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Executive Summary
District heating and cooling systems are thermal energy networks that
distribute hot water, chilled water, or steam through insulated pipes
to serve commercial, residential, institutional, and industrial energy
needs for space heating, space cooling, and industrial purposes.
District heating and cooling systems permit energy, as distinguished
from fuel, to be bought and sold as a commodity.
District heating and cooling systems have several attributes that
give them an advantage under certain conditions over competing energy
systems. By replacing many individual boilers with one central
heating and cooling source, they can increase effective building
space, reduce building construction and operating costs, and
contribute to improving air quality. They increase energy efficiency
by encouraging the cogeneration of electricity and thermal energy.
District heating and cooling systems can also use a variety of
fuels, including otherwise hard-to-dispose-of municipal solid wastes.
This flexibility allows the substitution of cheaper fuels for more
expensive oil and gas.
In general, a number of factors contribute to the success of
district heating and cooling systems. These include a cold climate
(for heating systems), a densely populated area or core of high-use
buildings, a source or sources of relatively cheap fuel nearby, high
prices for competing oil and gas, the technical ability to cogenerate
heat and power or to use other fuel sources, and the desire to reduce
dependence on imported oil. The successful implementation of a system
also requires capable management, reasonable financing costs, a
commitment from all participants, and political leadership.
These factors vary in their significance from country to country
and from City to City. Some may be crucial while others count for
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~ ,^ _ ~ _
little in deciding whether and which system to build and in
determining how successful it will be. They may also vary in
importance depending on whether a municipal government or an
institution will build and operate the system.
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Historically, two types of district heating systems have developed
in the United States. First, steam heating systems were developed
beginning in the late nineteenth century to serve a variety of users
and buildings located in urban areas, typically in the central
business district. Many of these systems were owned and operated by
the local electric utility.
In recent decades, the older urban systems have declined in number
and amount of energy they supply. Power plants have been located away
from central cities, cheap~oil and gas have replaced coal as a fuel,
environmental concerns have limited fuel choice, and individual
boilers have replaced central heating systems. When operated by
investor-owned utilities, the older urban systems have been regulated
by state utility commissions in ways that often have made them
uncompetitive relative to alternative fuels and heating systems.
The second type of system serves institutional users. These
include college and university campuses, military bases, industrial
parks, multifamily residences, and office, medical, and commercial
complexes. Institutional systems serve a single user, a single or few
related buildings, or a complex of buildings.
In sharp contrast to the urban systems, institutional systems have
grown significantly in the last two or three decades. Until recently,
however, there was little or no data on which to judge their extent.
One recent informal survey found 4,900 miles of thermal piping on U.S.
Army installations in the United States. Another found 160
institutional systems in the Washington, D.C., and Baltimore
metropolitan area. Among the places served are the White House, the
U.S. Capitol, the National Zoo, and Washington's new subway system.
More recently, a third type of district heating and cooling system
has emerged. These are nonprofit, usually municipally incorporated or
owned systems that serve many and varied urban users. Many have
replaced older urban systems operated by investor-owned utilities, as
in St. Paul, Minnesota. In other cities, groups of users have
combined to form nonprofit cooperatives that run systems formerly
operated by investor-owned utilities, as has happened in Pittsburgh
and has been proposed for Rochester, New York.
These new urban systems have been assisted by demonstration
projects sponsored by the U.S. Departments of Housing and Urban
Development (HUD) and Energy (DOE). HUD, in particular, has used
district heating and cooling as a tool to help cities with their
economic and community development. DOE began sponsoring cogeneration
and district heating projects in 1977 that retrofitted power plants in
central cities. Another boost came from the Public Utility Regulatory
Policies Act (PURPA), which requires-electric utilities to purchase
power from small power producers and cogenerators at rates equal to
the "avoided cost" of generating equivalent amounts by conventional
means.
Meanwhile, district heating systems have spread throughout much of
western and northern Europe in recent decades. The Europeans tend to
view district heating as a system for the sale of thermal energy to
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increase energy efficiency, reduce dependence on imported oil, and
improve air quality. So far, however, few European cities have
adopted district cooling.
Both the older investor-owned and the newer institutional systems
represent valuable community resources around which new or expanded
urban systems could be built. Where possible, existing energy
infrastructures and financing instruments should be used. Several of
the newer urban systems referred to above have indeed done just that.
Why has district heating and cooling grown so rapidly in
institutional settings in the United States and for urban uses in
Europe while the investor-owned urban systems in the United States
generally continue to decline? Clearly, the latter face certain
impediments that do not affect the latter to as great a degree.
