HOT|COOL NO.2/2016 - "District cooling in the Middle East"

In this edition of Hot Cool, you will find articles describing the general development of district cooling in the Middle East but also some specific projects like the metro project in Qatar and the Etihad Towers in Abu Dhabi.

N0. 2 / 2016



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FROM POWER PLANT TO CONSUMER CONNECTION Grundfos is one of the world’s leading suppliers of solutions across the full range of pump applications. In Grundfos District Heating, we think beyond the pump. We look at the entire system – from power plant to end user – to

provide you with the most intelligent, reliable and adaptable solutions possible. This approach has made us a preferred partner for district heating companies across the globe, and we look forward to helping you as well. To learn more go to


Lars Hummelmose, Managing Director, DBDH THE COLUMN


District cooling is an almost 50 years' old and well-proven technology. It started in the US, moved to Europe and the Middle East in the 60s. It started out slow but today it is a multi-billion dollar industry that has grown by 60% the last decade. Today, the Middle East is leading the way, by large new installments of district cooling and today district cooling is counting for 17% of the cooling market, and 32% of the total worldwide capacity is installed in the Middle East. The district cooling market in the Middle East is expected to grow annually with more than 15% the coming years. The new district cooling projects in the Middle East are enormous, and the preferred technology by many developers. The most prestigious development projects in the Middle East have district cooling installed. This counts for landmark projects such as The Pearl Qatar, Dubai Metro, Lusail Development, Riyadh´s King Khalid International Airport and the large district cooling project of Mekkah, in the kingdom of Saudi Arabia. All these projects are due to the fact that district cooling is a sustainable and efficient technology that reduces the use of electricity and make it possible to use electricity at off-peak hours. In this edition of Hot Cool, you will find articles describing the general development of district cooling in the Middle East but also some specific projects like the metro project in Qatar and the Etihad Towers in Abu Dhabi.

The global demand for cooling is exploding and it will continue to grow. It is expected that within the next 40 years, the use of energy for cooling will be larger than the amount of energy used for heating. Due to new type of buildings with much glass and due to large internal heat sources from computers, almost all office building globally needs cooling. Even in Europa, it is expected that from now until 2030, the use of energy for cooling will increase with 72%. But, the largest increase in use of cooling will in the beginning be in the Middle East, then in the growing economies in Asia – first China and later followed by India. Also as the economy grows in Africa, there will be increased need of cooling. The challenge with cooling is that in most places cooling is produced by individual air-condition that use electricity at the same time, in a none intelligent way as any other appliances. That puts an enormous pressure on the peak load capacity of the power system. In some cities the demand for air-condition takes up to 70% of electricity demand. A part of the solution is to use intelligent district cooling. That is district cooling with storage facilities, with cold-water tanks and/or ice storages. Hereby the cooling can be produced at off-peak hours for the power system and thereby it can take off the largest peaks.

Please read on in this Hot Cool magazine and get inspired.



By Peter Sonne, Senior Advisor, Sweco

By state-of-the art district heating and environmental standards we normally think of preinsulated pipes in the ground, automatic control systems, and switching from dusty coal to CHP based on more clean fuels. But the technical and financial conditions have turned these assumptions upside down. In the tundra with permafrost it is impossible to lay pipes in the ground. The soil (permafrost) is constantly on the move. Anything put down in the ground runs a serious risk of being destroyed - the same problem with pipes for fresh water. They cannot be laid in the ground and would soon freeze from the same reason. Neither can the pipes be installed above ground, as the water will soon freeze during the long winter. The fuel situation is also a chal lenge considering the environmental impact requirements. For a long time, the fuel oil has been more expensive compared to coal. Fuel oil must be supplied over long distances whereas coal is a local commodity. So in order to reduce the cost of heat, a fuel switch to coal was decided. By constructing larger boiler plants based on coal, the environmental requirements can be met by the large-scale production. Of course, the boiler plants need additional flue gas cleaning systems, which are also part of the project. By installing large boiler plants, the network subsequently also needs to be bigger, with more consumers connected. As a concept for the projects, transmission systems were installed, connecting all the existing smaller networks with the worn-out boiler plants. The worn-out boiler plants are dismantled and the existing smaller network are insulated.

