The Argayash, which has a production capacity of 195 MW of electricity and 669 MW of heat, was commissioned in 1954. Credit: Fortum

The need to refit old district heating systems is making CHP providers upbeat about their market in Russia, where rising energy demand is prompting power companies to increase the efficiency and reliability of their CHP/district heating infrastructure, reports Richard Baillie.

Russia uses combined heat and power (CHP) generation extensively; it currently accounts for about a third of installed electricity generating capacity. Russia has more than 700 electricity plants with a total generating capacity of 215 GW. Of this, thermal electricity plants and CHP represent 68% (145 GW) of installed capacity.

Russia also has the largest and oldest district heating sector in the world. Already more than 100 years old and huge, it totals almost 500 CHP stations, 200,000 km of pipeline network and more than 65,000 boiler houses.

But Russia’s municipal district heating systems are a legacy of the Soviet era and growing competition from decentralized sources of heat means many Russian CHP plants run at only 40–45% of their capacity. District heating networks supply heat to about 80% of Russian residential buildings and about 63% of the hot water used by Russia’s population.

Generation from CHP plants over the past 20 years has declined by more than 30%. Total final consumption of heat in Russia is running at almost half the levels of 20 years ago, largely due to a dramatic drop in heat consumption by the industrial sector mainly during the 1990s when Russia’s GDP almost halved during its transition to a market economy.

Since 2000, heat consumption has continued to drop due to the unreliability of the district heating systems and heat tariffs calculated on a basis that is not cost-reflective. As the average cost of the heating system has increased, many companies have found it economic to seek decentralized sources of heat.

Araceli Fernandez Pales, analyst at the International Energy Association (IEA) in Paris, sees the plunge in heat produced in Russia as due to falling GDP growth in the 1990s. ‘This lower output of heat has continued and reflects an increasing use of decentralized heat systems as a more reliable source of heat or as a source of top-up heat when the district heating system does not provide adequate supply,’ she says.

Indeed, during the period from 1998 to 2007, state CHP plants (part of the RAO UES state monopoly before the completion of the privatization process) accounted for a declining share of heat produced in Russia, slipping from 35% to 31%. About 60% of all heat produced in Russia was consumed in the residential and commercial and public sectors.

According to Pales, barriers to the future development of CHP in Russia are directly linked to the lack of government focus on the many challenges facing its heat sector, including the need for the refurbishment of the ageing district heat supply network to reduce system losses and enhance reliability, heat tariffs to cover the full cost of supply and an effective government strategy to promote CHP.

Certainly, there is little doubt that Russia’s district heating systems have great potential for energy savings, especially through cutting losses from the network and implementing energy efficiency measures. ‘Given an estimated 20–30% of heat is lost through the heat distribution network before it reaches the end consumer, focusing on reducing these network losses will be an essential first step,’ says Pales. ‘Only after this stage is completed will the installation of meters and heat-regulating devices to allow for demand-side management be effective.’

The need to refurbish and invest

Since the early 2000s there has been increasing momentum in refurbishing existing boiler houses with gas turbines or smaller scale industrial CHP units with a capacity of less than 25 MW. Most retrofitting to date used foreign technology. About 120 of these units are now operating across Russia.

Bashkirenergo in Bashkortostan and Tatenergo in Tatarstan are the leaders in using micro or smaller-scale industrial CHP in Russia. These units have resulted not only in more efficient use of natural gas as an input fuel but also in lower emissions and a smaller impact on the environment. This trend towards smaller–scale, gas-fired CHP in Russia seems positive as efficiencies are likely to be over 80%, which is the sort of efficiency that the IEA believes Russia should be aiming for.

And while low investment and inadequate maintenance in Russia during the 1990s severely reduced the reliability of heat supply in many systems, below-cost pricing has also contributed to under-investment and poor maintenance, with an estimated 60% of the Russian network in need of major repair or replacement. In fact, more than half of the 200,000 km network of municipal heat distribution pipelines is estimated to have already passed its technical life expectancy. Some pipeline systems are 40–50 years old – way beyond their 16–20 year technical life expectancy. About 25–30% of the system is considered in critical condition.

For this reason it is estimated that a minimum of 10–12% of pipes need to be replaced every year. But each year only about 1% of pipes are changed on average across the whole Russian network. Raising the investments needed to replace, repair and maintain this immense network is the key challenge facing Russia’s district heating system.

