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The Market for District Heating and Cooling As of 1982, urban district heating and cooling systems in the United States had about 7,400 megawatts MW(th) or 25,240 MBtu/h of installed capacity (OTA, 1982~. There are no comparable figures for the installed capacity of institutional systems, although one survey of colleges and universities cited in Chapter 2 found that they have an annual heat production of 337.5 trillion Btu. Given the number of systems in the Washington and Baltimore metropolitan area alone, one can assume that institutional systems have even more installed capacity than urban ones. What are the prospects for expanding the number of urban district heating and cooling systems in the United States? The committee cannot provide definitive answers to that important question. Recent studies seem to indicate they could supply up to 10 percent of the total energy demand in this country by the year 2004 (Teotia et. al., 1981; Karnitz, 1983~. Even under the best of circumstances, it seems unlikely, however, that district heating and cooling will supply much more than that. THE ARGONNE MODEL Nevertheless, there is good reason to think that district heating and cooling will increase its current share of the energy market. A recent Argonne National Laboratory study (Teotia et. al., 1981) constructed several scenarios estimating the growth of U.S. district heating by the year 2004 (Figure 3-1~. One Argonne scenario foresees district heating accounting for 0.4 quadrillion Btu of energy by 2004 compared with 0.065 quadrillion Btu in 1982 (see Chapter 2~. This scenairo assumes that nothing additional will be done to encourage district heating. A second scenario shows that an additional 1.5 quadrillion Btu could be provided, using the Argonne model, if Congress clarifies the IRS tax regulations regarding depreciation of energy equipment and enacts energy investment tax credits for district heating (similar to those provided for other energy conservation devices). If, in 39

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40 Quads 5.0 4.5- 4.0- 3.5- 3.0- 2.5- 2.0 1.5 1 .0- 0.5 / 1' I Capital Support /~ Im/proved I Regulatory I Financial Incentives ~- Demonstrations / I Project Packaging Technical Assistance ~ . Base Case 1984 1988 1992 1996 2000 2004 FIGURE 3-1 District heating market penetration (courtesy Argonne National Laboratory).

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41 addition, capital support were provided by state and local governments, as is done in Sweden, West Germany, and other European countr ies, the Argonne model shows district heating providing a total of 3.5 quadrillion Btu by 2004. If a seasonal load factor of 30 percent is assumed, these growth figures indicate increases in installed U.S. capacity of 166,800 MW(th) to 311,200 MW(th). A total of 3.5 quads would represent about 5 percent of the 1983 energy demand in the United States (see Figure 3-1 and Tables 3-1 through 3-4~. Whether district heating will be able to achieve its potential, as outlined above, will depend on how it is perceived by potential customers and how well it is able to overcome various impediments to its implementation (Chapter 43. Although data on energy savings are not available for district heating in industrial applications, district cooling, and district heating and cooling systems that are noncogeneration based, it is safe to assume that the net energy savings would substantially increase if these were introduced into the model developed by Argonne National Laboratory. When these systems are introduced into the model, the amount of energy supplied by district heating and cooling could reach about 10 percent of the national energy demand. The funds spent on district heating and cooling systems will be retained in urban areas and will be respent in the local economy. The Department of Commerce estimates a threefold income multiplier effect (the number of times a dollar will be respent locally) for large urban areas. In the base case, the local economies will experience spending of $7.5 billion and in the financial incentives case the local effect will be $168.9 billion. This is a rather significant amount of spending in cities as a result of money invested in new district heat ing and cool ing systems . System size will vary by city, as will the end user's costs for thermal energy e These var tables will determine the value to the local economy of district heating and cooling development (Argonne National Laboratory, 1981~. PROSPECTS AND USES Chapter 2 noted six conditions that have favored district heating in Europe: densely populated areas, cold winters, nearby cheap energy sources, high prices for imported oil and gas, the technical ability to cogenerate, and utilities with the capacity to supply adequate heat and power during long, cold winters. Three of the six conditions apply almost as well to the United States as to Europe. Our cities are densely populated--some more so than their European counterparts--and many have long, cold winters. The U.S. technology certainly exists--and has been encouraged by federal legislation such as PURPA--for cogeneration.