Most people and especially women likes to decorate themselves with gold and diamonds. Jewelries are important issues of modern living. But where do these come from? We know that many diamonds are found and developed in South Africa. Brazil and Australia also have their production industry. But the fact that a major part comes from difficult approachable areas in Siberia is a secret to many people. With the extreme climate conditions, with temperatures down to below -60°C and permafrost, extraction of the precious materials is undertaken under huge difficulties, but by people who have decided to live and work under these conditions. The importance of the industry in Siberia has always been recognized by the leaders in Moscow, and the income appreciated. For decades, people were forced to stay and work in these areas, but nowadays most people live and work there voluntarily. Because of the sparse forest growth; most wood for house construction is imported from southern regions. Early on, the administration in these villages realized that centralized boiler plants were to prefer instead of individual stoves. The existing boiler plants and heating systems in the villages normally cover a handful of houses. The boilers are operated on either coal or fuel oil. In general, all the installations are worn out and the boilers quite inefficient. Poor pipe insulation is also a big problem everywhere. About ten years ago, the government of the Sakha region approached EBRD in London, and a project for rehabilitation of heating systems in a number of the villages in the region of Sakha was agreed on for joint financing with the administration. The project would cover about 30 sites in the region, of various size. The rehabilitation projects should meet state-of-the-art district heating and environmental standards.

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The logistic of the project is more serious than we normally see. As the contractor and his facilities are normally located in the middle of Russia, all equipment is purchased, packed and transported from his premises, and preferably by river, to the locations. The transport route may pass the Pacific Ocean or the Arctic Ocean. When the riverboats meet the ocean, it is necessary to reload the cargo as these boats are only suited for river sailing. So reloading twice is not unusual during the transport. Facing these conditions, the transportation time may be up to three months. During winter, transport is possible on the winter roads, meaning heavy vehicles on the frozen rivers. This is, however, very costly.

In order to overcome the challenge with the permafrost and the freezing water pipes, the project concept is aerial pipes laid on columns and with loops. The fresh water pipe is constructed and insulated together with one of the main heating pipes. For all the network pipes, pre-insulated pipes are applied. The original concept of the heating systems is the open type, meaning that the district heating water also supplies hot tap water. Unfortunately, due to financial reasons, this principle is not changed with the rehabilitation of the systems, and the reconstructed systems are still open systems. In the connecting points (ITPs, substations), heat exchangers are separating the transmission systems from the existing local heating systems. In the substations, modern equipment with plate heat exchangers, Grundfos pumps, Danfoss control systems and Kamstup metering systems are applied, and all working under these extreme arctic conditions. A SCADA system even enables the local manager to monitor the operation on a 24/7 basis. The biggest challenge by realizing the project has not been the principle design and selection of components. Modern equipment for district heating system are well functioning under these extreme conditions. The most serious challenge has been the available contractor to undertake the project and realizing them according to the agreed time schedule.

Combining the fact that most construction work on site can only be undertaken during the short summer period with the fact that transportation last up to three month and the fact that river transport is only possible during summer time means serious planning year ahead. Short construction periods from decision to completion, which are seen in our western societies, and which is normally expected from the client and the financial institutions, are unrealistic. The issue of contractual penalties is often discussed among the participants because the contractors have accepted the time schedules from the tender documents. During these years many projects have been undertaken and new are still issued for contracting. We expect this to be the situation for the next three to five years.

Local contractors are few and without enough experience for realizing such larger district heating projects. Contracting companies that have the experience with such projects are found in the middle of Russia. The same with the supply of materials and components. They too have to be supplied from distant locations.

For further information please contact:

Sweco A/S Att.: Peter Sonne Granskoven 8 DK-2600 Glostrup

T +45 4348 6431 M +45 2723 6431 F +45 4348 6660



By Kristina Lygnerud, PhD University of Halmstad

Taking into account that a majority of the Swedish district heating companies are municipally owned and under municipal jurisdiction, it is interesting to note that municipally owned entities strive to increase commitment, quality and to develop the way that operations are carried out (The Swedish Association of Local Authorities and Regions (SKL), 2012). One tool that has become widely spread and used in the Swedish municipal sector is Lean (one municipality of five in Sweden has ongoing Lean projects: The Swedish Association of Local Authorities and Regions (SKL), 2012). Having worked with Lean in different contexts (healthcare and district heating), my experience is that there are many different ways to use Lean. If used well, the largest benefit resulting from it is the creation of transparent processes. One very relevant process to shed light on in district heating companies is the one of balancing investments andmaintenance. Currently, research is made on the possible mismatch between investment decisions and maintenance levels in district heating companies. One hypothesis is that reinvestments are being undertaken prematurely. Regardless of how large the potential is to enhance internal efficiency through integrated investment/ maintenance strategies, transparency fosters questions and questions trigger change; leading to the much neededmakeover of district heating companies for future survival.

