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Conclusions and Recommendations
District heating and cooling is a well-advanced technology in the
United States, although its growth has been strongly sectoral and
largely influenced by the presence or absence of regulation and
taxation and the character of financing and decision-making processes.
DISTRICT HEATING AND COOLING SYSTEMS
In general, three types of district heating and cooling systems have
emerged in the United States: investor-owned urban systems, municipal
or not-for-profit urban systems, and institutional systems.
Institutional systems have increased in number considerably since
1950. More than 3,000 institutional systems are estimated to exist in
the United States today. These systems are generally not regulated by
state public utility commissions and are not subject to federal,
state, or local taxes (except where they are business entities). They
secure their financing by legislative appropriations, bonds, or
conventional bank and other commercial loans, have a
well-circumscribed decision-making process, and serve a single user or
sector.
Urban district heating and cooling systems numbered more than 250
in 1951 (Figure 2-1~. By 1980, their number had fallen to 59. During
the last five years, the investor-owned utilities in Chicago,
Baltimore, Pittsburgh, and Rochester have closed their district
heating operations or are in the process of being replaced by
not-for-profit entities. Such investor-owned utility systems are
economically regulated by public service commissions in 35 states, are
taxed by federal, state, and local governments, secure their financing
through bonds, have cumbersome decision-making processes with many
adversarial participants, and serve many users and sectors. Since the
systems are investor owned, return on investment plays a significant
role in the decision process.
Municipally owned or not-for-profit urban systems are growing
slowly. Recently, their growth has been stimulated by the district
85
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heating and cooling assessment program run jointly by the U.S.
Departments of Housing and Urban Development (HUD) and Energy (DOE),
as well as the HUD urban development action grant program.
These systems share many growth conditions with the institutional
systems, except that for municipally owned systems financing through
revenue or general obligation bonds is subject to great internal
competition and indebtedness limitations. The decision-making process
is very complex, with many vested interests and participants, which
increases financial risk. These systems serve many users and sectors.
To a great extent, economic regulation and taxes influence the
differential growth rates of the three types of systems. Except for
direct financial incentives, the greatest degree of market penetration
would be brought about by regulatory reform, particularly by state
public utility commissions, together with tax treatment equivalent to
that of competing energy sources.
o HUD should extend the district heating and cooling assessment
program to include studies of the feasibility of expanding
institutional systems to create new or expand existing urban systems.
Where feasible, such expansions should be tested in site applications.
o HUD should use the district heating and cooling systems serving
public and subsidized housing units as a base to help create new or
expand existing urban systems.
o HUD should develop better liaison between its housing and
community development offices to improve its management of community
energy programs.
~ REGULATION
The economic regulation of electric utilities, which follows from the
concept of a publicly granted and regulated monopoly, is
inappropriately applied to district heating and cooling systems.
Urban systems require large initial investments, particularly during a
project's early stages, when revenues are small or lacking. Where
economic regulation by state utility commissions limits the return on
investment and controls the ability to roll investment costs into
rates, the incentive to urban systems is removed for the private
sector.
Currently, most successful systems in the United States are
operating without these regulations or taxation because they are
tax-exempt, not-for-profit, municipal, or institutional
installations. Likewise, costly and lengthy regulation and permit
procedures are disincentives to entrepreneural systems because they
increase the uncertainty, cost, and complexity of development. Real
or perceived regulatory risks unfavorably affect cost and financing.
0 Economic regulation of district heating and cooling systems by
state or local authorities should be eliminated. District heating and
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cooling systems should be allowed to operate in the same open mar ket
that now exists for competing fuels and energy systems.
Fuel flexibility represents district heating and cooling's major
advantage over competing energy sources. The ability to use a variety
of solid fuels, such as coal and municipal solid waste, allows
district heating and cooling systems to offer lower prices. District
heating and cooling's primary competition is oil and gas burned in
onsite boilers. If district heating and cooling systems can burn
cheaper fuels, distinct economic advantages can be realized.
