Experts Discuss Ways to Finance the Heating System Using Extrabudgetary Funding

1 march 2018

"At the moment a lot of people are discussing what resources the central heating supply system needs but nobody talks about the tools and mechanisms that are already available. However, we do have an extensive set of tools for raising non-budgetary funds, unfortunately very few of those tools are being used at the moment," said Vitaly Kovalchuk, the Assistant of the Department of Industry and Infrastructure of the Executive Office of the Government of the Russian Federation, speaking at a roundtable on Financing Efforts to Improve the Efficiency of Heating Supply from Producers to Consumers that was held at the Analytical Center.

According to the expert it is important that successful examples should be demonstrated and replicated. "To that end the Analytical Center has scheduled a series of roundtables to discuss the practical application of the tools available under the current regulations. Having reviewed the cases presented at those roundtables we should be able to develop recommendations for heating utilities," Vitaly Kovalchuk said.

"In Russia the losses in the heating supply systems reach 60%, meaning that out of 100% of the thermal power that is produced only 40% makes it to the end consumers. Something needs to be done about it because the financial losses resulting from this are staggering," believes Alexander Chekrygin, Head of Marketing at VTB Factoring. The expert noted that foreign practices should be learned from. As an example, in Scandinavia thermal power losses are about 20%.

Tatenergo First Deputy CEO for Economics and Finance Airat Sabirzanov talked about financing efficiency improvements in the central heating system in Kazan where a transition was made in 2017 from centralized hot water supply to local water heaters. "The problems related to the heating scheme with central  heat supply stations in Kazan are typical for big cities in Russia: a short service life, a lot of wear and tear in the system, the pipes and equipment easily incur damage," Mr. Sabirzanov said. According to him, when the issue of retrofitting the central heat supply stations was raised, mathematical models showed beyond a shadow of a doubt that a transition to automated individual heating plants would make much more financial sense: retrofitting the existing central heat supply stations would have cost RUB 3.8 billion while installing new automated individual heating plants only cost RUB 1.5 billion.

As for funding sources for the program to transition to automated individual heating plants, there are both pros and cons, Mr Sabirzanov noted. For example, energy service contracts do not require the use of the consumer's funds because all financing is provided by the operators of the project and the investments then get recouped as a result of improved energy efficiency of the resulting solution. However, in this setup there is no mechanism for preserving the system where the energy service is financed through the rates, which requires changes in the legislation.

Vladilen Prokofiev, Head of the Urban Economy Department at the Institute for Urban Economics Foundation, talked about how things are done in other countries. "In other countries there is a trend away from centralized heating supply to decentralized heating solutions. In Russia we're seeing the reverse of that, which results in strict government regulation," the expert said. "In other countries they have a broad range of heating supply management institutions while here in Russia all we have for that is concession agreements."