The preconditions for district heating companies are fierce and district heating companies cannot afford to let heat go up the chimney. It is not feasible to let inefficient operations, as a result of habit, remain and it is not possible to create long-term customer relationships without revisiting the way that customer value is created. District heating providers are under pressure: Fuels risk becoming scarce, expensive or obsolete as a result of political decision making. Customers want more than heated space and water in the tap, and energy savings shrink the heat market. The circumstances do not allow for inefficient usage of resources and inefficient activities. Insufficient internal communication, inefficient production planning, blunt sales, incorrect measurements of consumed quantities of heat, poor follow up of investments, and too early reinvestments are examples of internal inefficiencies that seem to be part of the way that business is conducted in some district heating companies (Lygnerud, 2008 and Lygnerud, 2011). It is risky to keep internal inefficiencies if district heating companies want to stay competitive. Potential to increase internal efficiency District heating companies base their business on fixed assets. A production plant is in use to produce the heat which is distributed in networks to the customers. There is a point at which the demand is too low to make production economically viable. One alternative is then to replace the existing production plant with a smaller one. However, even such a strategy will eventually come to a dead end. Talking to managers in Swedish district heating companies it is not known how long it will take to reach that point. The pace depends on what kind of production is in use - CHP plants will for example become unprofitable fast whereas an old, fossil-fueled boilers might actually benefit from lower demand. Hence, it can take years (a few or many) for the demand to sink low enough to put the companies out of business (Lygnerud, 2011). That heat demand will not decrease overnight is both a risk and a possibility. It is risky because the reduction in heat demand is slow enough to cradle management in safety. It is a possibility to management that is forward looking since it provides the time needed to cut internal inefficiencies.


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Internal efficiency and revisited business models is a possible way forward

Apart from unique features, district heating providers need to be innovative when meeting the customer need. Most district heating companies in Sweden have different models for private customers and for the commercial segment. The latter segment is increasingly becoming differentiated to meet customer needs. Some companies offer their professional customers “comfort” whereas other offer everything from traditional heating solutions to temperature specific packages (Lygnerud, 2011). It should be noted that not all changes in customer demand can be easily met. Customers with two heating alternatives (heat pump and district heating) that use district heating only when the heat pumps are not sufficient are an increasing phenomenon in Sweden. This kind of customer erodes rather than strengthens most business models in use in district heating companies, and a major revision of the way that business is conducted must be made if these customers are desirable long term. The Swedish district heating association, Svensk Fjärrvärme, is actively engaged in research and a large effort has been made to enhance knowledge about business models in Swedish district heating companies. The research resulted in checklists and guidelines for revisiting business models. As a result much attention has been paid to the component of price models in Swedish district heating companies. However, focusing on one component of the business model is not enough for long- term competitiveness and will not create a situation where the customer relationship and customer value are revisited. More work remains to be done, something that an increasing number of district heating companies acknowledge. The work must be undertaken from several, different points of departure. The future, successful district heating provider manages external risks efficiently, operates efficiently and establishes customer value in such a way that customers remain loyal to the local and environmentally friendly option.

It is known that business models in use that still yield profit tend to linger on even if they are partially obsolete. One hurdle is fear amongst management that the existing revenue flows will be distorted, which impacts the results in the short term. Taking the many challenges that district heating companies face into account it is no longer possible to base business on economies of scale. The business model of district heating must be updated and the changing customer demand must be met by a revisited customer relationship. District heating companies have some unique selling points. District heating is one of the main reasons why Sweden has been successful in reducing emissions of carbon dioxide. Through the switch from fossil to renewable fuels, more efficient usage of energy, combined heat and power production, and reuse of residual heat and heat from waste incineration, the total emissions of carbon dioxides has been reduced by one fifth in two decades (Svensk Fjärrvärme, 2015). These things are often forgotten in the customer dialogue. The companies must become better at marketing their impact on environmental change. Another, unique, possibility is to create local commitment. District heating companies need a certain level of heat demand to be in business; as a result, there is usually only one company present per locality. District heating companies have the possibility to turn the local monopoly into something positive by showing local commitment and considerations. For example, wood can be acquired locally by entering strategic partnerships with local foresters. Loops can be closed (returning ashes to the forest). Energy can be recovered through incineration of local waste. The next generation can gain knowledge about energy and the need to save it by means of dialogue with their local district heating provider. Once a local, two-sided engagement is established, district heating companies will have strong loyalty to their brand, which is important to meet competition. A strengthened, local customer relationship is however fragile. It does not allow for sudden and large price increases (deviations from a given price level upsets; Lygnerud (2011)), usage of fossil fuels at peak load and not closing the loops.