Russia’s CHP/district heating infrastructure urgently requires modernization

But identifying the need for refurbishment is one thing; actually doing something about it is another thing entirely. Scott Nolen, executive product manager at GE Jenbacher, Austria, sees this situation as a big opportunity for GE. ‘Russia is a big and growing market for us and there’s a real good economic model around district heating at the moment as the Russians are looking to upgrade old Soviet-era boilers, some of which are 20, 30 or even 40 or 50 years old.’

Chelyabinsk CHP-2 was commissioned in 1962 and modernization is under way Credit: Fortum

Rebuilding the heat network

Higher heat tariffs would help to cover maintenance costs for refurbishing heat supply networks. As the maintenance of the systems improves, the overall efficiency of the system would rise with significant saving in heat losses.

In 2009, the refurbishment of the heat network of the Mitish suburb of Moscow led to the reduction of heat losses from 30% to only 12%. Were this to be repeated across the whole of Russia, this would equal a savings of almost 20% in input fuel to the heat sector or 30 billion m3 of natural gas.

An IEA policy document concludes: ‘Russia would benefit from a long-term outlook of the heat sector with clear policy formulated to guide this sector’s development over the next 20 years. The current policy experience characterized by isolated investment and technology fixes without considering the broader need for market reform and policies to support the sector’s sustainability has led to a situation where Russia’s heat supply is unreliable and inefficient.’

The tariff dilemma

Heat tariffs in the residential sector are not cost reflective. Heat costs and tariffs in Russia vary widely from $4 to $250 per Giga calorie (Gcal). The prices for heat provided by regional power utility companies are set by the Federal Tariff Service, a government agency. Because residential and commercial customers do not have meters, they are typically charged by a formula based on floor space, with the charge frequently included in their rent. Heat prices are set for a two-year period in the form of a minimum floor and a maximum cap. This provides some predictability of heat price evolution.

The final price level is established by Regional Energy Commissions. These commissions also set prices for heat generated by industrial CHP and boilers. As a rule, municipalities are no longer responsible for setting heat prices. The heat tariff setting system was changed at the end of 2005 with a cap in the growth of heat tariffs established for each region by the Federal Tariff Service to control the level of national inflation.

Clearly this is no long-term solution as the system provides no incentive for investing in the sector. Over time and to ensure the long-run operation of the system, final consumers will need to pay tariffs that cover their full costs. Ultimately, billing should be based on actual consumption, even if the lack of individual metering and control systems will make this difficult in the foreseeable future.

The cost of installing meters and heat regulators is yet another barrier to the process, especially given the low incomes of many Russian residents. As a result, heat tariffs have been kept low for political reasons, given the inability of most of Russia’s residential population to pay higher rates. The downside is that these low rates also reduce the sector’s attraction to investors.

To further complicate matters, heat tariffs based on norms, as opposed to actual use, hamper the effectiveness of measures to raise the efficiency of heat use and to reduce residential demand. The continued practice of cross-subsidizing heat tariffs between industry and the residential sector has driven some industries away from large CHP heat sources to decentralized heat boilers or mini-CHP.

That said, and confronted with the pressing necessity to modernize the district heating sector, Russia, with the Federal Heat Law, adopted a new legislative basis and tariff structure for heat supply during 2012.

The draft law states: ‘The new tariff approach is aimed at enabling the realization of energy efficiency and renewable energy policy objectives. Energy efficiency improvement and the priority development of CHP are central components to this new structure. Renewable energy sources are indirectly included in the concept of energy efficiency and fall within the scope of the modernization programme.’

It may sound fairly promising but Dr Anatole Boute, Russian energy specialist at Aberdeen University, says the success of the new law depends on how well it is implemented across the country. ‘With respect to tariff setting, the ultimate question is to what extent the authorities will tolerate the short-term price increases that are necessary to finance the capital costs of energy efficiency investments or the operating costs of biomass projects. In this context, what costs will the tariff authorities consider as economically well-founded and justified? When balancing investor and consumer interests, tariff authorities must pay particular attention to the long-term influence that energy efficiency improvement measures have on heat prices.

‘By generating energy savings, these measures contribute to the future affordability of heat supply. These investments reduce the impact that primary energy price increases and volatility can have on end-consumer prices. Preventing investors from recovering their capital costs and earning reasonable returns will delay the modernization of the heating sector, stimulate “boileralization” and expose consumers that cannot afford individual boilers to higher heat prices in the long term,’ adds Boute.

While there is no doubt that the new heat law is a step in the right direction, it is also clear that a far more co-ordinated strategy is needed in Russia to promote high-efficiency CHP both in terms of residential and industrial applications. Overall, there remains a clear and pressing requirement for a strategy that includes stable financial and fiscal support for district heating system investments that reflect the full value of the long-term environmental and economic benefits.

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