicated by the average heat consumption index · all flats on the first floor get a reduction of of all types of residential buildings in Tianjin were 30 percent reimbursed for a share of the reduced consumption; · all flats located at the building corners get a those who used more did not have to pay in reduction of 20 percent. addition to the prepaid amount. The heat metering report prepared by the Tianjin working group in Compensation factors will likely not be cumulative; 2005 shows that the actual heat consumption of the higher factor will be applied. Once the metering consumers in the demonstration buildings is, on results of the 2005/06 season have been evaluated, average, substantially below the norm consumption the above factors could be corrected. assumed by the heating companies for those Source: Tianjin Experts Group (2005) and personal communication from Tianjin Heating Office. for large connected loads (see Kalkum 2003 for Allocation of Heat Consumption and Costs an example). to Consumers In China, individual contracts between All heat-metering options require that the total consumers and providers of communal services heat consumption of a building is allocated such as centralized heat are legally mandated. between the individual consumers. Individual The collective contract modality may, however, heat meters without a building meter are the be preferable to the individual contract exception; billing of heat consumption could modality, especially considering the current be done directly according to the readings of transition from welfare- to market-based heat the meters. Flat-wise heat metering seems to supply. Most importantly, housing management be the fairest method as the heat supplied by companies or the homeowners' associations the heating company can be measured directly may be more effective in collecting bills from at the apartment with a satisfying precision. individual households (see the example from Consumers may be more prepared to accept Poland in Box 2.8), since they are more in touch such a metering approach since it is similar to with the communities they represent and may the process of metering electricity consumption. possess means and ways to follow up on bill However, flat-wise heat metering measures only collection that are not available to the heating a portion of the heat supplied to a flat, since company. it cannot register the heat that is delivered by 50 5035-CH02.pdf 50 5035-CH02.pdf 50 5/27/08 8:19:23 AM 5/27/08 8:19:23 AM Heat Reform in Eastern Europe and the Role of Heat Pricing transmission from neighboring flats or from among buildings with significantly different pipes crossing the flat. Individual heat meters heat consumption. It is recommended to apply also do not report building-internal losses. Thus, the same practice in China. even when individual heat meters are installed, Sincelow-incomehouseholdsaremorelikely it might be advisable to use them only for heat to live in buildings without energy-efficient allocation purposes in addition to a building features, it is important to mitigate the financial heat meter. consequences of high heating costs due to very Sharing fixed and variable costs within a high heat consumption (if caused by design- building. The total variable and fixed costs can and construction-related factors) through an unambiguously be determined at the substation appropriate social assistance program (see or the building entrance where a meter and Chapter 6). Building reconstruction programs a flow-limiter (see footnote 36) are installed. shouldfocusonbuildingswithveryhighspecific Variable costs are determined in accordance heat consumption, and provide additional to the metered energy and fixed costs can financial support to low-income flat owners be determined in accordance to installed so they can participate in such energy efficient substation capacity (or total area if capacity reconstruction (see page 70). The National is not available; see page 39). If flat-wise heat Experts Team went one step further, suggesting meters are installed, the variable costs for each that for existing buildings consumption- flat can be distributed in accordance to meter based billing should only be introduced in readings of the individual meters. There will combination with energy-efficiency retrofits. always be differences between the readings of This proposal could hamper the introduction centralized meters and the accumulated results of metering and consumption-based billing of the individual meters due to metering errors significantly. It would be very costly and, since and building-internal consumption and losses. the payback time for energy-efficient building Such difference could be distributed among rehabilitation is quite long, financing for such flats by m² or kWh. If heat cost allocators are a large program would be difficult to raise. installed, the variable costs are distributed in Instead, experience with metering in existing accordance to the readings of the cost allocators. buildings should be gained and on this basis, Heating costs include building-internal losses. cost-effective rehabilitation measures should The fixed charge is typically distributed among be proposed, including the design of innovative flats in accordance to the heated area, since the financing mechanisms. Projects along these maximum heat load of a single flat is usually not lines are currently implemented by bilateral registered by a heat meter. and multilateral donors in Harbin, Tangshan, Sharing Fixed and Variable Costs between and Baotou. Various Buildings. A meter installed for Recommendations. The key to making heat each building or staircase measures the heat a commodity is to meter it and to bill customers consumption of the respective facilities, which according to consumption. In order to achieve can however differ substantially from building this quickly and involve as many consumers as to building due to design- and construction- possible, meters at the building level should be related factors. The question arises as to installed as soon as possible. The meter readings whether consumers should be billed strictly in constitute the basis for calculating the costs of accordance to the measured consumption. In heat consumption of the entire building, which Western and Eastern Europe, each building (or can then be distributed among the individual more precisely, the collective of the apartment consumers in a variety of ways. Flat-wise heat owners who have the obligation to maintain meters can be used as well as simpler and less the building) is regarded to be responsible for expensive heat cost allocators. For a transition its own heat consumption, and compensating period, heating costs could also be distributed factors are not applied to balance heating costs by flat area. 51 5035-CH02.pdf 51 5035-CH02.pdf 51 5/27/08 8:19:24 AM 5/27/08 8:19:24 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Box 2.10 Heat Metering in Baotou An analysis of heat metering data in several buildings in Baotou (Inner Mongolia) was performed as part of an effort under the World Bank/GEF "Heat Reform and Building Energy Efficiency" project to identify cost-effective renovation measures for existing residential buildings. Over a period of four heating seasons an increasing number of apartment heat meters failed for various reasons ("heating meters are jammed and the data is zero; heating meters are spoiled and screens do not show; door locks are changed and staff can not get in; there are much sundries and the data cannot be read"). Apartment heat consumption in the buildings, which were all built without exterior insulation, varies considerably; the position of the apartment is significant in determining the consumption, which varies on average about 30 percent. Illustration of different kinds of apartment positions 1 3 . . . 3 1 1: corner angle position 2 5 . . . 5 2 2: gable wall . . . . . . . . . . . . 3: top position 2 5 . . . 5 2 4: bottom position 1 4 . . . 4 1 5: middle position Average energy consumption of room in different location Location type 1 2 3 4 5 Average consumption 36.66 32.46 30.87 28.19 27.10 (w/m2) Source: Beijing Institute of Civil Engineering and Architecture (2006). Existing differences in the heat consumption differences, since comprehensive empirical of different flats or different buildings should not analyses are not available. The following be used as a pretext against consumption-based principles should be applied to determine billing.Thisissuestillneedstobefullyresearched compensation factors: in China. Results of metering pilots--such as in Baotou--should be analyzed carefully and the · Compensationfactorsshouldnotcompensate reasons for deviations should be investigated for heat energy waste caused by consumer (see Box 2.10). Under a two-part tariff system, behavior. only about 50 percent of the energy bill will be · Compensationfactorsshouldnotcompensate affected by such differences in consumption. In for heat losses that can be removed by the addition,theapplicationofcompensationfactors individual consumer (for example, by within buildings could be considered. window sealing) at low cost. Of course, again Use of compensation factors for heat the affordability issue has to be considered. consumption. It is a common argument against However, even if heat losses are due to consumption-based billing that differences old windows, which are relatively costly in heat consumption are mostly design- and to replace, it should be considered that a construction-related. Since these are factors that corresponding compensation factor would are beyond the responsibility of each consumer, remove any incentive to replace them by billing strictly according to consumption would new ones. be unfair. Although there is no doubt that · Compensation factors should usually only construction- and design-related factors have an compensate for heat losses that affect more impact, it is currently impossible to determine than one flat (e.g. bad insulation of outer to what extent these factors contribute to such walls, roofs, etc.). 52 5035-CH02.pdf 52 5035-CH02.pdf 52 5/27/08 8:19:24 AM 5/27/08 8:19:24 AM Heat Reform in Eastern Europe and the Role of Heat Pricing · The system of compensation factors should collective or individual contracts (see page 52), be as simple as possible and transparent for DH companies in Europe usually do not carry consumers. out heat cost allocation and preparation of heating bills for individual households, as this In several countries in Western Europe, is not considered their core business. These compensation factors are not used for three services can, in general, be provided by separate reasons. (i) In well-insulated buildings heat- billing companies on a competitive basis. For consumption varies only to a small extent, due example, in Sofia (Bulgaria) 16 companies to behavioral factors; (ii) when consumers buy or fulfilling certain criteria were selected by the rent an apartment, the price does reflect to some DH company and proposed to customers in a extent the location and heat consumption of the letter with information on heat metering and unit; and (iii) the fixed part of the heat bill takes consumption-based billing. into account diverging heat consumption. When Under consumption-based billing, in heatrequirementsdiffersubstantiallyandcannot addition to the charges according to the heat be changed with reasonable costs, a higher share tariff, several additional cost components can of fixed cost (i.e., closer to 50 percent) could be be part of the heating bill of the individual recommended (JP/CEEB 2002). consumer (see JP/CEEB 2002): It is important to point out that using heat compensation factors to achieve perceived · Charge for heat losses in the building- fairness in billing will defeat much of the internal piping network downstream if only simplicity offered by metering options C and apartmentheatmetersareused.Forexample, D, and may not be advisable in these situations. in Korea 10 percent is added to the energy Even in option B, the use of compensation factors charge to cover these losses. Some German may contribute to a lack of transparency for DH companies charge slightly higher retail the consumer rather than enhance fairness of tariffs for customers with apartment meters billing. than, for example, to an entire building. Conclusions. Heat consumption can never · Heating costs of common areas. In Western be attributed exactly to one of several end-use Europe, where common areas are usually points in one building. Using compensation heated, this represents around 30 percent of factors to achieve a fairer allocation of heat the total space heating costs of a building; costs is justified only if large discrepancies in · Installation and maintenance costs of the heat consumption are found between similar individual metering devices; and dwellings in different locations of a building. · Cost of the billing service (i.e., cost of reading This is more likely to occur in poorly insulated themeter),calculatingthehouseholdcharges buildings. Use of compensation factors may and preparing the bills for individual not be advisable for well-insulated buildings, households. especiallyinowner-occupiedbuildingswherethe apartment location factor is already considered When consumption-based billing is first in purchasing decisions. Furthermore, the fixed introduced, the government or the regulator part of a two-part heating tariff already takes into can accelerate its acceptance by consumers by account to a large extent that heat consumption establishing a basic framework for heat cost might vary depending on the location of an accounting and individual heat metering and by apartment in a building and other factors. certifying billing companies so that consumers are assured that these are competent and that Billing, Collections and Payment Terms heating bills are calculated according to a sound Consumption-basedbillingrequiresconsiderable methodology. investments not only in equipment, but also Chinese customers have to pay the total in related services. Independently of having heating bill for the entire heating season at 53 5035-CH02.pdf 53 5035-CH02.pdf 53 5/27/08 8:19:25 AM 5/27/08 8:19:25 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY consumption of the previous heating season, Box 2.11 Consumption-based Billing and reconciliation with the actual consumption on a Monthly Basis takes place at the end of the heating season. This In Plovdiv, Bulgaria, the building meters and is typical in Western Europe, where heat and hot electronic heat cost allocators (existing in water are paid together with the maintenance 92 percent of all residential buildings) are read fees by inhabitants of multifamily residential remotely on the first day of every month. The buildings. For consumers, it has the advantage billing department of the DH company separates the heat and hot water consumption and sends of spreading out the payments evenly over the data on the fifth day to the billing company. the year, thus avoiding very high heating bills It performs the billing for the households in each and, potentially, payment problems during the building and sends the breakdown per household two or three coldest months. (ii) Alternatively, (customer) back to the DH company between the meters are read every month and customers eighth and tenth day. The DH company sends the are billed according to the actual consumption bill out to each household on the twelfth day and every month during the heating season. The the customer has fourteen days for payment latter has become increasingly popular with without incurring any interest charges. the wider application of remote reading of heat Source: Meyer (2003). and electronic heat allocation meters. Customers seem to appreciate the direct relationship between consumption and payment. Box 2.11 describes the process of monthly metering and the beginning of the heating season. For even billing in Plovdiv/Bulgaria. earlier payment, many heating companies offer It might be a good marketing strategy if the discounts. Prepayments are justified by heating heating company gives customers a choice of companies as a fund for buying fuels and payment cycle. This might lower the extent of other materials needed for the coming heating late payments. It is recommended, however, that season, but they can constitute significant those customers preferring to be billed monthly hardship, especially for low-income households. according to metered readings have metering With payment responsibility shifting now to devices that can be remotely read. Otherwise, households, insisting on prepayment could the billing costs would be too high (JP/CEEB contribute to lowering the willingness to pay 2002). and thus collections. Inthefuture,Chineseheatsupplycompanies Impacts from Heat Metering need to become more flexible and offer a broader range of payment options. For payment of and Consumption-Based Billing fuels and other inputs, they should rely more From a public policy point of view, the main on short-term loans. The financing costs have purpose of adopting heat metering is the to be accepted as justified costs of heat supply. creation of a market incentive for end-use energy This would also be in compliance with the conservation. This incentive to realize cost commercialization of the heat supply business. savings may directly result in energy savings. Companies in Western and Eastern Europe Experiences from Western and Eastern Europe offer various payment options: In unmetered show that consumer control and metering of DH systems, payments for heating are usually heat consumption and consumption-based made every month of the heating season based billing will typically result in a reduction of heat on the size of the living area. In case of severe demand by some 15 to 30 percent. Much of this nonpayment problems, prepayments or lump- can be achieved with metering at the building sum payments are required. level, which should be widely and quickly In metered DH systems, two options prevail. implemented as a minimum requirement. (i) Customers either pay in equal monthly