For further information please contact:

University of Halmstad Att.: Kristina Lygnerud Kristian V’s Väg 3 301 18 Halmstad, Sweden



By Anders Dyrelund, Senior Market Manager, Ramboll Energy

In this small town of Vojens the district heating consumer co-operative have through decades established district heating to almost all buildings. In 2015 they established the world largest solar water heating system and heat storage pit in order to be more efficient and reduce their heating bills. The solar heating covers 50% of the annual heat production, and the system is ready to integrate more fluctuating renewable energy. The system is financed 100% by loans at a very competitive interest rate, thanks to a good business plan and municipal guarantee. There is no subsidy except the indirect subsidy of tax on the natural gas, which it replaced by the solar heat.

networks. The zoning depends on the local conditions and, as with the other natural monopolies, it is an important task in the urban planning to find this optimal zoning. World-wide we find cities with no DH&C, although it is both viable and feasible, and we can see cities in which 99% of all buildings are connected, e.g. Copenhagen. What is the secret behind this difference? Different yet uniform ownership structures may be the answer and the key to a further development of the sector. In order to assess which ownership form is most efficient for the city and the energy consumers, it may help to look at three main factors of the efficiency: • The technical efficiency: Is the network and plants designed and installed to ensure long life-time and optimal performance etc. • The institutional efficiency: Do we utilize the natural monopoly 100%, is the zoning optimal for the city as a whole and have we identified and been able to implement the least cost solution for heat supply taking into account contributions from all local stakeholders. • The financial efficiency: Do we finance the investments in the most efficient way at the lowest interest rate on the market. A campus is a small city In a campus, one legal entity owns all buildings and infrastructure. One manager is responsible for providing a good and reliable indoor climate in all buildings at the lowest cost in the lifetime of the campus and at the same time meeting the overall policy of the owner.

There are many good reasons to develop district heating and cooling (DH&C) in urban area: • DH&C is a precondition for integrating fluctuating and low quality energy sources for heating and cooling • DH&C is a good instrument for reducing the environmental impact of energy • DH&C can benefit from the economy-of-scale in cities • DH&C can help the power system to avoid black-outs due to uncontrolled use of chillers • And finally, integrate fluctuating wind and solar power by forming a cost effective virtual battery

But how can landowners, industries and residents harvest these benefits?

In order to come closer to the answer, we have to realize that DH&C is a strong natural monopoly, and that the hot and cold water are closely related. They are two sides of the same coin. All cities realized more than 100 years ago that water and sewage systems are important natural monopolies in cities. All buildings are now connected, and the sewage systems have even double pipes for wastewater and rainwater. Like DH&C, they are twin- grids serving the need of the city. Also the public traffic system is a strong natural monopoly. In some cities, there is a potential for either DH or DC, but in most cities for both. In many Northern Europe countries we have DH in the whole city, but only cooling in the business areas. It is a challenge to identify the optimal zoning of these infrastructure

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The general trend these days in Denmark is that consumer co-operatives merge in case it is efficient, and they take over municipally or privately owned district heating systems as well. In Denmark, the municipalities often guarantee for loans for their consumer co-operatives in order to improve the financial efficiency and to enable them to invest in projects of public interest. Even companies with little staff can undertake relatively large investment projects as they can engage consultants, who help themwith the planning, design, procurement and operation to ensure competition among all suppliers.

What will the manager then do? In most cases, we find that universities, military camps, hospitals and airports have found DH&C as themost cost-effective solution. Moreover, they do their utmost to optimize from building installation to production. Most campus areas in the US have district energy, but unfortunately, rather old steam systems, as US was fist-mover in district energy. However, many are now being modernized, shifting to lower temperature DH&C in order to meet the new challenge of climate change and integration of efficient and renewable energy sources. In Denmark, the Technical University and Copenhagen Airport have recently supplemented their DH with DC to almost all buildings, including even heating and cooling individual aircrafts at the gate. In Carlsbergbyen, a new large urban development in Copenhagen, the owner of the land has planned for connecting all buildings to the city-wide DH system and to connect all buildings with a cooling demand (around 50%) to a local DC system. This is the most cost-effective for all in the long run; for all who will buy and rent buildings in the district and thus also for the developer who is going to sell the land. This confirms that DH&C is the most cost effective long-term solution in cities with maximal connection and with an optimal zoning. The energy manager of a campus can see that his building infrastructure and his DH&C infrastructure have the same long life-time, and he therefore has an interest in working for long-term strategies for both. What do we do in cities? But what about cities, which have many thousand decision- makers. Can owners, citizens and private companies agree on harvesting the benefits of DH&C? Can they elect a city council to serve their common interests in this respect, or do they prefer not to co-operate? For a city there are many options, each having specific advantages and disadvantages. Consumer co-operatives The closest we come to the campus-ownership is a consumer co-operative. In this case, land-owners form and own a co- operative with the aim to develop a DH&C system. All consumers will share the ownership, and the aim of the company will in general be to deliver reliable DH&C in the most cost-effective way to the owners. This form of ownership is in the regulatory language called “non-profit” ownership as it leaves no profit to external investors. Should there be a profit, it will be returned to the consumers by reducing the price. In such a structure, there is a strong inventive for the board and the management to perform efficiently, as the consumers are also owners and they will elect a new board at next year-s general assembly in case they are not satisfied. Denmark is known for farmers’ co-operatives and for co-operatives for water supply and DH in almost all small towns, even up to 50,000 inhabitants. The consumer co-operatives are also known to be very active owners, who try hard to find solutions to lower costs and provide better comfort. They have e.g. been drivers for adopting innovative solutions in co-operation with small industries, e.g. preinsulated pipes (company Logstor), large-scale solar water heating and heat storage pits (town Marstal).