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42 TABLE 3-1 Net Energy Savings from Cogeneration District Heating, Residential and Commercial Applications Million Barrels of Oil Case Quads (Equivalent) - Base 0.128 22.07 Improved regulation 0.850 146.54 Financial incentives 1.585 273.25 SOURCE: Adapted from Argonne National Laboratory. TABLE 3-2 Scarce Fuel Savings from Cogeneration District Heating Residential and Commercial Applications Million Barrels of Oil Case Quads (equivalent) _ Base -0.102 Improved regulation 1.038 Financial incentives 1.779 SOURCE: Adapted from Argonne National Laboratory l -17.58 178.95 306.70 . 1

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43 TABLE 3-3 National District Heating and Cooling Employment Generation Construction Employment Expenditure All Job (Millions of Dollars) Years Job Years Case Construction Base 2,88267,43927,091 Improved regulation 40,298942,973378,801 Financial incentives 70,5321,650,449663,001 SOURCE: Argonne National Laboratory TABLE 3-4 Retention Model United States--Base Case $/MMBTUa $/MMBTUa Capita1 Retained O&M Retained Fuel Retained Retained 11.09 5.55 4.71325 2.77 2.77 2.77 0.27725 7.76 MMBTU sold 325,485 Retention Factors Total $ retained 2,526,740.06 Local multiplier 3 Capital 0.85 Years 20 O&M 1 Annual cities Fuel 0.1 benefit 379,011.01

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44 TABLE 3-4 Retention Model (continued) United States--Improved atorv Case $/MMBTUa Capital Retained O&M Retained S/+BTUa Retained Retained 23.66 11.83 MMBTU sold Total $ retained Local multiplier Total cities benefit Years Annual cities benefit al 10.0555 5.92 5.92 1,886,730 31,248, 002.26 3 93,744,066.78 20 4, 687, 203.34 5.92 0.5915 16.S6 Retention Factors Capital O&M Fuel United States--Financial Incentives Case Retained O&M Retained Fuel Retained 23.62 11. 81 10.0385 5.91 5.91 MMBTU sold Total $ retained Local multiplier Total cities benefit Years Annual cities benefit 3,404'910 56,296, 781.94 3 168, 890, 345.82 20 8, 444, 517.29 MMBTU means 1 million or 106 Btu. SOURCE: Argonne National Laboratory . 0.85 1 0.1 $/MMBTUa Retained_ 5.91 0.5905 16.53 Retention Factors Capital O&M Fuel 0.85 1 0.1

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45 The relative lack of urban district heating and cooling in the United States can be explained, in part, by large domestic supplies of relatively inexpensive oil and natural gas that have made the older, investor-owned systems economically uncompetitive (Santini, 1981~. Since the Arab oil embargo, however, the United States has become more interested in reducing oil imports, in increasing energy efficiency, and in the reducing energy costs of rising fuel prices. A number of other f actor s have contributed to the successful implementation or revitalization of some district heating and cooling systems in the United States. These include a high level of expertise among project management, low financing costs, commitment from all participants, and political leadership (see Chapter 5~. All the above factors vary in their significance from country to country and, within the United States, from city to city. Some may be crucial while others count for little in deciding whether to build a district heating and cooling system and in determining how successful it will be. They may also vary depending on whether the system is municipally owned or incorporated, an investor-owned utility, or an institutional system. A cold climate, for instance, reduces the relative cost of distributing thermal energy by extending peak heating demands over a longer time. It also provides more favorable load factors (ratios of average to peak demand), which reduces the cost of heat per million Btu produced (see Tables 3-5 and 3-6 and Appendix D). In St. Paul, Minnesota, for example, the total of 8,159 heating degree days yields an annual or capacity load factor of 0.29 (OTA, 1982~. By comparison, Dallas, Texas, has only 2,382 heating degree days and a load factor of 0.15, half that of St. Paul. Such considerations were included in St. Paul's decision to create a new municipally incorporated system to replace an older, investor-owned utility system (see Appendix A). As district heating can benefit from a cold climate, district cooling can profit from the long, hot summers typical of the American South and Southwest. In Los Angeles, for instance, a district heating and cooling system provides chilled water for air conditioning and steam or hot water for heating in Century City. This 180-acre site includes offices, shops, restaurants, apartments, theaters, and a hotel. It was built on former Twentieth Century Fox movie lots (see Appendix A). An even larger and more complex system serves the Regency Square shopping center in Jacksonville, Florida. The center cogenerates both power for electricity and steam for both heating and cooling, using an absorption unit. Since 1981 the center has shut its system down late at night and depended instead on electricity supplied by the Jacksonville Electric Authority. During the day, Regency Square sells power back to the utility (MERRA, 1981~.