Heat consumers in Poland, for example, installments over 12 months, based on the heat adopted energy-saving measures in large 54 5035-CH02.pdf 54 5035-CH02.pdf 54 5/27/08 8:19:26 AM 5/27/08 8:19:26 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Box 2.12 Energy Savings and Reduced Heat Bills in Poland, 1992 to 2000 The government of Poland implemented energy- Figure 2.7 Heat Sales per m2 in Poland and sector reforms under which the full payment Finland, 1992 and 1999 for heat gradually became the responsibility of (in GJ/m2) households. DH companies installed heat meters at 1.4 the building level, a two-part tariff was introduced 1.32 ea and households began to use heat more efficiently ar 1.2 1.15 1.05 1.03 by investing in controls, heat allocation meters, 1 0.96 0.94 0.95 floor better windows and some exterior building insulation 0.8 0.75 per (but not renovation of internal piping). The share of (GJ/m2) 0.6 renovated buildings is fairly high now; for example 0.46 0.45 sales 0.4 in the city of Gdynia it amounts to approximately 70 0.2 to 75 percent of the residential building stock. The Heat 0 efficiency improvements by consumers, together with the technical, operational, and management arsaw Gdansk Gdynia Krakow W improvements in DH supply, resulted in an average Turku/Finl. 18 percent drop of heat sales per m2 of heated space 1992 1999 in four cities participating in a World Bank project (see Figure 2.7). With strictly regulated heat tariffs (see Figure 3.1) this resulted Figure 2.8 Heat Prices per m2 in Poland and in an average decrease in costs of heating Finland, 1992 and 1999 (in PLN/m2 a given apartment area by 55 percent in 1999 prices, without VAT) (see Figure 2.8). Even though some of the real decrease in prices didn't reach 70 consumers due to an increase in the VAT in 61.2 60 55 55.7 rate at the same time, the remaining cost 49.5 50 46.3 reduction helped to make the removal of PLN/m2 40 the subsidy less burdensome to households. in prices 30 28 27.8 Net consumer prices per square meter 25 24.4 21.4 21.0 price 1999 20 of heated area are now comparable with prices in Finland. The price drop has 10 Heat improved competitiveness of DH, and DH 0 has attracted additional customers. The arsaw combination of comprehensive investment Gdansk Gdynia Krakow W Katowice Turku/Finl. programs and strictly regulated retail 1992 1999 heat tariffs did, however result in serious financial difficulties for all DH companies Note: 1$ = 3.72PLN; 25PLN = 6.7$ = 55yuan/m2. involved in the World Bank project, including a substantial decrease of the gross margin Source: Based on World Bank 2000. (see footnote 43 for the definition). numbers after metering was introduced (see to judge which type of heat metering is justified Box 2.12 with Figures 2.7 and 2.8). In a rapidly (i.e., if the social benefits of potential energy growing economy such as China, providing savings outweigh the additional costs). In China, incentives through metering and consumption- the Tianjin experience with substantial heat bill based billing could further lead to energy-smart refunds for most consumers in buildings built decisions on home purchasing, driving up according to BEE standards confirms that heat demand for more energy-efficient buildings. metering and consumption-based billing is Thus, the cost effectiveness of achieving indeed generating benefits for those consumers potential energy savings becomes a key criterion (see Box 2.9). 55 5035-CH02.pdf 55 5035-CH02.pdf 55 5/27/08 8:19:26 AM 5/27/08 8:19:26 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Box 2.13 Impact of Consumption-based Billing on Heating Bills in Bulgaria In Bulgaria residential heat and electricity Figure 2.9 Distribution of Monthly District Heating expenseshavegoneuptoapointwherethey Bills in Plovdiv, Bulgaria, 2002 to 2003 amount to about 40 percent of household income. Many households have, however, % 60 during the past few years managed to cut their consumption and their expenditures 50 $55= average down considerably. Figure 2.9 shows some heat bill at `April 03 norm results of implementing metering and 40 `March 03 consumption consumption-based billing for heat on the `Febr 03 basis of a two-part tariff in Bulgaria. For Households 30 `Jan 03 an average apartment with two rooms, of `Dec 03 the average monthly heat bill would have 20 `Nov 03 cent been US$55, had households been billed Per 10 per m2 according to consumption norms. But since buildings are now equipped 0 with heat meters and households have <15 15­ 30­ 45­ 60­ 75­ 90­ 105­ >120 thermostatic radiator valves (TRVs) and 30 45 60 75 90 105 120 heat allocation meters, the heating bills Monthly Heat Bill in US$ of most households are far below this Source: Plovdiv DH Company and State Energy Regulatory Commission. amount. Even during the coldest months of the 2002/03 heating season----which was one of the coldest in memory----almost three quarters of the residential customers of the Plovdiv DH company paid less than US$45 per month, and in the warmer months of the heating season this was true for more than 95 percent. This result shows that households actually manage their consumption and thus their expenditures, by turning heat down or lower during all or part of the time, when the combination of technology and price incentives are in place. As a result of energy savings, consumption- What happened in Bulgaria and Poland is based billing can also have a major impact on typical for DH systems where heat metering consumers' heating bills. The example from and consumption-based billing have been Bulgaria in Box 2.13, which shows the substantial introduced. Heat consumption goes down and decline in monthly bills in Figure 2.9, is typical in the short term DH companies will experience for many other cases in Eastern Europe. reduced sales and revenues. In the mid- to However, once consumers can control the long-term they can generate profits again by temperature level, it is expected that some modernization investments, thus improving heat consumers who received a low level of efficiency and reducing costs of heat provision heat in the past will choose more comfort, and by connecting new customers to the which may result in higher heating bills as network. For Chinese heating companies, the well. The example of Lithuania in Box 2.14 impacts of heat metering and consumption- is a case in point. If a consumer chooses to based billing could turn out to be much more increase the indoor temperature, for example, beneficial since new housing developments and from 16ºC (the currently required minimum thus new customers are materializing every day. supply temperature in Chinese heat supply With heat loads and consumption of existing systems) to 20ºC, heat consumption would customers decreasing, new capacity and supply increase by about 13 percent. Savings due to does not have to be provided completely from consumption-based billing could offset such new infrastructure, provided that local heat increases. markets are restructured in a way that gives 56 5035-CH02.pdf 56 5035-CH02.pdf 56 5/27/08 8:19:27 AM 5/27/08 8:19:27 AM Heat Reform in Eastern Europe and the Role of Heat Pricing Box 2.14 Thermo-Renovation in Lithuania Between 1996 and 2001 homeowners and energy saving would have been 25 percent. Based homeowner associations were participating in the on a survey, 56 percent of respondents had their Lithuania Energy Efficiency and Housing Project, heat bills decreased and 48 percent reported financed by the World Bank, to finance residential improvement in housing quality. Average payback building energy efficiency improvements through time of investments (without taking into account a credit-line. In 96 monitored projects (of 229 in increased comfort or other imputed values such as total) investments varied from less than US$250 reduced maintenance costs, extension of asset life, per apartment to more than US$3,500 with an or increased property values) amounted to 17 years. average close to US$1,000. Among the investments Taking into account subsidies through a grant of 30 were rehabilitation of DH substations, change of percent of the loan principal and a VAT exemption, windows, weather proofing of roofs and exterior average payback time of the investments was in fact walls. Energy savings showed a very large spread, reduced to 12 years. from significant additional consumption to more Low-income households were initially reluctant to than 50 percent reduction with an average value participate in the project and take on long-term for a normal year of 17 percent (without adjustment financial obligations. Starting in 1998, it was possible for comfort change). In reality, many homeowners to apply the subsidy to the debt obligations of low- preferred increased comfort to savings and raised income households. This removed an obstacle to indoor temperatures. A rough estimation showed their participation. that without temperature increases average Source: World Bank 2002 and HUDF 2002. companies and existing infrastructure a chance transitions. The government might structure the to supply new housing developments. implementation process in two steps. Recommendations for China 1. "As a first step, it should be required to meter all buildings, new as well as existing, or at The experience with heat metering during the the very minimum other wholesale units past five years in China, albeit still quite limited, such as heat substations. This will enable suggests that the recommendations of the 2002 the basic commodification of heat through report still hold, but possibly with a reduced the previously described collective heating emphasis on apartment-level metering as the contract modality, provide direct incentives ultimate goal: "Although achieving individual for heating companies to improve the heat metering may be the eventual goal, the efficiency of heat production and delivery, national policy should leave room for the level and should also provide some incentives to of metering (building-based vs. apartment- realize energy savings on the consumption based) at the initial phase of implementation side. Thus, building-level metering should to allow for learning and capacity building, as be made a minimum requirement for all well as to leave open the metering options to central heating systems. allow for multiple choices of technologies and 2. "In the second step, the objective is to realize let the heat customers, suppliers and the market the potential end-use energy savings by determine the proper applications at different adopting apartment-level heat metering, locations. Therefore, a gradual approach in which is considered essential for motivating adopting heat metering and consumption-based heating energy conservation among end- billing would be appropriate for China. This users.Therewillbecasesinwhichconsumers also reflects international experiences in similar may opt to combine the two steps and go 57 5035-CH02.pdf 57 5035-CH02.pdf 57 5/27/08 8:19:27 AM 5/27/08 8:19:27 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY directly to apartment-level metering. This theimprovedinfrastructureforheatmetering should be encouraged if the conditions and billing would provide a solid base for are ripe for such attempts. But in general introducing individual heat metering. delaying the requirement of apartment-level Moreover, at this point the development of metering a few years would be a practical less expensive and more reliable small heat policy. In a few years time after the first step, meters should have progressed to enable the results of the demonstration projects and their use on a wider basis." 58 5035-CH02.pdf 58 5035-CH02.pdf 58 5/27/08 8:19:28 AM 5/27/08 8:19:28 AM 3 Improved Heat Price Administration System A New Regulatory ·In bigger countries, locally or regionally Framework for the based regulation may be preferable to a national regulatory agency. Municipal Centralized Heating Sector level regulation is less than ideal since it In China, municipal agencies are currently means that municipalities carry out several responsible for setting heat prices and for functions--not only are they frequently supervision of the local heat supply sectors in the owners of DH companies, but also the general. Changes in heat prices require a fairly regulators. Conflicts of interest could be elaborate procedure, involving several local the result if necessary checks and balances government departments, public hearings, are not in place. In addition, the necessary and finally a political decision by the local experience to efficiently perform regulatory government. There is consensus that the functions is frequently scarce at the local government should continue to be involved level. Ensuring the independence of local in setting heat prices "to restrict monopoly regulators from local politics and capacity earningsandprotectthebenefitsoftheresidents" building for them would thus be very (National Experts Report 2005), but through important. A national-level regulator with a more transparent, flexible, and efficient regional or local offices may be an alternative process. for the DH sector. With regulation at the Lessons from Eastern Europe that are subnational level it is recommended that relevant to the regulation of heat pricing one agency gather nationwide information, follow: provide benchmarking, and inform consumersabouttheresultsoftheregulatory · The regulatory framework needs to ensure process. Of particular importance would that tariffs and the tariff setting process are be comparisons of heat prices and various simple and transparent in order to make efficiency measures of heat supply in cities the process manageable and to increase the with centralized heat supply. acceptance of tariff changes by consumers, ·Even if regulation is carried out at the politicians and the regulated companies. subnationallevel,thefollowingmethodologies Any regulation should be designed in a and sample contracts should be developed way that allows quick reactions to changes on a national level: (i) uniform rules for cost in the market through reduced details in accountingandcostallocation,(ii)anationally legislation and greater delegation of powers applicable methodology for tariff setting, to the regulatory agency. Although some of including computation of the heat supply the smallest companies could be exempted costs, (iii) standard supply contracts for from regulation, it is important to treat general or tariff customers, and (iv) standard all DH companies equally regarding, for connection and supply conditions, including example, tax status and application of cost a definition of minimum requirements for accounting standards. service quality. 59 5035-CH03.pdf 59 5035-CH03.pdf 59 5/27/08 8:25:35 AM 5/27/08 8:25:35 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY · Coordination between regulators of CHP Tianjin advocated tariff adjustments in case companies--usually the regulator for of considerable increases of the variable costs. the power sector--and DH companies is Most companies would be able to cut expenses important. This concerns at minimum the and increase the efficiency to compensate for methodology for CHP cost allocation. smallerpriceincreases.Thenationalexpertstook these proposals a step further, advocating quasi- During this project only basic improvements automatic heat price adjustments to changes in of the regulatory framework--as they relate input prices. to making heat pricing more effective--were In many countries in Eastern Europe where investigated. The Chinese government (MOC heat tariffs are regulated, automatic partial and NDRC) have issued a national heat pricing adjustment of heat tariffs has been implemented methodology (Heat Pricing Management after a period when governments were very Method) in 2007. A scoping analysis of more reluctant to increase heat tariffs for fear of general issues to be resolved in the development contributing to inflation pressure or increasing of a new national regulatory framework for affordability problems. Box 3.1 presents the the centralized heating sector has been carried experiences in Poland. These also provide out jointly by experts of MOC and the World another lesson, namely about the importance Bank in 2005/06. Based on those results, more of balancing the interests of heat consumers and detailed investigations will be the subject of a suppliers when setting heat tariffs. An analysis new collaborative effort between MOC and the of the distribution of benefits of the World World Bank (ESMAP), starting in late 2007. Bank financed investment project mentioned in Box 2.12 shows that most of the project benefits (and a substantial part of the DH companies' Flexible Heat Price---- profits) were transferred to heat consumers due Automatic Partial to the government's control of tariffs.As a result Adjustment of the limited tariff increases, the profitability level of the DH companies hardly improved. Heat tariffs in China used to be fairly stable This would make it difficult for the companies during long periods of time. Despite significant to access commercial loans for further necessary increases in the costs of major inputs, heat investments. "It is therefore important that tariffs for residential buildings in many cities further tariff increases, combined with further had not changed between the mid-1990s and efficiency improvements, be sufficient over early 2000. There was no built-in mechanism time to enable the DH companies to generate to ensure that tariffs are adjusted in accordance adequate funds to meet their debt service, make to specific exogenous cost increases or general a contribution toward investments and pay a inflation. Automatic partial price adjustment reasonable dividend to equity holders." (World is important from the perspective of securing Bank 2000, p. 9) sufficient financing of DH companies, providing Recommendations. Price adjustment a reasonable continuity and planning security formulae should allow adjusting the tariff to and avoiding overt political influence over heat certaininputpriceincreaseswithoutpriorofficial prices. approval. To prevent any automated adjustment This project was implemented during a time of tariffs to inflation, price adjustment formulae of steep coal price increases (see Figure 3.2a). do not necessarily have to comprise all cost Most city working groups proposed some items. Moreover, adjustments could be limited to kind of price adjustment formula, but not as only once or twice per heating season and/or to an automated mechanism to adjust heat tariffs. input price increases exceeding a certain ceiling Existing price approval procedures would (e.g., fuel prices increases of more than 5 percent continue to be applied. Both Taiyuan and compared with the initial price). 