Regulations on air quality, facility siting, and zoning are often
inappropriate when applied to district heating and cooling. They can
reduce or preclude the combination of fuel flexibility and technical
advantages that make district heating and cooling systems economically
viable.
In addition, environmental regulations usually fail to consider
adequately that district heating and cooling systems replace many,
untreated, individual sources of air pollution with a single, treated
source.
o Regulation of energy systems should be modified to take into
account district heating and cooling's need for fuel flexibility.
o HUD and DOE should jointly convene a meeting of representatives
from state and local public service commissions to develop a model
regulatory approach for district heating and cooling systems.
O DOE should disseminate the results of its research on the
effects of siting, air-quality, and fuel regulations on cogeneration
and district heating and cooling systems to state public utility
commissions and local regulatory authorities.
o Working with DOE, the U.S. Environmental Protection Agency
should review its "bubble policy" to allow the substitution of one
treated source of pollution for many, individual, untreated sources.
If necessary, the Clean Air Act should be amended to allow such
trade-offs.
TAXES
Taxes significantly affect the ability of investor-owned utilities or
other for-profit corporations to build and operate urban district
heating and cooling systems. Tax disincentives can ultimately affect
the ability to finance the system. At the state and local levels,
gross receipts, fuel taxes, franchise taxes, and special utility taxes
in combination can be excessive. In the worst case known to the
committee, they added 20 percent to the cost of thermal energy.
At the federal level, the mismatch between tax and energy policy
continues to discourage potential investors. Two years after
authorizing the use of industrial revenue bonds for district heating
and cooling, Congress again limited their application by placing a per
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state limit of $150 per capita on the use of industrial development
bonds .
Municipalities are deterred f rom building new systems because the
Internal Revenue Service does not allow investment tax credits to be
used by a tax-exempt organization or government for district heating
and cooling equipment. District heating and cooling is subject to
higher financial risk assessments in part because it is not clear
whether the distribution pipes qualify for the accelerated capital
recovery provisions of the Economic Recovery Tax Act of 1981. The
difference between a 5- and 15-year depreciation schedule
significantly affects the system's viability and the customer's costs.
O State and local taxes should treat district heating and cooling
equally with its competitors. Fuel and franchise taxes are
particularly discr iminatory. These taxes should be changed to
recognize the energy efficiency and conservation attributes of
district heating and cooling.
Federal tax policy currently provides credits for those who install
solar energy systems, windmills, home insulation, and other energy-
conserving measures. These tax credits are scheduled to expire at the
end of 1985 unless Congress renews them. District heating and cooling
systems can compete with other energy systems if all are treated
equally by the tax laws.
o Federal tax policy should be modified to place district heating
and cooling systems and equipment on a par with other energy systems.
If Congress renews the tax incentives for other energy systems and
equipment, the incentives should be applied to district heating and
cooling too. If so, particular attention should be given to the
following:
- Providing investment tax credits for district heating and cooling
property.
- Allowing residential energy credits for district heating and
cooling expenditures.
- Transferring district heating and cooling property to a municipal
government or tax-exempt organization without recapture of
depreciation or investment tax credit by the former owner.
- Applying accelerated capital cost recovery schedules to district
heating and cooling property and retrofitted equipment.
- Arranging tax-exempt financing through exclusion of district
heating and cooling systems from the $150 per capita state limit and
the project size restr lotions recently placed on the use of industrial
development bonds.
- Arranging an additional 20-percent investment tax credit for
district heating and cooling property through December 31, 1990.
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DATA AND INFORMATION
Municipal and not-for-profit urban systems have been hindered by the
lack of public awareness of district heating and cooling and its
attributes. Where the technology is known, it is often referred to by
a name other than district heating and cooling.
Until recently, the district heating and cooling industry's
outreach and education efforts have been inadequate to the task. Too
much activity has been directed toward lobbying and too little toward
developing the potential market.
