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District heating and market economy in Latvia
Energy 24 (1999) 549–559 www.elsevier.com/locate/energy
District heating and market economy in Latvia Henrik Lunda,*, Frede Hvelplunda, Ilmars Kassb, Edgars Dukalskisb, Dagnija Blumbergab a
Department of Development and Planning, Aalborg University, Fibiger Straede 13, DK-9260 Aalborg, Denmark b Faculty of Energy and Electrotechnics, Riga Technical University, Kronvalda Boulv. 1, LV-1010 Riga, Latvia Received 8 December 1998
Abstract From the Soviet time Latvia inherited a number of district-heating systems fuelled with Russian natural gas or imported heavy fuel oil. From a fuel efficiency point of view there is no reason to preserve the district heating systems unless the boilers are replaced by CHP. However, 50% of the electricity consumption is imported, and the import prices are low because the production prices in neither Estonia nor Lithuania fully include the long-term capacity costs. Thus, Latvia has two major long-term strategic choices to make: (1) should the country try to reduce the energy demand, and (2) should the country try to replace the import of electricity by domestic production. In implementing the latter solution Latvia could benefit from cogeneration, if the local district heating systems are preserved. This article seeks to form a strategy to develop the use of Latvian wood resources in local cogeneration. Even though cogeneration from a business economic point of view is not feasible with today’s import prices, the Latvian balance of payments would benefit immediately from the implementation of such technologies. 1999 Elsevier Science Ltd. All rights reserved.
1. Introduction Officially, the Republic of Latvia restored its independence on the 4 May 1991. Since this date Latvia has been in a situation of changing its economy to market conditions and integrating to
* Corresponding author. Tel: ⫹ 45-9815-8522; fax: ⫹ 45-98-15-65-41; e-mail: [email protected] 0360-5442/99/$ - see front matter 1999 Elsevier Science Ltd. All rights reserved. PII: S 0 3 6 0 - 5 4 4 2 ( 9 9 ) 0 0 0 1 7 - 1
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different European economic and political structures as quickly as possible. Table 1 compares key figures for Latvia with Denmark and the EU [1–3]. Latvia is approximately 1.5 times the area of Denmark; the percentage of forest area is much higher; and the population is only 2.5 million compared with the Danish population of 5.2 million. Together this means that the wood resources per capita are much higher in Latvia than in Denmark. Latvia, however, is in a difficult economic situation. The gross national product is only one-tenth of the EU average, and Latvia has a deficit on the balance of payments of more than one month’s gross pay of all employed persons in the economy. Only some of this deficit can be explained by investments in the transition of its economy. The Latvian transition to a market economy has influenced industry substantially during the past 7 years, leading to a more than 40% fall in the primary energy supply and a decrease in electricity consumption of more than 40%. The consumption of energy in households and industries is only 66 GJ/capita compared with 111 and 121 GJ/capita in the EU and Denmark, respectively. This is partly due to the fact that only a very small part of the electricity is produced using fuels. Most of it is either imported or produced on hydropower. But even though the consumption is rather small, the use of primary energy is rather high. Compared with Denmark and the EU, the Latvian energy losses are high. Especially compared with GDP, the Latvian energy use is much higher (42 TJ/million $US) than in Europe (7 TJ/million $US) and Denmark (5 TJ/million $US). Due to the decrease in the primary energy supply, the emissions of CO2 in Latvia have decreased by 45% since 1990. Most of the decrease is, however, directly linked to the economic decline and cannot continue at such a rate indefinitely. After economic recovery, a period of stabilization and an increase in energy use is likely to follow. Right now, Latvia can easily live up to the Kyoto protocol or any declaration that formulates objectives in the percentage of 1990 emissions. However, after economic recovery, CO2 problems might return. Moreover, the CO2 emission level of 1990 is not expected to be reached before 2020. The Kyoto target is an 8% reduction [4]. This give Latvia the opportunity to sell CO2 credits, because the CO2 emission levels in 2010 will be less than in 1990 (see Fig. 1). Table 1 Comparison between Latvia, Denmark and the EU
Area and population Population (million) Area (1000 km2) Wooded area (%) Economics GDP (US$/capita) Balance of payments ($US/capita) Average salary ($US/month) Energy Primary energy (GJ/capita) ⫺ pr. GDP (TJ/mio. $US) Consumption (GJ/capita) Electricity (kWh/capita)
EU
Denmark
Latvia
371 ? ?
5.2 43.1 12%
2.5 64.6 45%
23 000 ?
32 000 ⫹ 740
1800 ⫺ 240
?
?
170
156 7 111 5407
159 5 121 6054
75 42 66 2490
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Fig. 1.
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CO2 emission 1990-2010 in Latvia.