60 5035-CH03.pdf 60 5035-CH03.pdf 60 5/27/08 8:25:36 AM 5/27/08 8:25:36 AM Improved Heat Price Administration System Box 3.1 DH Tariff Increases below Inflation in Poland, 1991 to 2000 The Polish Ministry of Finance fixed standard prices the Consumer Price Index (CPI), 5.4 times from its for space heating and domestic hot water (DHW), 1991 level, with the increase in DH consumer prices, determining the national maximum tariff that DH which have risen 3 to 4 times from their 1991 level companies could charge their residential customers. in the four cities participating in the World Bank The standard prices were in force until the end of project. The consumer has thus benefited from 1997, at which time the costs and therefore also lower real unit price of heating. The heat prices in the tariffs of most DH companies were below the cities having received WB financing support are this maximum tariff. After standard prices were on average lower than in other Polish cities.43 abolished, for three years annual tariff increases In 2000 the secondary legislation in Poland was were limited to 15 percent. In fact, the average tariff changed to add more flexibility to the tariff setting increases approved by the regulator in 1999 and in process and reduce the workload of the regulator. 2000 were below inflation, resulting in a decrease in Tariffs could be approved for a maximum of three real tariff levels. Only in 2000 real tariffs increased years, including an adjustment formula, and they again. The limited tariff adjustments resulted in would be based on planned justified costs instead substantial reductions of most of the DH companies' of historic costs. gross margins. Figure 16 compares the increase in Source: World Bank 2000. Figure 3.1 DH Tariff Increases and Inflation in Poland, 1991 to 2000 600 500 (1991=100) eases 400 incrf tarif 300 Heat 200 and 100 Inflation=CPI 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 CPI Gdansk Gdynia Krakow Warsaw Source: World Bank 2000. More generally, applying a price-cap encompassingsomeaspectsofpartialautomated mechanism in China's centralized heating heat price adjustment, the use of price-cap tariffs sector, similar to the one in force in Lithuania would go beyond it. An initial (baseline) tariff (see Box 2.5), should be considered. Although would be approved by the regulatory authority 43See ESMAP 2000 and World Bank 2000. Gross margin is defined as gross income divided by net sales, expressed as a percentage. 61 5035-CH03.pdf 61 5035-CH03.pdf 61 5/27/08 8:25:36 AM 5/27/08 8:25:36 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY (currently the municipal government) for each of at least one year, heat-generation tariffs can individual heating company, but for a period of be increased according to the coal cost share three to five years, including a price adjustment in total heat-generation cost without going formula for the same period. Thereafter, the through the established channels for municipal baseline tariff and the price adjustment formula heat price approval. Heating companies should would be recalculated and approved by the bear 10 to 30 percent of the cost increase as an regulatory entity. For a limited period of time incentive to improve efficiencies and lower coal (i.e., until the next approval of the baseline consumption. The increases in coal price and tariff), this tariff system would allow the heat heat generation tariff should also be reflected in supply companies to generate extra profits by the end-user tariff; in this case a public hearing improving the efficiency and performance of would be required. Local governments and the company. heating companies seem to have acted quickly Implementation. In October 2005, NDRC in adopting the partial automatic heat price and MOC issued a joint regulation, allowing adjustment clause. In many cities heat tariffs the partial automatic adjustment of heat prices were increased for the 2005 to 2006 heating in case of increasing coal prices. If the coal price season after years of rising coal prices and flat increases more than 10 percent over the period heat tariffs; see Figures 3.2a and b. Figure 3.2 a­b Coal and Heat Price Development 2000 to 2005 (a) Coal Prices (2000=100) 240 220 200 180 160 140 120 100 80 2000 2001 2002 2003 2004 2005 Coal Beijing Coal Tianjin Coal Tangshan Coal Yinchuan Coal Liaoning (b) Heat Tariffs (2000=100) 240 220 200 180 160 140 120 100 80 2000 2001 2002 2003 2004 2005 Beijing Tianjin Tangshan Yinchuan Shenyang Benxi Yingkou Liaoyang Chaoyang Source: Based on data from MOC and the Liaoning Project Management Office. Note: Shenyang, Benxi, Yingkou, Liaoyang, and Chaoyang are all located in Liaoning Province, and the same coal price applies for all cities. 62 5035-CH03.pdf 62 5035-CH03.pdf 62 5/27/08 8:25:37 AM 5/27/08 8:25:37 AM Improved Heat Price Administration System Coordination between market-based framework, both products from Power, Bulk Heat, and CHPplants need to be able to compete with heat and electricity from other sources. If it is decided Heat Pricing----Role to promote CHP, for example on the basis of of Cogeneration environmental, resource-saving and energy security considerations, the cost-allocation Many centralized heating systems in China method for CHP plants must be in line with this receive their heat from cogeneration plants policy preference.44 and heat purchased from such plants is thus an Heat provided from cogeneration plants is important cost factor. The use of cogeneration an important cost factor in many DH systems. is, however, less important for Chinese DH Therefore, its pricing could have a significant systems than, for example, for DH systems in impact on retail heat tariffs. For example, in the European Union countries (see para. 85). One Kiev/Ukraine the cost allocation in CHP plants reasonfortheunderutilizationofCHPinChina's providing heat to the Kiev DH system was DH systems is the high cost of cogenerated heat. changed in 1998, resulting in a decrease of the The fact that Chinese DH systems do not supply average retail tariff from US$22/Gcal to US$17/ domestic hot water is one factor contributing to Gcal (World Bank 1998). the high costs of delivered heat. Depreciation It is recommended to develop a pricing charges are typically much higher than for methodology for heat and electricity from HOBs, and electricity gets most of the benefits cogeneration that shares the benefits between of the cogeneration process. The potential for heat and electricity in a way that maximizes energy savings from cogeneration as compared the economic benefits from cogeneration. Such to heat supply from HOBs could be realized to a methodology would have to be developed much greater extent if the applied cost allocation together with the regulatory agency for the method would be more favorable for heat rather power sector. than for power. More generally, politicians and regulators should keep in mind that within an increasingly 44For example, within the European Union CHP installations now receive preferential treatment. (http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_052/l_05220040221en00500060.pdf). 63 5035-CH03.pdf 63 5035-CH03.pdf 63 5/27/08 8:25:37 AM 5/27/08 8:25:37 AM 5035-CH03.pdf 64 5035-CH03.pdf 64 5/27/08 8:25:38 AM 5/27/08 8:25:38 AM 4 Transfer of Payment Responsibility to Consumers, Transparent Subsidies, and Social Support for Low-income Consumers Within this report, consumer payment do not receive work-unit based housing any responsibility and transparent heat subsidy more and have to acquire their own dwellings. are investigated as the final part of the Chinese More than 80 percent of residential housing heat-pricing reform agenda. For the Chinese is now privately owned. Transferring the government and experts, it constitutes a most payment responsibilities of housing-related fundamental and important part of the reform expenditures from work units to consumers agenda, to be implemented first. would open also these related markets to a market-based approach. For infrastructure Transfer of Payment services a shift in payment responsibility would Responsibility from Work have the advantage that the costs of these Unit to Consumer services might be included in housing purchase decisions. Consumers would consider energy In the big cities in China's northeast where and other resource savings, particularly when centralized heating started, it became part of the payments for heating, water, and so on are the work-unit-based social welfare system. based on metered consumption (see page 59). Heat was provided for free as part of housing Important steps have already been taken benefits to employees of work-units under the across cities in northern China to discontinue the central government, receiving funding from the heating welfare system, but in the various cities to state budget, such as schools or in SOEs. Heat a different extent. In the four cities participating supply as social welfare was also prevalent in in this project the contribution of the employees Beijing and in "company towns" relying on to the total heating costs varies between 10 and one big SOE. In smaller cities or cities outside 100 percent (see Table 4.1). Tianjin has been the the northeast where centralized heating started nationalleaderofthisaspectofheatreform,starting later, heating was not necessarily provided for the transfer of payment responsibility already free by work-units. in 1999 to 2000 and reaching 100 percent within With the dismantling of the work-unit- threeyears.Irrespectiveoftheultimateshareofthe based social welfare system since the late 1990s, heat bill for which consumers are responsible, in housing markets have already become much most cities they now need to pay heating bills and more market-based. Government employees request reimbursement by their employers. 65 5035-CH04.pdf 65 5035-CH04.pdf 65 5/27/08 8:26:07 AM 5/27/08 8:26:07 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY In December 2005 the central government the burden in general. In most countries, general issued a two-year deadline for the completion subsidies have been phased out completely, and of the transfer of heat bill payment from work only poor households receive social assistance unit to consumer (Circular No. 220). support, as is the case in Western Europe and North America.45 Compensation through Explicit Cash Payments Social Support for Poor Under the old welfare system heat was supplied Heat Consumers asin-kindlaborcompensation.Itwouldtherefore In many cities in northern China the process of be logical to transform this into an explicit making consumers responsible for the payment payment when transferring heat payment of heating bills and at the same time adopting responsibility to employees. Although the measures to subsidize the heat consumption of principle is generally acknowledged and would poor households is well underway. The existing go a long way in preventing affordability and social assistance system based on the Minimum collection problems, the extent of compensation Living Standard (MLS) Scheme, a national is controversial and difficult to implement in transfer program, is used for targeting of heating an equitable fashion. Government employees subsidies in many locations, but rarely are the are the group where the conversion of the two systems administratively unified. The main invisible to a visible subsidy is most relevant. tools of supporting poor heat consumers can be In many cases additional payments are already divided into three categories, described in detail forthcoming and discussions center around the in Zhang/Xu (2005): extent of compensation: should it be a one-time, complete, or partial compensation, should all 1. Heat security funds are special local future heat price increases be compensated government funds to help low-income and as well, should compensation be provided to poor households to cover their heat fees. each employee regardless of whether other Cities with such funds include Shenyang, family members also receive compensation? Changchun, Harbin, Taiyuan, Qiqihar, For enterprises where payments to employees Daqing, Anshan, Fushun, Benxi, Dandong, do not already implicitly include a component Liaoyang and Tieling. for heating, compensation is recommended, but 2. Discounts and waivers of heating fees--the cannot be enforced. In SOEs that are in financial payment of heat bills is shared between trouble, payment for heat to employees or to consumers, government, and enterprises, pensioners is very unlikely to materialize. These for example in Tianjin, Changchun, and heat consumers, those who are unemployed and Harbin. other poor households not included in the old 3. Afew cities have enhanced the MLS scheme state-financed system are the ones for whom by including heat fees into MLS benefits social assistance should be provided. and raising the MLS benefit levels. Cities In Eastern Europe the transfer of payment adopting this practice include Beijing responsibility to consumers was generally and Yingchuan, but other cities are also established at the beginning of the transition contemplating the method. period. Consumers did not receive any cash compensation, but heat was usually provided With heat reform only in its beginnings, with general subsidies that were gradually the existing systems are necessarily imperfect reduced with increases in the cost recovery level and several issues need to be resolved in the of heat tariffs. Increasing income levels reduced future: 45For a summary on targeted subsidy mechanisms, see Meyer (2003). For more details on Eastern European energy safety net programs see Lovei et al. (2000) and USAID (2003). 66 5035-CH04.pdf 66 5035-CH04.pdf 66 5/27/08 8:26:08 AM 5/27/08 8:26:08 AM Transfer of Payment Responsibility to Consumers, Transparent Subsidies, and Social Support for Low-Income Consumers Table 4.1 Social Programs in Pilot Cities Tianjin Changchun Harbin Taiyuan Consumer 100 15 10 15 share of heat bill, percent Social 50 to Heat Security Heat Security Heat Security Heating 60 percent Fund finances Fund finances Fund finances Subsidy discounts discounts and discounts discounts of 85 Programs wavers (living area percent (living limited) area limited) Eligibility MLS and MLS 9 classes of MLS households, criteria unemployed households eligible poor DH companies households on households and enterprises in the margin of econ. difficulties MLS Source: Based on Zhang/Xu 2005. · Municipal heat security funds are often laid-off, and other poor people. With some underfunded and can provide only limited widening of eligibility criteria now occurring relief to poor families. In some cities the (see Table 4.1), it will be a challenge to locally funded heat subsidies already maintain simplicity so that the resulting account for a large percentage of total MLS system is not becoming too complicated, funding (e.g., Changchun 16 percent and intransparent, and difficult to administer. Harbin 32 percent). But unlike the MLS · With heating subsidies not being channeled scheme, heat security funds rely on local to consumers, but mostly directly to heating funding sources only. companies,manyconsumerscomplainabout · Heating companies had to finance a large bad quality service and a lack of influence part of the discounts and waivers of heating on providers. fees from the municipality. The financing of a large part of the subsidies to poor In each of the four pilot cities basic social consumers is increasingly in contradiction mitigation measures are currently in place to the requirements of a more commercial for many poor households included in the behavior of those companies. Indeed, this MLS program (see Table 4.1). The low-income is changing now with local governments population, however, does not usually receive taking over all or some of the financing support in paying heating bills from either burden, e.g., in Tianjin. their work unit or the government. According · The targeting approach leads to inclusion to the social surveys carried out under this and exclusion errors: 66 percent of surveyed project, the total heat bill is about 23 percent of MLS households in the four cities have the income of poor consumers (first quintile) not received heat subsidies, whereas 23 and 10 percent of the income of low-income percent of heat subsidies went to non-MLS consumers (second quintile). The self-paid households. heat bill (i.e., after deducting payments to · Only a subset of needy households get heat suppliers from employers or government supportinsecuringbasicheatingneeds.Poor, agencies) amounts to 13 percent and 8 percent, non-MSL households are rarely covered by respectively, of income (see Figure 1.6). This subsidies. In Beijing, the government plans shows that subsidies are quite effective in to expand coverage to people not covered by reducing the burden for poor households. Few MLS but near poverty, such as unemployed, low-income households, however, experience 67 5035-CH04.pdf 67 5035-CH04.pdf 67 5/27/08 8:26:08 AM 5/27/08 8:26:08 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY any relief. A reversal between low-income and targeted financial support to poor and low- poor households could easily happen. Therefore income households, as follows: the Chinese experts involved in this project recommend the extension of subsidies to low- · Payment responsibility should be shifted income households. Detailed analysis is required fully to heat consumers. to determine the extent of social assistance · Targeted support to poor