For one thing, urban systems are costly to build. Several years of
construction are required before they begin to generate revenue, which
makes financing particularly important. High interest rates may
prevent district heating and cooling systems from offering the lower
prices that make them attractive. In addition, lenders may require
that a city commit its "full faith and credit" to a system and that
all customers sign binding 20- or 30-year agreements to buy energy
from the system.
Tax-exempt or general obligation bonds can be used to finance
projects, but both require complex legal and financial arrangements.
On the federal level, Congress recently placed a per state limit of
$150 per capita on industrial development bonds that any municipality
or state agency may sell. This stipulation could make financing of
district heating and cooling projects even more difficult.
Fixed costs represent about 80 percent of the cost of delivered
energy from district heating and cooling systems, which makes their
success more heavily dependent on interest rates. As much as
two-thirds of the fixed costs may be for the distribution system.
Thus, most systems serve high-use customers within specified
geographic areas. In comparison, building owners can incorporate the
cost of a boiler in the mortgage financing for their entire structure,
in effect hiding its true cost and the cost of its associated floor
space, which in most cases does not emphasize the full cost of the
heating and cooling elements.
When owned by an investor-owned utility or when designed to serve a
variety of general users, district heating and cooling systems are
usually subject to economic regulation by state and, in some cases,
local public utility commissions. These commissions often set rates,
fix returns on investment, and determine areas of service in ways that
make district heating and cooling unattractive to potential investors
and uncompetitive with other energy systems.
More consistent regulatory policies from state to state are
needed. A better understanding of the highly competitive environment
in which district heating and cooling operates might lead state
governments to reduce the extent of economic regulation to allow a
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free marketplace for heating and cooling. The development of a model
regulatory approach would help.
Further, the "bubble policy" adopted by the U.S. Environmental
Protection Agency (EPA) does not adequately reflect the air quality
benefits gained from replacing many individual untreated boilers with
one treated central heating and cooling plant. EPA's policy may need
some modifications if cogeneration and urban district heating systems
are to expand in number.
The ability of district heating and cooling to compete with
individual boilers is also affected by the variety of federal, state,
and local taxes levied on investor-owned utility systems. For
example, many systems must pay franchise taxes that do not apply to
those who install individual boilers or heat pumps. In addition, some
utilities are taxed both on the fuel they buy and on the energy they
produce from burning that fuel.
In general, too many financially pressed state and local
governments view utilities as sources of revenue rather than as
potential community resources. Some cities charge the utilities a fee
each time they want to excavate a street to lay pipes to extend or
repair a district heating and cooling system. Instead, that piping
network could be viewed as a way to revitalize a downtown area, for
example, by attracting commercial development and businesses to
relocate where their energy costs will be lower.
In part, the regulatory, financing, and tax problems facing
district heating and cooling have stemmed from the lack of public
awareness of its benefits. This is due to the scarcity of reliable
data on its prospects and current extent. As a result, investors
often term such systems "high risks" and city officials tend to
overlook their potential. ~
To help resolve the data problem,-DOE should collect and
disseminate information on district heating and cooling. This would
help create an unbiased source of data that could be used for
research, analytical, and project-support purposes. At the same time,
the professional and trade associations that represent the
again-growing industry should expand their public education efforts by
disseminating more information, particularly to the financial
community.
Currently, to overcome these and other impediments, complex
political, legal, and financial arrangements are required. This has
often led to innovative institutional arrangements, as in St. Paul,
Trenton, and Baltimore, that depend on strong leadership from a mayor
or business community. Coordinated policies are also required toward
district heating and cooling on the part of various federal, state,
and local government agencies.
For the most part, institutional systems do not face these
impediments. Since they are not investor-owned utilities,
institutional systems are not subject to regulation. Since many are
run by nonprofit entities or agencies of governments, such as a
university or the U.S. Army, they are not subject to taxes. And,
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since most serve just one customer, they do not require the same
complex legal, political, and financial arrangements for
implementation.
In contrast to the impediments discussed above, the technology for
district heating and cooling is well understood. Nevertheless,
improvements could be made that would increase its efficiency, lower
costs, and help make U.S. manufacturers more competitive in both
domestic and international markets. In particular, research is needed
on improved meters, nonmetallic piping, more effective insulation,
low-temperature systems, and combined district heating and cooling
systems.
Also needed is an improved capability for technology transfer.
Information on research and its applications needs to be better
circulated among trade, professional, industrial, and client groups.
DOE and HUD can help by sponsoring meetings and workshops, and by
participating fully in the district heating and cooling activities of
the International Energy Agency (IEA) and other similar organizations.
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Representative terms from entire chapter:
individual boilers
