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Executive Summary District heating and cooling systems are thermal energy networks that distribute hot water, chilled water, or steam through insulated pipes to serve commercial, residential, institutional, and industrial energy needs for space heating, space cooling, and industrial purposes. District heating and cooling systems permit energy, as distinguished from fuel, to be bought and sold as a commodity. District heating and cooling systems have several attributes that give them an advantage under certain conditions over competing energy systems. By replacing many individual boilers with one central heating and cooling source, they can increase effective building space, reduce building construction and operating costs, and contribute to improving air quality. They increase energy efficiency by encouraging the cogeneration of electricity and thermal energy. District heating and cooling systems can also use a variety of fuels, including otherwise hard-to-dispose-of municipal solid wastes. This flexibility allows the substitution of cheaper fuels for more expensive oil and gas. In general, a number of factors contribute to the success of district heating and cooling systems. These include a cold climate (for heating systems), a densely populated area or core of high-use buildings, a source or sources of relatively cheap fuel nearby, high prices for competing oil and gas, the technical ability to cogenerate heat and power or to use other fuel sources, and the desire to reduce dependence on imported oil. The successful implementation of a system also requires capable management, reasonable financing costs, a commitment from all participants, and political leadership. These factors vary in their significance from country to country and from City to City. Some may be crucial while others count for .n ~ ,^ _ ~ _ little in deciding whether and which system to build and in determining how successful it will be. They may also vary in importance depending on whether a municipal government or an institution will build and operate the system. 1
2 Historically, two types of district heating systems have developed in the United States. First, steam heating systems were developed beginning in the late nineteenth century to serve a variety of users and buildings located in urban areas, typically in the central business district. Many of these systems were owned and operated by the local electric utility. In recent decades, the older urban systems have declined in number and amount of energy they supply. Power plants have been located away from central cities, cheap~oil and gas have replaced coal as a fuel, environmental concerns have limited fuel choice, and individual boilers have replaced central heating systems. When operated by investor-owned utilities, the older urban systems have been regulated by state utility commissions in ways that often have made them uncompetitive relative to alternative fuels and heating systems. The second type of system serves institutional users. These include college and university campuses, military bases, industrial parks, multifamily residences, and office, medical, and commercial complexes. Institutional systems serve a single user, a single or few related buildings, or a complex of buildings. In sharp contrast to the urban systems, institutional systems have grown significantly in the last two or three decades. Until recently, however, there was little or no data on which to judge their extent. One recent informal survey found 4,900 miles of thermal piping on U.S. Army installations in the United States. Another found 160 institutional systems in the Washington, D.C., and Baltimore metropolitan area. Among the places served are the White House, the U.S. Capitol, the National Zoo, and Washington's new subway system. More recently, a third type of district heating and cooling system has emerged. These are nonprofit, usually municipally incorporated or owned systems that serve many and varied urban users. Many have replaced older urban systems operated by investor-owned utilities, as in St. Paul, Minnesota. In other cities, groups of users have combined to form nonprofit cooperatives that run systems formerly operated by investor-owned utilities, as has happened in Pittsburgh and has been proposed for Rochester, New York. These new urban systems have been assisted by demonstration projects sponsored by the U.S. Departments of Housing and Urban Development (HUD) and Energy (DOE). HUD, in particular, has used district heating and cooling as a tool to help cities with their economic and community development. DOE began sponsoring cogeneration and district heating projects in 1977 that retrofitted power plants in central cities. Another boost came from the Public Utility Regulatory Policies Act (PURPA), which requires-electric utilities to purchase power from small power producers and cogenerators at rates equal to the "avoided cost" of generating equivalent amounts by conventional means. Meanwhile, district heating systems have spread throughout much of western and northern Europe in recent decades. The Europeans tend to view district heating as a system for the sale of thermal energy to