The consumer owned Høje Taastrup District Heating delivers district cooling to 73 consumers in Copenhagen Markets.

Municipally owned public utilities The city council is elected to take care of the interest of the residents and the private companies in the city. In most cities around the world, they take care of the basic infrastructure for traffic and environment, often in separate entities entirely owned by the city. Denmark, Sweden, Finland and Germany have a long tradition for municipally owned utilities for DH&C, wastewater, water, electricity, gas, public transport etc. The basic idea is to run these services to the benefit of the consumers, separated from the municipal budget and benefitting from the synergies having all services in one company (one bill for all services to the building owner). In general, it is the same ownership structure as the consumer-cooperative, only the election of members to the board is indirectly via the city council. In Denmark, most of the large DH companies are owned by the local municipality in which they distribute their heat, and the company has its own “non- profit” budget. In Germany, e.g., it is allowed to transfer profit or deficit from one service to another – but it is still essentially the same structure as in Denmark. Municipal partnership companies In case the optimal district heating system covers several municipalities, one solution is to form a municipal partnership company formed by the municipalities that are to be supplied from the system. In Denmark, most of the natural gas grid, all the waste incinerators and all large heat transmission systems are owned in this way. Each owner municipality appoints members to the board, and the companies are managed like the municipally owned companies. The municipalities share loan guarantees for the company. The municipal partnership companies can, like the co-operatives and the municipal owned



However, it can be hard for the city to encourage a private owner to extend the DH&C grid to cover the zoning, which is optimal seen from the perspectives of the city and to shift to meet the energy policy objectives of low carbon energy. Moreover the profit (and risk) of the DH&C business will be given to the owners and not to the consumers. Maybe that is one of the reasons why many cities in e.g. Germany and in Sweden regret that they once have sold their grid to a private investor and now want to buy it back. What is most efficient for the city? It is our experience that the consumer and municipal ownership forms can offer the highest score on all three efficiency factors (technical, institutional and financial), provided that the city council offers the least cost planning and local stakeholder analysis full attention, that the city is creditworthy and is willing to take some risk. An ESCO may also be efficient, provided, however, that the city and the ESCO can agree on a transparent partnership agreement which share risk and benefit in a reasonable and open way. For new urban developments it is e.g. an opportunity for the city or the urban development company to include the investments in the network infrastructure in the basic infrastructure cost to be paid by all land-owners and thereafter lease or transfer the network to the ESCO company. Looking around the world it seems that there is a huge potential for more DH&C, not least due to the new energy policies, who are going to implement the COP21 agreement. As regards ownership we find that: • DH is fully developed in almost all countries in which the cities has taken the responsibility • The largest potential for DH is in communities with no tradition for municipal or consumer ownership. Therefore, the challenge will be to form such organisational structures in cities or to find better ways to share benefit and risk between the cities and investors.

companies, undertake large investment projects with a small staff by engaging consultants and advisers in the first phase. Thereby they control the budget of the natural monopoly and find the most competitive suppliers, contractors, service companies and financial institutions. ESCO companies In case the city council or the consumers do not want to take the risk of forming a company or in case they are not able to guarantee for loans, the alternative solution is to allow a private investor to establish and operate the DH&C system within a certain contract period, a so-called BOOT concept (Build, Own, Operate and Transfer). In this way, the ESCO company and the city can share the risk and benefit of the DH&C business, and the city will be able to transfer it to a municipal or a consumer-owned company after the end of the contract period. The long-term energy price from an ESCO will be larger than the price from a consumer- owned or a municipally owned company, as the ESCO takes a certain risk. The larger risk - the larger price. As DH&C is a natural monopoly, the activities of a private entity will normally be subject to strong regulation from the national energy regulator in order to protect the consumers, and the rather complicated contract between the city and the ESCO company has to take into account the regulatory framework. ESCOs seem to have an important role to play in countries, in which consumers and cities are not able to establish DH&C companies.