More recently, the joint efforts of the district heating and
cooling industry and the U.S. Conference of Mayors have substantially
increased awareness and understanding of the technology and its
attributes among senior municipal officials. Unfortunately, only
limited efforts have been made to encourage such knowledge in the
financial community. The high financial risk assessments for urban
systems can be reduced only by disseminating more information about
them.
o The district heating and cooling industry should undertake a
series of regional seminars in cities where urban systems are
operating. These seminars should focus on the role of district
heating and cooling in promoting energy efficiency and the
redevelopment of central c ities . They should include federal, state,
and local officials, design professionals, bankers, building owners
and managers, business representatives, and community leaders.
o HUD, DOE, and relevant professional associations should support
and participate in these seminars.
Few data are available on the extent and condition of district
heating and cooling in the United States. Despite all the studies
funded by industry and government, the data are still fragmented,
incomplete, and often biased. In part, this reflects the
fragmentation of the industry itself. In part, it reflects the view
promoted by the European experience that district heating and cooling
is limited to those systems that sell thermal energy or cogenerate.
This limited international definition of district heating and
cooling does not reflect the U.S. situation. The technology is found
extensively in institutional settings where the sale of thermal energy
is not a condition of use. There are an estimated 1,000 cities in the
world with some form of urban district heating and cooling. In
comparison, there are an estimated 3,000 U.S. institutional systems.
The latter is probably a conservative figure.
The extent, locations, and scope of institutional district heating
and cooling systems suggest that they may offer a greater potential
for developing urban systems than utilities. The opportunities for
joint ventures between institutional systems and municipalities are
many and unexplored. The Danish experience of creating an urban
system by combining many small systems may have applications in the
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U.S. market. Without data about these systems, an opportunity may be
lost.
o DOE should maintain a data base on district heating and cooling
as a part of its continuing energy information activities. The data
should be consistent, verifiable, and analyzed periodically. The data
base should encompass the institutional applications as well as urban
ones. The information should be readily available to the general
public.
o DOE should fund studies to determine the extent of district
heating and cooling, particularly institutional systems, in the United
States.
o Concerned professional societies, trade associations, and major
public interest groups should actively assist DOE in disseminating
information on district heating and cooling. The focus should be on
encouraging technology transfer, especially for district cooling, to
Europe and elsewhere.
DOE has played a limited role in the International Energy Agency
(IEA), particularly in its district heating committee. This has
hindered the transfer of technology and the development of the
consistent data base discussed above. IEA activities are funded by
either direct or in-kind contributions by the member nations.
o To accelerate the international exchange of data, information,
and experience pertaining to district heating and cooling, DOE should
actively participate as a full partner in IEA district heating
activities.
THE FEDERAL ROLE
While district heating and cooling is widely used by institutions, it
is not often used for urban development by munic ipal officials, urban
planners, and architects. Federally assisted urban renewal efforts in
the 1950s and 1960s may have been a major contributor to the decline
of investor-owned urban systems. The removal of industrial and
commercial customers from central business districts eliminated many
former and potential customers. The trend was exacerbated by the
lengthy rebuilding process and the tendency to equip new buildings
with individual heating systems.
Because of its responsibilities for community development and
because of budgetary realities, HUD has had the lead program
responsibility for community energy projects, including district
heating and cooling. DOE supports HUD programs by sponsoring
demonstration projects.
The HUD and DOE demonstration programs have had a significant
effect on the recent revival of urban district heating and cooling
systems. Federal energy policy has consistently emphasized increased
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self-sufficiency and energy efficiency. The federal government still
has a role in assisting in the accomplishment of these goals.
In particular, DOE has helped develop economic models and
assessment techniques that can simplify the planning for future urban
systems. Similarly, HUD's urban development action grant program has
provided both key funding and encouragement in developing new and
revitalized urban district heating and cooling systems. The
continuation of these efforts at this time is important to the growth
of urban systems.
o HUD should continue to have the lead program responsibility for
district heating and cooling. DOE should continue to support HUD
programs and should expand its research and data programs for district
heating and cooling.
o The HUD community development block grant program should be
amended to encompass projects that enhance the ability of communities
to conserve and make more efficient use of energy. District heating
and cooling should be among the eligible activities specified.
o DOE and HUD should prepare and disseminate broadly a concise
topical review of the district heating and cooling assessment program
as a follow-up to this report. The review should be written for
decision makers, not technicians, and should take into account
contacts, technical assistance sources, available technical assessment
studies and economic models, funding sources, and legislative and
regulatory initiatives. Complete case studies of cities in the
assessment program should form the basis for the review.