3 increase energy efficiency, reduce dependence on imported oil, and improve air quality. So far, however, few European cities have adopted district cooling. Both the older investor-owned and the newer institutional systems represent valuable community resources around which new or expanded urban systems could be built. Where possible, existing energy infrastructures and financing instruments should be used. Several of the newer urban systems referred to above have indeed done just that. Why has district heating and cooling grown so rapidly in institutional settings in the United States and for urban uses in Europe while the investor-owned urban systems in the United States generally continue to decline? Clearly, the latter face certain impediments that do not affect the latter to as great a degree. For one thing, urban systems are costly to build. Several years of construction are required before they begin to generate revenue, which makes financing particularly important. High interest rates may prevent district heating and cooling systems from offering the lower prices that make them attractive. In addition, lenders may require that a city commit its "full faith and credit" to a system and that all customers sign binding 20- or 30-year agreements to buy energy from the system. Tax-exempt or general obligation bonds can be used to finance projects, but both require complex legal and financial arrangements. On the federal level, Congress recently placed a per state limit of $150 per capita on industrial development bonds that any municipality or state agency may sell. This stipulation could make financing of district heating and cooling projects even more difficult. Fixed costs represent about 80 percent of the cost of delivered energy from district heating and cooling systems, which makes their success more heavily dependent on interest rates. As much as two-thirds of the fixed costs may be for the distribution system. Thus, most systems serve high-use customers within specified geographic areas. In comparison, building owners can incorporate the cost of a boiler in the mortgage financing for their entire structure, in effect hiding its true cost and the cost of its associated floor space, which in most cases does not emphasize the full cost of the heating and cooling elements. When owned by an investor-owned utility or when designed to serve a variety of general users, district heating and cooling systems are usually subject to economic regulation by state and, in some cases, local public utility commissions. These commissions often set rates, fix returns on investment, and determine areas of service in ways that make district heating and cooling unattractive to potential investors and uncompetitive with other energy systems. More consistent regulatory policies from state to state are needed. A better understanding of the highly competitive environment in which district heating and cooling operates might lead state governments to reduce the extent of economic regulation to allow a
4 free marketplace for heating and cooling. The development of a model regulatory approach would help. Further, the "bubble policy" adopted by the U.S. Environmental Protection Agency (EPA) does not adequately reflect the air quality benefits gained from replacing many individual untreated boilers with one treated central heating and cooling plant. EPA's policy may need some modifications if cogeneration and urban district heating systems are to expand in number. The ability of district heating and cooling to compete with individual boilers is also affected by the variety of federal, state, and local taxes levied on investor-owned utility systems. For example, many systems must pay franchise taxes that do not apply to those who install individual boilers or heat pumps. In addition, some utilities are taxed both on the fuel they buy and on the energy they produce from burning that fuel. In general, too many financially pressed state and local governments view utilities as sources of revenue rather than as potential community resources. Some cities charge the utilities a fee each time they want to excavate a street to lay pipes to extend or repair a district heating and cooling system. Instead, that piping network could be viewed as a way to revitalize a downtown area, for example, by attracting commercial development and businesses to relocate where their energy costs will be lower. In part, the regulatory, financing, and tax problems facing district heating and cooling have stemmed from the lack of public awareness of its benefits. This is due to the scarcity of reliable data on its prospects and current extent. As a result, investors often term such systems "high risks" and city officials tend to overlook their potential. ~ To help resolve the data problem,-DOE should collect and disseminate information on district heating and cooling. This would help create an unbiased source of data that could be used for research, analytical, and project-support purposes. At the same time, the professional and trade associations that represent the again-growing industry should expand their public education efforts by disseminating more information, particularly to the financial community. Currently, to overcome these and other impediments, complex political, legal, and financial arrangements are required. This has often led to innovative institutional arrangements, as in St. Paul, Trenton, and Baltimore, that depend on strong leadership from a mayor or business community. Coordinated policies are also required toward district heating and cooling on the part of various federal, state, and local government agencies. For the most part, institutional systems do not face these impediments. Since they are not investor-owned utilities, institutional systems are not subject to regulation. Since many are run by nonprofit entities or agencies of governments, such as a university or the U.S. Army, they are not subject to taxes. And,
s since most serve just one customer, they do not require the same complex legal, political, and financial arrangements for implementation. In contrast to the impediments discussed above, the technology for district heating and cooling is well understood. Nevertheless, improvements could be made that would increase its efficiency, lower costs, and help make U.S. manufacturers more competitive in both domestic and international markets. In particular, research is needed on improved meters, nonmetallic piping, more effective insulation, low-temperature systems, and combined district heating and cooling systems. Also needed is an improved capability for technology transfer. Information on research and its applications needs to be better circulated among trade, professional, industrial, and client groups. DOE and HUD can help by sponsoring meetings and workshops, and by participating fully in the district heating and cooling activities of the International Energy Agency (IEA) and other similar organizations.
