EE Project Group 1: District Heating Energy EfficiencyProjects

1.     Objective

      Systemsto supply space heating to buildings in northern China consumed over 270million tons of coal equivalent (tce) in 2012-13^[1], amounting to some 12% of China’s total final energyconsumption.  As most of this energy useinvolves direct coal combustion in or near urban areas, the air pollutionimpacts of urban heating systems have long been a concern in China’senvironmental community.   Whileconversion to natural gas is possible and being pursued in some cases,improvement in the energy efficiency of coal-based central heating systems isthe primary option for most.  Key heatsystem energy efficiency measures include:

      (1)Expansion of large-scale district heating systems, and elimination of manysmall-scale heat boilers in favor of large, centralized heat only or combinedheat and power (CHP) boilers;

      (2)Upgrading of heat transmission and distribution systems, including upgrading ofsubstations;

      (3)EE renovations at major heat source plants;

      (4)Institution of heat use and billing reforms, including development of consumerdemand-based systems, with consumer controls and meters, and adoption ofconsumption-based billings; and

      (5)Combinations of these.

2.     Measure Description

      a.  Relevant laws and regulations. Inaddition to the targets, physical improvements and billing reforms for China’sdistrict heating systems called for in the 12th Five Year Plan, recenthigh-level air pollution control policy documents and China’s new Air PollutionControl Law specifically call for implementation of district heating EE andpollution control measures.

      TheState Council’s 2013 Air Pollution Prevention and Control Action Plan^[2]specifically calls for:

      (1)elimination of small coal-fired boilers in urban areas and acceleration oflarge-scale district heating development (Article 1);

      (2)expansion and renovation of district heating networks (Article 15); and

      (3)popularization of heat metering and residential heat energy conservationmeasures, followed by institution of consumption-based heat billing (Article15).

      Promulgatedin August 2015, China’s Air Pollution Control Law requires that all unitsoperating coal-fired heat production facilities in district heating systemsobtain emissions permits (Article 19). The new Law also emphasizes that CHP and district heating developmentshould be promoted in coal-based heating areas, strictly prohibits newconstruction or expansion of dispersed coal-fired heat boilers, and requireselimination of coal-fired heat supply boilers that do not meet emissionsstandards (Article 39).

      b.   Scope for adoption of the measure.  Over a half billion people live in China’scold and severe cold climate zones where space heating is required.  The heated floor area of residential,commercial and public buildings in China amounted to about 8 billion squaremeters in 2012-13, about ten times the total heated building floor area ofSweden.  Over the decades, individualheat boiler systems have been largely replaced by centralized heating forbuilding blocks, increasingly supplied by large-scale district heatingsystems.  With natural gas in relativelyshort supply, coal remains the dominant fuel. Most cities have made major progress over the last decade eliminatingsmall heat-only boilers, connecting small centralized heating systems withlarge district heating networks, and further optimizing systems.  However, much work remains to be done,especially in medium and small-sized cities and in the less advanced northernprovinces.  Even just meeting current mandatoryemissions standards and inefficient coal-fired boiler elimination regulationsremains a challenge for many.  Inaddition, transition to demand-driven systems and consumption-based heatbilling on a large scale, which holds the key for the greatest energyefficiency gains in the future, is just beginning.  Although more and more cities are beginningto make the transition and the area covered is growing, the Ministry of Housingand Urban and Rural Development (MOHURD) estimates the total heated area withconsumption-based billing was 805 million square meters in 2013, representingabout 10% of the total.

      c.  Description of the measures. Currentlyattractive EE measures for district heating systems may best be considered intwo categories:  (1) EE retrofits toexisting supply-driven systems, focusing mostly on hardware, and (2) conversionto demand-driven systems, with associated billing reform, including bothtechnical changes and large-scale billing reform.