Both the expected economic recovery and the possibility of exports of CO2-credits indicate that CO2-reduction should be an issue in Latvia. Different activities oriented to the reduction of CO2 emissions have been carried out. The most important contributions have been provided by the Swedish governmental loan program, “Environmentally Adapted Energy Systems in Baltic States and Eastern Europe” (EAES). The EAES program provides material for the implementation of the 1992 UN Framework Convention on Climate Change, in particular the pilot phase for Activities Implemented Jointly (AIJ) [5]. During the period 1993–98, 27 pilot AIJ projects have been implemented in co-operation with different multilateral programs: 16 biomass projects; 8 energy-efficiency projects; 2 small-scale CHP projects and wind energy projects. They resulted in a total reduction of CO2 emissions of 120 000 ton/year [6]. 2. Latvian energy system During the Soviet time the Baltic electricity supply was an integrated system for the three Baltic countries (Estonia, Latvia and Lithuania) and some of the neighboring regions. Most of the electricity was produced either using oil shale in Estonia or nuclear power in Lithuania. In Latvia the most important production units were hydropower, and they were used for power regulation in all of the Baltic electricity systems. Therefore, the present situation in Latvia is that 50% of the Latvian electricity consumption is imported, 30% is produced using hydropower, and the rest is produced using fossil fuels (partly in cogeneration). The natural gas supply system was also an integrated system for all three Baltic countries and neighboring regions. In relation to Belarussia and Russia, Latvia can be regarded as a natural gas transit country, and almost all of the storage capacity for the whole region is located in Latvia. The underground gas reserve in Latvia is used for the stabilization of the regional gas supply. The reserve supplies gas to Estonia and Lithuania, stores Russian strategic gas reserve, and returns gas to Russia in the winter. There are unique geological structures for the construction of additional storage, enough for covering the load fluctuation for the whole European gas market. Seventy percent of the heat demand in Latvia is provided by district heating. The political transition has created potential problems for many district-heating systems. The systems are often
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based on burning imported heavy fuel oil (50%), and very few take advantage of cogeneration (15%). Many district heating pipelines are not well insulated, and the heat losses are relatively high. Most of the systems were constructed between 1960 and 1990, and a considerable part of the system is close to the end of service time, or has already reached this level. Decline of industry and agriculture has rendered the installed production and distribution capacities much higher than needed, and therefore they operate with low efficiencies. The political transition has also led to market pricing of fuel and heat, and thus the heat prices have increased dramatically. Therefore, many consumers are considering disconnecting from the district heating system. Latvia has some interesting opportunities. As already mentioned, the resources of wood are considerable. Forty-five percent of Latvia is forest area, and the population is only 2.5 million, living on 65 000 km2. In comparison the Danish population is 5.2 million living on only 43 000 km2, with a much lower percentage of forest area. This article seeks to form a strategy to develop the use of Latvian wood resources in local cogeneration. In this way, Latvia might be able to build up an energy-efficient alternative to importing electricity from neighboring countries. Today, approximately 50% of the Latvian electricity is imported from Estonia, Lithuania and a little from Russia. The import price is only approximately 0.014 Ls/kWh (2–3 USc/kWh). This very low import price is a short-term marginal price, which is possible because the production in Estonia and Lithuania is based on existing production capacities inherited from the former Soviet Union. In Estonia the production is based on local oil shale and in Lithuania on nuclear power. In both countries, necessary long-term capital costs are not included in the production prices. Today, more than 90% of the Estonian electricity production comes from oil shale power stations. These stations have no capital costs, and the electricity is, therefore, produced at very low short-term marginal costs of only 0.27 EEK/kWh (2 USc/kWh). It should be mentioned that this very low price does not include the cleaning up after production (half of the oil shale is turned into ashes, which creates pollution problems). Most of the oil shale power stations are very old, however, and will soon (i.e. 5 or 10 years from now) have to be replaced by either new stations or other solutions. So very soon Estonia will be facing an increase in electricity production prices. Such long-term marginal costs are calculated at approximately 0.50 EEK/kWh (3.5 USc/kWh) [7]. It should be emphasized that this price is based on today’s fuel costs of oil shale of 105 EKK/ton. These fuel costs are likely to increase in the future, especially if the environmental costs of mining are to be included. 3. Local CHP-solutions: the case of Saldus town The analysis of local CHP-solutions in Latvia is based on the case study of Saldus town in the Saldus region, which is one of 33 administrative regions in Latvia. It is located 110 km west of Riga and 100 km to the east of the Baltic Sea. The area of the Saldus region is 2171 km2 and it has a common border with Lithuania. Two towns (Saldus and Broccni) are located in the center of the region with a distance between the towns of approximately 5 km. The rest of the region is divided into 19 small rural districts with a municipality council each. Saldus town has approximately 12 500 inhabitants and Broccni 3200. The total number of inhabitants in the Saldus region is nearly 40 000. The area is typical for Latvian rural areas. The surrounding area is mainly flat land with a mixture of forest and farmland. Peat, as well as wood fuels, is readily available.
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Consumers of heat in Saldus town can be divided into individual heating, centralized heating and district heating. Most buildings have individual stoves or central heating mainly fuelled with wood logs. Larger consumers have individual central heating fuelled with fuel oil, natural gas, wood logs, peat briquettes, coal or district heating. Most of the multi-family buildings have district heating. Saldus town has seven separate district-heating networks. The pipelines are mainly placed in the ground. However, in some cases, the pipelines are placed above the ground or in corridors in the basements of buildings. In most cases, the central heating systems in the houses are connected directly to the district heating system. Old four-pipeline direct heat systems are actually being replaced by new two-pipeline systems with separate consumer connections. In the future, the plan is to connect all existing networks into one district heat supply system with three main boiler houses. The heat production is based on heavy fuel oil, natural gas and wood logs. The wood logs are used whenever it is possible. In the future, it is planned to use more wood fuels. The total consumption of all the district heating networks is 54 700 MWh/year. Using the SESAM computer model [8] for analysis of integrated energy systems, four scenarios of district heating consumption have been calculated. Two scenarios of improvements in the building have been used. The first represents a reference with no major improvements of buildings. The other scenario results in 90% of the present heat demand due to energy conservation activities by reducing ventilation losses, lowering indoor temperature, and improving insulation. Two scenarios of the future connection to the district heating system have been examined, too. Again, the first represents a status-quo situation in which only a very few new buildings are connected to the district heating system. The second scenario connects most of the heat demand in Saldus town and makes the district heating demand grow by a factor of nearly 3. The results are shown in Table 2. Today, the cheapest solution for supplying the district heating system with heat seems to be to continue with partly imported heavy fuel oil and partly wood logs. Of course, this solution is not good for the Latvian balance of payments and the environment. Neither does this solution create employment and industrial development in Saldus or in Latvia. The boilers, however, will soon be due for replacement with new boilers, and new boilers for burning local woodchips are being investigated. The long-term costs of this solution seem to have led to a small rise in heat prices. Such a solution will indeed help imports but at the same time it might also trap Saldus in a future situation of separated heat and power production, preventing the implementation of fuel-savings from cogeneration. Therefore, a number of alternative CHP-solutions have been compared with reference to the woodchip boiler (and imports of electricity). The five CHP-alternatives are the following: 1. Natural gas in a gas engine. 