1. Witold Cherubin Adviser to the President of the Energy Regulatory Office HEAT SUPPLY AND COGENERATION IN CEE COUNTRIES – PRESENT STATUS AND PERSPECTIVE OF DEVELOPMENT  Present situation in DH sector  Pricing regulation and taxation  Energy and environmental policy and perspective of DH sector development

2. Witold Cherubin PRESENT SITUATION IN DH SECTOR Country DHeat supply [GWh] DH share [%] Bulgaria 8 777 18 Czech Rep. 40 562 44 Estonia 10 200 40 Hungary 16 024 16 Latvia 9 180 70 Lithuania 10 572 50 Poland 105 000 54 Romania 23 010 24 Slovakia 7 870 40

3. Witold Cherubin PRESENT SITUATION IN DH SECTOR DH networks  heat carrier distribution system  heat production  different technologies and fuels Different structure of primary energy in CEE countries  coal  major fuel for DH systems  about 50 %  natural gas  intensively used  approx. 35 %  dependency on single gas supplier  security of supply  oil share  about 9 %  renewables  increasing share (from 1.5 to 5 %)  wastes & industrial surplus heat  about 1 %

4. Witold Cherubin PRESENT SITUATION IN DH SECTOR Heat demands reduction during last 10 – 15 years  different reasons  DSM & industrial production Energy policies and regulations in several countries  Increasing number of connected customers  Heat production stabilisation (except BG and RO) DH systems modernisation  reduction of heat losses (still in range 10 - 20 %)  beginning of District Cooling implementation  general improvement of DH systems effectiveness

5. Witold Cherubin PRESENT SITUATION IN DH SECTOR CHP production  in some countries 1 – 2 % increase Energy policy  support schemes (micro & small CHP)  New CHP plants & existing plants modernisation  HOB plants replacement by CHP units  Hungary  highest increase of CHP production  favouring small size CHP over a long period  favouring small size CHP over a long period  weighted average CHP share in CEE countries = 55 %  from 35 % in Baltic States to 72 % in Hungary  from 35 % in Baltic States to 72 % in Hungary

6. Witold Cherubin PRESENT SITUATION IN DH SECTOR Different organisational and legal forms of DH Comp.  State owned enterprises  not transformed  Municipal budgetary units  Ltd. Companies owned by municipality  Joint stock companies owned by municipality  Private companies  different type  Various forms of Public – Private Partnership

7. Witold Cherubin PRESENT SITUATION IN DH SECTOR CountryOrganisationOwnership BulgariaCentralisedDifferentiated Czech Republic DecentralisedDifferentiated EstoniaDecentralisedDifferentiated HungaryDecentralisedDifferentiated LatviaDecentralisedDifferentiated LithuaniaDecentralisedDifferentiated PolandDecentralisedDifferentiated RomaniaDecentralisedDifferentiated SlovakiaDecentralisedDifferentiated

8. Witold Cherubin PRESENT SITUATION IN DH SECTOR Movement to a vertical integration  production & distribution  DHC operating one DH system in a single city  decentralised  Some DHC operate DH system in different cities  centralised Horizontal integration with other energy services CHP and DH companies privatisation  Sale of DH shares or DH system as a whole  Leasing of DH plants and/or networks

9. Witold Cherubin PRESENT SITUATION IN DH SECTOR Ownership/Organisation changes  start of DHC restructuring  Economic transformation  related technical activities  energy use effectiveness  decrease of environment pollution  increase of quality and reliability of heat supply  improvement of customer’s services  Existence of DH schemes  opportunities for :  CHP production development  integrated supply plans  incineration plants, waste heat use etc.  DH systems modernisation & buildings thermo-modernisation  heat losses reduction  heat production/demand decrease

10. Witold Cherubin PRESENT SITUATION IN DH SECTOR Similar trends in DH sector restructuring  improvement of DH schemes efficiency and profitability  change of fuels structure  growth of gas and renewable share  CHP development  small plants especially  investments on supplies and demand (DSM) sides Different financial sources  own national funds  loans from national and foreign banks  private investors  direct foreign investments Different financial mechanisms  preferential taxes  CHP encouragement  financing by third party

11. Witold Cherubin PRESENT SITUATION IN DH SECTOR Country Investment Funds/Type of investments Bulgaria WB and EBRD loans  mainly DH networks Czech Rep. Mainly own funds & EU funds & commercial banks Estonia Own funds & EU funds  mainly RES Hungary Own funds & EU funds  mainly CHP Latvia Own funds (public & municipal) & EU funds Lithuania Own funds & EU funds & WB, EBRD loans Poland Own funds & EU funds & WB, EBRD loans and other Romania Own funds & EU funds & WB, EBRD, EIB loans Slovakia Self - financing

12. Witold Cherubin PRICING REGULATION AND TAXATION Pricing  crucial parameter of economic transformation  Extremely low heat prices in the past  DH sector subsidising in CEE countries  consumer payments  small lump sum (per m 2, per person)  Recently DH prices moved to cost reflection  two component tariff structure started to become standard  measurement implementation  great effort in some countries  individual heat costs allocation & room temperature control  Lack of measurements in some countries  lump sum use