consumers needs under various scenarios and how it can be to be reevaluated in the light of possible financed. Any extension of social assistance for tariff increases. In particular, it should be heating payments would further increase the considered to provide social assistance for financial challenges of local governments. A payment of heating bills not only to di bao, national transfer program should therefore be but also to low-income consumers, which considered to mitigate the heating burden for are not among the MLS beneficiaries. urban residents in northern China. · To preserve incentives for a rational use of Subsidy mechanisms generally provide heat, each consumer should pay at least support by lowering the heating expenses some part of the heat bill. Alternatively, of poor households. They do very little to refunds for lower consumption could be reduce consumption, even when the subsidy considered. mechanism does not have a distorting impact. · Introduction of flexible, customer-tailored Measures to improve the tightness of the payment terms to improve affordability and building shell lower the requirements for collection rates is especially important for heating. Furthermore, traditional DH systems lower income consumers. need to be supplemented with meters and · The use of subsidies to pay for metering controls, which enable consumers to control their and control equipment and some thermal consumptionandtheirheatingbills(seeBox 2.13, renovation of existing buildings could lower with the Bulgaria example). Such measures are heat expenses in the future. rather expensive, however, and unless very bad · Financing of targeted social assistance needs conditions are remedied, payback times of 5 to a secure funding base. It should not be the 10 years are typical; exterior insulation has an responsibility of the heating company, but of even longer payback time. These investments the government, and the central government must be coupled with innovative financial should share in the burden together with the instruments that enable consumers, particularly local government. the poor, to distribute capital costs over a longer period and/or receive part of the necessary A more efficient supply of heat, delivered financing as a grant.46Actual programs to reduce by better managed and operated heating energy waste in the homes of poor households­­ companies, and enforcement of energy efficiency financed through existing social safety net efforts standards for new housing construction and or other channels­­are, however, very rare. basic thermal renovation of existing buildings One of the few examples is the heat subsidy in would reduce the amount and cost of heat to Lithuania (see Box 2.14). be supplied. Although this would benefit all consumers of heat, it would do so especially Conclusions for poor and low-income consumers. Finally, metering and consumption-based billing A market-based, affordable, and equitable provides an instrument to heat consumers to provision of heating services should combine manage consumption and better adapt it to their full payment of heat bills by consumers and needs and incomes. 46Lampietti/Meyer 2002. 68 5035-CH04.pdf 68 5035-CH04.pdf 68 5/27/08 8:26:09 AM 5/27/08 8:26:09 AM 5 Implementation of Heat Price Reform Implementation Strategy: with various alternative ways of implementing Actions and Sequencing subcomponents. Of the highest priority is the implementation The Chinese experts/authorities list four of the market and social agenda in component important components of heat price reform: one--that is, to make consumers responsible for payment of the heating bill, to provide some 1. Changing from invisible to visible heat level of compensation for those consumers who subsidywiththreesubcomponents(i) transfer received heat as part of in-kind wage payments, heat bill payment responsibility from the and to improve the social heat assistance system. work unit to the consumer, (ii) establishment The urgency of establishing a basic market of a system of explicit cash payments for relationship for the heating sector has been employees having benefited from welfare recognized by the central government in its heating, and (iii) improvement of social December2005circularinwhichitgaveadeadline safeguards for poor heat consumers; of two years for transferring the responsibility for 2. Rationalizingtheheattariffbydeterminingthe heat bill payments to consumers. justified costs and cost-recovery heat tariffs. The main focus during the second phase, This would support the commercialization which should start in parallel to the first, would and franchising of the heating sector; be the rationalization of the heat tariff, based on 3. Applying a two-part tariff, introducing improved financial accounting and auditing of metering and controls and transition from heating companies, to ensure that tariffs cover area-based to consumption-based billing; justified costs of heating. One of the suggested and actions, the automatic linkage of heat tariffs 4. Improving the heat tariff management and coal prices has already been introduced in system. late 2005. The national heat price management method has also been issued and will be in force Due to many required actions and in order starting October 2007, but further actions on not to jeopardize the success of the reform the the central and local government levels (e.g., implementation of these components should development and enforcement of appropriate be carried out step by step. In their final uniform accounting rules, rationalization of report, Chinese national experts proposed connection fees, clarification of asset base and implementation arrangements and requirements valuation) are required to achieve the intended for heat price reform, which are summarized results. in Table 5.1. Actions to be implemented The application of a two-part tariff system immediately and demonstration and pilot and transition to consumption-based billing projects are proposed under all but the heat tariff is foreseen in the third phase. This seems to management component. This acknowledges reflect the uneasiness of Chinese experts and the urgency to get started and to gain experience practitioners with the results so far of heat 69 5035-CH05.pdf 69 5035-CH05.pdf 69 5/27/08 8:26:40 AM 5/27/08 8:26:40 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY metering and consumption-based billing to improve the management capacity of the pilots, which have fallen somewhat short government agencies responsible for heat price of expectations, in part since no metered administration. They propose to continue the tariff system was available. Based on cost- application of uniform tariffs in each city, but to benefit considerations, the experts propose differentiate tariffs according to the fuels used for implementation of basic metering at the heat generation. Improving the efficiency of the substation and building level before expanding heating industry is an important objective of heat metering to individual apartments. price reform and the experts propose nontariff The fourth component, improvement of the measures, such as setting of efficiency targets for heat tariff management, is not restricted to a existing companies and for competitive bidding single phase. The experts emphasize the need for new heating franchises. Table 5.1 Heat Price Reform Components and Actions Proposed by Chinese Experts Major Components Subcomponents Actions First phase: Transfer heat · Criteria for compensation Transform bill payment · Implement new billing system invisible to responsibility to the visible heat consumer · Provide consumers with heat controls subsidy Social safeguards · Surveys to determine gravity of heat poverty for poor households · Criteria for eligibility and subsidy level · Identification of financial resources Second phase: Determine justified · Uniform financial accounting standards Rationalize costs · Connection fee reform heat tariff · Methodology for calculation of justified cost · Calculation of heat tariffs that recover total justified costs · Heat price adjustment formula · Definition of suppliers' and consumers' rights Third phase: Transition from · Methodology to determine two-part tariffs under area-based to different metering arrangements Implement consumption-based two-part tariff · Guidelines for and implementation of metering billing (substation, buildings, individual) in new and existing buildings · Guidelines, financial arrangements, and implementation of retrofit of existing buildings, including for low-income households · Guidelines and implementation of room-level temperature control Improve · Determine status and advancement of centralized heat tariff heating industry management · Determine and implement level of improved energy system efficiency, particularly of DH companies Source: Based on National Experts Team 2005. 70 5035-CH05.pdf 70 5035-CH05.pdf 70 5/27/08 8:26:41 AM 5/27/08 8:26:41 AM Implementation of Heat Price Reform ConclusionsandRecommendations.Itisobvious Normative figures, which are based on that the envisaged heat price reform requires the calculation of heat and ventilation radical changes, which need to be realized in losses, may substantially differ from actual several steps. This is recommended based on the consumption figures. experience from Eastern Europe, but also taking · Cost recovery requires the identification into account some issues particular to China: of the prudent costs of heat supply. Since too many different accounting systems · An increasing share of the income of private are currently in use, many of which are households whose employers currently still incomplete, appropriate and uniform cost payalargeshareofheatingcostswilllikelybe accounting standards and cost allocation required in the near future to pay for heating. systems need to be applied (designed if Although there is a strong intention on the necessary) as soon as possible. political level to compensate households for · Underthegivencircumstances,DHcompanies their increasing contribution to heating costs, have difficulties preparing robust forecasts it is not clear to what extent consumers will of costs, sales, and revenues. Overestimating receive payments, either from employers or the final consumption and, thereby, sales social assistance programs. The reactions volumes (a frequent occurrence in Eastern of consumers to out-of-pocket heating bill Europe during the 1990s) could result in increases are hard to predict and must be substantial financial losses. In addition to monitored. The compensation payments managing a technical modernization of will most likely mitigate, but not completely heat supply, heating company managers prevent some financial strain on household therefore need to pay more attention to the incomes. business aspects of heating. If necessary, · The proposed consumption-based billing training has to be provided. The hiring of system will induce consumers to take managers with business background should measures to adjust their heat consumption, be considered. including through investing in energy- · The local heating industries are very efficiency measures. The extent of this fragmented. The environmental, economic, adjustment process is hard to predict. It is and administrative performance of the sector expected that most consumers would be able would greatly improve if consolidation to realize energy savings compared to the would be initiated and allow mergers of normative heat consumption. Experiences heating companies with fewer, cleaner have to be collected about the magnitude of and more efficient heating sources, lower energy savings in different circumstances. overall personnel and overhead costs, more Experiences from Eastern Europe show professional management, and simpler savings in the range of 10 to 30 percent sector administration, including company- (including savings from temperature- specific tariffs. Municipal heat planning controlled substations). would be a helpful tool in the restructuring · Consumers need to become familiar with of local heating sectors. the new control and regulation technologies. · Finally, estimates of required heating Although they will have more freedom assistance program expenditures entail in- and responsibilities to adapt the heat depth investigations of the likely number of supply to their own needs, this requires an affected households and their requirements understanding of the way new technologies for assistance. Sources of finance for such function and how behavior needs to assistance will have to be identified. change. · Due to a lack of measurements of heat Dividing the heat-price reform program production, supply, and consumption, the into several phases would allow collecting actual final consumption is not known. experiences step by step and facilitate necessary 71 5035-CH05.pdf 71 5035-CH05.pdf 71 5/27/08 8:26:42 AM 5/27/08 8:26:42 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY corrections. The proposal of the Chinese experts in Tianjin, which has been a pilot city for heat will help steer the heating sector from the reform, including heat tariff reform, since the welfare-based orientation to a more market- late 1990s. The heat price reform started with based operation. When comparing Table 5.1 transferring the payment responsibility from to Table 1, the impression is that the experts' work units to final consumers. This process proposal lays out in most aspects how to move was completed within three years, largely due beyond a transitional stage. Only in some to the fact that Tianjin has a relatively recent aspects it seems to fall short, particularly in and modern heating infrastructure, a fairly high how to incorporate better efficiency incentives per-capita income, and relatively few problems for heat suppliers into the pricing system. Now with unemployment and poverty. Government the challenge is to proceed with implementation employees are compensated through additional of heat pricing reform as part of overall heat nonwage payments and poor households receive reform to reap the full benefits of a market-based substantial discounts on the heat bill. Box 5.1 system. provides details of Tianjin's heat price reform experiences so far. Tianjin should continue to be Initial Implementation a good pilot case for a deepening of heat price Experiences: Tianjin reform, since economic and social conditions are quite favorable, the heating period is relatively The implementation of heat price reform in short and experiments with reforming the well-defined and sequenced actions is based on heating sector have been underway for some and backed to a large extent by the experience time. Box 5.1 Experiences with Heat Price Reform in Tianjin Tianjin is a municipality of provincial rank, 150 km with the Tianjin "Blue Sky Program," which calls for southeastofBeijing,withabout10millionpermanent the elimination of all coal-fired heating boilers of inhabitants, of which about 6 million live in the urban less than 7 MW and expanded use of DH and clean areas. It has the highest per-capita income among fuels within Tianjin's ring road. large cities in northern China after Beijing and As of 2005, Tianjin was the most advanced Dalian, while unemployment and poverty rates are large city in China in the development of heat among the lowest in northern China (for example, reform. Over a period of three years, starting in in 2003 only 3.7 percent of Tianjin's population 2000, responsibility for heat bill payment was participated in the MLS program, compared to shifted completely from work units to households. 11.1 percent in Changchun, 9.4 percent in Harbin and Employers in the public sector are required to 4.9 percent in Taiyuan; see Zhang/Xu 2005). provide heating fee compensation as a nonwage District heating started in Tianjin only in the benefit. Heat metering with different technologies 1980s and now covers about 80 percent of the has been applied in demonstration projects since urban residential floor area. The heating sector is 1997 (see Box 10). The strengthened enforcement still very fragmented, with more than 200 heating of energy efficiency standards for new residential companies operating independent networks, many buildings has led to the best compliance record of them supplied from small coal-fired boilers. The among northern Chinese cities in the country. In municipal government is now implementing a 2003 addition, Tianjin tightened the energy efficiency to 2015 heat supply development plan, including the requirements for new residential buildings in a new interconnection of the local systems, elimination standard in 2005. of the small boilers, and development of larger As part of the ESMAP project "Heat Pricing and heat sources that can provide heat with suitable Billing Reform in China," Tianjin was chosen as the environmental controls. This would be in compliance first case study for the development of a new tariff 72 5035-CH05.pdf 72 5035-CH05.pdf 72 5/27/08 8:26:42 AM 5/27/08 8:26:42 AM Implementation of Heat Price Reform Box 5.1 Continued system.Localandnationalexpertgroupscooperated compensation for the heat price increases. Di bao to design a practical tariff system based on the continue to receive a 50 percent discount, while the review of the operations of representative heating local government will pay the remainder. companies (see Box 2.3). The resulting two-part Starting in the 2005 to 2006 heating season, tariff covers, on average, the reasonable costs of the two-part tariff was applied on an experimental heat supply in Tianjin, and includes taxes and a small basis for an area of two million m2 in 12 residential profit margin. Heat tariffs continue to be uniform. communities. Residents were informed about this Compared to the existing tariffs, the new tariffs are change by mail and published advertisements. slightly higher due to increases in costs reflected in All participating buildings comply with the 1995 the tariffs. Variable and fixed part component have building energy efficiency standard. The apartments equal weight in the tariff, deviating slightly from the are equipped with radiator valves and have either actual cost structure where variable costs have a individual heat meters or heat cost allocators. Even 55 percent share. The Municipal Pricing Bureau has though differences in heat consumption in the approved the methodology and the individual tariff apartments of these new, well-insulated buildings components. should be fairly minimal (except for those triggered Forthe2004to2005heatingseason,aftergoing by the behavior of residents), simple compensating through a formal tariff approval process, the Tianjin factors are used for calculating the heating bill. government raised the heat price for residential Heat tariff and billing reform in Tianjin is part customers from 15.4 yuan/m2 to 20 yuan/m2. The of the citywide heat reform plan to which Tianjin tariff for nonresidential consumers was increased has committed as participant in the World Bank / to a unified level of 26 yuan/m2, from previously GEF "Heat Reform and Building Energy Efficiency" 18.5 yuan/m2 for public, 21 yuan/m2 for enterprises project, which is currently under implementation. and 24 yuan/m2 for hotels. All approved tariff The project is also supporting several new housing increases are below the levels calculated according projects in the application of both improved building to the new heat-price methodology. At the same energy efficiency standards and improved heat time, government employees received additional supply technologies. Source: Based on Tianjin Experts Group 2003 and 2005. 