Discontent Across Entire Heat Supply Market

19 june 2015

The Analytical Center has discussed ways to reform heat supply in Russia and considered problems currently plaguing the sector.

Vitaly Kovalchuk, the Assistant of the Industry and Infrastructure Department of the Russian Government Administration, noted that heat supply problems in Russia have been known for a very long time and that the goal now was to understand what to do about them now. "The past two years we’ve been discussing how to reform the sector and move on to a new model based on completely different pricing and regulation principles," the expert said. "A number of decisions were made at the governmental level to move towards the ‘alternative boiler room’ model, but the range of these decisions is pretty broad and further discussion is needed before we can figure out the steps that need to be followed to implement them."

Victoria Gimadi, the Head of the Department for Fuel and Energy Sector of the Analytical Center, said that the heat supply sector has two principal options for where to go next. The first one is to rely on the existing rules, in which case the development trajectory would be defined at the level of approved and detailed rules that all heat supply utilities must follow. The other option is a reform, specifically the introduction of the Target Thermal Energy Market Model action plan. Ms. Gimadi also identified the current problems in the industry, saying the most acute ones were technological obsolescence and significant wear and tear of central heating equipment. The sector is also unattractive for investors; there are problems with consumer payments as well as a number of other less serious problems.

"At the moment there’s discontent across the entire market, suppliers are unhappy, consumers are unhappy and the government is unhappy," Parviz Abdushukurov, the Vice President, the deputy CEO for operations and chief engineer of OJSC Fortum believes. Suppliers are unhappy about insufficient pricing regulations, consumers are unhappy about the low quality of services and the government is unhappy about the direction the sector is moving in. "We suggest creating a new environment that would encourage private investments in the sector," Mr. Abdushukurov said, talking about the new model for the heat supply market. "Regulation must be in the form of price ceilings that have to be introduced following common transparent rules. A single agency or ministry must be appointed in charge of price regulation and whenever violations are discovered, consumers must be paid compensation." The expert believes that without identifying the final beneficiary and assigning responsibility private business will never be willing to invest in heat supply and without private investments the existing heat supply infrastructure can never be modernised."

Mr. Abdushukurov also talked about ways to attract investors to the sector. He believes that a systems approach has to be employed here. According to him, first a model needs to be created that would allow investors to make money in the heat supply sector. "To that end we created three rules,’ the expert said, ‘First we agreed terms, second we set a timeframe that investors can rely on and third, we created a favourable environment." Mr. Abdushukurov is confident that if all the conditions are met, investors will start coming into the sector.

"We’re always forgetting the fact that what we’re dealing with are not isolated instances but a system, consisting of individual elements where none of these individual elements can produce the effect achieved by the system as a whole," Vladimir Shkatov, the Deputy Chair of the Management Board of NP Market Council believes. In his opinion if the old system were to be abandoned at this point, a new one would have to be put in its place immediately but that would require huge amount of cash." We can’t expect our soviet system that was designed for specific purposes to produce a different effect than what it was designed for. It’s technically impossible. Either we have to maintain the old system or we have to build a new one from scratch," he believes.

Towards the end of the meeting representatives of the Construction Ministry noted that whatever methods may be used, some unanticipated difficulties are abound to arise. So experiments need to be carried out in individual regions with alternative central heating systems to trial new models, the experts believe. And then based on the results of such experiments steps should be taken to make appropriate adjustments to existing regulations to tackle possible consequences of reform. At the same time all the specialists present noted that there were no principal objections to the new model.