2. Gas engine fuelled with wood gas from wood gasification. Table 2 Four scenarios of Saldus District Heating (consumption year 2020) Existing consumers, existing insulation Existing consumers, high insulation More consumers, existing insulation More consumers, high insulation
60 500 MWh/year 49 200 MWh/year 150 800 MWh/year 129 700 MWh/year
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3. Natural gas cogeneration plus a heat pump. 4. Stirling engine fuelled with wood. 5. Gas engine fuelled with biogas from a new biogas plant on manure and organic waste. 3.1. Business economy for the Saldus District Heating Company First, a rough estimate of the size of the five alternative CHP-units was found on the SESAM computer model [8]. Then the business economy for the Saldus District Heating Company was found by examining the KVBUDGET model [9]. Both SESAM and KVBUDGET are computer models based on simulations of the heat demand and production. From such simulations the computer models are able to calculate the division of heat production between CHP-units and peak load boilers. Adding investments and other costs with electricity sales can calculate prices for the reference case and the five supply alternatives. The investments and the operation and maintenance costs are based on typical Danish prices [10,11], when the energy plants are constructed and operated in Denmark. Salaries, however, are much lower in Latvia, and, therefore, the investments and particularly the operation costs are assumed to be lower [12,13]. Operation and maintenance (not including fuel) is very labor intensive, and so are investments in building and installation, while machinery is expected mainly to be imported at world market prices. Therefore, we have assumed total investment cost at 80% and operation and maintenance at 50% of the Danish level. It should be emphasized that the same assumptions have been used in both the reference and all the alternatives. The above-mentioned electricity prices are also based on lower salaries in the Baltic countries. Thus, other price assumptions will change both the reference case and the alternatives. The fuel prices are based on today’s fuel prices (see Appendix A). The resulting heat production prices have been calculated using the existing system without cogeneration as a reference. This system consists of a mixture of heavy fuel oil and wood log boilers in which using the wood log has first priority. However, some of the boilers will have to be replaced after 5 years and the rest after 10 years. Therefore, the reference is supplemented with a new woodchip boiler in the year 2004 and a peak load boiler in the year 2009. The reference is operated and paid back over 20 years with an interest rate of 5% (plus inflation). The calculation has resulted in a heat production price of approximately 4 Ls/MWh (7 $US/MWh) rising to between 6 and 7 Ls/MWh in the year 2004, when investments in new boilers are needed. The reference heat production price has been used in the calculation of the alternatives in order to be able to present the results in terms of present values of the total costs and benefits. All five alternatives have been calculated over the same 20-year period with the same interest rate of 5%. The results are shown in Table 3. The feasibility of cogeneration is very sensitive to the electricity sales prices. The business economy of the five alternatives has been calculated both for sales prices based on the existing consumer prices and on the short-term marginal costs, i.e. the import costs. None of the five alternatives is feasible with the short-term marginal import costs, and some of the present value deficits are nearly as high as the investments. With an electricity sales price based on the consumer price, the CHP alternative becomes feasible, and the heat pump alternative has only a minor deficit (compared with the investments). The electricity sales price is between 0.015 and 0.019 Ls/kWh for all the alternatives except for the heat pump alternative, which has a very high
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Table 3 Economic feasibility (in present value, Pv) Supply alternatives
Size (MWe)
Reference Ngas cogen. Gasification Heat pump Stirling Biogas
– 6 2⫹4 1⫹3 3 3
Investment (million Ls) 1.8 2.4 6.2 2.9 3.7 5.7
Con. el-price, Import el-price, Balance elDay/night elPv (million Ls) Pv (million Ls) price (Ls/kWh) price – 2.3 3.0 ⫺ 0.8 3.2 2.5
⫺ ⫺ ⫺ ⫺ ⫺
– 2.2 2.3 2.2 0.2 0.8
0.019 0.018 0.030 0.015 0.017
0.034/0.014
price of 0.030 Ls/kWh. However, the heat pump in combination with a CHP unit has the possibility of producing electricity in the daytime and consuming electricity during night hours. Therefore, this alternative may become feasible just by having differentiated electricity prices of 0.014 Ls/kWh at night and 0.034 Ls/kWh during the day. 3.2. The socioeconomy of Latvia A socioeconomic calculation has been carried out for the same five alternatives. The calculation shows the effects on the Latvian balance of payments. The results are shown in Table 4. The influence on the Latvian balance of payments is found by including only imports and exports in the calculation. Import of natural gas has been set to the import price for Russia at the border. The electricity is assumed to be a reduction in the imports from Estonia, Lithuania and Russia, and the cost of wood for fuel plus operation and maintenance costs are found by assuming a certain import of tools and components for these activities. The cost of making woodchips is assumed to be 20% of the selling price, and for operation and maintenance 15% of the total cost is assumed to be imports. For investments, two scenarios are calculated: (1) the main CHP-components are imported and only buildings and some of the installation and transport are Latvian; and (2) some of the main components are produced in Latvia. In the first situation the imports are estimated at 70% of the total investment, and in the latter 40%. Table 4 Socioeconomic feasibility (in present value, Pv) 70% imports in investment Supply alternatives
Size (MWe)
Ngas cogen. Gasification Heat pump Sterling Biogas
6 2⫹4 1⫹3 3 3
Investment (million Ls)
Investment (million Ls)
2.4 6.2 2.9 3.7 5.7
1.6 4.3 2.0 2.6 4.0
40% imports in investment
Pv (million Ls) Investment (million Ls) 0.1 1.7 ⫺ 1.7 1.6 0.7
0.9 2.5 1.6 1.5 2.3
Pv (million Ls)
0.8 3.5 ⫺ 0.8 2.7 2.5