      Fourtypical types of EE retrofit projects are shown in Table 1.  Boiler consolidation projects involveelimination of small and/or inefficient heat-only boilers for system supply andmovement to larger sources of heat supply, with greater efficiency andenvironmental control.  Heat transmissionand distribution projects involve renovations to heat networks, primarily to reducelosses and to extend supply with the same amount of heat.  Integrated heat sources and transmission anddistribution system upgrades combine these first two.  A final type of measure focuses on EEretrofits to large heating plants, such as combined heat-and-power plants.

      Conversionto demand-driven systems requires a package of measures including: (1)modification of indoor heating systems to allow consumer control of heatsupply; (2) partial or full transition of district heating systems from fixed-flowto variable flow, to allow system supply to be adjusted to meet dynamic demand;(3) changes in metering technology and/or housing block bill allocation toallow billing that is based more on actual use than the traditional flat squaremeter per season charges; and (4) institution of consumption-basedheat billing with a new price structure. This process is not simple and requires commitment from cityleaders.   For new homes, currentregulations require heat pipe configurations that can accommodate thechange.  However consumer control andhousehold metering options in homes predating the early 2000s and relying onsingle-pipe vertical flow indoor heating system are clumsier, even thoughcertainly possible.  In China, mostresidents have welcomed the ability to control their heat and their heatbill.  For local heating companies, themajor transition causes many changes in operations and introduces revenueuncertainties, and hence there are needs to cover potential risks.

      d.  Implementation framework. Municipalheating companies are the key implementing entities.  Municipal heat offices, operating withinlocal Construction Commissions are the key oversight agency.  Heat billing reform, encouraged by thecentral government, involves a variety of municipal government agencies.

      e.  Benefits and costs:

•    Potential cost effective energy savings from district heatingefficiency improvements and improved adoption of demand-based systems andconsumption-based billing could be 50 million TCE or more.  District heating system efficiencies couldrise to over 67% if variable-flow technology is used, compared to averagesclose to 52% for constant-flow district heating technology and some 40% forscattered coal-fired heating systems.^[3]  In addition, the power of thecost-savings incentives of consumption-based billing for typical cost-consciousChinese families to yield additional savings should not be underestimated.

•    The energy savings through district heating improvements have anespecially strong air pollution reduction impact because these projects reducedirect coal combustion within urban areas. Coal-fired heat supply boilers are, by definition, located relativelynear to the urban population that they supply heat to.

•    Total Investment costs vary substantially according to project scopeand scale.  Project specific data isavailable only for the EE retrofit projects. The table below shows the average investment costs, net financialbenefits gained from energy costs savings after subtracting investment costs,and the average SO2 and NOx pollution reduction per project for the 19 districtheating retrofit projects in the study sample.  While all of the project types yield strong financial and environmentalbenefits, the boiler consolidation project benefits are especially noteworthy.

Table 1. Typical Benefits and Costs of District Heating Retrofit Projects

* Undiscountedlifecycle energy cost savings minus total investment costs  (revise these to net present value[1] ).

      f.  Key issues for implementation.  District heating EE retrofit projects arelargely under the purview of local heating companies.  Pressure from city government to improveenvironmental results can help prod investment, which is likely to befinancially beneficial for the companies over the medium term.  Programs to move to demand-based systems andconsumption-based billing require strong commitment and organization frommunicipal leaders.  While the potential environmentalbenefits of such programs are great and can be expected to be welcomed by heatconsumers if implemented properly, the major changes in heat control, meteringand billing require steady efforts to gain the understanding of urbanresidents. For municipal heating companies, shift from company supply-basedcontrol of heat flows to consumer-driven demand based heat flows is a majoroperational change, bringing many new operational issues, potential declines inheat sales and   concern about revenueuncertainties.  Government support inworking through these issues with heating companies is critical.

      g.  Other. EE retrofit projects and especially transition to demand-based heatingsystems can bring substantial improvements to heat service quality, in additionto cost savings and environmental benefits to society.