73 5035-CH05.pdf 73 5035-CH05.pdf 73 5/27/08 8:26:43 AM 5/27/08 8:26:43 AM 5035-CH05.pdf 74 5035-CH05.pdf 74 5/27/08 8:26:43 AM 5/27/08 8:26:43 AM 6 Conclusions and Recommendations Important Steps Forward installation of heat meters and consumer toward Rational and Market- control devices, and consumption-based billing. Otherwise, tariff increases could easily trigger based Heat Pricing deteriorating collection rates and eventually nonpayment and even disconnections, offsetting The heat-pricing methodology developed under the expected revenue increases through the this project determines heat tariffs that are based adoption of heat tariffs that cover the full costs on the full costs of the core heating business. of heat supply. This methodology can be used to calculate The need to proceed with heat metering heat tariffs for unmetered customers, and it and consumption-based billing has been re- can be transformed into a two-part tariff to be emphasized by the government. The minimum used for consumption-based billing of metered requirement of a meter at the building level is customers. nowwidelyacceptedfornewbuildings.Metering The methodology for the determination of and consumption-based billing demonstration a two-part tariff was first developed for Tianjin pilots should become more meaningful with the and has been applied for additional case studies application of a two-part tariff. This will provide in Changchun, Harbin, and Taiyuan, and experts a better basis for gathering information on actual there accepted it for application. It has been performance of heating systems (i.e., heat losses) broadly discussed and is recognized among and on consumer behavior. Both are necessary national and municipal officials and other to properly calibrate tariffs so that heat-supply experts in the DH sector as an important step costs are covered by sales revenues. forward in heat-pricing reform. It is the basis Establishing consumer responsibility for for the 2007 national heat-pricing management paying heat bills is an important ingredient in method. making the heat market work. The government The partial automatic pass-through of coal has confirmed that this component of heat price increases that came into force in 2005 is reform has to be in place by the end of 2007. The an important advance, since it limits the need implementation of plans to replace employer- for formal tariff reviews. This will contribute to provided or paid-for heat services with explicit securing sufficient financing of DH companies cash payment and to extend social programs to during periods of rapidly increasing input costs, provide heat subsidies targeted at low-income providing a reasonable continuity and planning consumers has started in many cities. With wider security and avoiding overt political influence application of these programs, the probability over heat prices. of collection and affordability problems should The experience from Eastern Europe clearly be fairly low. shows that heat-price reform needs to be Applying this methodology is thus a first and packaged with a number of other measures, important step to implementing a more rational such as social assistance programs, heat cost heat-pricing system in northern Chinese cities. reductions through efficiency improvements, It can be considered an acceptable compromise 75 5035-CH06.pdf 75 5035-CH06.pdf 75 5/27/08 8:27:10 AM 5/27/08 8:27:10 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY between continuing with the old heat-pricing charges. Consumers would be charged twice in system and a proper cost-related two-part tariff such cases. There is therefore an urgent need to system. However, the methodology needs to clarify the legality of connection charges and to be developed further in order to move from a ensure that they are accounted for in a way that transitional stage toward a fuller realization of treats consumers fairly. the heat-reform objectives. The proposed pricing methodology is based on historic costs of previous years. Since the newly determined tariffs will be applied in the Many More Steps Are future, tariffs should be based on the planned Necessary to Move beyond cost. This also requires a careful forecast of future the Transition Phase heat demand. The methodology does not provide any The proposed tariffs are uniform across a effective incentives or obligations for the heat municipality and are based on a mix of adjusted supply enterprises to improve efficiency and average costs and standard costs of a sample performance. Tariffs are determined purely on a of heat supply companies, rather than on the cost-plus basis. Profits are related to costs, thus individual costs of a heat supply enterprise. providing an incentive to boost costs. Relating Therefore, they cannot reflect cost differences the profit to the invested capital (i.e., fixed in different heat supply enterprises due to assets and working capital) would improve differences in the management and performance incentives for efficiency, but the value of heating of the heat supply enterprises, the use of different infrastructure assets is at best a very rough fuels (gas being scarce and much more expensive estimate. The use of competitive mechanisms than coal), or different supply conditions. to award concessions for heat supply areas, Until heating systems are more integrated into benchmarking of performance, and enforcement larger, more efficient systems and the number of efficiency standards would be nontariff of heating companies is reduced from the measures to improve efficiencies. In the mid- to hundreds to a more manageable number, the long-term, the use of incentive-based pricing use of individual tariffs by heating company with price caps would be preferable as a means would be an almost impossible task to handle to provide incentives for more efficient supply for the municipal authorities supervising the of heat (see page 100). local heating industry. Also, the application of There is a consensus that a two-part heat uniformcostaccountingstandardsandauniform tariff should be adopted. Provided the energy tax treatment of all heating companies regardless charge and the fixed charge are properly set, it of their ownership, would be requirements for can achieve a balance between financial security heating-company specific tariffs. for the heat-supply company, which will Heat tariffs should cover the justified costs prefer to minimize unpredictable variations of heat supply to ensure that heating companies in revenue, and the need to provide strong can cover their operating as well as their capital incentives for efficient use of energy. A two- costs, including the replacement of assets. The part tariff with a capacity charge based on cost of expanding heating systems is usually contracted maximum demand would also not covered by the tariff (with the exception provide proper signals to consumers about of the profit component). In China, connection the costs of capacity. For the time being it will, charges are common means in many cities to however, be related to the apartment area and raise funds for financing of new heat supply thus not be able to provide the correct signals. infrastructure. Ultimately, consumers pay for this Heat-supply companies should be allowed to through the real estate they are buying. But in adopt heat-load based capacity charges as soon many cases, heat tariffs include the depreciation as possible, particularly for new real estate for the equipment financed through connection developments. 76 5035-CH06.pdf 76 5035-CH06.pdf 76 5/27/08 8:27:11 AM 5/27/08 8:27:11 AM Conclusions and Recommendations Experts decided to give variable and fixed either, but as the experiences in Eastern Europe costs an equal share in the new heat tariffs, while and in some pilot projects in China (for example, in practice variable costs tend to be somewhat Baotou) have shown, technical problems such higher than fixed costs. In Western Europe a as water quality and reliability of meters need high variable tariff charge is usually applied to to be resolved. Admittedly, the issue of how to provide incentives to consumers to save energy, fairly implement consumption-based billing in even though variable costs are fairly low due to poorly insulated buildings remains contentious. the high capital intensity. In an economy such Evaluating the results of heat metering would as in China where the behavior of consumers is contribute to a better understanding of the actual widely unknown and not sufficiently analyzed, heat demand and factors affecting demand and it would be risky to delink the tariff components would be helpful in coming up with innovative from the actual cost structure. The two tariff schemes for consumption-based billing in components should follow the real cost structure existing buildings. as closely as possible, at least as long as consumer The tariff setting and approval mechanism behavior is not known and consequences for the currently involves many different steps, requires heat-supply company and consumers cannot several municipal agencies to collaborate and sign be assessed properly. For similar reasons, it is off, and requires public hearings, and in the end not recommended to apply a one-part, energy- the municipal government makes a decision. This charge-only, heat tariff. process needs to be streamlined further to ensure In a cost-based price-setting regime, that tariffs and the tariff-setting process are simple the number of customer groups should be and transparent in order to make the process manageable, since each of the customer groups manageable and to increase the acceptance of would have its own tariffs according to the tariff changes by consumers, politicians, and the costs they cause. It is recommended to use regulated companies. In the longer term, more only one general customer group under a professional and independent heat regulation two-part tariff regime. Under such a tariff, agenciesshouldbeestablished.Theuseofahybrid different consumption levels (quantities) and price cap mechanism under which tariffs would different consumption patterns (even or uneven be approved for a period of three to five years, consumption over time) will result in different including the application of a price adjustment heating bills, even with the same tariff, provided formula, should also be considered. the fixed part of the tariff is based on capacity Equity issues need to be continuously (kW) rather than on area (m2). monitored and addressed during heat reform. Thelackofmeteringandmeteringexperience For poorer households, heat bills already in China has been cited as one reason for slow constitute a much larger share of income than progress of heat price reform. The experience for households with higher incomes. This is not a with and predominance of metered district large problem under the traditional system with heating in Western Europe and many Eastern many employers paying for their employees or European cities suggests that implementation of the government paying for di bao. However, some metering and consumption-based billing could poor without employment, but not qualifying be accelerated in China, particularly if meters for MLS payments, are confronted with heat were introduced in all new buildings, at least bills they cannot afford. With the transfer of on the building level. If necessary, standards the invisible to a transparent subsidy under should be prepared and their implementation the ongoing heat reform and responsibility of monitored and enforced. It should be considered households for payment, the problem of an that heating companies can refuse to connect unsustainable heat-bill burden for low-income new buildings without meters to the heating households becomes larger and very visible. network. For older buildings, metering at the Therefore, workable targeted subsidy building level is not an insurmountable problem mechanisms including low-income households 77 5035-CH06.pdf 77 5035-CH06.pdf 77 5/27/08 8:27:11 AM 5/27/08 8:27:11 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY need to be devised or improved upon. In and information and education of consumers particular, should precede widespread introduction of consumption-based billing. The sequencing · Targeted support to poor consumers needs to would also allow resolving technical problems be reevaluated in the light of possible tariff that are bound to happen when metering and increases. control equipment is used in larger numbers. · To preserve incentives for a rational use of heat, each consumer should pay at least Steps Needed to some part of the heat bill. · Introduction of flexible, customer-tailored Achieve the Expected payment terms to improve affordability and Results and Impacts collection rates is especially important for lower-income consumers. Awider application of consumption-based tariff · The use of subsidies to pay for metering, systems is important since it will contribute to controls and some thermal renovation of a substantial reduction of coal consumption existing buildings could lower heat expenses and emissions. Experiences from Western in the future. and Eastern Europe show that consumer · Financing of targeted social assistance control and metering of heat consumption and needs a secure funding base; it should be consumption-based billing will typically result the responsibility of the government, not of in a reduction of heat demand by some 10 to heating companies. 30 percent. Much of this can be achieved with metering at the building level, which should be A more efficient supply of heat, delivered widely and quickly implemented as a minimum by better managed and operated heating requirement. companies, and enforcement of energy-efficiency Consumption-based billing will also provide standards for new housing construction and incentives for consumers to buy better, more basic thermal renovation of existing buildings energy-efficient apartments that are supplied would reduce the amount and costs of heat to by more efficient heating systems. The overall be supplied. Although this would benefit all impact of a package of heat price reform and consumers of heat, it would do so especially improved building energy efficiency with for poor and low-income consumers. Finally, a growing building stock is several times metering and consumption-based billing would larger than that of consumption-based billing allow households to further reduce their heating in isolation and is estimated to reduce coal bills and adapt heating expenditures to their consumption for heating and associated CO2 incomes. emissions by at least one third (see Figure 1.3). The introduction of heat-pricing reform Heat suppliers will ultimately benefit from should be carried out in a carefully planned those changes as well, even if heat consumption sequencetoavoidsurprisesandfrequentchanges goes down, leading to reduced sales and in the beginning due to the lack of information. revenues in the short term. In the mid- to For example, actual losses in various parts of long-term they can generate profits again by the heat-supply system, the real consumption in modernization investments thus improving various types of buildings (old and new), and the efficiency and reducing costs of heat provision reactions of consumers to consumption-based and by connecting new customers to the billing are typically unknown in the beginning. network. For Chinese heating companies the This makes any permanent decisions and the impacts of heat metering and consumption- prediction of what will happen to consumers' based billing could turn out to be much more bills and heating company revenues very beneficial since new housing developments and difficult. Metering, monitoring, and evaluation thus new customers are materializing every day. of pilot projects with consumption-based billing, With heat loads and consumption of existing 78 5035-CH06.pdf 78 5035-CH06.pdf 78 5/27/08 8:27:12 AM 5/27/08 8:27:12 AM Conclusions and Recommendations customers decreasing, new capacity and supply state, and the expected results will not be does not have to be provided completely from achieved. Therefore, obstacles that prevent the new infrastructure, provided that local heat actors in the heating sector from overcoming markets are restructured in a way that gives the welfare-based way of doing business need companies and existing infrastructure a chance to be removed. Among the most important to supply new housing developments. changes to be introduced as soon as possible are as follows: Moving from the · Uniform rules of doing business should be Transition Phase to Real applied, including accounting framework Heat Price