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46 TABLE 3-5 Comparative Urban Heat Load Density Values Degrees Below Annual Temperature 65F(18C) Heating on Heating on Heating Degree Design Design Load Region and City Days Day (OF) Day Factora Northeast and North Central Boston 5,621 g 56 0.28 Milwaukee 7,444 -4 69 0.30 Minneapolis-St. Paul 8,159 -12 77 0.29 South and West Los Angeles 1,819 40 25 0.20 Baltimore 4,729 13 52 0.25 Dallas 2,382 22 43 0.15 Memphis 3,227 18 47 0.19 Seattle 5,185 26 39 0.36 2The load factor is calculated by dividing the total heating degree days by the product of degrees below 65F on the heating design day (the systems designed peak load) times 365 days. SOURCE: Office of Technology Assessment (1982~.

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47 TABLE 3-6 Heating Degree Days (Below 65F; 18C) and Population Densities Annual Per Capita Residential Heating Total Population Space Heat Degree Population Density Consumption City Days (103) (people/acre) (106/Btu) 1. Helsinki] 8,4007502.4 17.1 2. Minneapolis 8,40043412.3 42.7 3. Stockholm 8,10075016.2 21.8 4. Buffalo 7,10046317.5 36.1 5. Malmo 6,7002549.5 18.0 6. Hamburg 6,3001,8009.7 19.9 7. Denver 6,3005158.4 32.3 8. Chicago 6,2003,36723.6 31.319 9. Detroit 6,2001,51117.1 31.3 10. West Berlin 6,1002,00016.9 19.0 11. New York 5,000 7,895 41.3 25.6 Metropolitan area. NOTE: European cities listed are known to have extensive district heating systems. SOURCE: J. Karkheck et al. (1977~.

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48 In some cities, district heating and cooling can be used successfully because many modern office and other commercial buildings require heating in one part and cooling in another at the same time. In addition, modern office buildings require cooling even on days when most residences do not, because their windows are often sealed shut to meet the requirements of high internal energy loads caused by lighting equipment and density of people. District heating and cooling likewise benefits from the recent surge in the number of multifamily residences built in or near downtowns in U.S. cities. Apartment complexes, in particular, create a favorable potential market for district heating and cooling. The Century City development in Los Angeles includes two high-rise apartment buildings (one 28 and the other 20 stories). A third high r ise is planned. District heating and cooling for urban residential units need not be limited to new construction or upper-income dwellings, as in Los Angeles. In Baltimore, for example, the Cherry Hill public housing development, with some 1,600 units, was linked to a new district heating and cooling system using thermal energy produced by a privately owned solid waste incinerator (see Appendix A). A similar development may take place in New York City, where an industrial park has been proposed to replace the Brooklyn Navy Yard; a district heating and cooling system is planned for the park that would also supply thermal energy to nearby public housing units. The plans may depend, however, on whether New York City builds a municipal waste incinerator at the site. No final decision has yet been made. Many cities are interested in encouraging the economic development and revitalization of their downtown areas. New urban residential units are just a part of this development. Cities like St. Paul, Minnesota, Piqua, Ohio, and Jamestown, New York, have used their new or revitalized district heating and cooling systems to attract business and commercial development to their downtowns (see Appendix A). A new, privately owned, for-profit system provides district heating and cooling to the downtown area in Trenton, New Jersey (see Appendix A). The system offers heating without the expense of new boilers in each building, thus permitting new structures to be built and operated more economically. In fact, four new commercial structures designed without individual boilers were under construction in 1983. The Trenton system cogenerates electricity and thermal energy using diesel generators providing hot exhaust gas to a supplementary fired boiler that recovers the waste heat. The unique distribution system consists of three independent loops. Each delivers hot water at a different temperature to meet the different thermal requirements of the customers served. The high-temperature loop delivers water at 400F, the medium- temperature loop at 320F, and the-low temperature loop at 235F. The high-temperature water is flashed into steam at the customer's site by heat exchangers and the low-pressure steam is distributed