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The results are shown in Table 4. From a Latvian balance of payments point of view, it is seen that the CHP alternatives based on wood are attractive even in the situation in which 70% of the investment is imported. If Latvia can produce 60% itself, those investments are even more attractive. However, the heat pump and CHP based on imported natural gas from Russia is not particularly attractive. In the case of biogas, the socioeconomic feasibility is not as good as wood. This means that this alternative needs either a strong Latvian part of the investment or other benefits included in the calculation such as handling problems concerning manure and organic waste. 3.3. Public regulation The socioeconomic calculations show that with today’s electricity import prices the balance of payments will benefit from the development of CHP alternatives based on wood, even if 70% of the investments are imported. It must be mentioned that the last conclusion is based on “ceteris paribus”. This means that public regulation must assume the same prices for the industrial consumer. Also, it means that no advantage of a possible export of new technology can be achieved. From a public regulation point of view, the problem is that the best long-term solutions cannot be implemented and developed because the business economy is not feasible with the short-term conditions. But from a socioeconomic point of view, it is shown that the development may be arranged in a way that allows the balance of payments to benefit even on a short-term basis, especially if measures are taken to secure Latvian industrial participation in the investments. The possible effect of some public regulation measures is calculated in Table 5. One measure could be to ensure electricity sales prices for local CHP. As already shown, this will improve the business economy considerably. Another measure could be to assure public guarantees for loans. In Denmark such guarantees have resulted in interest of 2.5 to 3% (plus inflation). Such a measure would mean a lot to business economy. Of course, investment subsidies could be a measure. In Table 5, the effect of a subsidy of 20% is calculated. 4. Conclusions In the Soviet time, the Latvian energy supply was part of an integrated system for the whole Baltic region. Most of the electricity was produced in Estonia and Lithuania using oil shale and Table 5 The effect on economy of possible public regulation measures Supply alternatives
Size (MWe)
Ngas cogen. Gasification Heat pump Stirling Biogas
6 2⫹4 1⫹3 3 3
Investment (million Ls)
2.4 6.2 2.9 3.7 5.7
Today 0.014 Ls/kWh Pv (million Ls) ⫺ ⫺ ⫺ ⫺ ⫺
2.2 2.3 2.2 0.2 0.8
With 20% investment subsidy Pv (million Ls) ⫺ 1.8 ⫺ 1.1 ⫺ 1.7 0.5 0.3
With 3% loan reform Pv (million Ls) ⫺ 2.2 ⫺ 1.5 ⫺ 2.1 0.4 0.1
With el-price 0.020 Ls/kWh Pv (million Ls)
0.5 0.9 ⫺ 1.4 1.8 1.2
With el-price 0.020 Ls/kWh and loan ref. Pv (million Ls) 1.1 2.3 ⫺ 1.0 2.9 2.6
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nuclear power. Therefore, Latvia now is in a situation of importing approximately 50% of its electricity consumption from these countries, in which the short-term production prices do not include necessary long-term costs of new production capacities. Thus, Latvia has very low short-term electricity import prices. But, in the near future, the electricity production price in both Estonia and Lithuania will increase, when the existing oil shale and nuclear power stations have to be replaced. Already, Latvia has potential short-term problems in restoring the district heating systems. The prices are rising, and many consumers have converted to electric heating. This could lead to the collapse of the district heating systems. From the point of view of fuel efficiency the only basis for district heating will be exploiting the advantages of cogeneration. Thus, Latvia has two major long-term strategic choices to make: (1) should the country try to reduce the energy demand, and (2) should the country try to replace the import of electricity by domestic production. If Latvia chose to develop domestic production, then the choice is whether it should be new centralized production units or it should be decentralized. In the first case, the domestic heating will be left to boilers or electric heating leading to a very high primary energy supply. In the latter, Latvia could benefit from the advantage of cogeneration leading to lower fuel consumption. It should be emphasized that if Latvia chooses the decentralized solution, it is very important to act soon. First of all, it is necessary to save the district heating systems. Secondly, it takes time to develop the decentralized CHP production alternative and it should be ready before a sudden increase in import prices. This article shows that the implementation of local CHP is very sensitive to the electricity sales prices. CHP units are not economically feasible with an import price based on the short-term marginal costs of oil shale and nuclear power. However, from the socioeconomic point of view of the balance of payments, local wood and biogas resources should be preferred to imported natural gas. If such CHP technologies are wanted, then several public regulation initiatives are needed: 1. Long-term electricity sales prices should be secured, i.e. sales prices higher than today’s import prices. 2. Technological development of new solutions such as the Stirling engine, gasification and biogas should be initiated. 3. The alternative of electric heating and individual natural gas boilers should (also in the short term) be made more expensive than staying on the district heating systems. 4. Taxes or subsidies should make wood CHP alternatives more attractive than natural gas CHP.
Acknowledgements This article is based on the results of a group work session during a Nordic training program for Energy Experts in the Baltic States (the PROCEED program) financed by the Nordic Council of Ministers. Special thanks to our colleagues in the teachers’ team from both Denmark and Latvia, and to all the participants in the Latvian course which took place during the spring of 1998.
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Appendix A
Table 6 Investment cost estimates (exchange rate: 1 Ls ⫽ 12 DKK) Investments
Unit
Heavy fuel oil boiler Ngas boiler Woodchip boiler Ngas cogeneration
MWth MWth MWth MWe
Gasification cogeneration
MWe
Stirling engine
MWe
Heat pump
MWth
Biogas cogeneration
MWe
Efficiency
Price in DK (Mio. DKK)
Price in LV (80%) (Mio. Ls)
Imports if main Imports if components are produced in imported (%) Latvia (%)
90% 95% 90% 40% 50% 34%
th th th el th el
0.5 0.2 2.5
0.03 0.01 0.17
70 70 70
40 40 40
5.5
0.37
70
40
43% 25% 60% ⫺ 20% ⫹ 100% 36% 40%
th el th el th el th
20
1.33
70
40
18
1.20
70
40
5
0.33
70
40
28
1.86
70
40
Table 7 Operation and maintenence cost estimates (exchange rate: 1 Ls ⫽ 12 DKK) Operation and maintenance Unit Existing wood log boiler Heavy fuel oil boiler Ngas boiler Woodchip boiler Ngas cogeneration Gasification cogeneration Stirling engine Heat pump Biogas cogeneration
MWhth MWhth MWhth MWhth MWhth MWhth MWhth MWhth MWhth
Price in DK (DKK) – 15 5 25 50 80 70 20 120
Price in Ls (50%) (Ls)
Imports (15%) (Ls)
1.2 0.6 0.2 1.0 2.1 3.3 2.9 1.3 5.0
0.18 0.09 0.03 0.15 0.32 0.50 0.44 0.47 0.75
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Table 8 Fuel cost estimates (exchange rate: 1 Ls ⫽ 12 DKK) Fuel prices
Unit
Wood blocks Woodchips Heavy fuel oil Russian gas Electricity
Nm3 Nm3 ton Nm3 kWh
Price (Ls/unit) 4 6 60 0.069 0.024
Import price (Ls/unit) 0.8 1.2 40 0.045 0.014
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District heating and market economy in Latvia Henrik Lunda,*, Frede Hvelplunda, Ilmars Kassb, Edgars Dukalskisb, Dagnija Blumbergab a
Department of Development and Planning, Aalborg University, Fibiger Straede 13, DK-9260 Aalborg, Denmark b Faculty of Energy and Electrotechnics, Riga Technical University, Kronvalda Boulv. 1, LV-1010 Riga, Latvia Received 8 December 1998
Abstract From the Soviet time Latvia inherited a number of district-heating systems fuelled with Russian natural gas or imported heavy fuel oil. From a fuel efficiency point of view there is no reason to preserve the district heating systems unless the boilers are replaced by CHP. However, 50% of the electricity consumption is imported, and the import prices are low because the production prices in neither Estonia nor Lithuania fully include the long-term capacity costs. Thus, Latvia has two major long-term strategic choices to make: (1) should the country try to reduce the energy demand, and (2) should the country try to replace the import of electricity by domestic production. In implementing the latter solution Latvia could benefit from cogeneration, if the local district heating systems are preserved. This article seeks to form a strategy to develop the use of Latvian wood resources in local cogeneration. Even though cogeneration from a business economic point of view is not feasible with today’s import prices, the Latvian balance of payments would benefit immediately from the implementation of such technologies. 1999 Elsevier Science Ltd. All rights reserved.