FINANCING
The municipally owned and not-for-profit urban district heating and
cooling systems have experienced difficulties in securing financing to
construct and operate the systems during the start-up phases. High
interest rates certainly add to the projects' costs, but the largest
problem is the unnecessarily high risk assessments levied on these
systems. The risk assessment is expressed in the form of additional
guarantees or liens over and above the value of the systems themselves.
Municipal participation in urban systems usually involves the
issuing of either revenue or general obligation bonds. With revenue
bonds, the system's revenues are used to meet the bond payments as a
first right. General obligation bonds are paid from the
municipality's general fund, which is based on local taxes, fees,
interest on investments, and other earnings. In either case, the
bonds are guaranteed by the full faith and credit of the municipality.
For district heating and cooling systems, a further guarantee is
required. Customers must sign 20- to 30-year "take or pay" contracts,
which means they guarantee that they will remain customers of the
system for the term of the financing or pay an annual penalty equal to
the cost of the service if they fail to use it. Under the law, the
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agreements may be considered long-term liens against the users'
property and may be an important factor in the future sale,
alteration, or demolition of a structure.
In contrast, institutional systems are financed either by revenue
bonds, direct appropriations, or both, for government agencies; by
self-guaranteed development bonds, for private institutions; or by
direct borrowing, for commercial or industrial entities. Direct
borrowing is usually the most costly in terms of interest rates.
Two aspects of the institutional f inancial situation are
signif icant. First, financing is relatively simple. Second, such
systems are known by names other than district heating and cooling.
Under other names they are considered an ordinary and common energy
system used in institutional complexes and have been financed without
the risk assessments applied to new urban systems.
The costs of financing and fuels are not the critical issues for
institutional decision makers. The lower cost of operations and
maintenance, fuel flexibility, and energy efficiency are the key
determinants.
o The district heating and cooling industry, trade associations,
DOE, and HUD should aim their information efforts especially at the
financial community. The goal should be to increase this community's
awareness of district heating and cooling and of the degree to which
investors already support it in institutional settings.
o Special seminars should be held for representatives of the
national financial community. DOE and HUD should support these
seminars.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The technology for district heating and cooling is well understood.
Nevertheless, there are opportunities to improve system components in
ways that would reduce costs and, most importantly, give a competitive
advantage to U.S. manufacturers both at home and abroad. The
international market for district cooling, in particular, could do
well, since virtually all the district cooling is located in the
United States.
The district heating and cooling industry, typical of the
construction industry, is small and fragmented. It has limited
capital and capacity for research and development. DOE recognizes the
importance of research, especially in areas related to district
heating and cooling. In general, DOE research emphasizes more
cost-effective technologies that use local energy sources.
The current DOE research budget concentrates on low-cost, accurate
control and metering systems, combined heating and cooling systems,
retrofit systems, distribution systems, and thermal production
equipment. According to DOE estimates, if the capital and operating
costs of district heating and cooling can be reduced by 10 to 20
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percent, its market potential in the United States could more than
double. The market penetration model developed by the Argonne
National Laboratory estimates that 2.5 quads of energy, primarily in
oil and gas, could be saved over the next 20 years if the market
penetration of district heating doubled (see Chapter 3~. These two
estimates do not include the institutional systems that are by far the
largest segment of district heating in the United States, nor do they
include district cooling or noncogenerating facilities.
o DOE should convene industry, academic, and user groups to aid in
establishing and evaluating its research agenda for district heating
and cooling. Such groups should allocate roles, responsibilities, and
resources among public and private institutions.
o Research should emphasize simultaneous heating and cooling
technologies that will enhance the sales opportunities for U.S.
manufacturers both here and abroad.
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Representative terms from entire chapter:
urban district