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49 internally. The medium-temperature loop serves new buildings and the low-temperature loop serves customers near the power plant, mostly for older buildings with internal steam heating equipment. In New York City, a privately owned, 46-building apartment complex in Brooklyn gets its heating, cooling, and electricity from an onsite cogenerating power plant (Figure 3-2~. Star rett City, as the complex is called, consists of 20,000 residents plus retail, medical, recreational, and educational facilities. The project's owners estimate the cost of Starrett City's thermal energy as about one-third that of retail rates. Several older, steam-based systems have recently been revitalized and expanded by adding hot water. Fairbanks, Alaska, added a new 12,000-foot hot water system in 1982 to its steam-based district heating system built in 1905 (see Appendix A). Another opportunity for urban systems may come from combining several existing institutional ones. The current district heating system in Copenhagen, for example, began as separate systems that were later combined. Later still, the new system was expanded to serve new customers. Now, half of the residential dwellings in Copenhagen itself and 40 percent of those in the greater metropolitan area are served by district heating (Trojborg, 1984~. One can envision similar developments in the United States. In Washington, D.C., for example, the institutional systems operated by American, Georgetown, and George Washington universities could be combined to form one system that could serve a variety of other users in the northwest part of the city. On the other side of the city, the Howard University, University of Maryland, and Gallaudet College systems might be similarly combined. In both cases, the three campuses are within five miles of one another (see Appendix B). Such new systems could help financially pressed colleges and universities generate additional revenue to finance their educational programs. In a similar vein, Mannheim, West Germany, uses the profits from its district heating system to help finance the municipal transit system. Instead of switching from institutional to urban systems, the U.S. Army Corps of Engineers has adopted the opposite course. The Corps has decided to link U.S. Army bases in West Germany to 31 municipal district heating systems to decrease oil and natural gas use by 98 percent and the number of individual boilers from more than 8,000 to 750 (U.S. Army Corps of Engineers, letter to Senate Committee on Appropriations, 1984~. In the United States, four military installations in San Diego--the Naval Training Center, Marine Corps Recruiting Depot, San Diego Naval Station, and North Island Naval Air Station--buy steam from Energy Factors Company, a former subsidiary of San Diego Gas and Electric Company. The latter had supplied downtown San Diego with district heating since 1921. Energy Factors, now a public corporation, uses heat recovery boilers attached to turbines to cogenerate electricity and steam for its military and other customers (MERRA, 1981~.

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~50 ,',:,;.,~,-,f.'.~::" 2'>-':,<~'',.,.2 ~ FIGURE 3-2 Starrett City: A New York community served by district heating and cooling (Star rett City Energy Office, Grenadier Realty Corporation) .

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51 College campuses represent one of the best potential markets for district heating and cooling (see Chapter 2~. In fact, the number of systems on college campuses increased from 25 in 1900 to 150 in 1950 and about S80 in 1982 (NADHCI Newsletter, October 24, 1983~.* Four- fifths of those provide cooling as well (Figures 3-3 and 3-4~. The fuels used by these systems vary: 433 colleges reported using natural gas, 250 oil, 65 coal, 47 cogenerated heat, 2 refuse, and 39 "other" (Figure 3-5~. As the numbers indicate, several use more than one fuel. This illustrates the flexibility district heating and cooling systems possess in their ability to use more than one fuel at a time. While many universities and colleges have their own systems, others buy thermal energy from off-campus systems. The Indianapolis Power and Light Company, for example, sells steam for district heating to the campuses of both Indiana and Purdue universities in Indianapolis. The system serves more than 600 other commercial, residential, and industrial customers. The above examples illustrate a range of prospects for district heating and cooling in expanding its share of the energy market in the United States. The situations described can probably be found in many other U.S. cities too. Many other possibilities are discussed in Appendix A, the committee's symposium proceedings, and the references cited. DI STM CT HEATING AND C~LING MEETS To take advantage of the potential markets for district heating and cooling outlined above, new or expanded systems will have to address the issues and challenges each market type poses. District heating and cooling serves commercial, industrial, residential, and institutional markets. Each has different requirements for service, payback periods, innovativeness, and financial participation. These requirements can make planning complex and time consuming, and can determine whether district heating and cooling systems are adopted or expanded. Commercial users generally require reasonable first costs with the shortest payback periods for energy-related investments. Customer disruption from construction is often an issue. These concerns can be minimized by careful planning, community involvement, and modern construction techniques. The simplest and least costly approach is to develop the system while installing or replacing other public services, such as water or sewer systems. *These figures are based on an NADHCI survey of universities, of which some 700 responded. These numbers may thus be conservative. 2,000 colleges and

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52 550 500 450 400 us in 350 LL o cr UJ ~ 250 in 200 300 i' l Total Growth in College District Heating; \ l Steam Only, 150 I_ Hybrid-Steam and Hot Water ~doff 100 50 o 1900 19:10 1920 1930 1940 1950 1960 1970 1980 - r' Cut HI r~_~_ ,~-'.W ~ ~ Hot Water Only YEARS FIGURE 3-3 The growth of district heating on college campuses (NADHCI Newsletter, October 24, 1983) .