1. Introduction Officially, the Republic of Latvia restored its independence on the 4 May 1991. Since this date Latvia has been in a situation of changing its economy to market conditions and integrating to
* Corresponding author. Tel: ⫹ 45-9815-8522; fax: ⫹ 45-98-15-65-41; e-mail: [email protected] 0360-5442/99/$ - see front matter 1999 Elsevier Science Ltd. All rights reserved. PII: S 0 3 6 0 - 5 4 4 2 ( 9 9 ) 0 0 0 1 7 - 1
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different European economic and political structures as quickly as possible. Table 1 compares key figures for Latvia with Denmark and the EU [1–3]. Latvia is approximately 1.5 times the area of Denmark; the percentage of forest area is much higher; and the population is only 2.5 million compared with the Danish population of 5.2 million. Together this means that the wood resources per capita are much higher in Latvia than in Denmark. Latvia, however, is in a difficult economic situation. The gross national product is only one-tenth of the EU average, and Latvia has a deficit on the balance of payments of more than one month’s gross pay of all employed persons in the economy. Only some of this deficit can be explained by investments in the transition of its economy. The Latvian transition to a market economy has influenced industry substantially during the past 7 years, leading to a more than 40% fall in the primary energy supply and a decrease in electricity consumption of more than 40%. The consumption of energy in households and industries is only 66 GJ/capita compared with 111 and 121 GJ/capita in the EU and Denmark, respectively. This is partly due to the fact that only a very small part of the electricity is produced using fuels. Most of it is either imported or produced on hydropower. But even though the consumption is rather small, the use of primary energy is rather high. Compared with Denmark and the EU, the Latvian energy losses are high. Especially compared with GDP, the Latvian energy use is much higher (42 TJ/million $US) than in Europe (7 TJ/million $US) and Denmark (5 TJ/million $US). Due to the decrease in the primary energy supply, the emissions of CO2 in Latvia have decreased by 45% since 1990. Most of the decrease is, however, directly linked to the economic decline and cannot continue at such a rate indefinitely. After economic recovery, a period of stabilization and an increase in energy use is likely to follow. Right now, Latvia can easily live up to the Kyoto protocol or any declaration that formulates objectives in the percentage of 1990 emissions. However, after economic recovery, CO2 problems might return. Moreover, the CO2 emission level of 1990 is not expected to be reached before 2020. The Kyoto target is an 8% reduction [4]. This give Latvia the opportunity to sell CO2 credits, because the CO2 emission levels in 2010 will be less than in 1990 (see Fig. 1). Table 1 Comparison between Latvia, Denmark and the EU
Area and population Population (million) Area (1000 km2) Wooded area (%) Economics GDP (US$/capita) Balance of payments ($US/capita) Average salary ($US/month) Energy Primary energy (GJ/capita) ⫺ pr. GDP (TJ/mio. $US) Consumption (GJ/capita) Electricity (kWh/capita)
EU
Denmark
Latvia
371 ? ?
5.2 43.1 12%
2.5 64.6 45%
23 000 ?
32 000 ⫹ 740
1800 ⫺ 240
?
?
170
156 7 111 5407
159 5 121 6054
75 42 66 2490
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Fig. 1.
551
CO2 emission 1990-2010 in Latvia.