13. Witold Cherubin PRICING REGULATION AND TAXATION NoCountry Heat price (exc.. VAT)  [€/MWh] 1Bulgaria 22 (average) 2 Czech Republic from 25 to 75 3Estonia 30 (average) 4Hungary from 25 to 50 5Latvia from 18 to 33 6Lithuania 32.75 (average) 7Poland 36 (average) 8Romania 19 (average) 9Slovakia 47.40 (average) 10Austria 53.84 (average) 11Denmark from 40 to 50 12Finland 42.20 (average) 13Germany 54.86 (average) 14Netherlands 53.45 (average) 15Norway 51 (average) 16Sweden 48 (average)

14. Witold Cherubin PRICING REGULATION AND TAXATION DSM & reduction of industrial activity in CEE countries  heat demand decrease  systematic rise of heat prices  DH sector subsidising in CEE countries  Low real income of the population  ability to pay heat bills  heat costs  60 % accommodation related payments  Disconnecting problem  industrial and residential consumers  in some countries (H) industrial customers only  serious situation in RO  21 % households disconnected  small DH units closed down in many towns  small DH units closed down in many towns  40 DH companies collapsed during last 2 years  40 DH companies collapsed during last 2 years  recently  program for DH sector rehabilitation  recently  program for DH sector rehabilitation

15. Witold Cherubin PRICING REGULATION AND TAXATION Heat tariffs  set or approved by regulatory bodies  national level (BG, CZ, EST, LT, PL and RO)  municipal level (H, LV, SK)  not guaranteed independence  national regulator  more effective option  Regulation  supplier and customer interest balancing  covering reasonable (justified) costs of heat supply  consumers protection against supplier’s market power  cross – subsidies elimination  Mainly „cost plus” regulation  incentive regulation in some countries (CZ, EST, LT)  trend toward „price cap” regulation (CZ, EST)

16. Witold Cherubin PRICING REGULATION AND TAXATION Alternative energy sources  heat supply availability  pricing policy adjusted to market conditions (competitive heat prices)  main competitors  individual gas heating; rarely oil & electricity Lack of real competition in heat supply  artificially low gas and electricity prices for some customers  tariff structure favors small consumers  social & political reasons  cross subsidies between different categories of customers  direct competition between NG and DH networks (CZ, EST, H, LV, LT, RO, SK)  buildings connected to NG & DH networks  disconnection problems in DH sector Municipal (local) energy planning  in some countries optimisation of energy supply  Local Energy Planning (EST)  Local Energy Plan  “zoning” of the city area between NG and DH networks  compulsory connection to the DH or NG networks in defined city area

17. Witold Cherubin PRICING REGULATION AND TAXATION Specific problem common for CHP production  e.g. Hungary  electricity market liberalization influence on heat prices level  electricity market liberalized in 2004  open for all consumers except dwelling  CHP plants often not belong to the DH Company  CHP owners interested in competitive (low) electricity price  large CHP plants sell electricity at low prices and heat at high prices Favourable legislation for CHP plants < 50 MW  obligatory purchase and guaranteed electricity price  significant reduction of heat prices

18. Witold Cherubin PRICING REGULATION AND TAXATION

19. Witold Cherubin ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVE   National energy policy and legislative framework   direct or indirect influence on CHP/DH sector   driven mainly by EU Directives   EU legislation  different national implementation   more or less positive results in CHP/DH development   EU energy & environmental policy  EU Directives   new EU legislative initiatives

20. Witold Cherubin ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVE  Directive 2003/53/EC  electricity internal market  Directive 2003/55/EC  gas internal market  Directive 2001/77/EC  promotion of electricity produced in RES  Directive 2002/91/EC  energy performance of buildings  Directive 2003/87/EC  greenhouse gas emission trading scheme  Directive 2004/8/EC  promotion of cogeneration  useful heat  Draft Directive on energy end-use efficiency & energy services

21. Witold Cherubin ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVE Legislative framework

22. Witold Cherubin ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVE Energy policy  sustainable development & security of supply Different legislative framework for energy sector several countries  single Energy Law covers all different sectors some countries  sectoral Laws for different energy sectors EU policy concerning CHP/DH sector  CEEC implementation before Directive 2004/8/EC  CHP development schemes after Directive 2003/87/EC  National Allocation Plans till 2007 competition with individual heaters  CHP/DH “penalized”  individual installations not covered by Directive  CHP/DH development  allowances purchase  costs increase

23. Witold Cherubin ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVE CHP support mechanisms

24. Witold Cherubin ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVE Limited possibilities to build up new DH systems Existing DH systems modernization  costs optimization improvement of energy efficiency on supply side  lower costs  production  fuel use decrease & fuels basket optimization  transmission & distribution  heat & water losses decrease improvement of energy efficiency on demand side  lower heat use  improvement of heat supply control in substations and buildings  heat supply measurements  buildings  cost allocation  flats maximizing of existing capacity use  customers connecting  local HOB plants liquidation  different fuels  new buildings  different customers  commercial; residential

25. Witold Cherubin ENERGY & ENVIRONMENTAL POLICY and DH SECTOR DEVELOPMENT PERSPECTIVE Custome’s payments  according to heat use (measurements) operational costs optimization  fuel costs  50 - 70 % maintenance costs reduction Subsidies elimination  cross and direct - subsidizing institutional support for poor households  removed from DHC Gradual heat prices increase  heat supply costs covering Pricing evolution  two-part tariffs & new elements in future environmental or fuel element rational CHP electricity purchase procedures EU environmental policy  CHP/DH sector “penalized” competitive individual heaters not covered by Directive DH development  allowances purchase  supply costs increase