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Tariff Structures & Debt Management in community heating or district energy developments

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Tariff Structures & Debt Management in community heating or district energy developments


Published by Yan Evans for ENER-G Switch2 Limited in Housing and also in Bill Payments

 By Yan Evans, Director, ENER-G Switch2


In general,  the consumer tariff structure for a community heating or district energy development comprises a fixed charge and a variable element. 

 The variable element of the tariff is primarily based around what is consumed by the resident -measured through a heat meter located within each dwelling.  This meter measures the thermal energy consumed for space heating and for domestic hot water use (sinks, bath, shower) by the resident(s).  The variable element of the tariff takes into consideration the cost of the primary fuel consumption within the energy centre, which could be a blend of fuels, e.g. natural gas and wood pellets, depending on the technologies chosen to generate the heat, and the overall efficiency of heat generation and distribution. From our own experience and involvement in a significant number of community heating systems, including operating schemes as the ESCo, the overall efficiency of the heating system (fuel input through to delivered heat at the point of consumption)  is typically between 50% and 60% once heat distribution losses have been taken into consideration.  The efficiency of the system is often over stated leading to incorrect tariffs being set by the scheme owner (local authority or housing association) or operator (managing agent or ESCo). This can lead to  under-recovery of operating costs and is a key pitfall that many fall into.

The fixed element of the tariff structure is, to some extent, the cost to deliver heat to the point of use and is not related in any way to the energy being consumed within the dwelling.  The fixed element would typically include the operation and maintenance of the energy centre equipment, heat distribution infrastructure, and items of plant located within the apartment. These include:  heat interface unit (exchanges thermal energy between the heat distribution network (the primary circuit) and the heat demand side within the dwelling (the secondary circuit)), heat meter and automatic meter reading system.  This element of the charge would also include metering and billing administration services, bad debt provision, and a ‘sinking fund’ to cover the cost of replacing major items of capital equipment at the end of its useful life (typically a 15 to 25 year term). 

The cost of the electricity required to pump the heat from the energy centre through to each resident across the development is also factored into the fixed element of the tariff.  This should perhaps be considered as part of the scheme service charge (covered under landlord’s costs) rather than be recovered through the heat charge.  The final element is the utility “bulk” meter standing charge that the development has to bear and is usually passed through to residents via the fixed element of the tariff structure.

The debate needs to be had with the scheme owner as to whether the ‘sinking fund’ should be factored into the tariff structure or not.  Its absence would certainly result in a lower tariff which may be desirable, depending on resident’s expectations of energy costs.  The replacement of capital equipment could be financed outside of the tariff structure, as and when required.  It is worth noting that ownership of the ‘sinking fund’ is that of the residents who have collectively contributed towards the fund via the fixed element of the tariff. As such,  monies cannot be accessed, to cover the cost of replacement plant without prior approval of the residents and/or their representatives.

 In some cases the fixed charge can be as much as 60% to 70% of the overall heat tariff, depending on what is factored into the calculation. This level of fixed charge is in line with other European countries, in particular, Germany and Denmark, where the district heating market is far more mature and district energy is considered the norm.  The UK market will need to acknowledge and accept such a pricing structure, particularly if legislative issues drive projects down the community heating/district energy route, as currently experienced with the “London Plan”.   

 It is worth noting that the Code for Sustainable Homes is driving the UK housing sector to build stock with an increasingly lower carbon footprint through fabric improvements, higher levels of insulation and air tightness and the adoption of low and zero carbon technologies.  As such, heating loads are reducing and subsequently heating bills will be lower.

 A popular method of setting communal heating scheme energy tariffs is to benchmark against a competitor fuel, such as gas or electricity.  This enables the landlord or scheme operator to offer a competitive price for the heat delivered when compared to alternative utility suppliers and different methods of energy delivery.  This is another potential pitfall that can be extremely risky. Charges structured in this way may not reflect the actual cost of generating and delivering the heat to the point of use, as it does not take into consideration critical factors such as those previously outlined.  The danger is that payment for heat by the residents may not cover the cost of the primary fuel supplied through the bulk meter, especially if the development is not fully occupied for a length of time. An actual cost pricing methodology offers greater accuracy and provides a model that is application and development specific.

 Where a renewable energy technology e.g. biomass boiler, has been deployed in the energy centre, there may be to opportunity to claim the Renewable Heat Incentive (RHI) for the heat generated by the particular technology.  Depending on the thermal output of the appliance and the annual running hours, the revenue available through the RHI can be used to help reduce both the variable and fixed elements of the tariff.  In the case of a biomass boiler the cost of wood pellet fuel (depending on the volume to be consumed) is usually higher than the cost of natural gas.  The operation and maintenance costs of such a boiler are also higher than those associated with conventional gas fired plant.  The revenue available through the RHI may completely offset the increased fuel and O&M costs, helping to present a more attractive tariff structure to the residents.  An element of the RHI payment could also be used in some instances to offset the capital cost of the biomass boiler. 

 A key factor for securing this valuable revenue is  to ensure an appropriate metering strategy is adopted at the development and this needs to be considered very early in the scheme design process.  The availability of payment from the RHI is paramount to balancing the “carbon agenda” of the project while at the same time being able to deliver affordable heat to residents.

 If, for example, a Combined Heat & Power (CHP) units is being utilised to generate an element of heat and electricity on-site, and achieves a good overall thermal efficiency level. as defined to be “Good Quality” under the CHP Quality Assurance Programme, then the natural gas fuel input to the CHP unit would be exempted from the Climate Change Levy (currently 0.167 p/kWh on natural gas).  The cost saving could be reflected in a reduced variable element of the tariff structure as it would impact on the overall cost of the energy centre primary fuel.

 In terms of how the resident actually pays for the heat consumed, there are two basic options – credit billing or “pay-as-you-go” (pre-payment). On many community heating schemes the development comprises mixed tenure and there is often a combination of credit paying consumers and those who pay for their heat under a prepayment arrangement.  “Pay-as-you-go” is certainly one method of helping both residents to manage their budget while helping operators to manage debt on a scheme. Historically the prepayment method has required a point-of-sale retail outlet,  which on small developments has not been cost effective. Traditional prepayment has always been viewed as means to eradicate debt on a community heating scheme, when, on occasions, it simply transfers the debt risk from residents to the point-of-sale retail outlet.

 More recently “token-less” pay-as-you-go devices have entered the market, including ENER-G Switch2's G6 unit.   This alleviates the need for a point-of-sale outlet and avoid the ‘social stigma’ attached to prepayment, by enabling residents to top-of their heat by direct debit, via the internet, over the phone and at around 25,000 PayPoint outlets around the UK including the Post Office. 

 Pay as you go solutions are not just about debt management. More importantly they actually support the consumer in budgeting and managing their energy costs and with some of the more innovative devices, can also help to change consumer behaviour as such units incorporating an In Home Display Unit showing historical data and messaging. If stewarded properly then these intelligent systems can also be used to support the more vulnerable residents by monitoring spend and consumption patterns.




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