Both the expected economic recovery and the possibility of exports of CO2-credits indicate that CO2-reduction should be an issue in Latvia. Different activities oriented to the reduction of CO2 emissions have been carried out. The most important contributions have been provided by the Swedish governmental loan program, “Environmentally Adapted Energy Systems in Baltic States and Eastern Europe” (EAES). The EAES program provides material for the implementation of the 1992 UN Framework Convention on Climate Change, in particular the pilot phase for Activities Implemented Jointly (AIJ) [5]. During the period 1993–98, 27 pilot AIJ projects have been implemented in co-operation with different multilateral programs: 16 biomass projects; 8 energy-efficiency projects; 2 small-scale CHP projects and wind energy projects. They resulted in a total reduction of CO2 emissions of 120 000 ton/year [6]. 2. Latvian energy system During the Soviet time the Baltic electricity supply was an integrated system for the three Baltic countries (Estonia, Latvia and Lithuania) and some of the neighboring regions. Most of the electricity was produced either using oil shale in Estonia or nuclear power in Lithuania. In Latvia the most important production units were hydropower, and they were used for power regulation in all of the Baltic electricity systems. Therefore, the present situation in Latvia is that 50% of the Latvian electricity consumption is imported, 30% is produced using hydropower, and the rest is produced using fossil fuels (partly in cogeneration). The natural gas supply system was also an integrated system for all three Baltic countries and neighboring regions. In relation to Belarussia and Russia, Latvia can be regarded as a natural gas transit country, and almost all of the storage capacity for the whole region is located in Latvia. The underground gas reserve in Latvia is used for the stabilization of the regional gas supply. The reserve supplies gas to Estonia and Lithuania, stores Russian strategic gas reserve, and returns gas to Russia in the winter. There are unique geological structures for the construction of additional storage, enough for covering the load fluctuation for the whole European gas market. Seventy percent of the heat demand in Latvia is provided by district heating. The political transition has created potential problems for many district-heating systems. The systems are often
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based on burning imported heavy fuel oil (50%), and very few take advantage of cogeneration (15%). Many district heating pipelines are not well insulated, and the heat losses are relatively high. Most of the systems were constructed between 1960 and 1990, and a considerable part of the system is close to the end of service time, or has already reached this level. Decline of industry and agriculture has rendered the installed production and distribution capacities much higher than needed, and therefore they operate with low efficiencies. The political transition has also led to market pricing of fuel and heat, and thus the heat prices have increased dramatically. Therefore, many consumers are considering disconnecting from the district heating system. Latvia has some interesting opportunities. As already mentioned, the resources of wood are considerable. Forty-five percent of Latvia is forest area, and the population is only 2.5 million, living on 65 000 km2. In comparison the Danish population is 5.2 million living on only 43 000 km2, with a much lower percentage of forest area. This article seeks to form a strategy to develop the use of Latvian wood resources in local cogeneration. In this way, Latvia might be able to build up an energy-efficient alternative to importing electricity from neighboring countries. Today, approximately 50% of the Latvian electricity is imported from Estonia, Lithuania and a little from Russia. The import price is only approximately 0.014 Ls/kWh (2–3 USc/kWh). This very low import price is a short-term marginal price, which is possible because the production in Estonia and Lithuania is based on existing production capacities inherited from the former Soviet Union. In Estonia the production is based on local oil shale and in Lithuania on nuclear power. In both countries, necessary long-term capital costs are not included in the production prices. Today, more than 90% of the Estonian electricity production comes from oil shale power stations. These stations have no capital costs, and the electricity is, therefore, produced at very low short-term marginal costs of only 0.27 EEK/kWh (2 USc/kWh). It should be mentioned that this very low price does not include the cleaning up after production (half of the oil shale is turned into ashes, which creates pollution problems). Most of the oil shale power stations are very old, however, and will soon (i.e. 5 or 10 years from now) have to be replaced by either new stations or other solutions. So very soon Estonia will be facing an increase in electricity production prices. Such long-term marginal costs are calculated at approximately 0.50 EEK/kWh (3.5 USc/kWh) [7]. It should be emphasized that this price is based on today’s fuel costs of oil shale of 105 EKK/ton. These fuel costs are likely to increase in the future, especially if the environmental costs of mining are to be included. 3. Local CHP-solutions: the case of Saldus town The analysis of local CHP-solutions in Latvia is based on the case study of Saldus town in the Saldus region, which is one of 33 administrative regions in Latvia. It is located 110 km west of Riga and 100 km to the east of the Baltic Sea. The area of the Saldus region is 2171 km2 and it has a common border with Lithuania. Two towns (Saldus and Broccni) are located in the center of the region with a distance between the towns of approximately 5 km. The rest of the region is divided into 19 small rural districts with a municipality council each. Saldus town has approximately 12 500 inhabitants and Broccni 3200. The total number of inhabitants in the Saldus region is nearly 40 000. The area is typical for Latvian rural areas. The surrounding area is mainly flat land with a mixture of forest and farmland. Peat, as well as wood fuels, is readily available.
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Consumers of heat in Saldus town can be divided into individual heating, centralized heating and district heating. Most buildings have individual stoves or central heating mainly fuelled with wood logs. Larger consumers have individual central heating fuelled with fuel oil, natural gas, wood logs, peat briquettes, coal or district heating. Most of the multi-family buildings have district heating. Saldus town has seven separate district-heating networks. The pipelines are mainly placed in the ground. However, in some cases, the pipelines are placed above the ground or in corridors in the basements of buildings. In most cases, the central heating systems in the houses are connected directly to the district heating system. Old four-pipeline direct heat systems are actually being replaced by new two-pipeline systems with separate consumer connections. In the future, the plan is to connect all existing networks into one district heat supply system with three main boiler houses. The heat production is based on heavy fuel oil, natural gas and wood logs. The wood logs are used whenever it is possible. In the future, it is planned to use more wood fuels. The total consumption of all the district heating networks is 54 700 MWh/year. Using the SESAM computer model [8] for analysis of integrated energy systems, four scenarios of district heating consumption have been calculated. Two scenarios of improvements in the building have been used. The first represents a reference with no major improvements of