Ramboll Att.: Anders Dyrelund www.ramboll/ For further information please contact:

Copenhagen Markets: The pipes are located under the roof in the huge market building to each tenant.

Private ownership Finally, in some countries there is no regulation of the sector, and private companies can own and operate the DH&C infrastructure and sell DH&C on commercial conditions. This form of ownership can, in principle, develop almost the same DH&C system as the consumer co-operative or the municipally owned utility.

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By Michael King: Social entrepreneur, researcher, author and commercial adviser

What are these measures? Firstly, in November 2015 the Government announced that £320m will be allocated for capital investment in heat networks over the next five years. Known as the Heat Network Investment Programme (HNIP) DECC are presently engaging with stakeholders on how this funding might be most effectively allocated – via grants, loans, equity or underwriting – as well as the investment vehicle to manage it. The overall aim is to trigger a broader investment to reach a point where the market is self-sustaining. Secondly, the Government encouraged the industry trade body, the Association for Decentralised Energy (ADE), to work together with the Chartered Institute of Building Services Engineers (CIBSE) to produce a ‘Heat Networks: Code of Practice for the UK’, which was published in July 2015. This comprises a set of technical standards to improve the quality of heat network design, construction, commissioning and operation. CIBSE is now providing a training and registration programme for those delivering projects under the Code. Thirdly, the Government is supporting the development of the District Energy Procurement Agency (DEPA). This is an initiative being led by Manchester City Council and seeks to benefit suppliers and manufacturers providing a single entry point into the UK market, standardizing procedures and acting as a competent negotiating partner with them. By reducing transaction costs for market actors it aims to reduce the 20% higher cost for delivering heat network projects in the UK compared to other European markets. Lastly, the Government encouraged the industry to establish a consumer protection scheme. After two years of discussion between industry and consumer groups, the ADE established the Heat Trust in November 2015. This is an industry-led self- regulation initiative that sets customer service standards and customer requirements for member network operators to adopt. Although Government supported membership is voluntary. It is hoped that these measures will provide investors with confidence, particularly when a secondary market for fully built- out projects develops. But do they go far enough to address market concerns, particularly around customer protection that will influence widespread acceptance of heat networks?

In 2013, the United Kingdom’s Department of Energy & Climate Change published ‘The Future of Heating’ which set out the Government’s ambition to de-carbonise the heat sector. District heat networks play a crucial part of this vision in providing anywhere between 14 – 43% of the heat market by 2050. In this document it was envisaged that most of the necessary funding would come from the private sector. The role of government was to develop the opportunity for commercial investors to take up. However, the debate has moved on to consider issues of reducing risk, increasing confidence, and a much wider range of ownership models. This was illustrated in September 2015 when the UK Trade & Investment arm of the Department of Business, Innovation & Skills (BIS) in association with the Department of Energy & Climate Change (DECC) hosted a conference with an audience from the investment community to present opportunities in a document ‘Investing in the UK’s heat infrastructure: Heat Networks’. This highlighted the work of DECC’s Heat Network Delivery Unit in building a pipeline of 280 projects supported through heat mapping, energy and master planning together with technical feasibility and financial viability studies. The objective is to develop these projects to reach commercialisation over the next ten years. Within this timeframe DECC estimates these projects will require a capital investment of £2 billion generating a further £3.2 – £6.4 billion’s worth of operational and maintenance contracts over the next 40 years. This resurgence of interest in heat networks now represents a substantial opportunity for the investment community. A question raised at the conference noted that the investment market presently seeks a rate of return in the region of 15% whereas the majority of projects in the pipeline delivered a return between 6 – 10%. The answer is that DECC expects to build confidence in the heat network sector through a number of measures presently under development so that investor expectations will drift down towards the lower range, which should attract greater institutional and pension fund interest. Furthermore, drawing on a report by the Scottish Futures Trust ‘Guidance on Delivery Structures for Heat Networks’ ownership could be structured in a range of commercial options with varying degrees of public and private sector involvement allowing for investment from both sectors to be blended.