Reform and taxation. · Local heating sectors should be consolidated, The implementation of the proposed first steps taking into account municipal heat plans of heat price and billing reform is taking place carried out with regard to least cost and in an environment that is still largely shaped by environmental considerations. the legacy of welfare heating: · Heating companies should be licensed · A large number of heating companies exist to ensure that they are technically and in many cities, with owners ranging from financially able to operate a sound and the municipality proper, the power sector, efficient business. to real estate bureaus. They all operate · Metering of customers should be completed, under different legal, tax, and accounting at minimum at the building level. A rules. Assets of heating companies are not consumption-based bill must be distributed well defined, and their book values may not at the building level among all inhabitants reflect replacement values. in a variety of ways. · Heating infrastructure is still largely financed · Heatingcompaniesshouldbecommercialized, by customers through connection charges. including separating municipal ownership What used to be the role of work units has from regulation and supervision. Heating been taken over by real estate developers infrastructure assets need to be clearly and ultimately by consumers. assigned and valued properly. · Municipalities have conflicting roles as · Improvements should be made in the owners of heating companies and regulators knowledge base about and within the of the local heating industry. centralized heating sector through extended · Consumers in established DH systems in data gathering as part of regular statistical large cities are just now becoming responsible surveys, analysis of metering data, customer for payment of heating bills, and they may surveys, and benchmarking of heating or may not be compensated by employers company operations, within and across or receive social assistance if they are poor. municipalities. This also requires more · Heating companies and consumers have professional regulatory agencies on the relatively brief and limited experiences national, but especially on the local levels. with heat metering, consumption-based billing, and consumer control of heating It is proposed to move forward quickly in all consumption. Most heating companies still areas, establishing the basis for the introduction bill their customers based on heated area. of heat pricing rules that offer more and better Actual losses in heating systems and actual incentives to suppliers and consumers to provide consumption of different types of buildings and use heat efficiently: are still largely unknown. · Company-specific heating tariffs. Among the As long as those conditions are not changing, most important advances to be made is heat price reform will remain in a transitional the transition from uniform citywide to 79 5035-CH06.pdf 79 5035-CH06.pdf 79 5/27/08 8:27:13 AM 5/27/08 8:27:13 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY company-specific heating tariffs. Tariffs the different costs of customers with different based on the individual costs of a heat consumption levels and patterns. supply enterprise cover the justified · Introduction of incentive-based pricing under costs of individual suppliers and reflect which properly designed base heat tariffs cost differences due to differences in the would be in force for three to five years with management and performance of the heat automatic pass-through of the most important supply enterprises, the use of different cost components. This would provide fuels or different supply conditions. Thus, better incentives for heating companies heat suppliers would be able to cover their for efficiency improvements than cost-of operating as well as their capital costs, service pricing as proposed for the transition including the replacement of assets. phase. · Profit margins based on asset value are particularly important with company-specific heating tariffs. By moving forward in all areas, heat price Under the alternative of cost-based profits it reform can join other areas of heat reform to would be even harder to control the incentive realize the expected benefits of substantially for companies to inflate costs. reduced coal consumption and improved · Two-part tariffs with fixed charges based on urban environments, lower heat bills and more capacity instead of square meters would provide comfort for consumers and a heating industry incentives to customers to properly determine which becomes a tax payer instead of requiring required heat demand. Such properly designed periodic injections of public funds. two-part tariffs would also be able to reflect 80 5035-CH06.pdf 80 5035-CH06.pdf 80 5/27/08 8:27:13 AM 5/27/08 8:27:13 AM Glossary of Heating Annex Technical Terms (Unless mentioned otherwise, the source is Cogeneration or Combined ESMAP 2000) Heat and Power District Heating Compared to separate production of heat and power in HOBs and condensing power plants, Usually, the term district heating (DH) describes respectively, the same amounts of heat and a system supplying heat produced centrally power can be produced in CHP plants using in one or several locations to a nonrestricted about one-third less fuel. The exact savings number of customers. Heat is distributed by depend on the types of power and heat plants, means of a network using pressurized hot water the cogeneration technology, and types of fuel or steam as a medium. Often, the heat is also used. The energy savings of cogeneration can used for domestic hot water preparation (though be illustrated in a Sankey diagram (see Figure rarely in China) and for industrial purposes, A.2), which depicts the fuel inputs, sources such as process heat. Although most people of losses, and outputs of power and heat for understand DH to be large centralized urban separate and joint production. To generate heating systems, many national statistics also 55 units of electricity and 100 units of heat, the include very small heating systems. In the case fuel consumption in the CHP case (176 units) is of China, the term DH is reserved for centralized 31 percentlessthanintheseparategenerationcase heating systems with capacities greater than (256 units). The values in Figure A.2 are typical 10 tons/h, sufficient to supply approximately for cogeneration technologies based on the use 100,000 square meters of construction. of solid fuels currently used in Western Europe. A DH system (see Figure A.1) consists of heat generation plants, CHP plants and HOBs, transmission or primary networks Mode of Operation: Constant between generation facilities and substations Flow and Variable Flow and distribution or secondary networks between substations and buildings. In modern There are two distinct models for designing and DH systems substations often are located in operating a DH network:47 buildings, eliminating the need for a distribution Constant flow is the quality control referring network. tosupplytemperatureregulation.Thewaterflow 47The terms variable/constant flow control are used in Western literature, and quantity/quality control in Eastern literature. 81 5035-ANNEX.pdf 81 5035-ANNEX.pdf 81 5/27/08 8:15:08 AM 5/27/08 8:15:08 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Figure A.1 Schematic View of Typical District Heating System in China CHP Plants Boiler houses Supply Return Primary network Substations Final consumers Secondary network Final consumers Source: ESMAP 2000. is kept constant whilst the supply temperature The use of constant flow technology does at the heat source is varied according to outdoor not require advanced technology and is quite temperature to match the system output with robust and easy to implement. It has a number expected heating need. This mode does not of disadvantages: require flow regulation equipment. In other words, the heat source regulates how much heat · More heat energy than necessary is sent will be delivered to the consumer. through the system. The concept of constant Variable flow is quantity control referring to water- flow means that the distribution of energy flow regulation. Both the supply temperature and is determined by a number of fixed valves, the water flow are varied according to outdoor orifices or other throttling equipment in temperature to match the system output with the system, which are set manually every the real heating need. This mode requires flow now and then. The heat production plant regulation valves at points of consumption. The via its setting of temperature of the supply circulation pumps at heat sources are usually water determines the heat output for each equipped with speed controls to save electricity radiator. Because of imbalances in the in variable flow systems. In other words, heat system, some customers receive more and consumers regulate how much heat they really others less heat than needed. Especially in need and the heat source has to adjust the spring and autumn, the supply temperature supply temperature according to the outdoor of the primary system must be higher than temperature. needed for space heating needs in order 82 5035-ANNEX.pdf 82 5035-ANNEX.pdf 82 5/27/08 8:15:09 AM 5/27/08 8:15:09 AM Annex: Glossary of Heating Technical Terms Figure A.2 Energy Balance of Separate and Cogeneration of Power and Heat (for Solid Fuels) Separate production Fuel 256 Combustion 136 120 Combustion loss loss 15 Power Heat 20 Condensing loss 66 Products 55 100 Combined production Fuel 176 Combustion loss 21 Power Heat Products 55 100 Source: ESMAP 2000. to maintain the DHW temperature at an secondary network in relation to the heat acceptable level. This causes high space- supply ranges between 12 and 20 kWh/ heating temperatures, resulting in excess MWh (used electricity/supplied heat); room heat that must be ventilated out in variable flow systems, the value is 5 to through open windows. The annual average 8 kWh/MWh. However, some of the higher temperature in the piping system (supply electricity consumption benefits the heating and return water temperatures) is lower in system, as friction heat is passed on to the the variable flow system than in the constant DH water. flow system leading to lower heat losses and · There is a higher need for heat production higher power production at CHP plants. capacity. Due to the constant flow design, · Since consumers cannot control their heat the coincidence factor of peak demand is intake, the constant flow system makes it close to one. In a variable flow system the impossible to achieve the full benefits of coincidence factor of peak demand is 0.6 to a modern, incentive-based system of heat 0.8, and therefore the capacity of the heat supply and demand. sources can be 30 to 40 percent less.48 · Pumping costs are higher. In constant flow · Variable flow allows for a lower temperature systems, electricity consumption for the in the system at peak demand, which again 48Even after switching to variable flow, DH systems in Central and Eastern Europe will not achieve a coincidence factor of demand as low as 0.5 to 0.6. In Western Europe, the coincidence factor is low because of the important share of residential consumers in individual houses, and because of the prevalence of two string radiator systems with thermostatic valves. In Central and Eastern Europe, single family houses make up an insignificant proportion of heat demand and many high rise buildings have one-string radiator systems. This reduces demand variations. The situation in China is initially closer to the latter, but with the quick adoption of modern technologies in new housing developments coincidence factors closer to the Western European one should be achievable. 83 5035-ANNEX.pdf 83 5035-ANNEX.pdf 83 5/27/08 8:15:10 AM 5/27/08 8:15:10 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY makes it possible to increase electricity the branch to enable them to function as they production at the CHP plant. used to. · Constant flow does not allow for merit order dispatching of heat plants along the transmission system. Load dispatching Indirect and Direct (including from decentrally located Connection and Vertical alternative supply sources) is not possible without manual isolation of specific supply and Horizontal Building- areas. It means that the capability of adapting Internal Piping to changes in demand and production is very limited. Variable flow permits the In direct systems, the primary pipe network establishmentofpeakandreserveloadboilers (from the heat production plant to the central in the local supply areas and dispatching of substation) and the secondary network (from the the plants according to merit order. central substation to the heat receiving stations · Constant flow requires slow-flow velocities in the buildings) are directly connected by valve and respectively larger pipes (otherwise, the devices. Also, the secondary network and the pumping cost would be very high), which building heat distribution system are directly leads to higher investment cost. Variable connected at the building substation (without flow can provide the same heating capacity heat exchangers), where mixing pumps and with use of smaller diameters. In variable valves or hydro-elevators are applied. In indirect flow, the velocities in the pipes can be twice systems, heat exchangers are used, isolating as high as in a constant flow system for the the primary from the secondary space heating short time when the maximum transmission networks. capacity is really needed. However, because Unlike in most buildings in Western Europe, the higher transport capacity of variable flow radiators traditionally installed in buildings in is used to lower the maximum temperatures Eastern Europe or in China are not connected in in the system, the difference in diameter sizes parallel (Figure A.4), but in series (Figure A.3). is relatively small in practice. Radiators are vertically connected to each other. From the substation a distribution ring Transition from constant to variable flow: When is installed in the basement, from which risers customerinstallationsareequippedwithcontrols go up to the top level and are connected to that regulate the water flow, the system turns the top radiators of the vertical strings. The from the constant to the variable flow operation bottom radiators of the strings are connected to mode. In a typical DH system with thousands a collector pipe in the basement. Such system is of consumer substations, several years are referred to as a one-pipe system, instead of the required to implement the transition process. two-pipes, which are connected to each radiator The basic problem in the transition phase is when radiators are installed in parallel. how to organize the mixed constant/variable One consequence of the one-pipe system is flow operation when one part of the substations that the entrance temperature to each following regulates the flow and the others do not. If the radiator is lower than that of the previous transition is not properly organized, the constant one. In the design, the drop in temperature flow customers will suffer underheating in from one radiator to the next is compensated winter and overheating in spring and autumn. for by increasing the radiator area. A second To prevent inconveniences, the rehabilitation consequence is that an apartment is crossed by should take place branch by branch.As one main several vertical strings. Thus, measuring the network branch is rehabilitated, the other mains heat consumption for one apartment requires have to be equipped with pressure difference measuring the contribution of each radiator control valves which keep the pressure difference supplied by a separate string. Introduction of constant for the old fashioned customers of heat control at the level of a radiator is also more 84 5035-ANNEX.pdf 84 5035-ANNEX.pdf 84 5/27/08 8:15:10 AM 5/27/08 8:15:10 AM Annex: Glossary of Heating Technical Terms Figure A.3 Building Internal Heat Distribution: One Pipe Vertical Risers Connected in Series Ground Floor BOILER OR HEAT EXCHANGER 1 Source: Marc Bellanger (SOREIB). complicated. Thermostatic valves must have of balancing valves in each string, the situation low resistance and bypasses must be installed can be improved. However, the consequence of to allow continuation of the flow to the next such measures is that it increases the required radiators when the valve is closed. pressure drop between the supply of the risers In many buildings in Eastern Europe and and the return in the collectors. China, the internal heating system is unbalanced, In more modern buildings, in Western meaningthatthedivisionoftheflowamongstthe Europe, but also in new buildings in Eastern individual risers is poor--some risers receiving Europe or in China, radiators within an too much, others too little water. By installation apartment are installed in a horizontal loop (see 85 5035-ANNEX.pdf 85 5035-ANNEX.pdf 85 5/27/08 8:15:11 AM 5/27/08 8:15:11 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Figure A.4 Building Internal Heat Distribution: Horizontal Distribution with a Two-pipe System THERMOSTATIC VALVES RADIATORS Ground floor HEATMETER SHUTTING BOILER VALVES or 1 HEAT EXCHANGER Source: Marc Bellanger (SOREIB). 86 5035-ANNEX.pdf 86 5035-ANNEX.pdf 86 5/27/08 8:15:13 AM 5/27/08 8:15:13 AM Annex: Glossary of Heating Technical Terms Figure A.4). A central riser is installed in each reconfigured to horizontal piping, with a shut- staircase from which branches extend into each off valve and space for a heat meter for each apartment, looping back to the central return apartment located in the staircase. This measure pipe in the staircase. This configuration allows wasimplementednotsomuchtoenablemetering a more even heat distribution and enables and consumer control and consumption-based apartment-based control and metering. billing, but to improve collections by being able In some cities in China--for example, in to more effectively cut off individual consumers. Shenyang and Changchun--the building- The cost-benefit of this conversion to horizontal internal piping in older buildings has been piping is dubious at best. 87 5035-ANNEX.pdf 87 5035-ANNEX.pdf 87 5/27/08 8:15:13 AM 5/27/08 8:15:13 AM 5035-ANNEX.pdf 88 5035-ANNEX.pdf 88 5/27/08 8:15:13 AM 5/27/08 8:15:13 AM References Alexander, Ian, and Timothy Irwin. 