buildings. The other scenario results in 90% of the present heat demand due to energy conservation activities by reducing ventilation losses, lowering indoor temperature, and improving insulation. Two scenarios of the future connection to the district heating system have been examined, too. Again, the first represents a status-quo situation in which only a very few new buildings are connected to the district heating system. The second scenario connects most of the heat demand in Saldus town and makes the district heating demand grow by a factor of nearly 3. The results are shown in Table 2. Today, the cheapest solution for supplying the district heating system with heat seems to be to continue with partly imported heavy fuel oil and partly wood logs. Of course, this solution is not good for the Latvian balance of payments and the environment. Neither does this solution create employment and industrial development in Saldus or in Latvia. The boilers, however, will soon be due for replacement with new boilers, and new boilers for burning local woodchips are being investigated. The long-term costs of this solution seem to have led to a small rise in heat prices. Such a solution will indeed help imports but at the same time it might also trap Saldus in a future situation of separated heat and power production, preventing the implementation of fuel-savings from cogeneration. Therefore, a number of alternative CHP-solutions have been compared with reference to the woodchip boiler (and imports of electricity). The five CHP-alternatives are the following: 1. Natural gas in a gas engine. 2. Gas engine fuelled with wood gas from wood gasification. Table 2 Four scenarios of Saldus District Heating (consumption year 2020) Existing consumers, existing insulation Existing consumers, high insulation More consumers, existing insulation More consumers, high insulation
60 500 MWh/year 49 200 MWh/year 150 800 MWh/year 129 700 MWh/year
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3. Natural gas cogeneration plus a heat pump. 4. Stirling engine fuelled with wood. 5. Gas engine fuelled with biogas from a new biogas plant on manure and organic waste. 3.1. Business economy for the Saldus District Heating Company First, a rough estimate of the size of the five alternative CHP-units was found on the SESAM computer model [8]. Then the business economy for the Saldus District Heating Company was found by examining the KVBUDGET model [9]. Both SESAM and KVBUDGET are computer models based on simulations of the heat demand and production. From such simulations the computer models are able to calculate the division of heat production between CHP-units and peak load boilers. Adding investments and other costs with electricity sales can calculate prices for the reference case and the five supply alternatives. The investments and the operation and maintenance costs are based on typical Danish prices [10,11], when the energy plants are constructed and operated in Denmark. Salaries, however, are much lower in Latvia, and, therefore, the investments and particularly the operation costs are assumed to be lower [12,13]. Operation and maintenance (not including fuel) is very labor intensive, and so are investments in building and installation, while machinery is expected mainly to be imported at world market prices. Therefore, we have assumed total investment cost at 80% and operation and maintenance at 50% of the Danish level. It should be emphasized that the same assumptions have been used in both the reference and all the alternatives. The above-mentioned electricity prices are also based on lower salaries in the Baltic countries. Thus, other price assumptions will change both the reference case and the alternatives. The fuel prices are based on today’s fuel prices (see Appendix A). The resulting heat production prices have been calculated using the existing system without cogeneration as a reference. This system consists of a mixture of heavy fuel oil and wood log boilers in which using the wood log has first priority. However, some of the boilers will have to be replaced after 5 years and the rest after 10 years. Therefore, the reference is supplemented with a new woodchip boiler in the year 2004 and a peak load boiler in the year 2009. The reference is operated and paid back over 20 years with an interest rate of 5% (plus inflation). The calculation has resulted in a heat production price of approximately 4 Ls/MWh (7 $US/MWh) rising to between 6 and 7 Ls/MWh in the year 2004, when investments in new boilers are needed. The reference heat production price has been used in the calculation of the alternatives in order to be able to present the results in terms of present values of the total costs and benefits. All five alternatives have been calculated over the same 20-year period with the same interest rate of 5%. The results are shown in Table 3. The feasibility of cogeneration is very sensitive to the electricity sales prices. The business economy of the five alternatives has been calculated both for sales prices based on the existing consumer prices and on the short-term marginal costs, i.e. the import costs. None of the five alternatives is feasible with the short-term marginal import costs, and some of the present value deficits are nearly as high as the investments. With an electricity sales price based on the consumer price, the CHP alternative becomes feasible, and the heat pump alternative has only a minor deficit (compared with the investments). The electricity sales price is between 0.015 and 0.019 Ls/kWh for all the alternatives except for the heat pump alternative, which has a very high
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Table 3 Economic feasibility (in present value, Pv) Supply alternatives
Size (MWe)
Reference Ngas cogen. Gasification Heat pump Stirling Biogas
– 6 2⫹4 1⫹3 3 3
Investment (million Ls) 1.8 2.4 6.2 2.9 3.7 5.7
Con. el-price, Import el-price, Balance elDay/night elPv (million Ls) Pv (million Ls) price (Ls/kWh) price – 2.3 3.0 ⫺ 0.8 3.2 2.5
⫺ ⫺ ⫺ ⫺ ⫺
– 2.2 2.3 2.2 0.2 0.8
0.019 0.018 0.030 0.015 0.017
0.034/0.014
price of 0.030 Ls/kWh. However, the heat pump in combination with a CHP unit has the possibility of producing electricity in the daytime and consuming electricity during night hours. Therefore, this alternative may become feasible just by having differentiated electricity prices of 0.014 Ls/kWh at night and 0.034 Ls/kWh during the day. 3.2. The socioeconomy of Latvia A socioeconomic calculation has been carried out for the same five alternatives. The calculation shows the effects on the Latvian balance of payments. The results are shown in Table 4. The influence on the Latvian balance of payments is found by including only imports and exports in the calculation. Import of natural gas has been set to the import price for Russia at the border. The electricity is assumed to be a reduction in the imports from Estonia, Lithuania and Russia, and the cost of wood for fuel plus operation and maintenance costs are found by assuming a certain import of tools and components for these activities. The cost of making woodchips is assumed to be 20% of the selling price, and for operation and maintenance 15% of the total cost is assumed to be imports. For investments, two scenarios are calculated: (1) the main CHP-components are imported and only buildings and some of the installation and transport are Latvian; and (2) some of the main components are produced in Latvia. In the first situation the imports are estimated at 70% of the total investment, and in the latter 40%. Table 4 Socioeconomic feasibility (in present value, Pv) 70% imports in investment Supply alternatives
Size (MWe)
Ngas cogen. Gasification Heat pump Sterling Biogas
6 2⫹4 1⫹3 3 3
Investment (million Ls)
Investment (million Ls)
2.4 6.2 2.9 3.7 5.7
