been privatized. Price increases following
deregulation have raised calls for reregulation. Determination of fair district heating
pricing is complicated by deregulation of
the electricity and natural gas markets and
the increasing internationalization of power
and gas grids. With district heating pro-duction intertwined with the power and gas
systems, costs have in some cases been shifted to district heating.
Sometimes governments mandate the
use of district energy within a specific development area. Korea has used this approach,
as has Singapore. In such cases, monopoly
power is conferred on the utility provider,
and some type of rate regulation is typically implemented.
Challenges in the
Middle East
District cooling in the Middle East has
rapidly developed as a commercial activity
and is not regulated except via normal
permitting processes. Generally, district
cooling companies have negotiated long-term agreements with individual building
owners or with master developers of large,
multiuse real estate projects.
District cooling development is occurring against a backdrop of strong growth
in real estate development and rapid change
in infrastructure related to these developments. Governments are struggling to keep
pace with the necessary power, water,
wastewater treatment and transportation
infrastructure to support new developments.
Reviewing, coordinating and approving
these multiple and overlapping infrastructure projects is a difficult challenge for
national and local governments. With district
cooling becoming an important part of the
infrastructural landscape, governments also
desire to make sure that these systems are
constructed and operated in a manner that
is economical, minimizes impacts and provides high reliability.
Gulf governments are recognizing the
valuable contribution that district cooling
makes toward the goal of managing peak
power demand and are also beginning to
look for ways to increase this fundamental
benefit of district cooling. The Dubai Electricity
and Water Authority (DEWA) is now requiring district cooling systems to incorporate
thermal energy storage (TES), although
the extent or characteristics of the TES are
not specified.
Governments are also beginning to
encourage district cooling systems to reduce
reliance on use of scarce water resources.
Earlier this year, DEWA wrote to all district
cooling providers operating in the emirate,
inviting them to use its treated sewage
effluent in their cooling towers.
Governments in the Middle East
are struggling to keep pace with
the necessary power, water,
wastewater treatment and
transportation infrastructure to
support new developments.
At the same time, ongoing subsidization of power and water rates in the region
is exacerbating shortages by pricing these
commodities below their costs and thus
stimulating demand. Although Saudi Arabia
is experimenting with time-of-day power
rates, which helps move rates closer to a
cost basis, generally little is being done to
encourage reduction of electricity demand
and consumption through cost-based prices.
Near-Term Recommendations
In mature district energy markets,
governments should resist the temptation
to reregulate rates. What is needed, however, are policies to ensure that deregulation of power and natural gas markets is
not inappropriately shifting cost burdens
to thermal consumers.
In the rapidly growing district cooling
markets in the Middle East and Asia, district
cooling should continue to be an entrepreneurial business governed by contracts
between district cooling providers and customers. Rate regulation of district cooling
would choke off this industry at a time when
governments desperately need the power
demand relief that these systems provide.
In these new markets it may be helpful to implement a system of licensing district cooling providers. Where the entire
district cooling system is contained within
a parcel of land owned or controlled by a
private entity (as is the case with some
major developments), no government regulation is appropriate. However, where
district cooling providers must use public
rights of way to provide service, the most
basic regulatory approach would be to
license district cooling companies to serve
a specific geographic (franchise) area. Licenses
could be granted based on an application
by the district cooling company that
addresses:
Identification of area to be served.
Identification of potential customers.
General description of existing and
proposed facilities, including locations,
capacities and types of equipment and
facilities.
Statement of qualifications for owning
and operating a district cooling utility
business, including financial strength
and operating track record.
The district cooling utility license may
also include provisions addressing periodic
reporting of financial results and utility
performance relative to reliability.
Assurance of the long-term viability of
district cooling companies can be addressed
via the qualifications process and ongoing
financial reports. Technical reliability can be
addressed through normal engineering
professional practice, adherence to IDEA
Best Practices design principles and reporting
of utility performance.
Governments will undoubtedly seek
to levy fees to cover the cost of licensing
and perhaps a fee for operating in the
public rights of way. However, it is critical
to avoid competitive distortions through
the combined effect of government fees
and the tariff structure for electricity used
to produce cooling. In some cases, franchise fees have resulted in a competitive
disadvantage for district energy systems if
fees are levied for all types of utility services
(for example, electricity and district cooling)
at the same percentage rate. This is inappropriate because district energy gross
revenues include many costs beyond fuel
or electricity inputs; they also include costs
for capital, labor and maintenance. Therefore,
a lower percentage fee level is needed to
avoid competitive distortions with other
alternative means of cooling (such as individual building electric chillers).
Integrated Utility Planning
In the long term, government policies
toward utilities should move in the direction
of encouraging integrated planning of all
utilities including power, cooling, heating,
gas, water and wastewater treatment.
Successful integration would reduce envi-