Consumer concerns The past few months have seen increased activity centred on the need for consumer protection on heat networks. This follows a Citizens Advice study in January of this year summarising a survey of local authorities on heat networks and district heating user complaints gathered through its advisory services and builds on a 2015 report from the consumer affairs organisation Which?. The Citizen Advice report focuses on: the availability of data on heat networks; billing and information provided to consumers; maintenance and controls; and customer protection. One recommendation from the Citizens Advice report was the need for an independent ombudsman to be in place, hence it is heartening to learn that this exactly what the Heat Trust will be offering along with other actions such as developing a common approach to tariff structures. However, whilst both reports helpfully dig into the issues, neither goes far enough. The Which? study provides a range of prices paid by those on heat networks ranging from 5.51p to 14.95p per kWh, and compares this with the lifetime costs (i.e. including the costs of replacement of a gas combi boiler and annual maintenance charge) associated with gas heating of between 9.55p to 11.60p per kWh and electricity heating price of between 22.91 – 22.99p per kWh (where an electric combi- boiler was considered). Clearly someone is getting a good deal. But which heat network operators are charging more than gas and what sits behind it? These reports do not say. I suspect it is because some operators are seeking returns on capital of 15% plus. These will tend to be networks delivered by the commercial sector that have recently been constructed as older networks will have paid off their initial capital cost or because they were wrapped into local authority housing budgets. Neither report recognises that higher tariffs are charged by commercial operators whilst generally public operators do not. These high returns are in part because investors perceive heat networks as high risk because they are unregulated and price debt capital accordingly. Therefore, could more formal regulation help address both the customer service issues and the financial risk issue at the same time? The other common theme in the Which? and Citizens Advice reports is the belief that the ability to switch supplier is a solution in itself. However, the UK Competition & Markets Authority published its findings on its investigation of the energy markets on 10th March which make clear that the gas and electricity markets are not working in the interests of the customer. Switching away from heat networks may not provide the solution that disgruntled customers seek. The reality is that individual customers have very little power in the market. They can exercise more market muscle if they join together. Witness the drive towards setting up municipal gas and electricity

retail companies and the large number of community energy projects trying to exercise precisely this collective approach to the market. Being on a heat network gives customers such collective market power that a single residential customer lacks. The two consumer reports suggest that the numbers of complainants are a minority, albeit significant ones. This suggests that the majority of customers are happy, but clearly more work must be done to ensure that this is the case. And at 5.5p per kWh district energy can deliver a competitive offer. But if we want customers to feel proud to be on a heat network and want to stay on it then the district energy sector needs to ensure it’s better than the alternatives if it is to prove itself a real alternative. Restructuring ownership along functional lines An alternative approach was suggested in an article referenced in the District Energy Vanguards newsletter last month (April 2016) by Ian Manders of the Royal Danish Embassy and Dr. Tanja Groth of the Carbon Trust, which argued for heat distribution infrastructure to be moved into a not-for-profit pipe co. This may only be possible once projects have been built out and costs and revenues stabilised – in other words, the project has been de-risked. Indeed, it was also reported that last month the Green Investment Bank and Equitex had bought out 100% the Wick District Heating Scheme from its previous owners, Ignis Energy. This illustrates that the potential of a secondary investment market for de-risked projects is real. If the entity buying them was constructed as a not-for-profit then it could accept lower returns on capital more in line with regulated utilities. And consequently high standing or fixed charges would drop. Where next? In conclusion, the UK Government is working together with industry and the municipalities to build a platform that supports the development of the heat networks in the uniquely open British energy market. This means under the scrutiny of independent consumer groups more familiar with a competitive approach. In doing so, it has to balance the interests of investors, the industry and consumers. Undoubtedly, more regulation would give investors and consumers greater confidence. But that will risk burdening the industry and stifling innovation as it explores different commercial structures that will potentially give these stakeholders what they want whilst building a financially sustainable future for itself. The key challenge for Government is maintaining this delicate balance as the market grows and evolves. For further information please contact:

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By Muhammad Ali, Design Manager, District Cooling, Marafeq Qatar

Air-conditioning is predominantly provided in almost all types of buildings; residential, commercial, institutional and mixed- use developments. Different air-conditioning technologies are successfully adopted in GCC, including: • Water-cooled central plant • Air-cooled central plant • Variable refrigerant flow • Ducted split and packaged units • Split units and window air conditioners A local consultant in Dubai, United Arab Emirates made a survey of different types of technologymarket share and these are as follows:

Air-conditioning is an essential commodity to survive in the blistering heat of Middle East where the basic climate is hot and dry with coastal air laden with humidity. Sweltering temperatures and heat waves cause extreme combination of heat and humidity. The highest recorded heat index in the region is 178 o F (81 o C) in Dhahran, Saudi Arabia on July 8, 2003.