1996. Price Report 234/00, ESMAP and World Bank, Caps,RateofReturnRegulation,andtheCost Washington. http://www-wds.worldbank. of Capital. World Bank Private Sector Note org/external/default/WDSContentServer/ No. 87. Washington. http://rru.worldbank. 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Washington. http://www.worldbank.org/ astae/Bee-report-revised.pdf 91 5035-REFS.pdf 91 5035-REFS.pdf 91 5/27/08 8:29:57 AM 5/27/08 8:29:57 AM 5035-REFS.pdf 92 5035-REFS.pdf 92 5/27/08 8:29:57 AM 5/27/08 8:29:57 AM List of Formal Reports Region/Country Activity/Report Title Date Number SUB-SAHARAN AFRICA (AFR) Africa Regional Anglophone Africa Household Energy Workshop (English) 07/88 085/88 Regional Power Seminar on Reducing Electric Power System Losses in Africa (English) 08/88 087/88 Institutional Evaluation of EGL (English) 02/89 098/89 Biomass Mapping Regional Workshops (English) 05/89 ------ Francophone Household Energy Workshop (French) 08/89 ------ Interafrican Electrical Engineering College: Proposals for Short- and Long-Term Development (English) 03/90 112/90 Biomass Assessment and Mapping (English) 03/90 ------ Symposium on Power Sector Reform and Efficiency Improvement in Sub-Saharan Africa (English) 06/96 182/96 Commercialization of Marginal Gas Fields (English) 12/97 201/97 Commercializing Natural Gas: Lessons from the Seminar in Nairobi for Sub-Saharan Africa and Beyond 01/00 225/00 Africa Gas Initiative--Main Report: Volume I 02/01 240/01 First World Bank Workshop on the Petroleum Products Sector in Sub-Saharan Africa 09/01 245/01 Ministerial Workshop on Women in Energy 10/01 250/01 and Poverty Reduction: Proceedings from a Multi-Sector 03/03 266/03 and Multi-Stakeholder Workshop Addis Ababa, Ethiopia, October 23­25, 2002 Opportunities for Power Trade in the Nile Basin: Final Scoping Study 01/04 277/04 Energies modernes et réduction de la pauvreté: Un atelier multi-sectoriel. Actes de l'atelier régional. Dakar, Sénégal, du 4 au 6 février 2003 (French Only) 01/04 278/04 Énergies modernes et réduction de la pauvreté: Un atelier multi-sectoriel. Actes de l'atelier régional. Douala, Cameroun 09/04 286/04 du 16-18 juillet 2003. (French Only) 93 5035-LIST.pdf 93 5035-LIST.pdf 93 5/27/08 8:29:33 AM 5/27/08 8:29:33 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshops held in Africa 01/05 298/05 Power Sector Reform in Africa: Assessing the Impact on Poor People 08/05 306/05 The Vulnerability of African Countries to Oil Price Shocks: Major 08/05 308/05 Factors and Policy Options. The Case of Oil Importing Countries Angola Energy Assessment (English and Portuguese) 05/89 4708-ANG Power Rehabilitation and Technical Assistance (English) 10/91 142/91 Africa Gas Initiative--Angola: Volume II 02/01 240/01 Benin Energy Assessment (English and French) 06/85 5222-BEN Botswana Energy Assessment (English) 09/84 4998-BT Pump Electrification Prefeasibility Study (English) 01/86 047/86 Review of Electricity Service Connection Policy (English) 07/87 071/87 Tuli Block Farms Electrification Study (English) 07/87 072/87 Household Energy Issues Study (English) 02/88 ------ Botswana Urban Household Energy Strategy Study (English) 05/91 132/91 Burkina Faso Energy Assessment (English and French) 01/86 5730-BUR Technical Assistance Program (English) 03/86 052/86 Urban Household Energy Strategy Study (English and French) 06/91 134/91 Burundi Energy Assessment (English) 06/82 3778-BU Petroleum Supply Management (English) 01/84 012/84 Status Report (English and French) 02/84 011/84 Presentation of Energy Projects for the Fourth Five Year Plan (1983-1987) (English and French) 05/85 036/85 Improved Charcoal Cookstove Strategy (English and French) 09/85 042/85 Peat Utilization Project (English) 11/85 046/85 Energy Assessment (English and French) 01/92 9215-BU Cameroon Africa Gas Initiative--Cameroon: Volume III 02/01 240/01 Cape Verde Energy Assessment (English and Portuguese) 08/84 5073-CV Household Energy Strategy Study (English) 02/90 110/90 94 5035-LIST.pdf 94 5035-LIST.pdf 94 5/27/08 8:29:34 AM 5/27/08 8:29:34 AM List of Formal Reports Central African Republic Energy Assessment (French) 08/92 9898-CAR Chad Elements of Strategy for Urban Household Energy The Case of N'djamena (French) 12/93 160/94 Comoros Energy Assessment (English and French) 01/88 7104-COM In Search of Better Ways to Develop Solar Markets: The Case of Comoros 05/00 230/00 Congo Energy Assessment (English) 01/88 6420-COB Power Development Plan (English and French) 03/90 106/90 Africa Gas Initiative--Congo: Volume IV 02/01 240/01 Côte d'Ivoire Energy Assessment (English and French) 04/85 5250-IVC Improved Biomass Utilization (English and French) 04/87 069/87 Power System Efficiency Study (English) 12/87 Power Sector Efficiency Study (French) 02/92 140/91 Project of Energy Efficiency in Buildings (English) 09/95 175/95 Africa Gas Initiative--Côte d'Ivoire: Volume V 02/01 240/01 Ethiopia Energy Assessment (English) 07/84 4741-ET Power System Efficiency Study (English) 10/85 045/85 Agricultural Residue Briquetting Pilot Project (English) 12/86 062/86 Bagasse Study (English) 12/86 063/86 Cooking Efficiency Project (English) 12/87 Energy Assessment (English) 02/96 179/96 Gabon Energy Assessment (English) 07/88 6915-GA Africa Gas Initiative--Gabon: Volume VI 02/01 240/01 The Gambia Energy Assessment (English) 11/83 4743-GM Solar Water Heating Retrofit Project (English) 02/85 030/85 Solar Photovoltaic Applications (English) 03/85 032/85 Petroleum Supply Management Assistance (English) 04/85 035/85 Ghana Energy Assessment (English) 11/86 6234-GH Energy Rationalization in the Industrial Sector (English) 06/88 084/88 Sawmill Residues Utilization Study (English) 11/88 074/87 Industrial Energy Efficiency (English) 11/92 148/92 Corporatization of Distribution Concessions through Capitalization 12/03 272/03 95 5035-LIST.pdf 95 5035-LIST.pdf 95 5/27/08 8:29:34 AM 5/27/08 8:29:34 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Guinea Energy Assessment (English) 11/86 6137-GUI Household Energy Strategy (English and French) 01/94 163/94 Guinea Bissau Energy Assessment (English and Portuguese) 08/84 5083-GUB Recommended Technical Assistance Projects (English & Portuguese) 04/85 033/85 Management Options for the Electric Power and Water Supply Subsectors (English) 02/90 100/90 Power and Water Institutional Restructuring (French) 04/91 118/91 Kenya Energy Assessment (English) 05/82 3800 KE Power System Efficiency Study (English) 03/84 014/84 Status Report (English) 05/84 016/84 Coal Conversion Action Plan (English) 02/87 ------ Solar Water Heating Study (English) 02/87 066/87 Peri-Urban Woodfuel Development (English) 10/87 076/87 Power Master Plan (English) 11/87 ------ Power Loss Reduction Study (English) 09/96 186/96 Implementation Manual: Financing Mechanisms for Solar Electric Equipment 07/00 231/00 Lesotho Energy Assessment (English) 01/84 4676-LSO Liberia Energy Assessment (English) 12/84 5279-LBR Recommended Technical Assistance Projects (English) 06/85 038/85 Power System Efficiency Study (English) 12/87 081/87 Madagascar Energy Assessment (English) 01/87 5700- Power System Efficiency Study (English and French) 12/87 075/87 Environmental Impact of Woodfuels (French) 10/95 176/95 Malawi Energy Assessment (English) 08/82 3903- Technical Assistance to Improve the Efficiency of Fuelwood Use in the Tobacco Industry (English) 11/83 009/83 Status Report (English) 01/84 013/84 Mali Energy Assessment (English and French) 11/91 8423-MLI Household Energy Strategy (English and French) 03/92 147/92 Islamic Republic of Mauritania Energy Assessment (English and French) 04/85 5224- Household Energy Strategy Study (English and French) 07/90 123/90 Mauritius Energy Assessment (English) 12/81 3510- Status Report (English) 10/83 008/83 Power System Efficiency Audit (English) 05/87 070/87 96 5035-LIST.pdf 96 5035-LIST.pdf 96 5/27/08 8:29:34 AM 5/27/08 8:29:34 AM List of Formal Reports Bagasse Power Potential (English) 10/87 077/87 Energy Sector Review (English) 12/94 3643- Mozambique Energy Assessment (English) 01/87 6128- Household Electricity Utilization Study (English) 03/90 113/90 Electricity Tariffs Study (English) 06/96 181/96 Sample Survey of Low Voltage Electricity Customers 06/97 195/97 Namibia Energy Assessment (English) 03/93 11320- Niger Energy Assessment (French) 05/84 4642-NIR Status Report (English and French) 02/86 051/86 Improved Stoves Project (English and French) 12/87 080/87 Household Energy Conservation and Substitution (English and French) 01/88 082/88 Nigeria Energy Assessment (English) 08/83 4440-UNI Energy Assessment (English) 07/93 11672- Strategic Gas Plan 02/04 279/04 Rwanda Energy Assessment (English) 06/82 3779-RW Status Report (English and French) 05/84 017/84 Improved Charcoal Cookstove Strategy (English and French) 08/86 059/86 Rwanda Improved Charcoal Production Techniques (English and French) 02/87 065/87 Energy Assessment (English and French) 07/91 8017-RW Commercialization of Improved Charcoal Stoves and Carbonization Techniques Mid-Term Progress Report (English and French) 12/91 141/91 SADC SADC Regional Power Interconnection Study, Vols. I­IV (English) 12/93 ------ SADCC SADCC Regional Sector: Regional Capacity-Building Program for Energy Surveys and Policy Analysis (English) 11/91 ------ São Tomé and Principe Energy Assessment (English) 10/85 5803-STP Senegal Energy Assessment (English) 07/83 4182-SE Status Report (English and French) 10/84 025/84 Industrial Energy Conservation Study (English) 05/85 037/85 Preparatory Assistance for Donor Meeting (English and French) 04/86 056/86 Urban Household Energy Strategy (English) 02/89 096/89 Industrial Energy Conservation Program (English) 05/94 165/94 97 5035-LIST.pdf 97 5035-LIST.pdf 97 5/27/08 8:29:35 AM 5/27/08 8:29:35 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Seychelles Energy Assessment (English) 01/84 4693-SEY Electric Power System Efficiency Study (English) 08/84 021/84 Sierra Leone Energy Assessment (English) 10/87 6597-SL Somalia Energy Assessment (English) 12/85 5796-SO Republic of South Africa Options for the Structure and Regulation of Natural Gas Industry (English) 05/95 172/95 Sudan Management Assistance to the Ministry of Energy and Mining 05/83 003/83 Energy Assessment (English) 07/83 4511-SU Power System Efficiency Study (English) 06/84 018/84 Status Report (English) 11/84 026/84 Wood Energy/Forestry Feasibility (English) 07/87 073/87 Swaziland Energy Assessment (English) 02/87 6262-SW Household Energy Strategy Study 10/97 198/97 Tanzania Energy Assessment (English) 11/84 4969-TA Peri-Urban Woodfuels Feasibility Study (English) 08/88 086/88 Tobacco Curing Efficiency Study (English) 05/89 102/89 Remote Sensing and Mapping of Woodlands (English) 06/90 ------ Industrial Energy Efficiency Technical Assistance (English) 08/90 122/90 Power Loss Reduction Volume 1: Transmission and Distribution System Technical Loss Reduction and Network Development (English) 06/98 204A/98 Power Loss Reduction Volume 2: Reduction of Non-Technical Losses (English) 06/98 204B/98 Togo Energy Assessment (English) 06/85 5221-TO Wood Recovery in the Nangbeto Lake (English and French) 04/86 055/86 Power Efficiency Improvement (English and French) 12/87 078/87 Uganda Energy Assessment (English) 07/83 4453-UG Status Report (English) 08/84 020/84 Institutional Review of the Energy Sector (English) 01/85 029/85 Energy Efficiency in Tobacco Curing Industry (English) 02/86 049/86 Fuelwood/Forestry Feasibility Study (English) 03/86 053/86 Power System Efficiency Study (English) 12/88 092/88 Energy Efficiency Improvement in the Brick and Tile Industry (English) 02/89 097/89 Tobacco Curing Pilot Project (English) 03/89 UNDP 98 5035-LIST.pdf 98 5035-LIST.pdf 98 5/27/08 8:29:35 AM 5/27/08 8:29:35 AM List of Formal Reports Terminal Report Uganda Energy Assessment (English) 12/96 193/96 Rural Electrification Strategy Study 09/99 221/99 Zaire Energy Assessment (English) 05/86 5837-ZR Zambia Energy Assessment (English) 01/83 4110-ZA Status Report (English) 08/85 039/85 Energy Sector Institutional Review (English) 11/86 060/86 Power Subsector Efficiency Study (English) 02/89 093/88 Energy Strategy Study (English) 02/89 094/88 Urban Household Energy Strategy Study (English) 08/90 121/90 Zimbabwe Energy Assessment (English) 06/82 3765-ZIM Power System Efficiency Study (English) 06/83 005/83 Status Report (English) 08/84 019/84 Power Sector Management Assistance Project (English) 04/85 034/85 Zimbabwe Power Sector Management Institution Building (English) 09/89 ------ Petroleum Management Assistance (English) 12/89 109/89 Charcoal Utilization Pre-feasibility Study (English) 06/90 119/90 Integrated Energy Strategy Evaluation (English) 01/92 8768-ZIM Energy Efficiency Technical Assistance Project: Strategic Framework for a National Energy Efficiency Improvement Program (English) 04/94 ------ Capacity Building for the National Energy Efficiency Improvement Programme (NEEIP) (English) 12/94 ------ Rural Electrification Study 03/00 228/00 Les réformes du secteur de l'électricite en Afrique: Evaluation Ð de leurs conséquences pour les populations pauvres 11/06 306/06 EAST ASIA AND PACIFIC (EAP) Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 ------ China County-Level Rural Energy Assessments (English) 05/89 101/89 Fuelwood Forestry Preinvestment Study (English) 12/89 105/89 Strategic Options for Power Sector Reform in China (English) 07/93 156/93 Energy Efficiency and Pollution Control in Township and Village Enterprises (TVE) Industry (English) 11/94 168/94 Energy for Rural Development in China: An Assessment Based 99 5035-LIST.pdf 99 5035-LIST.pdf 99 5/27/08 8:29:36 AM 5/27/08 8:29:36 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY on a Joint Chinese/ESMAP Study in Six Counties (English) 06/96 183/96 Improving the Technical Efficiency of Decentralized Power Companies 09/99 222/99 Air Pollution and Acid Rain Control: The Case of Shijiazhuang City and the Changsha Triangle Area 10/03 267/03 Toward a Sustainable Coal Sector In China 07/04 287/04 Demand Side Management in a Restructured Industry: How Regulation and Policy Can Deliver Demand-Side Management Benefits to a Growing Economy and a Changing Power System 12/05 314/05 A Strategy for CBM and CMM Development and Utilization in China 07/07 326/07 Development of National Heat Pricing and Billing Policy 03/08 330/08 Fiji Energy Assessment (English) 06/83 4462-FIJ Indonesia Energy Assessment (English) 11/81 3543-IND Status Report (English) 09/84 022/84 Power Generation Efficiency Study (English) 02/86 050/86 Energy Efficiency in the Brick, Tile and Lime Industries (English) 04/87 067/87 Indonesia Diesel Generating Plant Efficiency Study (English) 12/88 095/88 Urban Household Energy Strategy Study (English) 02/90 107/90 Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90 Prospects for Biomass Power Generation with Emphasis on Palm Oil, Sugar, Rubberwood and Plywood Residues (English) 11/94 167/94 Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93 Institutional Development for Off-Grid Electrification 06/99 215/99 Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87 Gas Utilization Study (English) 09/91 9645-MA Mongolia Energy Efficiency in the Electricity and District Heating Sectors 10/01 247/01 Improved Space Heating Stoves for Ulaanbaatar 03/02 254/02 Impact of Improved Stoves on Indoor Air Quality in Ulaanbaatar, Mongolia 11/05 313/05 Myanmar Energy Assessment (English) 06/85 5416-BA Papua New Guinea (PNG) Energy Assessment (English) 06/82 3882- Status Report (English) 07/83 006/83 Institutional Review in the Energy Sector (English) 10/84 023/84 Power Tariff Study (English) 10/84 024/84 100 5035-LIST.pdf 100 5035-LIST.pdf 100 5/27/08 8:29:36 AM 5/27/08 8:29:36 AM List of Formal Reports Philippines Commercial Potential for Power Production from Agricultural Residues (English) 12/93 157/93 Energy Conservation Study (English) 08/94 ------ Strengthening the Non-Conventional and Rural Energy Development Program in the Philippines: A Policy Framework and Action Plan 08/01 243/01 Rural Electrification and Development in the Philippines: Measuring the Social and Economic Benefits 05/02 255/02 Solomon Islands Energy Assessment (English) 06/83 4404-SOL Energy Assessment (English) 01/92 979-SOL South Pacific Petroleum Transport in the South Pacific (English) 05/86 ------ Thailand Energy Assessment (English) 09/85 5793-TH Rural Energy Issues and Options (English) 09/85 044/85 Accelerated Dissemination of Improved Stoves and Charcoal Kilns (English) 09/87 079/87 Northeast Region Village Forestry and Woodfuels Preinvestment Study (English) 02/88 083/88 Impact of Lower Oil Prices (English) 08/88 ------ Coal Development and Utilization Study (English) 10/89 ------ Why Liberalization May Stall in a Mature Power Market: A Review of the Technical and Political Economy Factors that Constrained the Electricity Sector Reform in Thailand 1998­2002 12/03 270/03 Reducing Emissions from Motorcycles in Bangkok 10/03 275/03 Tonga Energy Assessment (English) 06/85 5498- Vanuatu Energy Assessment (English) 06/85 5577-VA Vietnam Rural and Household Energy-Issues and Options (English) 01/94 161/94 Power Sector Reform and Restructuring in Vietnam: Final Report to the Steering Committee (English and Vietnamese) 09/95 174/95 Household Energy Technical Assistance: Improved Coal Briquetting and Commercialized Dissemination of Higher Efficiency Biomass and Coal Stoves (English) 01/96 178/96 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices In Vietnam 02/01 236/01 An Overnight Success: Vietnam's Switch to Unleaded Gasoline 08/02 257/02 The Electricity Law for Vietnam--Status and Policy Issues-- The Socialist Republic of Vietnam 08/02 259/02 Petroleum Sector Technical Assistance for the Revision of the Existing Legal and Regulatory Framework 12/03 269/03 Western Samoa Energy Assessment (English) 06/85 5497- 101 5035-LIST.pdf 101 5035-LIST.pdf 101 5/27/08 8:29:36 AM 5/27/08 8:29:36 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY SOUTH ASIA (SAR) Bangladesh Energy Assessment (English) 10/82 3873-BD Priority Investment Program (English) 05/83 002/83 Status Report (English) 04/84 015/84 Power System Efficiency Study (English) 02/85 031/85 Small Scale Uses of Gas Pre-feasibility Study (English) 12/88 ------ Reducing Emissions from Baby-Taxis in Dhaka 01/02 253/02 India Opportunities for Commercialization of Non-conventional Energy Systems (English) 11/88 091/88 Maharashtra Bagasse Energy Efficiency Project (English) 07/90 120/90 Mini-Hydro Development on Irrigation Dams and Canal Drops Vols. I, II and III (English) 07/91 139/91 WindFarm Pre-Investment Study (English) 12/92 150/92 Power Sector Reform Seminar (English) 04/94 166/94 Environmental Issues in the Power Sector (English) 06/98 205/98 Environmental Issues in the Power Sector: Manual for Environmental Decision Making (English) 06/99 213/99 Household Energy Strategies for Urban India: The Case of Hyderabad 06/99 214/99 Greenhouse Gas Mitigation In the Power Sector: Case Studies From India 02/01 237/01 Energy Strategies for Rural India: Evidence from Six States 08/02 258/02 Household Energy, Indoor Air Pollution, and Health 11/02 261/02 Access of the Poor to Clean Household Fuels 07/03 263/03 The Impact of Energy on Women's Lives in Rural India 01/04 276/04 Environmental Issues in the Power Sector: Long-Term Impacts And Policy Options for Rajasthan 10/04 292/04 Environmental Issues in the Power Sector: Long-Term Impacts And Policy Options for Karnataka 10/04 293/04 Nepal Energy Assessment (English) 08/83 4474-NEP Status Report (English) 01/85 028/84 Energy Efficiency & Fuel Substitution in Industries (English) 06/93 158/93 Pakistan Household Energy Assessment (English) 05/88 ------ Assessment of Photovoltaic Programs, Applications, and Markets (English) 10/89 103/89 National Household Energy Survey and Strategy Formulation Study: Project Terminal Report (English) 03/94 ------ Managing the Energy Transition (English) 10/94 ------ Lighting Efficiency Improvement Program Phase 1: Commercial Buildings Five Year Plan (English) 10/94 ------ 102 5035-LIST.pdf 102 5035-LIST.pdf 102 5/27/08 8:29:37 AM 5/27/08 8:29:37 AM List of Formal Reports Clean Fuels 10/01 246/01 Household Use of Commercial Energy 05/06 320/06 Regional Toward Cleaner Urban Air in South Asia: Tackling Transport Pollution, Understanding Sources. 