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53 500 450 400 UJ In 11 o a: UJ m me 350 300 250 200 150 100 so Total DHC Cool ing Growth ~1 1 l I / Distributed Chilled Water Based Systems I I/ ' 1i \i J Use of Absorptin Equips ~j/ L 1900 1 910 1920 1 930 1940 1950 1960 1970 1980 YEARS FIGURE 3-4 The growth of district cooling on college campuses (NADHCI Newsletter, October 24, 1983~.

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54 Co mparative Levels of Types of Fuels Used in Campus DHC Systems Natural Gas Oil FIGURE 3-5 1983). Coal Refuse Other Fuels used in campus systems (NADHCI Newsletter, October 24,

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55 Industrial markets require reliability and straightforward Btu-equivalent comparisons. They want to know which energy system will provide the most Btu of delivered energy at the least cost. Industry can often afford to invest in energy systems that serve their own manufacturing or office requirements. Such systems are smaller and less costly than urban ones, experience no cash shortfall before all users are connected, and can be depreciated. Likewise, financial risk assessments are different for industrial projects, although such projects pay higher interest rates than those charged municipal or other nonprofit systems. Fuel price plays a more important role for industrial markets than it does for other potential users. Some industries have low-temperature heat requirements and are thus prospective district heating and cooling customers. Others require high-quality energy, which they produce themselves. In this case, industrial processes often yield large quantities of waste heat that can be captured and sold to other customers. Institutional markets are like commercial ones: they require space conditioning and have few process applications. For colleges and universities, for example, operating and maintenance costs are more important than fuel price. District heating and cooling systems can reduce costs by replacing boilers in each building on the campus with one central generating plant. Colleges and universities also have access to the lowest interest rates on loans because, like municipal governments, they can pledge their "full faith and credit." As for commercial markets, reliability and the Btu-equivalent comparisons are important. There is considerable debate as to whether district heating and cooling can serve residential customers economically because of distribution costs. The costs of distributing steam and hot or chilled water to single-family homes are large. Medium- and high-density residential areas provide more desirable loads. Any service for low-density housing will require careful, site-specific economic analysis and will probably result from expansion of an efficient system built to serve high-use markets. Issues for district heating and cooling arise in part from the flexibility inherent in the systems' development and growth. Even though each system will produce energy and transport it to end users, each community will construct its own suitable technical, institutional, and financial structures (see Chapter 51. Each will consider a variety of factors, including the following (Hanselman, 1984~: o system size 0 growth and planning o system location o transmission distance o community dynamics

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56 o local goals and problems o alternative ownership schemes o fuel availability o national law and policy o state and local regulation o end-use requirements (including thermal fluid temperatures) o load distribution o alternative financing mechanisms. When all of the prospects and potential markets for district heating and cooling systems are evaluated, the most important considerations are the trends discussed in Chapter 2: urban, investor-owned utility systems continue to stagnate or decline, urban systems owned by municipal governments or nonprofit corporations continue to expand slowly, and institutional systems continue to expand rapidly. A number of factors have contributed to the decline of utility-owned urban systems and the slow growth of municipal ones (IEA, 1983~: o Low regulated prices for easily obtained fuels such as oil and natural gas. o A misalignment of federal, state, and local legislation. O Utility disinterest and, in some cases, hostility. O Lack of public awareness and acceptance. O The problems involved in siting coal-fired power plants or waste incinerators close to population centers. O The uncertain economic advantage of coal because of environmental considerations. o The inapplicability of the U.S. Environmental Protection Agency's (EPA) "bubble policy" for district heating and cooling systems. o High interest rates that raise the cost of building a new or revitalizing an old system. A number of other specific problems also impede the further growth of urban district heating and cooling systems. These include the lack of adequate data, the tax and fee structure, economic regulation by public utility commissions, and the need for complex institutional arrangements.