Within the Middle East are 6 Arab states of the Persian Gulf including Bahrain, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia (KSA), and United Arab Emirates (UAE), also called GCC (Gulf Cooperation Council) countries. Improved economic development and the influx of expatriates, combined with government vision to diversify the economy, supported accelerated developments in real estate market in GCC. UAE hosting the Expo 2020 and Qatar hosting the 2022 FIFA World Cup is a further boost towards the enhancement of transportation networks and primary infrastructures which are valuable add-on to real estate market. The Global Competitiveness Index 2015- 2016 Rankings by the World Economic Forum ranked Qatar at number 14 on list of the world’s fastest growing economies followed by UAE at number 17. Other GCC countries are also ranked high on this list. The non-oil private sector like tourism, food & beverages and automotive industry shows strong growth, fueled by domestic, regional demands. In the real estate market, state-of the art construction and Smart City Developments created the need for sustainable, economical and smart cooling technologies for new developments.

District cooling reportedly started in 1960 in GCC, but its development was not substantial because of limited real estate development market. With the real estate boom starting in 1990, district cooling plants started appearing in different countries of GCC as an ideal, high efficient, economical and eco-friendly alternative to conventional cooling technologies. Today, total installed capacity of district cooling systems in GCC is above 4 million refrigeration tons, which is accounting approximately 32% of total worldwide capacity. United Arab Emirates (UAE) experienced the widest application of the technology in GCC, accounting above 60% market share, followed by Saudi Arabia above 20% and Qatar above 7%. In UAE alone, district cooling installed capacity is above 2.6 million tons of refrigeration (approximately 8000 MW) and the technology is continuously progressing with current penetration of 20%. The largest district cooling plants in the world are built in GCC with largest single plant of 130,000 TR at the Pearl Qatar and largest district cooling system in one single development at Lusail City, Qatar where the total market requirement is above 550,000 TR, provided with a distribution network of 170 km chilled water piping.



The district cooling market in GCC is forecasted to grow at an outstanding compound annual growth rate (CGAR) of approximately 15 % over the next few years to serve large-scale developments in real estate and commercial sectors. By 2019, it is expected that 40% of overall worldwide district cooling demand shall come fromMiddle East and Africa. As per experts, this means a market of around US $ 29 billion. Saudi Arabia is expected to lead the growth of district cooling in GCC in the coming few years with projected growth rate of 34%, followed by Qatar at CAGR of approximately 18%.

GCC also successfully adopted European standards for pre- insulated piping systems. EN 13941 standards are used now widely for district cooling distribution network design and construction. Lusail City in Qatar is one of the largest application of EN 13941 based pre-insulated bonded pipe system where network pipe length is approximately 170 kilometers with pipe diameter ranging from DN 65 to DN 1600. This highly efficient and reliable system helped in reducing the thrust blocks in the buried piping system. The government is playing an important role in adoption of district cooling as a sustainable and efficient way of cooling the residential and commercial sectors. The government of Dubai established the Regulatory & Supervision Bureau (RSB), which supports the implementation of Dubai Integrated Energy Strategy 2030 (DIES) and Demand Side Management (DSM) which aims to increase the energy efficiency by 30% by 2030. District cooling is an important sector where Dubai looks to increase the market penetration from current 20% to 40% by 2030. In Qatar, Kahra- Maa (Qatar General Electricity & Water Corporation) formed a district cooling services department to establish district cooling services regulatory framework in the State of Qatar. Kahra-Maa district cooling services department advises to use Treated Sewage Effluent (TSE) for cooling tower makeup in all central cooling plants as per ministerial directive. District cooling is aligned with the Qatar National Vision (2030) which focuses on economic development by promoting and ensuring reduction in Qatar’s Electricity and water savings, environmental stability with a focus on reduction in carbon emissions. In Saudi Arabia, the Saudi Industrial Development Fund (SIDF) provides industrial support to district cooling systems.

District cooling is implemented in GCC for a wide variety of types of buildings including residential, offices, hotels, hospitals and shopping malls. District cooling plants provide comfort, reliability and flexibility to the end-user with economy-of-scale. Large centrifugal compressor-based chillers with field-erected cooling towers are typical in a stick built plant configuration. Most of the district cooling plants in the region are provided with chilled water-based thermal energy storage (TES) tanks that not only reduce the peak power demand but also reduce net capital cost. To conserve the natural water resources, treated sewage effluent (TSE) is widely being used as makeup water for condenser systems. District cooling plants are highly efficient with efficiencies in between 0.85 to 0.95 kW/TR at peak. This results in substantial savings in electricity which helps in managing the electrical demand by reducing the need to build power plants and transmission and distribution systems. As per an estimate, window, split and ducted air conditioning units have approximately 48% of cooling market share in Dubai, but drive 58% of the total cooling electrical load on power grid whereas district cooling and central chilled water plants have 25% of the market share but consume only 16% of electrical load for cooling.

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