1.6 4.3 2.0 2.6 4.0
40% imports in investment
Pv (million Ls) Investment (million Ls) 0.1 1.7 ⫺ 1.7 1.6 0.7
0.9 2.5 1.6 1.5 2.3
Pv (million Ls)
0.8 3.5 ⫺ 0.8 2.7 2.5
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The results are shown in Table 4. From a Latvian balance of payments point of view, it is seen that the CHP alternatives based on wood are attractive even in the situation in which 70% of the investment is imported. If Latvia can produce 60% itself, those investments are even more attractive. However, the heat pump and CHP based on imported natural gas from Russia is not particularly attractive. In the case of biogas, the socioeconomic feasibility is not as good as wood. This means that this alternative needs either a strong Latvian part of the investment or other benefits included in the calculation such as handling problems concerning manure and organic waste. 3.3. Public regulation The socioeconomic calculations show that with today’s electricity import prices the balance of payments will benefit from the development of CHP alternatives based on wood, even if 70% of the investments are imported. It must be mentioned that the last conclusion is based on “ceteris paribus”. This means that public regulation must assume the same prices for the industrial consumer. Also, it means that no advantage of a possible export of new technology can be achieved. From a public regulation point of view, the problem is that the best long-term solutions cannot be implemented and developed because the business economy is not feasible with the short-term conditions. But from a socioeconomic point of view, it is shown that the development may be arranged in a way that allows the balance of payments to benefit even on a short-term basis, especially if measures are taken to secure Latvian industrial participation in the investments. The possible effect of some public regulation measures is calculated in Table 5. One measure could be to ensure electricity sales prices for local CHP. As already shown, this will improve the business economy considerably. Another measure could be to assure public guarantees for loans. In Denmark such guarantees have resulted in interest of 2.5 to 3% (plus inflation). Such a measure would mean a lot to business economy. Of course, investment subsidies could be a measure. In Table 5, the effect of a subsidy of 20% is calculated. 4. Conclusions In the Soviet time, the Latvian energy supply was part of an integrated system for the whole Baltic region. Most of the electricity was produced in Estonia and Lithuania using oil shale and Table 5 The effect on economy of possible public regulation measures Supply alternatives
Size (MWe)
Ngas cogen. Gasification Heat pump Stirling Biogas
6 2⫹4 1⫹3 3 3
Investment (million Ls)
2.4 6.2 2.9 3.7 5.7
Today 0.014 Ls/kWh Pv (million Ls) ⫺ ⫺ ⫺ ⫺ ⫺
2.2 2.3 2.2 0.2 0.8
With 20% investment subsidy Pv (million Ls) ⫺ 1.8 ⫺ 1.1 ⫺ 1.7 0.5 0.3
With 3% loan reform Pv (million Ls) ⫺ 2.2 ⫺ 1.5 ⫺ 2.1 0.4 0.1
With el-price 0.020 Ls/kWh Pv (million Ls)
0.5 0.9 ⫺ 1.4 1.8 1.2
With el-price 0.020 Ls/kWh and loan ref. Pv (million Ls) 1.1 2.3 ⫺ 1.0 2.9 2.6
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nuclear power. Therefore, Latvia now is in a situation of importing approximately 50% of its electricity consumption from these countries, in which the short-term production prices do not include necessary long-term costs of new production capacities. Thus, Latvia has very low short-term electricity import prices. But, in the near future, the electricity production price in both Estonia and Lithuania will increase, when the existing oil shale and nuclear power stations have to be replaced. Already, Latvia has potential short-term problems in restoring the district heating systems. The prices are rising, and many consumers have converted to electric heating. This could lead to the collapse of the district heating systems. From the point of view of fuel efficiency the only basis for district heating will be exploiting the advantages of cogeneration. Thus, Latvia has two major long-term strategic choices to make: (1) should the country try to reduce the energy demand, and (2) should the country try to replace the import of electricity by domestic production. If Latvia chose to develop domestic production, then the choice is whether it should be new centralized production units or it should be decentralized. In the first case, the domestic heating will be left to boilers or electric heating leading to a very high primary energy supply. In the latter, Latvia could benefit from the advantage of cogeneration leading to lower fuel consumption. It should be emphasized that if Latvia chooses the decentralized solution, it is very important to act soon. First of all, it is necessary to save the district heating systems. Secondly, it takes time to develop the decentralized CHP production alternative and it should be ready before a sudden increase in import prices. This article shows that the implementation of local CHP is very sensitive to the electricity sales prices. CHP units are not economically feasible with an import price based on the short-term marginal costs of oil shale and nuclear power. However, from the socioeconomic point of view of the balance of payments, local wood and biogas resources should be preferred to imported natural gas. If such CHP technologies are wanted, then several public regulation initiatives are needed: 1. Long-term electricity sales prices should be secured, i.e. sales prices higher than today’s import prices. 2. Technological development of new solutions such as the Stirling engine, gasification and biogas should be initiated. 3. The alternative of electric heating and individual natural gas boilers should (also in the short term) be made more expensive than staying on the district heating systems. 4. Taxes or subsidies should make wood CHP alternatives more attractive than natural gas CHP.
Acknowledgements This article is based on the results of a group work session during a Nordic training program for Energy Experts in the Baltic States (the PROCEED program) financed by the Nordic Council of Ministers. Special thanks to our colleagues in the teachers’ team from both Denmark and Latvia, and to all the participants in the Latvian course which took place during the spring of 1998.
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Appendix A
Table 6 Investment cost estimates (exchange rate: 1 Ls ⫽ 12 DKK) Investments
Unit
Heavy fuel oil boiler Ngas boiler Woodchip boiler Ngas cogeneration
MWth MWth MWth MWe
Gasification cogeneration
MWe
Stirling engine
MWe
Heat pump
MWth
Biogas cogeneration
MWe
Efficiency
Price in DK (Mio. DKK)
Price in LV (80%) (Mio. Ls)
Imports if main Imports if components are produced in imported (%) Latvia (%)
90% 95% 90% 40% 50% 34%
th th th el th el
0.5 0.2 2.5
0.03 0.01 0.17
70 70 70
40 40 40
5.5
0.37
70
40
43% 25% 60% ⫺ 20% ⫹ 100% 36% 40%
th el th el th el th
20
1.33
70
40
18
1.20
70
40
5
0.33
70
40
28
1.86
70
40
Table 7 Operation and maintenence cost estimates (exchange rate: 1 Ls ⫽ 12 DKK) Operation and maintenance Unit Existing wood log boiler Heavy fuel oil boiler Ngas boiler Woodchip boiler Ngas cogeneration Gasification cogeneration Stirling engine Heat pump Biogas cogeneration
MWhth MWhth MWhth MWhth MWhth MWhth MWhth MWhth MWhth
Price in DK (DKK) – 15 5 25 50 80 70 20 120
Price in Ls (50%) (Ls)
Imports (15%) (Ls)
1.2 0.6 0.2 1.0 2.1 3.3 2.9 1.3 5.0
0.18 0.09 0.03 0.15 0.32 0.50 0.44 0.47 0.75
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Table 8 Fuel cost estimates (exchange rate: 1 Ls ⫽ 12 DKK) Fuel prices
Unit
Wood blocks Woodchips Heavy fuel oil Russian gas Electricity
Nm3 Nm3 ton Nm3 kWh
Price (Ls/unit) 4 6 60 0.069 0.024
Import price (Ls/unit) 0.8 1.2 40 0.045 0.014
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