03/04 281/04 Sri Lanka Energy Assessment (English) 05/82 3792-CE Power System Loss Reduction Study (English) 07/83 007/83 Sri Lanka Status Report (English) 01/84 010/84 Industrial Energy Conservation Study (English) 03/86 054/86 Sustainable Transport Options for Sri Lanka: Vol. I 02/03 262/03 Greenhouse Gas Mitigation Options in the Sri Lanka Power Sector: Vol. II 02/03 262/03 Sri Lanka Electric Power Technology Assessment (SLEPTA): Vol. III 02/03 262/03 Energy and Poverty Reduction: Proceedings from South Asia 11/03 268/03 Practitioners Workshop How Can Modern Energy Services Contribute to Poverty Reduction? Colombo, Sri Lanka, June 2­4, 2003 EUROPE AND CENTRAL ASIA (ECA) Armenia Development of Heat Strategies for Urban Areas of Low-income 04/04 282/04 Transition Economies. Urban Heating Strategy for the Republic Of Armenia. Including a Summary of a Heating Strategy for the Kyrgyz Republic Bulgaria Natural Gas Policies and Issues (English) 10/96 188/96 Energy Environment Review 10/02 260/02 Central Asia and The Caucasus Cleaner Transport Fuels in Central Asia and the Caucasus 08/01 242/01 Central and Eastern Europe Power Sector Reform in Selected Countries 07/97 196/97 Increasing the Efficiency of Heating Systems in Central and Eastern Europe and the Former Soviet Union (English and Russian) 08/00 234/00 The Future of Natural Gas in Eastern Europe (English) 08/92 149/92 Kazakhstan Natural Gas Investment Study, Volumes 1, 2 & 3 12/97 199/97 Kazakhstan & Kyrgyzstan Opportunities for Renewable Energy Development 11/97 16855- Poland Energy Sector Restructuring Program Vols. I-V (English) 01/93 153/93 Natural Gas Upstream Policy (English and Polish) 08/98 206/98 Energy Sector Restructuring Program: Establishing the Energy Regulation Authority 10/98 208/98 103 5035-LIST.pdf 103 5035-LIST.pdf 103 5/27/08 8:29:37 AM 5/27/08 8:29:37 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Portugal Energy Assessment (English) 04/84 4824-PO Romania Natural Gas Development Strategy (English) 12/96 192/96 Private Sector Participation in Market-Based Energy-Efficiency 11/03 274/03 Financing Schemes: Lessons Learned from Romania and International Experiences. Slovenia Workshop on Private Participation in the Power Sector (English) 02/99 211/99 Turkey Energy Assessment (English) 03/83 3877-TU Energy and the Environment: Issues and Options Paper 04/00 229/00 Energy and Environment Review: Synthesis Report 12/03 273/03 Turkey's Experience with Greenfield Gas Distribution since 2003 03/07 325/05 MIDDLE EAST AND NORTH AFRICA (MNA) Turkey Turkey's Experience with Greenfield Gas Distribution since 2003 05/07 325/07 Arab Republic of Egypt Energy Assessment (English) 10/96 189/96 Energy Assessment (English and French) 03/84 4157- Status Report (English and French) 01/86 048/86 Morocco Energy Sector Institutional Development Study (English and French) 07/95 173/95 Natural Gas Pricing Study (French) 10/98 209/98 Gas Development Plan Phase II (French) 02/99 210/99 Syria Energy Assessment (English) 05/86 5822-SYR Electric Power Efficiency Study (English) 09/88 089/88 Energy Efficiency Improvement in the Cement Sector (English) 04/89 099/89 Energy Efficiency Improvement in the Fertilizer Sector (English) 06/90 115/90 Tunisia Fuel Substitution (English and French) 03/90 ------ Power Efficiency Study (English and French) 02/92 136/91 Energy Management Strategy in the Residential and Tertiary Sectors (English) 04/92 146/92 Renewable Energy Strategy Study, Volume I (French) 11/96 190A/96 Renewable Energy Strategy Study, Volume II (French) 11/96 190B/96 Rural Electrification in Tunisia: National Commitment, Efficient Implementation and Sound Finances 08/05 307/05 Yemen Energy Assessment (English) 12/84 4892-YAR Energy Investment Priorities (English) 02/87 6376-YAR 104 5035-LIST.pdf 104 5035-LIST.pdf 104 5/27/08 8:29:37 AM 5/27/08 8:29:37 AM List of Formal Reports Household Energy Strategy Study Phase I (English) 03/91 126/91 Household Energy Supply and Use in Yemen. Volume I: Main Report and Volume II: Annexes 12/05 315/05 LATIN AMERICA AND THE CARIBBEAN REGION (LCR) LCR Regional Regional Seminar on Electric Power System Loss Reduction in the Caribbean (English) 07/89 ------ Elimination of Lead in Gasoline in Latin America and the Caribbean (English and Spanish) 04/97 194/97 Elimination of Lead in Gasoline in Latin America and the Caribbean - Status Report (English and Spanish) 12/97 200/97 Harmonization of Fuels Specifications in Latin America and the Caribbean (English and Spanish) 06/98 203/98 Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshop held in Bolivia 06/05 202/05 Power Sector Reform and the Rural Poor in Central America 12/04 297/04 Estudio Comparativo Sobre la Distribución de la Renta Petrolera en Bolivia, Colombia, Ecuador y Perú 08/05 304/05 OECS Energy Sector Reform and Renewable Energy/Energy 02/06 317/06 Efficiency Options The Landfill Gas-to-Energy Initiative for Latin America and the Caribbean 02/06 318/06 Bolivia Energy Assessment (English) 04/83 4213-BO National Energy Plan (English) 12/87 ------ La Paz Private Power Technical Assistance (English) 11/90 111/90 Pre-feasibility Evaluation Rural Electrification and Demand Assessment (English and Spanish) 04/91 129/91 National Energy Plan (Spanish) 08/91 131/91 Private Power Generation and Transmission (English) 01/92 137/91 Natural Gas Distribution: Economics and Regulation (English) 03/92 125/92 Natural Gas Sector Policies and Issues (English and Spanish) 12/93 164/93 Household Rural Energy Strategy (English and Spanish) 01/94 162/94 Preparation of Capitalization of the Hydrocarbon Sector 12/96 191/96 Introducing Competition into the Electricity Supply Industry in Bolivia Developing Countries: Lessons from Bolivia 08/00 233/00 Final Report on Operational Activities Rural Energy and Energy Efficiency 08/00 235/00 105 5035-LIST.pdf 105 5035-LIST.pdf 105 5/27/08 8:29:38 AM 5/27/08 8:29:38 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY Oil Industry Training for Indigenous People: The Bolivian Experience (English and Spanish) 09/01 244/01 Capacitación de Pueblos Indígenas en la Actividad Petrolera. Fase II 07/04 290/04 Boliva-Brazil Best Practices in Mainstreaming Environmental & Social Safeguards Into Gas Pipeline Projects 07/06 322/06 Estudio Sobre Aplicaciones en Pequeña Escala de Gas Natural 07/04 291/04 Brazil Energy Efficiency & Conservation: Strategic Partnership for Energy Efficiency in Brazil (English) 01/95 170/95 Hydro and Thermal Power Sector Study 09/97 197/97 Rural Electrification with Renewable Energy Systems in the Northeast: A Preinvestment Study 07/00 232/00 Reducing Energy Costs in Municipal Water Supply Operations 07/03 265/03 "Learning-while-doing" Energy M&T on the Brazilian Frontlines Chile Energy Sector Review (English) 08/88 7129-CH Colombia Energy Strategy Paper (English) 12/86 ------ Power Sector Restructuring (English) 11/94 169/94 Energy Efficiency Report for the Commercial and Public Sector (English) 06/96 184/96 Costa Rica Energy Assessment (English and Spanish) 01/84 4655-CR Recommended Technical Assistance Projects (English) 11/84 027/84 Forest Residues Utilization Study (English and Spanish) 02/90 108/90 Dominican Republic Energy Assessment (English) 05/91 8234-DO Ecuador Energy Assessment (Spanish) 12/85 5865-EC Energy Strategy Phase I (Spanish) 07/88 ------ Energy Strategy (English) 04/91 ------ Private Mini-hydropower Development Study (English) 11/92 ------ Energy Pricing Subsidies and Interfuel Substitution (English) 08/94 11798-EC Energy Pricing, Poverty and Social Mitigation (English) 08/94 12831-EC Guatemala Issues and Options in the Energy Sector (English) 09/93 12160- Health Impacts of Traditional Fuel Use 08/04 284/04 Haiti Energy Assessment (English and French) 06/82 3672-HA Status Report (English and French) 08/85 041/85 Household Energy Strategy (English and French) 12/91 143/91 106 5035-LIST.pdf 106 5035-LIST.pdf 106 5/27/08 8:29:38 AM 5/27/08 8:29:38 AM List of Formal Reports Honduras Energy Assessment (English) 08/87 6476-HO Petroleum Supply Management (English) 03/91 128/91 Jamaica Energy Assessment (English) 04/85 5466-JM Petroleum Procurement, Refining, and Distribution Study (English) 11/86 061/86 Energy Efficiency Building Code Phase I (English) 03/88 ------ Energy Efficiency Standards and Labels Phase I (English) 03/88 ------ Management Information System Phase I (English) 03/88 ------ Charcoal Production Project (English) 09/88 090/88 FIDCO Sawmill Residues Utilization Study (English) 09/88 088/88 Energy Sector Strategy and Investment Planning Study (English) 07/92 135/92 Mexico Improved Charcoal Production within Forest Management for the State of Veracruz (English and Spanish) 08/91 138/91 Energy Efficiency Management Technical Assistance to the Comisión Nacional para el Ahorro de Energía (CONAE) (English) 04/96 180/96 Mexico Energy Environment Review 05/01 241/01 Proceedings of the International Grid-Connected Renewable Energy Policy Forum (with CD) 08/06 324/06 Nicaragua Modernizing the Fuelwood Sector in Managua and León 12/01 252/01 Policy & Strategy for the Promotion of RE Policies in Nicaragua. (Contains CD with 3 complementary reports) 01/06 316/06 Panama Power System Efficiency Study (English) 06/83 004/83 Paraguay Energy Assessment (English) 10/84 5145-PA Recommended Technical Assistance Projects (English) 09/85 Status Report (English and Spanish) 09/85 043/85 Reforma del Sector Hidrocarburos (Spanish Only) 03/06 319/06 Peru Energy Assessment (English) 01/84 4677-PE Status Report (English) 08/85 040/85 Proposal for a Stove Dissemination Program in the Sierra (English and Spanish) 02/87 064/87 Energy Strategy (English and Spanish) 12/90 ------ Study of Energy Taxation and Liberalization of the Hydrocarbons Sector (English and Spanish) 120/93 159/93 Reform and Privatization in the Hydrocarbon Sector (English and Spanish) 07/99 216/99 Rural Electrification 02/01 238/01 Saint Lucia Energy Assessment (English) 09/84 5111-SLU 107 5035-LIST.pdf 107 5035-LIST.pdf 107 5/27/08 8:29:38 AM 5/27/08 8:29:38 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY St. Vincent and the Grenadines Energy Assessment (English) 09/84 5103-STV Sub Andean Environmental and Social Regulation of Oil and Gas Operations in Sensitive Areas of the Sub-Andean Basin (English and Spanish) 07/99 217/99 Trinidad and Tobago Energy Assessment (English) 12/85 5930-TR GLOBAL Energy End Use Efficiency: Research and Strategy (English) 11/89 ------ Women and Energy -A Resource Guide The International Network: Policies and Experience (English) 04/90 ------ Guidelines for Utility Customer Management and Metering (English and Spanish) 07/91 ------ Assessment of Personal Computer Models for Energy Planning in Developing Countries (English) 10/91 ------ Long-Term Gas Contracts Principles and Applications (English) 02/93 152/93 Comparative Behavior of Firms Under Public and Private Ownership (English) 05/93 155/93 Development of Regional Electric Power Networks (English) 10/94 ------ Round-table on Energy Efficiency (English) 02/95 171/95 Assessing Pollution Abatement Policies with a Case Study of Ankara (English) 11/95 177/95 A Synopsis of the Third Annual Round-table on Independent Power Projects: Rhetoric and Reality (English) 08/96 187/96 Rural Energy and Development Round-table (English) 05/98 202/98 A Synopsis of the Second Round-table on Energy Efficiency: Institutional and Financial Delivery Mechanisms (English) 09/98 207/98 The Effect of a Shadow Price on Carbon Emission in the Energy Portfolio of the World Bank: A Carbon Backcasting Exercise (English) 02/99 212/99 Increasing the Efficiency of Gas Distribution Phase 1: Case Studies and Thematic Data Sheets 07/99 218/99 Global Energy Sector Reform in Developing Countries: A Scorecard 07/99 219/99 Global Lighting Services for the Poor Phase II: Text Marketing of Small "Solar" Batteries for Rural Electrification Purposes 08/99 220/99 A Review of the Renewable Energy Activities of the UNDP/ World Bank Energy Sector Management Assistance Program 1993 to 1998 11/99 223/99 Energy, Transportation and Environment: Policy Options for Environmental Improvement 12/99 224/99 108 5035-LIST.pdf 108 5035-LIST.pdf 108 5/27/08 8:29:39 AM 5/27/08 8:29:39 AM List of Formal Reports Privatization, Competition and Regulation in the British Electricity Industry, With Implications for Developing Countries 02/00 226/00 Reducing the Cost of Grid Extension for Rural Electrification 02/00 227/00 Undeveloped Oil and Gas Fields in the Industrializing World 02/01 239/01 Best Practice Manual: Promoting Decentralized Electrification Investment 10/01 248/01 Peri-Urban Electricity Consumers--A Forgotten but Important Group: What Can We Do to Electrify Them? 10/01 249/01 Village Power 2000: Empowering People and Transforming Markets 10/01 251/01 Private Financing for Community Infrastructure 05/02 256/02 Stakeholder Involvement in Options Assessment: 07/03 264/03 Promoting Dialogue in Meeting Water and Energy Needs: A Sourcebook A Review of ESMAP's Energy Efficiency Portfolio 11/03 271/03 A Review of ESMAP's Rural Energy and Renewable Energy 04/04 280/04 Portfolio ESMAP Renewable Energy and Energy Efficiency Reports 05/04 283/04 1998-2004 (CD Only) Regulation of Associated Gas Flaring and Venting: A Global 08/04 285/04 Overview and Lessons Learned from International Experience ESMAP Gender in Energy Reports and Other related Information 11/04 288/04 (CD Only) ESMAP Indoor Air Pollution Reports and Other related Information 11/04 289/04 (CD Only) Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshop on the Pre-Investment Funding. Berlin, Germany, April 23­24, 2003. 11/04 294/04 Global Village Energy Partnership (GVEP) Annual Report 2003 12/04 295/04 Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshop on Consumer Lending and Microfinance to Expand Access to Energy Services, Manila, Philippines, May 19­21, 2004 12/04 296/04 The Impact of Higher Oil Prices on Low Income Countries And on the Poor 03/05 299/05 Advancing Bioenergy for Sustainable Development: Guideline 04/05 300/05 109 5035-LIST.pdf 109 5035-LIST.pdf 109 5/27/08 8:29:39 AM 5/27/08 8:29:39 AM CHINA: DEVELOPMENT OF NATIONAL HEAT PRICING AND BILLING POLICY For Policymakers and Investors ESMAP Rural Energy Reports 1999-2005 03/05 301/05 Renewable Energy and Energy Efficiency Financing and Policy Network: Options Study and Proceedings of the International Forum 07/05 303/05 Implementing Power Rationing in a Sensible Way: Lessons Learned and International Best Practices 08/05 305/05 The Urban Household Energy Transition. Joint Report with 08/05 309/05 RFF Press/ESMAP. ISBN 1-933115-07-6 Pioneering New Approaches in Support of Sustainable Development In the Extractive Sector: Community Development Toolkit, also Includes a CD containing Supporting Reports 10/05 310/05 Analysis of Power Projects with Private Participation Under Stress 10/05 311/05 Potential for Biofuels for Transport in Developing Countries 10/05 312/05 Experiences with Oil Funds: Institutional and Financial Aspects 06/06 321/06 Coping with Higher Oil Prices 06/06 323/06 Designing Strategies and Instruments to Address Power Projects Stress Situations 02/08 329/08 110 5035-LIST.pdf 110 5035-LIST.pdf 110 5/27/08 8:29:40 AM 5/27/08 8:29:40 AM Energy Sector Management Assistance Program China: Development of National Heat Pricing and Billing Policy Feedback Form 1. Is the format of this report easy to read? Yes No 2. Is the report a comfortable length to read? Yes No 3. If not, would you prefer more details/data less details/data 4. Do you find the information contained in this report relevant to your work? Yes No If yes, how would you use this information in your work? 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