3.     Method for Calculating Project EnergySavings and Emissions Reduction

      Airpollution reductions from district heating energy efficiency projects can becalculated from available data on the reduced energy use resulting the projectswhich then leads to reduced fuel combustion emissions.  Although some projects implemented oncoal-based systems also save relatively small amounts of electricity, the mainenergy savings and air pollution reduction benefits are from reductions indirect coal combustion in or close to urban areas.

      Projectinvestment and energy savings data for 19 district heating EE retrofit projectswere analyzed from the Institute for Industrial Productivity’s (IIP) databaseof 84 Chinese industrial energy efficiency projects completed during 2008-2014.  Both on-site and power plant emissionsreductions were then derived from average national coefficients for SO2 and NOxemissions reduction per ton of industrial on-site coal saved and for SO2 andNOx emissions reduction per ton of coal saved in thermal power production whererelevant.

      Informationon successful cases of transition to demand-driven district heating andconsumption-based billing in a variety of Chinese cities can be obtained fromMOHURD.

      Localenvironmental protection authorities can prepare improved, location-specificair pollution benefit calculations.  Theycan obtain recent local energy efficiency project investment and energy savingsdata and information on future project potential from local heat companies andgovernment heat supply offices.  Coalsavings-emission reduction coefficients should be fine-tuned to account forlocal coal characteristics.  Reductionsin local air-shed ambient PM 2.5 levels that can be achieved by portfolios ofenergy efficiency projects can be calculated by adding coal savings-PMemissions reduction coefficients (as well as SO2 and NOx coefficients), andcalculating synergistic effects using local air quality models.

4.     Project Examples

      Theinvestment costs, net lifecycle financial benefits arising from energy costsavings, pollution reduction per year and net financial benefits of SO2 and NOxreduction of four example projects are provided in Table 2 below.  All projects have been completed, with verifiedenergy savings levels.

      Project1 involved elimination of both 169 coal-fired boilers in 72 boiler dispersedboiler houses, plus elimination of individual coal stoves in about 4000homes.  Corresponding heat demands aresupplied with district heating with heat sourced from two new 58 MW chain-gratecoal-fired boilers.  The project hasexceptionally good financial returns—from an investment of RMB 46 million, netfinancial gains from coal savings amount to over RMB 240 million in 12 years.  Air pollution control benefits also arelarge:  the project is estimated to havereduced SO2 emissions by 954 tons per year and NOx emissions by 382 per year^[4].  Described another way, forevery ton of SO2 or NOx reduced by the project from coal savings over 12 years,the heat company also receives a financial benefit of RMB 15,000 for eachton.  

      Project2 included construction of 25 kilometers of primary district heatingtransmission piping and upgrading of insulation on parts of the existingtransmission and distribution network. Although the project does not involve elimination or upgrade of anyboilers, the improved efficiency of heat supply from the network upgrade stillyields attractive reductions in local SO2 and NOx of 419 and 168 tons per year,respectively.  The financial benefits tothe heating company remain strong, (with net gains of RMB 68 million from coalsavings), although these gains are not as strong as in Project 1.

      Project3 is a typical comprehensive district heating upgrade project, including (1)construction of a new heat-only boiler house with three 29 MW hot-water boilersand ancillary equipment, (2) addition of three new SO2 scrubbers, (3) additionof 14 new heat substations, (4) addition of 19.7 km of primary transmissionpiping and 23 km of secondary distribution piping, and (5) associated road andgreen space development.   Althoughinvestment costs are high, the financial and air pollution reduction benefitsfrom the coal savings alone (excluding the additional benefits of the new scrubbers),compared to use of the existing system, also are high.

      Project4 involves (1) renovation of 4 existing, large heat-only boilers, including newwater and sludge treatment, air pollution control, and fuel storage facilities,(2) construction of 9 new substations, and (3) addition of 8.35 km of newprimary transmission.   The value of coalsavings compared to the current system easily justifies the project.

Table 2. Examples of EE Retrofit Projects.

* Undiscountedlifecycle energy cost savings minus total investment costs.